<PAGE>
 
________________________________________________________________________________
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.   20549
                              ___________________

                                   FORM 10-K

(Mark One)
(X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
                  For the fiscal year ended December 31, 1997
                                      OR
( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (NO FEE REQUIRED).

                        Commission file number 0-28214
                           _________________________
                                        
                          MEDICAL DEFENSE HOLDING CO.
            (Exact name of registrant as specified in its charter)
                                        
<TABLE>
<S>                                                  <C>
                 Missouri                                43-1696112
       (State or other jurisdiction                   (I.R.S. Employer
    of incorporation or organization)               Identification No.)

1311 East Woodhurst, Springfield, Missouri                 65804
 (Address of principal executive offices)                (Zip Code)
</TABLE>

     (Registrant's telephone number, including area code):  (417) 887-3120
                  __________________________________________

      Securities registered pursuant to Section 12(b) of the Act:  None.

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant is undeterminable since there is no market at this time for the
stock. See Part II Item 5, Market for the Registrant's Common Stock and Related
Stockholder Matters.

     As of March 23, 1998 there were 7,426,010 shares outstanding of the
Registrant's Convertible Preferred Stock, $1.00 par value. In addition, there
were 999,998 shares of the Registrant's Class A Common Stock, $.50 par value
outstanding and there were 53,400 shares outstanding of the Registrant's Class B
Common Stock, $.50 par value.

     DOCUMENTS INCORPORATED BY REFERENCE:  None
________________________________________________________________________________
<PAGE>
 
                                    PART I

     Item 1.  Business
     -----------------

     BUSINESS OF THE HOLDING COMPANY

     Medical Defense Holding Co. (the "Company") was incorporated in Missouri on
November 28, 1994. The Company is the parent holding company of Medical Defense
Associates (the "MDA"), a Missouri stock casualty insurance company. MDA owns
all of the issued and outstanding stock of Medical Defense Services Corp.
("MDS"), a Missouri corporation. MDS, in turn, owns all of the issued and
outstanding stock of Medical Defense Insurance Company ("MDIC"), a Missouri
stock casualty insurance company. MDA and MDIC offer medical professional
liability insurance for physicians, surgeons, dentists and others engaged in the
delivery of health care services. The Company and its subsidiaries comprise an
insurance holding company system under Missouri law.

     BUSINESS OF MEDICAL DEFENSE ASSOCIATES

     Background
     ----------

     MDA was formed in 1976 as an entity operating under Chapter 383 R.S.Mo. for
the purpose of providing medical malpractice insurance or indemnification upon
the assessment plan. On April 3, 1995, the members of MDA voted in favor of the
conversion of MDA to a stock insurance company operating under Chapter 379
R.S.Mo. The conversion was completed on June 26, 1995 and MDA became a wholly
owned subsidiary of the Company at that time. The Company issued approximately
12,000,000 shares of Preferred Stock to policyholders who were named insureds of
MDA under policies in force on April 4, 1994. Officers, directors or members of
management of the Company or its subsidiaries also purchased 999,992 shares of
Class A Common Stock for approximately $500,000.

     Lines of Insurance
     ------------------

     MDA currently writes medical malpractice insurance as its only line of
business. MDA insures physicians and surgeons with the degree of Doctor of
Medicine or Doctor of Osteopathy, dentists and oral surgeons and ancillary
health professionals. MDA has written only medical malpractice insurance since
its inception in 1976. MDA offered only an Occurrence Policy from its inception
through March 31, 1986. Excess coverage was offered from 1981 through 1985.
Effective April 1, 1986, new policyholders were offered a choice of a Claims
Made Policy or an Occurrence Policy. Effective July 1, 1986, MDA offered only
Claims Made Policies to new policyholders. Existing occurrence policyholders
were converted to Claims Made Policies as they renewed after January 1, 1987. At
this time, MDA only offers Claims Made Policies.

     As of December 31, 1997, MDA had 1,165 policyholders including those with
corporate coverage. MDA writes limits ranging from $200,000 per occurrence and
$600,000 in the aggregate per year to $1,000,000 per occurrence and $3,000,000
in the aggregate per year. The policyholders represent a diverse range of
specialties and geographic locations within the State of Missouri.


     General Aspects of MDA's Business
     ---------------------------------

     UNDERWRITING

     MDA exercises strict underwriting which is performed by an Underwriting
Committee of five (5) physicians licensed in the State of Missouri. The
Underwriting Committee is augmented by an experienced underwriting staff.
 

                                       2
<PAGE>
 
     CLAIMS

     MDA's claims philosophy is to defend all non-meritorious claims. In
addition, MDA will not settle a claim without the prior consent of the insured.
In those claims in which the insured consents to settle and in which liability
exists, MDA moves promptly to settle the claim early in order to minimize
indemnity and loss adjustment expenses.


     RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

     MDA is required to maintain loss reserves for anticipated losses and loss
adjustment expenses. The loss reserves represent the estimated probable cost of
settling of losses under MDA's policies of insurance. The loss adjustment
expense reserves represent the estimated probable cost of investigating all
losses and when necessary defending lawsuits in connection therewith. The loss
reserves are estimated based upon individual loss data and historical loss data
and include amounts determined on the basis of individual and actuarially
determined estimates of future losses. Therefore, MDA's ultimate liability could
deviate from the amounts currently reflected in the loss reserves.

     MDA's claims department continually monitors and reviews circumstances
related to potential or actual claims and the methods utilized for making
reserve estimates. The reasonableness of statutory loss reserves under the terms
of MDA's policies and agreements, and under the requirements of the insurance
laws of the State of Missouri is subject to statement of actuarial opinion
requirements by a qualified actuary. The Missouri Department of Insurance (the
"Department") reviews the loss reserves of MDA as a part of an insurance company
financial examination. The latest examination done by the Department was in
1996. Any adjustments to loss reserves are reflected in operations.

