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 June 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 July 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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<CAPTION>


                                                        INDEX



                                                                                                          Page No.
Part I     Financial Information

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


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

                           Consolidated Statements of Operations -
                               For the six months ended June 30, 1998 and 1997                              6

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


                           Notes to Consolidated Financial Statements                                     8-15


           Item 2.         Management's Discussion and Analysis of Financial                             16-25
                           Condition and Results of Operations


Part II    Other Information

           Item 1.         Legal Proceedings                                                             25-29

           Item 2.         Changes to Securities                                                            29

           Item 3.         Defaults Upon Senior Securities                                                  29

           Item 4.         Submission of Matters to a Vote of Security Holders                              29

           Item 5.         Other Information                                                                29

           Item 6.         Exhibits and Reports on Form 8-K                                              29-30

                           Signatures                                                                       31

</TABLE>




                                       2
 

<PAGE>

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

                         RISCORP, INC. AND SUBSIDIARIES

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


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

Investments:
<S>                                                                                    <C>                   <C>
   Fixed maturities available for sale, at fair value
      (amortized cost $13,977 in 1998 and $142,876 in 1997)                             $        14,005       $     145,571
   Fixed maturities available for sale, at fair value
      (amortized cost $7,012 in 1998 and $53,437 in 1997)-restricted                              7,102              53,820
   Fixed maturities  held to maturity,  at amortized cost (fair value $15,628 in
      1998 and $24,347 in 1997)
                                                                                                 15,466              24,090
                                                                                                 ------              ------
      Total investments                                                                          36,573             223,481


Cash and cash equivalents                                                                           477              16,858
Cash and cash equivalents-restricted                                                             13,708              13,295
Premiums receivable, net                                                                              --             100,183
Accounts receivable--other                                                                         2,952              16,720
Recoverable from Florida Special Disability Trust Fund, net                                          --              45,211
Reinsurance recoverables                                                                              --             184,251
Prepaid expenses                                                                                  5,114                   --
Prepaid reinsurance premiums                                                                          --              29,982
Prepaid managed care fees                                                                             --               8,420
Accrued reinsurance commissions                                                                       --              37,188
Receivable from Zenith                                                                          105,083                   --
Deferred income taxes                                                                            23,356              22,120
Property and equipment, net                                                                         376              26,665
Goodwill                                                                                              --              15,286
Other assets
                                                                                                  5,420               9,990
                                                                                                  -----               -----

Total assets                                                                             $      193,059       $     749,650
                                                                                         ==============       =============








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


                                       3
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<TABLE>
<CAPTION>


                         RISCORP, INC. AND SUBSIDIARIES

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


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

Liabilities:
<S>                                                                                     <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
   Payable to Zenith                                                                            15,335                  --
   Accrued expenses and other liabilities                                                       26,772               65,885
   Net assets in excess of cost of business acquired
                                                                                                    --                5,749
          Total liabilities                                                                       42,274            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                                                                            9,632               25,195
   Treasury stock - at cost, 112,582 shares                                                        (1)
                                                                                                                        (1)
   Accumulated Other Comprehensive Income:
      Net unrealized gains on investments
                                                                                                   77                2,002
                                                                                                   --                -----
          Total shareholders' equity                                                           150,785             163,533
                                                                                        --------------     ---------------

          Total liabilities and shareholders' equity                                    $     193,059       $      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 June 30, 1998 and 1997
                 (in thousands, except share and per share data)


                                                                                            1998                1997
                                                                                       ---------------     ---------------
                                                                                        (Unaudited)         (Unaudited)
   Revenue:
<S>                                                                                       <C>                <C>  
      Premiums earned                                                                      $      --          $    46,652
      Fee income                                                                                  --                5,815
      Net realized gains                                                                       2,805                   --
      Net investment income                                                                    2,252                4,507
      Other income                                                                                93                   --
          Total revenue
                                                                                               5,150               56,974
                                                                                               -----               ------

   Expenses:
      Losses and loss adjustment expenses                                                         --              23,374
       Unallocated loss adjustment expenses                                                       --               4,081
       Commissions, underwriting and administrative expenses                                  11,352              22,135
       Interest expense                                                                            8                 487
       Depreciation and amortization                                                              31               1,906
                                                                                                  --               -----
          Total expenses
                                                                                              11,391              51,983
                                                                                              ------              ------