     MDA's loss reserves are estimated by an actuary on the basis of statistical
information regarding MDA's historical development pattern, industry averages,
and indices. A medical professional liability insurance company must accumulate
substantial loss reserves because policies provide for payments of substantial
amounts in the future for claims that have occurred in prior contract periods.
These loss reserves are established as balance sheet liabilities representing
estimates of future amounts needed to pay claims and related expenses with
respect to insured events which have occurred, including events that have not
yet been reported.

     MDA employs an independent actuary to make recommendations in the
establishment of its reserves. However, the quantification of reserves is
complex and imprecise as a result of the time it takes to settle claims, the
complex nature of damage claims and the evolving nature of claims and remedies
sought by plaintiffs. In determining reserve levels, actuaries necessarily rely
primarily on historical loss experience, adjusted for changing circumstances as
deemed appropriate. This reliance is based on the assumption that historical
loss experience provides a good indication of future loss experience despite
uncertainties in loss cost trends and delays in reporting and settling claims.
These uncertainties are increased by changes in normal inflation, changing
propensities of individuals to file claims, and new causes of action. Despite
these uncertainties in the determination of reserve levels, management believes
that the methods used by MDA to establish its reserves are reasonable and
appropriate.

     As additional information becomes available and is reviewed, the estimates
reflected in earlier reserves may be revised resulting in either increases or
decreases to reserves, including reserves for insured events of prior years. Any
such increases could have an adverse effect on results for the period in which
adjustments are made. The uncertainties inherent in estimating ultimate losses
on the basis of past experience have grown significantly in recent years as a
result of judicial expansion of liability standards and expansive
interpretations of insurance contracts.

                                        

                                       3
<PAGE>
 
                        Reconciliation of Loss Reserves
                        -------------------------------
                                        
     The following table sets forth an analysis of loss reserve liabilities and
loss adjustment expenses for the Company on a consolidated basis and provides a
reconciliation of beginning and ending liability balances for the years ended
December 31, 1997, 1996, and 1995:


            Reconciliation of Loss Reserves (gross of reinsurance)
                                (in thousands)

<TABLE>
<CAPTION>
                                                                   1997                 1996                1995
                                                                   ----                 ----                ----               
<S>                                                           <C>                  <C>                 <C>
Unpaid losses and loss adjustment expenses,
  beginning of year........................................      $63,205              $65,660             $65,803
                                                                 -------              -------             -------
 
Losses and loss adjustment expenses incurred
  related to:
    Current year...........................................       13,506               15,802              18,115
    Prior years............................................         (783)               4,145              (2,478)
                                                                 -------              -------             -------
    Total incurred.........................................       12,723               19,947              15,637
                                                                 -------              -------             -------
 
Losses and loss adjustment expenses payments,
  excluding the change in outstanding claim
  drafts, for claims incurred during:
    Current year...........................................          266                  749               1,333
    Prior years............................................       17,008               21,653              14,447
                                                                 -------              -------             -------
    Total paid.............................................       17,274               22,402              15,780
                                                                 -------              -------             -------
 
Unpaid losses and loss adjustment expenses,
  end of year..............................................      $58,654              $63,205             $65,660
                                                                 =======              =======             =======
</TABLE>
                                                                                
                        Loss Reserve Development Table
                                        
     The following table sets forth the development of loss and loss adjustment
expense reserve liabilities of MDA for each of the years in the ten year period
prior to December 31, 1997. The top line of the table shows the estimated
liability for unpaid losses and loss adjustment expense recorded at the end of
each of the years indicated. These liabilities represent the estimated amount of
losses and loss adjustment expense reserves for claims arising in the current
year and all prior years that are unpaid as of the end of each year.

     The "Cumulative Paid End of Year" portion of the table presents the
cumulative amounts paid with respect to the liability previously recorded as of
the end of each succeeding year. The portion of the table which shows the re-
estimated amount relating to the previously recorded liability is based upon
experience as of the end of each succeeding year. The estimate is either
increased or decreased as additional information about the frequency and
severity of claims for each individual year becomes available and is reviewed.

     The section of the table entitled "Cumulative Redundancy (Deficiency)" is
based upon actual amounts recorded in MDA's financial records and represents the
aggregate change in the estimated loss and loss adjustment expenses incurred
over all prior years.

     Information presented in the following table is cumulative and,
accordingly, each amount includes the effects of all changes in amounts for
prior years. For example, the amount of the increase related to losses settled
or provided for in 1996, but incurred in 1992, will be included in the
cumulative increase (decrease) in estimated losses and loss adjustment expenses
for all of the intervening years.


                                       4
<PAGE>
 
                   Loss Reserve Development Table, continued
                                        

     The most recent eight years, 1990 through 1997, are presented on a direct
basis consistent with Statement of Financial Accounting Standards #113. All
years prior to 1990 are presented on a net of reinsurance basis as it was not
practical to generate the table on a direct basis for those years due to
differences in financial reporting for periods prior to 1990.


                          Medical Defense Associates
                        Loss Reserve Development Table*
                                (in thousands)

<TABLE>
<CAPTION>
                             Net       Net      Net    Direct   Direct   Direct   Direct   Direct    Direct   Direct   Direct
                             1987     1988     1989     1990     1991     1992     1993     1994      1995     1996     1997
                           --------  -------  -------  -------  -------  -------  -------  -------  --------  -------  -------
<S>                        <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>       <C>      <C>
Reserve for unpaid.......  $42,312   $49,965  $66,984  $79,456  $76,515  $70,223  $70,326  $65,785  $65,606   $62,970  $58,594
Cumulative Paid
     End of Year:
1........................   13,630     6,240   12,607   17,210   19,070   11,682   18,528   14,779   21,967    16,853       --
2........................   19,111    17,291   26,719   32,208   28,142   29,017   31,097   31,823   35,921
3........................   28,899    25,912   37,626   38,022   41,127   39,101   43,342   42,881
4........................   33,769    30,907   40,093   47,882   49,277   46,472   48,245
5........................   37,323    32,380   43,907   52,389   54,653   49,222
6........................   38,456    34,816   47,579   57,189   56,163
7........................   40,484    38,257   51,077   58,145
8........................   43,050    41,415   51,813
9........................   46,160    41,988
10.......................   46,633
 
 
Re-estimated Liability:
1........................   52,721    53,801   66,511   72,994   71,098   66,291   68,666   63,695   70,101    62,249       --
2........................   55,650    55,584   61,105   69,179   67,965   64,076   66,191   66,385   68,325
3........................   56,810    51,579   59,313   66,734   66,781   62,601   67,699   63,438
4........................   54,105    49,949   56,606   66,477   66,267   62,990   65,659
5........................   52,481    45,762   56,715   66,428   67,541   61,628
6........................   49,420    46,072   57,276   67,148   66,529
7........................   49,928    46,544   58,003   66,239
8........................   50,179    47,441   57,599
9........................   51,075    46,981
10.......................   50,607
Cumulative Redundancy
(Deficiency).............
                            (8,295)    2,984    9,385   13,217    9,986    8,595    4,667    2,347   (2,719)      721       --
</TABLE>


     NOTE:  The figures presented on the Loss Reserve Development Table for
years 1990 through 1997 are gross of the effects of reinsurance in order to be
consistent with figures presented in those years' financial statements. However,
the figures for years 1987 through 1989 have not been restated and are net of
the effects of reinsurance. Restatement of the 1987 through 1989 amounts is not
practical because the information necessary is not contained in MDA's statutory
Annual Statement or records.

     *  Excludes MDIC, as MDIC's share of loss and loss adjustment expense
reserves compared to total reserves is less than one (1) percent.


                                       5
<PAGE>
 
                         Discounting of Loss Reserves
                                        
     The Company does not discount its loss reserves for generally accepted
accounting principles purposes. For statutory accounting purposes, for accident
years prior to 1995, MDA discounted its medical professional liability loss and
loss adjustment expense reserves on a non-tabular basis. During 1995, the
Missouri Department of Insurance instituted, for all Missouri domiciled property
and casualty companies, a policy which does not permit non-tabular discounting
of unpaid losses and loss adjustment expenses. In conjunction with this new
policy, MDA reached agreement with the Missouri Department of Insurance to
eliminate non-tabular reserve discounting in MDA's statutory financial
statements over a five-year period. Under this agreement all unpaid losses and
loss adjustment expenses related to accident years 1995 and subsequent will be
reflected gross of discounting. In addition, the total non-tabular discount of
$3,484,000 reflected in MDA's 1994 year-end reserves will be phased-out over
five years by a 20% adjustment per year directly to surplus as regards
policyholders. The effect of this phase-out adjustment on MDA's statutory
balance sheet at year end 1997 was to increase total reserves for loss and loss
adjustment expenses by $2,091,000, with a corresponding decrease to surplus as
regards policyholders. Discount factors and the discount taken for the five-year
period ended December 31, 1997 were as follows:


<TABLE>
<CAPTION>
         Year                   Discount Factor                Discount Taken
         ----                   ---------------                --------------
        <S>              <C>                                   <C> 
         1993                        3.0%                       $3,660,000
         1994                        3.0%                       $3,484,000
         1995            Based on statutory agreement           $2,787,000
                                  noted above                   
         1996            Based on statutory agreement           $2,090,000
                                  noted above                   
         1997            Based on statutory agreement           $1,393,000
                                  noted  above
</TABLE>


     MDIC's loss and loss adjustment expense reserves are not discounted for
statutory accounting purposes.


     REINSURANCE

     MDA reinsured all Occurrence Policies issued after October 31, 1980 and all
Claims-Made Policies issued before November 1, 1987. The Company ceased
reinsuring Claims-Made Policies as of November 1, 1987. All claims related to
Occurrence Policies issued after October 31, 1980 and Claims-Made Policies
before November 1, 1987 are still reinsured.

     A reserve for estimated retrospective premium due reinsurers has been
established for the excess of the anticipated reinsurance premium payable over
the amount paid to date for reinsurance treaty years 1980 through 1987. The
ultimate reinsurance premium to be paid is based on the ultimate loss
developments for claims arising during those treaty years. Changes in the
estimated amount due reinsurers are reflected in current operations. The
ultimate amount due reinsurers is estimated by MDA's independent actuary.


     INVESTMENT PROGRAM

     The goal of the investment portfolio is to achieve maximum income
consistent with capital preservation. MDA employs Scudder Insurance Asset
Management ("SIAM") headquartered in Chicago, Illinois, to manage the Company's
investment funds. SIAM operates under guidelines which are adopted by the Board
of Directors. These guidelines are reviewed periodically to ensure that they are
compatible with MDA's philosophy and needs. Current guidelines for SIAM are:

          1)  All investments must meet the criteria established for
              property/casualty insurance companies by (S)379.080 R.S.Mo.;

          2)  There shall be no minimum or maximum limit placed on investments
              directly guaranteed by the full faith and credit of the United
              States Government, such as U.S. Treasuries and Government National
              Mortgage Association Bonds;


                                       6
<PAGE>
 
     INVESTMENT PROGRAM, continued

          3)   Investments in agencies of the U.S. Government, which are
               implicitly guaranteed by the United States Government, such as
               Federal National Mortgage Association and Federal Home Loan
               Mortgage Association Bonds, shall be limited to no more than 50%
               of the total portfolio. There shall be no minimum limitation;

          4)   Investments in specific securities, other than U.S. Treasuries,
               shall be limited to no more than 2% of MDA's total portfolio,
               without regard to the new investment. In addition, corporate
               bonds shall be limited to no more than $1,000,000 par in any one
               position, and a minimum quality rating for corporate bonds shall
               continue to be AA or better. All corporate bonds cannot exceed
               30% of the portfolio;

          5)   Investments in federally tax-exempt securities shall be permitted
               as deemed appropriate from time to time, provided that tax-exempt
               securities in the aggregate shall not exceed 15% of the total
               portfolio. The acceptable quality rating for tax-exempt
               securities shall be AA or better;

          6)   All investments must receive the National Association of
               Insurance Commissioner's highest rating; and

          7)   Investments in corporate bonds and federally tax-exempt
               securities combined may not exceed 30% of the total portfolio.