   (Loss) income before income taxes                                                         (6,241)               4,991

   Income taxes                                                                                   --               2,025

   Net (loss) income                                                                        $(6,241)               2,966
                                                                                             =======               =====


   Per share data:
      Net (loss) income per common share - basic                                           $  (0.17)                0.08
                                                                                              ======                ====

     Net (loss) income per common share - diluted                                          $  (0.17)                0.08
                                                                                              ======                ====

   Weighted average common shares outstanding                                             36,916,725          36,868,114
                                                                                          ==========          ==========

   Weighted average common and common share
     equivalents outstanding                                                              36,916,725          37,152,420
                                                                                          ==========          ==========








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 six months ended June 30, 1998 and 1997
                 (in thousands, except share and per share data)


                                                                                            1998                1997
                                                                                       ----------------    ----------------
                                                                                         (Unaudited)         (Unaudited)
   Revenue:
<S>                                                                                    <C>                  <C>          
       Premiums earned                                                                 $       25,819       $      93,465
       Fee income                                                                               5,723              10,961
       Net realized gains                                                                       4,266                  --
       Net investment income                                                                    5,558
                                                                                                                    8,453
      Other income
                                                                                                   93                   --
          Total revenue
                                                                                               41,459             112,879
                                                                                               ------             -------

   Expenses:
       Losses and loss adjustment expenses                                                     24,016              55,921
       Unallocated loss adjustment expenses                                                     2,561               8,100
       Commissions, underwriting and administrative expenses                                   26,868              36,571
       Interest expense                                                                           477                 969
       Depreciation and amortization
                                                                                                3,100               3,839
                                                                                                -----               -----
          Total expenses
                                                                                               57,022             105,400
                                                                                               ------             -------

   (Loss) income before income taxes                                                         (15,563)               7,479

   Income taxes                                                                                   --                3,034

   Net (loss) income                                                                        $(15,563)               4,445
                                                                                             ========               =====

   Per share data:
      Net (loss) income per common share-basic                                              $  (0.42)                0.12
                                                                                               ======                ====

      Net (loss) income per common share-diluted                                            $  (0.42)                0.12
                                                                                               ======                ====


   Weighted average common shares outstanding                                              36,892,420          37,167,557
                                                                                           ==========          ==========
   Weighted average common shares and common
        share equivalents outstanding                                                      36,892,420          37,451,863
                                                                                           ==========          ==========







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



                                       6
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<TABLE>
<CAPTION>

                         RISCORP, INC. AND SUBSIDIARIES

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

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

<S>                                                                                        <C>               <C>        
Net cash used in operating activities                                                      $  (20,577)       $  (13,299)
                                                                                           ----------        ----------

Cash flows from investing activities:
     Purchase of property and equipment                                                          (777)           (3,112)
     Proceeds from the sale of equipment                                                           --                72
     Purchase of fixed maturities available for sale                                          (24,210)          (23,467)
     Purchase of fixed maturities held to maturity                                             (5,569)               --
     Proceeds from sale of fixed maturities available for sale                                 28,049            39,051
     Proceeds from maturities of fixed maturities available for sale                            6,029             7,467
     Proceeds from maturities of fixed maturities held to maturity                              5,700             1,000
     Proceeds from sale of equity securities                                                       --             2,780
     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                                                  (13,200)               --
                                                                                        -------------    --------------
       Net cash provided by investing activities                                                1,714            23,925
                                                                                       --------------      ------------

Cash flows from financing activities:
     Principal repayments of notes payable                                                       (245)             (422)
     (Decrease) increase in deposit balances payable                                           (1,599)              250
     Unearned compensation--stock options                                                          --               547
     Purchase of treasury stock                                                                 4,739            (2,100)
     Other, net                                                                                    --              (222)
     Transfer of cash and cash equivalents to restricted                                         (413)               --
                                                                                      ---------------   ---------------
       Net cash used in financing activities                                                    2,482            (1,947)
                                                                                       --------------     -------------