     BUSINESS STRATEGY

     MDA's primary mission is to provide professional liability insurance to
physicians, surgeons, dentists and other licensed health care professionals at
competitive prices consistent with sound actuarial principles.  MDA's secondary
mission is to offer other insurance and financial services and products that
support the Company's primary mission.


     FORWARD-LOOKING STATEMENTS

     In addition to the historical information contained herein, this Annual
Report contains "forward-looking statements" within the meaning of the Private
Securities Litigation Act of 1995.  These statements typically, but not
exclusively, are identified by the inclusion of phrases such as "the Company
anticipates," "the Company believes," "the Company expects," "the Company
plans," "the Company intends," and other phrases of similar meaning.  Such
forward-looking statements involve known and unknown risks, uncertainties,
contingencies and other factors that may cause the company's actual results of
operations, financial condition or business performance to be materially
different from the results of operation, financial condition or business
performance expressed or implied by such forward-looking statements.  Factors
that could cause or contribute to such differences include, but are not limited
to:  market competition and consolidation, government regulation and health care
reform, changes in key management, the year 2000 issue, and other factors
discussed elsewhere in this report.

     MARKET CONDITION AND COMPETITION

     The current status of the professional liability market in Missouri is one
of intense competition.  The business of medical malpractice is cyclical in
nature and is impacted by legislative changes, judicial interpretations, market
competition, inflation and other circumstances.  There are several major
competitors and with the "soft" portion of the insurance cycle in full
operation, the market is rife with price cutting and discounting.  MDA has not
responded in kind but has rather chosen to maintain its actuarially sound
pricing policy.  Due to changes in the health care industry, the recent trend
has been for physicians, surgeons and dentists, who have been the Company's
primary clients, to become employees of hospitals or other health care networks
and cease to obtain their own medical professional liability insurance.  Due to
this change, the Company's market share has continued to decline during the past
three years.  During 1995 the policyholder count declined from 1,751 to 1,609,
while in 1996 the count declined to 1,459, and in 1997 the policyholder count
further declined to 1,165.  However, the Company continues to intensify its
services to policyholders in an attempt to maintain or increase market share.

                                       7
<PAGE>
 
     MARKET CONDITION AND COMPETITION, continued

     MDA has no independent agents, and relies on its employees for the sale of
medical professional liability insurance.

     Other Aspects of MDA's Business
     -------------------------------

     EMPLOYEES
 
     MDA has one employee.  MDS, a wholly-owned subsidiary of MDA, performs
management services for MDA, MDIC, and the Company.  See following section on
Business of MDS for further discussion of employees.  The Company and MDIC at
this time have no employees.

     GOVERNMENT REGULATION

     The business and activities of MDA are generally subject to federal and
state laws and regulations which affect the conduct of its business.  As an
insurance company, MDA is subject to regulation and supervision by the
Department.  The Department has statutory authority and administrative power to
regulate such matters as licensing, investments, trade practices, loss reserves
and capital maintenance.  MDA is required to file financial and other reports
with the Department and the National Association of Insurance Commissioners (the
"NAIC") on a quarterly and annual basis, and the operations and accounts of MDA
are subject to periodic financial and market conduct examination by the
Department.  The Department conducted a routine periodic financial examination
of MDA and its subsidiaries during 1996.  The examination covered the two years
ended December 31, 1995.  The examination commenced on September 9, 1996 and the
final report became available to the public on March 21, 1997.  The report
reflected no change to MDA's statutory surplus for the periods under
examination.

     In recent years, the NAIC has promulgated new reporting requirements
relating to property and casualty insurance companies regarding risk based
capital ("RBC").  Under these new reporting rules, property and casualty
insurance companies are categorized according to the extent to which they meet
RBC thresholds, with increasing degrees of regulatory scrutiny or intervention
appropriate for companies in categories of less RBC compliance.  The RBC
requirements were adopted in Missouri in 1996 for property and casualty
insurers.  MDA and MDIC both significantly exceed the RBC thresholds, as
promulgated by the NAIC and adopted in Missouri.  Management believes that the
RBC thresholds will not have any significant regulatory effect on MDA or MDIC.

     BUSINESS OF MEDICAL DEFENSE SERVICES CORP.

     MDS, a wholly-owned subsidiary of MDA, was formed in 1982 as a corporation
under the General Business and Corporation Law of Missouri, Chapter 351 R.S.Mo.
MDS performs management services for MDA and MDIC under the terms of management
contracts.  As of December 31, 1997, MDS had 28 employees.  The employees of MDS
are not represented by any union or collective bargaining organizations and MDS
believes its employee relations are good.  Under the current management
contract, MDS provides services to MDA and MDIC at cost plus 10%.  MDA and MDIC
each pay their share of those costs, currently at 95% and 5% respectively.  All
inter-company balances are eliminated in the consolidated financial statements
of the Company.


     BUSINESS OF MEDICAL DEFENSE INSURANCE COMPANY

     MDIC, a wholly-owned subsidiary of MDS, was organized in 1982 as a Missouri
stock casualty insurance company under Chapter 379 R.S.Mo.  MDIC was formed to
issue non-assessable medical malpractice insurance policies to persons or
entities who could not be insured by MDA under (S)383.010 R.S.Mo.  MDIC is
licensed to operate in Missouri and in Kansas.  From its inception in 1982 until
September 1, 1988, MDIC only wrote business in Kansas.  In September of 1988,
MDIC voluntarily ceased writing business in Kansas.  In June of 1994, MDIC again
began to write business in Kansas.  For the year ended December 31, 1997, MDIC
had premiums written of less than $100,000 and fewer than twenty policyholders.

     MDIC does not have any employees, and all persons conducting MDIC's
business are employees of MDS.  See the paragraph above regarding Business of
MDS.