Net (decrease) increase in cash and cash equivalents                                          (16,381)            8,679

Cash and cash equivalents, beginning of period                                                 16,858            26,307
                                                                                        -------------      ------------
Cash and cash equivalents, end of period                                               $          477       $    34,986
                                                                                       ==============       ===========

Supplemental disclosures of cash flow information:

     Cash paid during the period for:
           Interest                                                                    $          479     $         974
                                                                                       ==============     =============
           Income taxes                                                                 $       3,435      $      3,445
                                                                                        =============      ============

Supplemental schedule of noncash investing and financing activities:

     The Company sold most of its 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                                                          (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 six months
       ended  June 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
       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.

                                       8
<PAGE>

       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 six months ended June 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 six months  ended June 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
       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


                                       9
<PAGE>

       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. Notice to the settlement class has been made.

       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.

       In April 1996, RISCORP Insurance Company ("RIC") and certain officers and
       directors were named as defendants in a purported class action suit filed
       in the United States District Court for the Southern  District of Florida
       (the "Vero Cricket  Litigation").  In this action, the plaintiffs claimed
       that  the  defendants  violated  the  Racketeer  Influenced  and  Corrupt
       Organizations Act ("RICO"),  breached fiduciary duties and were negligent
       in  the  Company's  acquisition  of  Commerce  Mutual  Insurance  Company
       ("CMIC") in 1995. The plaintiffs sought compensatory and punitive damages
       and equitable  relief and treble  damages for the RICO counts.  The named
       plaintiffs,  Vero Cricket Shop,  Inc.,  Vero Cricket Shop Too,  Inc., and
       Falls Company of Longboat Key, Inc.,  claimed to be former  policyholders
       of CMIC and claimed to represent others similarly situated. In June 1997,
       the  plaintiffs  amended the  complaint to add as  additional  defendants
       Zenith  Insurance  Company  and  the  Florida   Department  of  Insurance
       ("FDOI").

       On June 22, 1998, the court approved a settlement between the parties and
       dismissed  the  complaint.  Pursuant  to  the  terms  of  the  settlement
       agreement,  RISCORP Insurance Company paid to the plaintiffs a settlement
       amount of $475,000.  Seventy-five  percent of the  settlement  amount has
       been covered by insurance.  The Company  recognized the $475,000 proposed


                                       10
<PAGE>

       settlement  and  the  related  insurance  proceeds  in  the  accompanying
       financial  statements  as of December  31,  1997.  In  addition,  RISCORP
       Insurance  Company and the Company  agreed to assume full  responsibility
       for liabilities arising from all policies of insurance issued by the CMIC
       prior to January 1, 1995, and for assessments which might be imposed upon
       the class of  plaintiffs  arising from their status as  policyholders  of
       CMIC.  Upon the  acquisition of the Company's  assets,  Zenith  Insurance
       Company assumed those liabilities.

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

       On  August  10,  1998,  the  court  sentenced  RMS to pay  (i) a fine  of
       $300,000,  (ii) a  special  assessment  fee of $400,  (iii)  the  Florida
       Department of Law Enforcement $75,000 for the costs of the investigation,
       and (iv) to the State of  Florida  $50,000 in  restitution.  All of these
       amounts have been paid in full.  On August 11,  1998,  William D. Griffin
       was sentenced to five months incarceration,  five months house arrest and
       three  years  probation.  The  remaining  defendants  received  sentences
       varying  from  fines of $10,000 -  $25,000,  probation  from one to three
       years and, in some cases, community service.

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

       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.


                                       11
<PAGE>

       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  parties  to  the
       litigation  have agreed to attempt to mediate their  disputes on May 28 -
       29, 1998, and have invited the Company to participate in that  mediation.
       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
       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 have moved to dismiss the amended complaint
       and the Company has provided notice to Zenith that it believes this cause
       of action is included in the insurance  liabilities  assumed by Zenith in
       connection  with the asset sale.  Zenith has  provided  the Company  with
       notice that it disputes  this claim.  On April 22,  1998,  pursuant to an


                                       12
<PAGE>

       Omnibus  Administrative  Scheduling Order dated January 23, 1998, RISCORP
       adopted certain motions to dismiss the Amended Complaint filed by various
       other  defendants in this action.  These  motions,  if granted,  would be
       entirely  dispositive of the action. The motions have been fully briefed.
       Plaintiffs have filed a motion for class  certification,  and the parties
       are  engaged in  discovery.  A hearing  was held on June 30,  1998 on the
       class  certification  issue;  however,  no ruling  has been  issued.  The
       cut-off date for  discovery  has been  extended to October 15, 1998 by an
       Omnibus Order dated July 31, 1998.  Management  continues to contest this
       case vigorously.

       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 has
       not yet  issued  a final  report;  however,  based on the  draft  reports
       received  in late July 1998,  there were no proposed  adjustments  to the
       capital and surplus of RPC and $3.5  million of proposed  adjustments  to
       the  capital  and  surplus  of  RIC.  The  most  significant  examination
       adjustment 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 receivables that
       were  either  collected  or charged to expense in 1998.  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.


(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.

                                       13
<PAGE>

       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 it 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.  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 accompanying  June 30,
       1998  Consolidated  Statements of Operations  and reduced the  receivable
       from  Zenith  included  in  the  Proposed  Business  Balance  Sheet  from
       $141,054,796 to $140,083,446. 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 July 31, 1998, the amortized cost of such
       certificates  of  deposit  and  securities  that were still in process of
       being  transferred  to Zenith  totaled $6.5 million.  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.

                                       14
<PAGE>

       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
       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
       six months ended June 30, 1998 and year ended 1997,  respectively  are as
       follows (in thousands):
<TABLE>
<CAPTION>

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

<S>                                                                           <C>            <C>      
 Net (loss) income                                                            $ (15,563)     $   1,479
 Unrealized (losses) gains on securities available for sale:
    Unrealized holding losses during the period                                  (4,553)        (1,555)
    Reclassification  adjustment  for realized gains included in
        net earnings
                                                                                  1,912              -

 Comprehensive loss                                                           $ (18,204)      $    (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.


 

                                       15
<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;  (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
       operating  activities of the Company after April 1, 1998, a comparison of


                                       16
<PAGE>

       the results of operations  for the three months and six months ended June
       30, 1998 to the comparable period in 1997 is meaningless.  Therefore, the
       results  of  operations  for the three  months  ended  June 30,  1998 are
       explained  separately with no comparison to 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 anticipated  future
       operations.

       Results of Operations

       April 1, 1998 to June 30, 1998

       During the quarter ended June 30, 1998, the Company's  primary  operating
       activities were the preparation and the defense of the Proposed  Business
       Balance  Sheet,  the  investment  of the $25.0  million  initial  payment
       received from Zenith on April 2, 1998,  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 June 30,  1998,  the Company had  investments  totaling  approximately
       $36.6  million,   of  which  approximately  $15.3  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
       June 30, 1998 for the transfer of these securities to Zenith.

       The following is an analysis of other balances  contained on the June 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  $5.4  million  consisted  primarily  of $5.2
                million of certain insurance recoverables which will be received
                when the accrued legal settlements  discussed below are actually
                paid.

                 Prepaid expenses of $5.1 million consisted primarily of prepaid
                insurance coverages and retainers paid to certain  professionals
                and consultants.


 

                                       17
<PAGE>



                 Other accounts  receivable of $2.9 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
                $26.8  million and  consisted  primarily of $21.0  million of an
                accrued  legal  settlement,   $1.0  million  of  trade  accounts
                payable,  $1.0 million of unpaid  restructuring cost relating to
                the June  1997  Corporate  restructuring,  and $1.6  million  of
                accrued   accounting,   auditing  and  actuarial  expenses  that
                primarily relate to the defense of the Proposed Business Balance
                Sheet.

       The Company's  operating results for the three months ended June 30, 1998
       resulted in a net loss of $6.2  million.  The following is an analysis of
       the  Company's  revenues and expenses for the three months ended June 30,
       1998.

       Net  realized  gains for the three  months  ended June 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 six months  ended June 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.  There  were no  realized  gains or losses  during the first or
       second quarter of 1997.  Investment  income consists entirely of earnings
       from the investment portfolio, excluding unrealized gains & losses.