                                       8
<PAGE>
 
     YEAR 2000 COMPLIANCE

     Many computer systems world-wide are not currently equipped to properly
handle the change in calendar years from 1999 to 2000.  This problem is commonly
referred to as the Year 2000 Compliance issue.  The Company has an active
program in place to address the Year 2000 Compliance issue as it relates to the
various computer systems which the Company either uses or is dependent upon.  By
September 1996, the Company had migrated its application system software to a
hardware platform that could properly support dates after 1999.  By November
1997, all application software had been converted to be Year 2000 compliant.
The Company's existing computer operating system will be upgraded during 1998
and at that time the Company's computer systems will be fully Year 2000
compliant.  The total cost to the Company to become Year 2000 compliant is
projected to be approximately $275,000.  Of this amount, approximately $10,000
has yet to be incurred and, with the exception of the cost of new system
hardware and software of approximately $130,000 which has been capitalized over
periods not to exceed five years, all costs have been expensed as incurred.

     In addition, the Company has held discussions with various of its external
vendors with whom the Company is dependent upon and the Company believes that
these vendors will also be fully Year 2000 compliant in an appropriately  timely
fashion.

     Item 2.  Properties
     -------------------

     MDS currently owns the executive offices used by the Company, MDA, MDS and
MDIC.  The executive offices are in Springfield, Missouri, and consist of
approximately 16,000 square feet.  Management believes such facility is adequate
to support its business plans, both now and in the foreseeable future.

     Item 3.  Legal Proceedings
     --------------------------

     While the Company and its subsidiaries are routinely involved in defending
claims against its insureds, none of these entities were defendants in material
legal or regulatory actions as of December 31, 1997.

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

     No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of the year ended December 31, 1997.


                                 PART II

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

     MARKET

     None of the Preferred Stock, the Class A Common Stock or the Class B Common
Stock are listed on any securities exchange or with any automated quotation
system, such as NASDAQ.  No brokers or dealers serve as market makers for any
securities of the Company.

     HOLDERS OF RECORD

     As of March 23, 1998, there were approximately one thousand one hundred
forty (1,140) holders of Preferred Stock, ten (10) holders of Class A Common
Stock and three (3) holders of Class B Common Stock.

     DIVIDENDS

     The Company did not pay or declare dividends during 1997.  Pursuant to its
Articles of Incorporation, the Company is prohibited from paying any dividends
on its Class A Common Stock or Class B Common Stock while any Company Preferred
Stock is outstanding.  The Company Preferred Stock is redeemable, at the
Company's option after three years from the date of conversion.  Holders of
Preferred Stock may convert to Class B Common Stock, at their option, at any
time prior to redemption.

                                       9
<PAGE>
 
     Item 6.  Selected Financial Data
     --------------------------------

                                        
                  MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES
                                        
     The following Selected Consolidated Financial Data is derived from the
audited consolidated financial statements of the Company.  The Company acquired
MDA on June 26, 1995, and the accompanying data which pertains to preacquisition
periods have been prepared as if the companies were combined throughout those
periods.  This data should be read in conjunction with the Consolidated
Financial Statements and accompanying notes and management discussion and
analysis included elsewhere herein.
 
<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                        --------------------------------------------------------------------

                                                            1997         1996          1995          1994          1993
                                                            ----         ----          ----          ----          ----

                                                                       (in thousands, except per share data)
<S>                                                        <C>          <C>          <C>           <C>           <C>
Statement of Operations Data:
  Net premiums written............................         $ 10,582     $12,722      $ 13,960      $ 14,257      $ 15,697
                                                           =======      =======      ========      ========      ========
  Net premiums earned.............................          12,092       13,200        15,183        13,508        15,654
  Investment income...............................           5,279        5,584         5,810         5,583         5,850
  Net realized capital gains and other income.....             107           95           219           247         2,110
                                                           -------      -------      --------      --------      --------
     Total revenues...............................          17,478       18,879        21,212        19,338        23,614
                                                           -------      -------      --------      --------      --------
  Losses and loss adjustment expenses.............          13,301       20,379        16,159        14,727        12,475
  Other operating expenses........................           2,812        3,206         2,989         3,128         2,255
                                                           -------      -------      --------      --------      --------
     Total expenses...............................          16,113       23,585        19,148        17,855        14,730
                                                           -------      -------      --------      --------      --------
  Income (Loss) before income taxes...............           1,365       (4,706)        2,065         1,482         8,884
  Income tax expense..............................             783          795           248           586         2,662
                                                           -------      -------      --------      --------      --------
     Net income(loss).............................         $   582      $(5,501)     $  1,816      $    896      $  6,222
                                                           =======      =======      ========      ========      ========

Per common share: (1)
  Basic earnings per common share                          $  0.56      $ (5.39)     $   1.18           n/a           n/a
                                                           =======      =======      ========      ========      ========
  Diluted earnings per common share
     and common share equivalent                           $  0.03       n/a (2)        $0.05           n/a           n/a
                                                           =======      =======      ========      ========      ========

Balance Sheet Data (at year end):
  Investments.....................................         $81,335      $83,299      $ 91,748      $ 78,371      $ 90,673
  Total Assets....................................          89,931       96,778       108,199       102,301       110,008
  Unpaid losses and loss adjustment expenses......          58,654       63,205        65,660        65,803        70,436
  Unearned premiums...............................           6,059        7,572         8,055         9,210         8,457
  Stockholders' equity............................          22,355       21,835        29,557        22,932        27,090
</TABLE>

(1)  For 1995 earnings per common share are reflected for earnings subsequent to
     June 26, 1995, which is the date that Medical Defense Holding Co. completed
     its acquisition of Medical Defense Associates and its subsidiaries.  For
     years prior to 1995 no earnings per share data is presented since all
     earnings are related to Medical Defense Associates preacquisition
     activities and, therefore, are not considered earnings per common share of
     Medical Defense Holding Co.'s stockholders.  See Note 12 of Notes to
     Consolidated Financial Statements.
 (2) Anti-dilutive.


                                      10
<PAGE>
 
     Item 7. Management's Discussion and Analysis of Financial Condition and
     Results of Operations

     Management's discussion and analysis of financial condition and results of
operations is intended to provide a review of significant factors affecting the
financial condition and results of operations of Medical Defense Holding Co.
(the "Company") and its subsidiaries as of December 31, 1997 and 1996 and for
each of the three years presented elsewhere herein. These financial statements
give retroactive effect to the acquisition of MDA and its subsidiaries by the
Company on June 26, 1995. The following discussion should be read in conjunction
with the consolidated financial statements and the related notes thereto of the
Company which appear elsewhere herein.