       Net  investment  income for the three months ended June 30, 1998 was $2.3
       million. Net investment income consisted of interest income on the $105.1
       million  receivable  from Zenith of $1.6 million,  interest income on the
       $10.0  million  balance in escrow of $0.1  million  and other  investment
       income of $0.6 million.

       Operating  expenses  for the three  months  ended June 30,  1998  totaled
       approximately  $11.4  million.   This  amount  included  two  significant
       non-recurring  expenses  that arose due to the sale to Zenith.  The first
       non-recurring expense totaled approximately $3.2 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. in accordance with a Restricted Stock Award Agreement.

       The  remaining  $4.1  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);  $0.4  million  of  management
       expenses; $1.4 million of legal and accounting expenses; and $1.0 million
       of recurring  operating expenses such as rent,  telephone,  insurance and
       similar costs.

       Depreciation and amortization expense for the three months ended June 30,
       1998 was $.03  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  three  months  ended  June 30,  1998 was $.01
       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%.

                                       18
<PAGE>

       Net  investment  income for the six months  ended June 30,  1998 was $5.6
       million  compared  to $8.5  million  for the same  period in 1997,  a net
       decrease of $2.9 million.  The decline in investment  income was due to a
       decline in invested  assets  (including  the  receivable  from Zenith) of
       approximately  $84.0 million for the six month period ended June 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.

       The  effective  tax rate for the six  months  ended  June 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 the June 30, 1998 loss.

       The weighted average common and common share equivalents  outstanding for
       the three months ended June 30, 1998 was 36,916,725 versus 37,152,420 for
       the three months ended June 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 June 30, 1997
       and the six months  ended June 30, 1998  compared to the six months ended
       June 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 six months  ended June 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)
(Dollars 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
       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


                                       19
<PAGE>

       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").
<TABLE>
<CAPTION>

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

                                                                      Three Months Ended
                                       ---------------------------------------------------------------------------------

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

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

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

</TABLE>

                                       20
<PAGE>


 



       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        N/A
         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.

       Direct  premiums  earned  increased to $91.8 million for the three months
       ended June 30, 1997 from $77.7 million for the same period in 1996, a net
       increase of $14.1 million.  Direct  premiums  earned  increased to $183.3
       million for the six months  ended June 30,  1997 from $152.2  million for
       the same period in 1996, a net increase of $31.1 million. The increase in
       the direct premiums earned for the three months and six months ended June
       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 $4,891 for the six months
       ended June 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  premiums  from the  fronting
       agreement were approximately $2.0 million for the three months ended June
       30, 1997 and June 30,  1996.  The  increase  in assumed  premiums of $1.4


                                       21
<PAGE>

       million for the six months ended June 30, 1997 compared to the six months
       ended June 30, 1996 was  primarily  due to  increased  premiums  from the
       fronting  agreement.  While the company  assumes  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 six months  ended June 30, 1998 from
       $94.7  million  for the  same  period  in 1997 was due  primarily  to the
       decrease in direct premiums earned discussed above.

       Fee  income  for the six  months  ended  June 30,  1998 was $5.7  million
       compared to $11.0  million for the same period in 1997, a net decrease of
       $5.3 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 six months ended June 30, 1997 was $5.1 million  compared to $7.1
       million for the same period in 1996, a net decrease of $2.0 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.

       There were no realized gains or losses during the second quarter of 1997 
       or for the six months ended June 30, 1997.

       Net  investment  income for the six months  ended June 30,  1997 was $3.9
       million  compared  to $1.6  million  for the same  period in 1996,  a net
       increase of $2.3 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 six months ended June 30, 1998,  1997 and 1996 was
       93.0 percent, 69.5 percent and 63.5 percent,  respectively.  The increase
       in the 1998 loss ratio of 23.5 percent was due primarily to gross adverse
       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 six months  ended June 30,
       1997, were $32.5 million compared to $24.4 million for the same period in
       1996,  a net  increase of $8.1  million.  The $8.1  million  increase was
       primarily  due to loss  portfolio  transfers  and  writings in new states
       licensed  through RNIC,  as well as growth in the Company's  core Florida
       operations.

       Unallocated  loss  adjustment  expenses for the six months ended June 30,
       1997,  were $4.0 million  compared to $2.8 million for the same period in
       1996, a net increase of $1.2 million.  This increase was primarily due to
       the  increased  premium  volume and increased  loss reserves  during this
       period.  The unallocated loss adjustment expense ratio for the six months
       ended June 30, 1998,  1997 and 1996 was 9.9 percent,  8.5 percent and 7.3


                                       22
<PAGE>

       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 June 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 June 30, 1997 were $22.1  million  compared to $13.2 million
       for the same period in 1996, a net increase of $8.9 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, 693 and 790 at June 30, 1998, 1997
       and 1996, respectively.

       Interest  expense for the six months ended June 30, 1997 was $0.5 million
       compared to $1.1  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 six months ended June 30,
       1997 were $1.9  million  compared to $1.0  million for the same period in
       1996, a net increase of $0.9  million.  The  increase was  primarily  the
       result  of  amortization  of  goodwill  related  to the  acquisitions  of
       CompSource  and IAA in 1996,  and  additions  to property  and  equipment
       during 1996 necessary to support the Company's  growth.  This increase in
       depreciation  and  amortization  in  1997  was  partially  offset  by the
       reduction  in  recurring  amortization  of goodwill  from a $3.0  million
       writedown of goodwill associated with RWI and a $2.8 million writedown of
       goodwill  associated  with the IAA  acquisition  in the fourth quarter of
       1996.

       The  effective  tax rate for the six months  ended June 30, 1997 was 40.6
       percent  compared  to 36.8  percent  for the same  period  in  1996.  The
       increase  in the  tax  rate is  principally  due to the  increase  in the
       amortization of goodwill, which is non-deductible for tax purposes.

       The weighted average common and common share equivalents  outstanding for
       the three months ended June 30, 1997 was 37,152,420 versus 37,462,722 for
       the three months ended June 30, 1996. The weighted  average common shares
       outstanding  for the six  months  ended  June  30,  1997  and  1996  were
       37,451,863  and  35,012,634,  respectively.  The increase in the weighted
       average  number of shares for the six months ended June 30, 1997, was due
       primarily to the inclusion of the shares  issued in  connection  with the


                                       23
<PAGE>

       February  29, 1996 IPO for the entire  first and second  quarters of 1997
       versus  inclusion  of such  shares for only four months for the first and
       second 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 six months ended June 30, 1998 and for
       the year ended December 31, 1997 was $(20.6) million and $(13.3) million,
       respectively.  The decrease from January 1, 1998 to June 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 had projected  cash flows through  December 1998 and believes
       it  has  sufficient  liquidity  and  capital  resources  to  support  its
       operations.

       As of June 30, 1998 and 1997, the Company's  insurance  subsidiaries  had
       combined  statutory  capital and surplus of approximately  $151.9 million
       and $219.7 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
       sheet risk. These standards provide for regulatory  intervention when the


                                       24
<PAGE>

       percentage  of  total  adjusted  capital  to  authorized   control  level
       risk-based capital is below certain levels. At June 30, 1998 and December
       31, 1997, the Company's insurance  subsidiaries' statutory surplus was in
       excess of any risk-based capital action level requirements.


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. Notice to the settlement class has been made.

       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.

       In April 1996, RISCORP Insurance Company ("RIC") and certain officers and
       directors were named as defendants in a purported class action suit filed
       in the United States District Court for the Southern  District of Florida
       (the "Vero Cricket  Litigation").  In this action, the plaintiffs claimed
       that  the  defendants  violated  the  Racketeer  Influenced  and  Corrupt
       Organizations Act ("RICO"),  breached fiduciary duties and were negligent


                                       25
<PAGE>

       in  the  Company's  acquisition  of  Commerce  Mutual  Insurance  Company
       ("CMIC") in 1995. The plaintiffs sought compensatory and punitive damages
       and equitable  relief and treble  damages for the RICO counts.  The named
       plaintiffs,  Vero Cricket Shop,  Inc.,  Vero Cricket Shop Too,  Inc., and
       Falls Company of Longboat Key, Inc.,  claimed to be former  policyholders
       of CMIC and claimed to represent others similarly situated. In June 1997,
       the  plaintiffs  amended the  complaint to add as  additional  defendants
       Zenith  Insurance  Company  and  the  Florida   Department  of  Insurance
       ("FDOI").