     General

     The Company is a Missouri general business corporation formed for the
purpose of facilitating the conversion of MDA from a mutual association to a
stock insurance company. On June 26, 1995, the conversion was completed with the
exchange of the policyholders' rights in MDA, the mutual insurance association,
for shares of convertible Preferred Stock in the Company, the parent holding
company. The Company owns one hundred percent (100%) of the outstanding shares
of MDA.

     The accompanying consolidated financial statements and related discussion
include the accounts of the Company and its wholly-owned insurance subsidiary,
MDA, and have been consolidated with the Company in a manner similar to a
pooling of interests to reflect the conversion of MDA to a wholly-owned
subsidiary of the Company. Cash flow within the Company consists of investment
income and operating expenses. The Company does not have any significant revenue
producing operations of its own other than through its ownership of MDA. MDA is
licensed in Missouri to write medical professional liability insurance and MDA
is one of the leading writers of medical professional liability insurance in the
state of Missouri. Also included in the accompanying consolidated financial
statements are MDA's wholly-owned subsidiaries, Medical Defense Services Corp.
("MDS") and Medical Defense Insurance Company ("MDIC"). MDS is a wholly-owned
subsidiary of MDA and provides management services primarily to MDA. MDIC is a
wholly-owned subsidiary of MDS and is a stock insurance company organized under
Chapter 379 RSMo for the purpose of providing protection against loss from
medical professional liability claims. During the past 12 months, MDIC has
written a small amount of premium, less than $100,000, entirely in the state of
Kansas.

     The professional medical liability market in Missouri continues to be one
of intense competition. There are several major competitors and with the "soft"
portion of the insurance cycle continuing, the market is abundant with price
cutting and discounting. The Company has refused to respond in kind but rather
has chosen to maintain its actuarially based pricing structure. Due to changes
in the health care industry, the recent trend has been for physicians, surgeons
and dentists, who have been the company's primary clients, to become employees
of hospitals or other health care networks and cease to obtain their own medical
professional liability insurance. Due to this change, the Company's market share
has continued to decline during the past three years. During 1995 the
policyholder count declined from 1,751 to 1,609, while in 1996 the count
declined to 1,459, and in 1997 the policyholder count further declined to 1,165.
However, the Company continues to intensify its services to policyholders in an
attempt to maintain or increase market share.

     Results of Operations

     The Company recorded a 7% or $1,401,058 decrease in total revenues during
1997 as compared to 1996. This decrease was primarily the result of a reduction
in premium income of approximately $1,100,000, a decline in investment income of
approximately $305,000 and, an increase in realized investment gains of $12,316.
The decline in premium income was primarily the result of an approximate 20%
decline in MDA's total policyholders and occurred despite a 15% rate increase
which was effective January 1, 1997 on all of MDA's new and renewal business.
The decrease in the Company's investment income was primarily the result of a
decline in fixed maturity investments during 1997 as compared to 1996. These
fixed maturity investments normally generate a higher rate of return than short-
term investments. In addition, interest rate yields in 1997 were slightly lower
then the previous year. Realized investment gains increased $12,316, when
compared to 1996, as fixed-income investment prices were somewhat higher in 1997
and therefore the opportunity to realize investment gains was more prevalent
than in 1996.

                                      11
<PAGE>
 
     Results of Operations, continued

     The Company recorded an 11% or $2,332,960 decrease in total revenues during
1996 as compared to 1995. This decrease was primarily the result of a reduction
in premium income of approximately $1,983,000, a decline in investment income of
approximately $226,000 and, a decrease in realized investment gains of $123,697.
The decline in premium income was primarily the result of an approximate 9%
decline in MDA's total policyholders and occurred despite a 14% rate increase
which was effective January 1, 1996 on all of MDA's new and renewal business.
The decrease in the Company's investment income was primarily the result of a
decline in invested assets during 1996 as compared to 1995. This decline in
invested assets, which was approximately $8,450,000 at December 31, 1996
compared to the previous year-end, was the result of an increase in claim
payments in 1996 compared to 1995. See "Business of Medical Defense Associates -
Reserves for Unpaid Losses and Loss Adjustment Expenses." Realized investment
gains declined $123,697, when compared to 1995, as fixed-income investment
prices were generally higher in 1996 and therefore the opportunity to realize
investment gains was not as prevalent as in 1995.

     During 1997, total expenses decreased $7,471,717 or 31.7% compared to 1996.
This decrease was almost entirely the result of a decrease in claim losses and
claim loss adjustment expenses which decreased approximately $7.1 million
compared to these same expenses in 1996. During 1996 the Company experienced a
significant increase in claim expense payments, and following actuarial
analysis, the Company strengthened its loss and loss adjustment expense reserves
for accident years prior to 1996 by approximately $4.6 million. The Company will
continue to monitor the level of claim severity, and to seek input from
actuaries as appropriate. The balance of the decrease in total expenses during
1997 compared to 1996 was primarily the result of a decrease in amortization of
deferred acquisition costs of approximately $220,000, which is entirely related
to Missouri premium taxes, and a decrease in other underwriting and insurance
expenses of approximately $190,000, which was the result of a reduction in
general operating expenses of approximately 7.9%.

     See "Business of Medical Defense Associates - Reserves for Unpaid Losses
and Loss Adjustment Expenses."

     During 1996, total expenses increased $4,437,310 or 23.2% compared to 1995.
This increase was almost entirely the result of an increase in claim losses and
claim loss adjustment expenses which increased approximately $4.2 million
compared to these same expenses in 1995. Due to an increase in the amount of
claim loss and loss adjustment expense payments during 1996, Company management
retained its actuary to perform additional actuarial analysis and as a result of
actuarial analysis, the Company strengthened its loss and loss adjustment
expense reserves for accident years prior to 1996 by approximately $4.6 million.
The Company will continue to monitor the level of claim severity, and to seek
input from actuaries as appropriate. The balance of the increase in total
expenses during 1996 compared to 1995 was primarily the result of an increase in
amortization of deferred acquisition costs of approximately $315,000, which is
entirely related to Missouri premium taxes. The Company was not subject to
Missouri premium taxes prior to the completion of MDA's demutualization on June
26, 1995 and therefore, no deferred acquisition costs were recorded or amortized
prior to that date.