       On June 22, 1998, the court approved a settlement between the parties and
       dismissed  the  complaint.  Pursuant  to  the  terms  of  the  settlement
       agreement,  RISCORP Insurance Company paid to the plaintiffs a settlement
       amount of $475,000.  Seventy-five  percent of the  settlement  amount has
       been covered by insurance.  The Company  recognized the $475,000 proposed
       settlement  and  the  related  insurance  proceeds  in  the  accompanying
       financial  statements  as of December  31,  1997.  In  addition,  RISCORP
       Insurance  Company and the Company  agreed to assume full  responsibility
       for liabilities arising from all policies of insurance issued by the CMIC
       prior to January 1, 1995, and for assessments which might be imposed upon
       the class of  plaintiffs  arising from their status as  policyholders  of
       CMIC.  Upon the  acquisition of the Company's  assets,  Zenith  Insurance
       Company assumed those liabilities.

       On September 18, 1997, the United States  Attorney's office in Pensacola,
       Florida,  announced that a United States grand jury had indicted RISCORP,
       Inc., RISCORP Management  Services,  Inc. (a wholly owned,  non-regulated
       subsidiary of RISCORP, Inc.) and five former officers,  including William
       D.  Griffin,  Founder  and  Chairman of the Board,  for  various  charges
       stemming  from  alleged  illegal  political  campaign  contributions.  On
       September 18, 1997, the Board of Directors  approved a guilty plea by RMS
       to a single count of conspiracy to commit mail fraud. The guilty plea was
       entered by RMS and  accepted by the court on October 9, 1997.  Sentencing
       has been  scheduled  for August  10,  1998.  As a result of an  agreement
       negotiated  with the United  States  Attorney,  the court  dismissed  the
       indictment against RISCORP, Inc. on the same day.

       On  August  10,  1998,  the  court  sentenced  RMS to pay  (i) a fine  of
       $300,000,  (ii) a  special  assessment  fee of $400,  (iii)  the  Florida
       Department of Law Enforcement $75,000 for the costs of the investigation,
       and (iv) to the State of  Florida  $50,000 in  restitution.  All of these
       amounts have been paid in full.  On August 11,  1998,  William D. Griffin
       was sentenced to five months incarceration,  five months house arrest and
       three  years  probation.  The  remaining  defendants  received  sentences
       varying  from  fines of $10,000 -  $25,000,  probation  from one to three
       years and, in some cases, community service.

       On July 17,  1997,  plaintiffs  Thomas K.  Albrecht  and Peter D.  Norman
       filed,  in the Circuit Court of  Montgomery  County,  Alabama,  an action
       against the  Company,  Mr.  William D.  Griffin and several  other former
       officers of the Company. The suit alleged violations of federal and state
       securities laws,  common law fraud and breach of contract  resulting from
       the purchase by the Company of shares of IAA from  Albrecht and Norman in
       1996, as described above. The plaintiffs sought compensatory and punitive
       damages and equitable relief.  On or about December 2, 1997,  counsel for
       the Company and counsel for the  plaintiffs  negotiated a  settlement  of
       this action.  Settlement documents have been approved and executed by all
       parties.  As part of the  settlement  agreement,  the  Company  paid $2.0
       million to the  plaintiffs,  RISCORP,  Inc.  advanced $2.3 million to the
       plaintiffs  against an anticipated final distribution to shareholders and
       RISCORP,  Inc. accelerated a distribution of 790,336 additional shares of
       Class A Common  Stock to the  plaintiffs.  Such shares were  contemplated
       under  the  terms of the  Agreement  and Plan of  Merger by and among the
       Company, RISCORP-IAA,  Inc., IAA, Thomas K. Albrecht and Peter D. Norman,
       dated as of September 17, 1996.  The Company  estimates that $2.0 million


                                       26
<PAGE>

       of insurance  proceeds  will be available to offset the total  settlement
       amount, as well as related costs and expenses. The Company recognized the
       $2.0  million  settlement  and  the  related  insurance  proceeds  in the
       accompanying financial statements as of December 31, 1997. As part of the
       settlement  agreement,  the plaintiffs agreed to vote all their shares of
       Class  A  Common  Stock  in  favor  of the  Purchase  Agreement  and  the
       transaction  contemplated  therein.  The plaintiffs are record holders of
       1,580,672  shares of Class A Common Stock,  and, thus,  these  plaintiffs
       hold 13 percent of the outstanding shares of Class A Common Stock.

       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  parties  to  the
       litigation  have agreed to attempt to mediate their  disputes on May 28 -
       29, 1998, and have invited the Company to participate in that  mediation.
       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


                                       27
<PAGE>

       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 have moved to dismiss the amended complaint
       and the Company has provided notice to Zenith that it believes this cause
       of action is included in the insurance  liabilities  assumed by Zenith in
       connection  with the asset sale.  Zenith has  provided  the Company  with
       notice that it disputes  this claim.  On April 22,  1998,  pursuant to an
       Omnibus  Administrative  Scheduling Order dated January 23, 1998, RISCORP
       adopted certain motions to dismiss the Amended Complaint filed by various
       other  defendants in this action.  These  motions,  if granted,  would be
       entirely  dispositive of the action. The motions have been fully briefed.
       Plaintiffs have filed a motion for class  certification,  and the parties
       are  engaged in  discovery.  A hearing  was held on June 30,  1998 on the
       class  certification  issue;  however,  no ruling  has been  issued.  The
       cut-off date for  discovery  has been extended to October 15, 1998 by the
       Omnibus Order dated July 31, 1998.  Management  continues to contest this
       case vigorously.

       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 has
       not yet  issued  a final  report;  however,  based on the  draft  reports
       received in late July,  1998,  there were no proposed  adjustments to the
       capital and surplus of RPC and $3.5  million of proposed  adjustments  to
       the  capital  and  surplus  of  RIC.  The  most  significant  examination
       adjustment 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 receivables that
       were  either  collected  or charged to expense in 1998.  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.

                                       28
<PAGE>

Item 2.    Changes to Securities

       None.

Item 3.Defaults Upon Senior Securities

       None.

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

       On  June  4,  1998,   the  Company  held  its  1998  Annual   Meeting  of
       Shareholders. The shareholders voted upon one proposal, to elect Fredrick
       M. Dawson,  Seddon Goode,  Jr., George E. Greene III and Walter L. Revell
       to serve as  directors  of the Company  until the next annual  meeting of
       shareholders and until their successors are elected and qualified.

       Pursuant to the Company's Amended and Restated Articles of Incorporation,
       holders of Class B Common  Stock are  entitled to ten votes per share and
       the holders of Class A Common Stock are entitled to one vote per share on
       all matters to be voted on by the shareholders of the Company. There were
       243,344,430  Class B votes cast "for" each of the nominees for  director,
       consisting  of 100  percent of the  outstanding  shares of Class B Common
       Stock.  Holders of Class A Common  Stock voted their  shares as set forth
       below for each of the nominees:
<TABLE>
<CAPTION>

                             Fredrick M. Dawson     Seddon Goode, Jr.     George E. Greene, III   Walter L. Revell

<S>                                 <C>                   <C>                     <C>                 <C>       
         For:                       10,209,861            10,210,000              10,206,024          10,209,000

         Withheld:                     219,598               219,459                 223,435             220,459

         Total:                     10,429,459            10,429,459              10,429,459          10,429,459
</TABLE>

Item 5.    Other Information

       Shareholder Proposals

       The proxy  statement  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)  Exhibit

            11    Statement Re Computation of Per Share Earnings

            27    Financial Data Schedules


 


                                       29
<PAGE>


       b)  Reports on Form 8-K

          The Company  filed a Form 8-K on each of April 15, 1998 (as amended by
              a Form  8-K/A  filed on June 15,  1998)  and  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.


 


                                       30
<PAGE>

                                   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:    August 19, 1998





                  By:    /s/Edward W. Buttner, IV

                  Edward W. Buttner IV, CPA
                  Principal Accounting Officer

                  Date:    August 19, 1998






                                       31