     For the year ended December 31, 1997, the Company had net income (before
provision for income taxes) of $1,365,030, compared to a net loss (before
provision for income taxes) of $4,705,629 in 1996. Although the Company's net
income increased approximately $6 million from the prior year's net loss the
total tax provision was virtually unchanged at approximately $790,000. This was
primarily due to a decrease in the deferred tax provision of approximately $2
million, when compared to the prior year. This decrease in the deferred tax
provision was due to the change in the deferred tax asset valuation allowance
and the deferred tax asset. The deferred tax asset valuation allowance relates
entirely to loss reserve discounting and represents the difference between the
total deferred tax asset related to loss reserve discounting required by the
Internal Revenue Service and the amount that is more likely than not to be
realized by the Company. Due to a change in the tax law effective January 1,
1998, the Company may only carry back net operating losses two years and as no
taxes were paid in 1997 or 1996 the Company does not have any tax benefit to
recover from prior years taxes. Furthermore, the Company does not believe it can
reasonably determine the amount of loss reserve deferred tax benefit which can
be recovered from future taxable income using a more likely than not standard.
Therefore, as of December 31, 1997, the Company's total deferred tax asset was
included in the deferred tax asset valuation allowance. As a result, the
Company's net income for 1997 was $582,319 compared to a net loss of $5,501,042
for 1996.

                                       12
<PAGE>
 
     Results of Operations, continued

     For the year ended December 31, 1996, the Company experienced a loss
(before provision for income taxes) of $4,705,629, compared to income (before
provision for income taxes) of $2,064,641 in 1995. The Company's total tax
provision increased $547,150 to $795,413 which was primarily the result of an
increase in the deferred tax provision of approximately $3.7 million. This
increase in the deferred tax provision was due to an increase in the deferred
tax asset valuation allowance of approximately $2.4 million, which relates
entirely to loss reserve discounting and represents the difference between the
total deferred tax asset related to loss reserve discounting required by the
Internal Revenue Service and the amount that is more likely than not to be
realized. As a result, the Company's net loss for 1996 was $5,501,042 compared
to net income of $1,816,378 for 1995.

     Financial Condition

     Total consolidated assets of the Company at December 31, 1997 were
$89,930,625 which was a decrease of approximately $6.8 million or 7.1% as
compared to December 31, 1996. This decrease was primarily due to the payment of
loss and loss adjustment expenses in excess of incurred loss and loss adjustment
expenses by approximately $4.5 million and a decrease in premiums written during
1997 compared to the previous year of approximately $2.8 million which was the
result of the decline in policyholders discussed earlier. In addition, the
Company utilized a portion of its cash to conduct a tender offer during 1997 to
purchase outstanding shares of preferred stock. This tender offer resulted in
the purchase of approximately $1.8 million shares of the Company's preferred
stock for approximately $700,000. Over 93% of the Company's total assets at
December 31, 1997 are comprised of cash, cash equivalents, or investments and,
in addition, the Company's investment portfolio is conservatively invested in
high-quality investments as approximately 80% of total assets at December 31,
1997 consisted of either cash or cash equivalents, U.S. Treasury bonds or notes,
or U.S. government agency bonds. In addition, the Company does not hold, either
directly or indirectly, any real estate owned for investment purposes, any fixed
maturity investments rated below AA by nationally recognized rating agencies, or
any equities other than stock in affiliates. The composition of the Company's
total investments is not anticipated to change substantially in the near future.

     Total consolidated liabilities of the Company at December 31, 1997 were
$67,575,817 a decrease of $7,367,187 from the previous year end. This decrease
was the result of the increase in claim payments of approximately $4.5 million
discussed earlier, a decline of approximately $1.5 million in the unearned
premium reserve which was primarily due to the decrease in policyholders, a
decrease in amounts payable to reinsurers on retrospectively rated reinsurance
contracts of $857,000, and a decrease in claims drafts outstanding of
approximately $420,000 which is included in the decrease in other liabilities of
$426,125. Over 86% of the Company's total liabilities at December 31, 1997
relate to reserves for unpaid losses and loss adjustment expenses, which
declined approximately $4.5 million from the prior year end. These unpaid loss
and loss adjustment expense reserves are established based on actuarially
determined estimates and are reviewed regularly by management and the Company's
independent actuary.

     Stockholders' equity as of December 31, 1997, increased $519,318 or 2.4%
from December 31, 1996. This increase was due to the net income in 1997 of
$582,319, the purchase of the Company's preferred stock for $706,377, and the
net increase in the unrealized gains and losses on fixed maturity investments of
$643,376.

     Liquidity and Capital Resources

     Future cash flow for the Company will be primarily dependent on the ability
of its subsidiary, MDA, to pay cash dividends. MDA's cash flow is generated from
its insurance operations and investment portfolio. MDA is subject to annual
statutory dividend limitations as to the amount of any dividend which may be
paid without prior approval of the Director of the Missouri Department of
Insurance. For 1997 the maximum dividend payable to the Company from MDA,
without prior approval of the Missouri Department of Insurance, is $1,979,766.

                                       13
<PAGE>
 
     Liquidity and Capital Resources, continued

     The Company's consolidated net cash flow used by operating activities for
the year ended December 31, 1997 was $2,997,262 which was an increase in net
cash provided by operation of $4,113,584 when compared to the previous year.
This increase was primarily the result of an increase in net income for 1997
compared to the net loss in 1996 of $6,083,361, coupled with an increase in paid
loss and loss adjustment expenses over incurred loss and loss adjustment
expenses of $1,949,676 in 1997 compared to 1996. For the year ended December 31,
1996, compared to the previous year, the Company's consolidated net cash flow
provided by operating activities decreased by $12,750,632. This decrease was
primarily the result of several factors including a decrease in net income for
1996 compared to 1995 of $7,317,420, a decrease in unpaid loss and loss
adjustment expenses during 1996 compared to 1995 of $2,455,000, and the
collection in 1995 of amounts recorded as receivable from reinsurers which
accounted for $2,307,494 million of the variation from 1995.

     During 1997, as a result of the cash flow used by operating activities, the
Company's net cash flow provided from investing activities was $3,143,946, as
fewer fixed maturity investments were purchased to replace those investments
sold or matured. Also, during 1996, due to cash flow used by operating
activities, the Company's net cash flow provided from investing activities was
$6,785,490, again as fewer fixed maturity investments were purchased to replace
those investments sold or matured. Due to the positive cash flow provided by
operations during 1995, the Company was able to increase net cash flow in
investing activities for the year ended December 31, 1995 by $6,812,854.

     During 1997 the Company conducted a second tender offer for its shares of
preferred stock which resulted in the Company acquiring 1,765,943 preferred
shares at a cost of $0.40 per share. On November 15, 1996 the Company completed
the acquisition of 2,781,338 shares of its preferred stock at $0.40 per share in
a tender offer dated September 12, 1996. On June 26, 1995 the Company received
$499,996 in cash for the sale of shares of Class A Common Stock to Company
principals in conjunction with the consummation of the conversion of MDA to a
wholly-owned stock subsidiary of the Company.

     The Company's cash flow from operations and its investment portfolio are
utilized to meet its obligations related to payment of losses and loss
adjustment expenses, payment of operating expenses, and other needs as deemed
necessary from time to time. Under employment agreements with certain officers
and directors, payments totaling approximately $500,000 are to be made if the
number of insureds fall below 913. Such payments are forfeited in whole or in
part if the individual does not remain employed for a period of 36 months
following the payment date.

     The Company does not anticipate in the immediate future any major capital
expenditures outside the normal course of operations.

     The Company anticipates that its future cash flow will be sufficient to
meet its ongoing obligations for the foreseeable future.

                                       14
<PAGE>

     Item 8.  Financial Statements and Supplementary Data
     ----------------------------------------------------

                 MEDICAL DEFENSE HOLDING CO. AND  SUBSIDIARIES
            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

<TABLE>
<CAPTION>
                                                                                                                  Page
                                                                                                              ------------

<S>                                                                                                           <C>
Report of Independent Accountants...........................................................................            16

Consolidated Balance Sheets as of December 31, 1997 and 1996................................................            17

Consolidated Statements of Operations for the years ended December 31,  1997,  1996  and  1995..............            19

Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997,
  1996 and 1995.............................................................................................            20

Consolidated Statements of Cash Flow for the years ended December 31, 1997,  1996  and  1995................            21

Notes to Consolidated Financial Statements..................................................................            22

Schedules:
</TABLE>

<TABLE>
<CAPTION>
<S>        <C>                                                                                                  <C>
           Report of Independent Accountants on Supplemental Schedules........................................           S-1

 I  -      Summary of Investments as of December 31, 1997, 1996 and 1995......................................           S-2

II  -      Condensed Financial Information of Registrant (Parent Company Only) for the
             year ended December 31, 1997 and 1996............................................................           S-3

IV  -      Reinsurance Schedule for the years ended December 31, 1997, 1996 and 1995..........................           S-6

 V  -      Valuation and Qualifying Accounts Gross of Reinsurance for the years ended
             December 31, 1997, 1996 and 1995.................................................................           S-7

VI  -      Supplemental Information Concerning Property/Casualty Insurance Operations
             as of December 31, 1997, 1996 and  1995 and for the years then ended.............................           S-8
</TABLE>


                                       15
<PAGE>
 
Report of Independent Accountants

To the Board of Directors
Medical Defense Holding Co.:


We have audited the accompanying consolidated balance sheets of Medical Defense
Holding Co. and Subsidiaries (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Medical
Defense Holding Co. and Subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

As discussed more fully in Note 12, to the financial statements, the Company
adopted Statement of Financial Accounting Standard No. 128, Earnings Per Share.

 

                                    COOPERS & LYBRAND L.L.P.


St. Louis, Missouri
February 13, 1998

                                       16
<PAGE>
 
Medical Defense Holding Co.

Consolidated Balance Sheets
December 31, 1997 and 1996


<TABLE>
<CAPTION>
          ASSETS                                 1997            1996
<S>                                           <C>             <C>        
Investments:
  Fixed maturity investments, at market 
    value (amortized cost of $73,477,904 
    and $79,151,698, respectively)            $74,091,837     $78,789,906
    Short-term investments, at market           7,242,682       4,508,740
                                              -----------     -----------
      Total investments                        81,334,519      83,298,646
 
Other assets:
    Cash and cash equivalents                   2,955,161       3,514,854
    Accrued investment income                     998,833       1,054,327
    Premium receivable                          1,521,050       1,895,965
    Reinsurance recoverable on loss and
        loss expenses:
      Paid claims                                                   2,798
      Unpaid claims                             1,373,000       1,951,000
    Property and equipment, net of
      accumulated depreciation of
      $1,250,772 and $1,163,536, respectively   1,028,089       1,117,542 
    Federal income tax:
      Current - refundable                        383,879       2,401,224
      Deferred                                                  1,204,000
    Other assets                                  336,094         338,138
                                              -----------     -----------
        Total assets                          $89,930,625     $96,778,494
                                              ===========     ===========
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                      17
<PAGE>
 
<TABLE>
<CAPTION>
       LIABILITIES AND STOCKHOLDERS' EQUITY           1997             1996
<S>                                                <C>              <C> 
Liabilities:
  Claims and policy liabilities:
    Unpaid losses and loss adjustment expenses     $58,654,324      $63,205,000
    Unearned premiums                                6,059,398        7,571,534
                                                   -----------      -----------
      Total claims and policy liabilities           64,713,722       70,776,534
 
Other liabilities:
  Retrospective premium due reinsurers               1,113,047        1,970,047
  Amounts withheld or retained by Company 
    for account of others                              252,429          273,679
  Other liabilities                                  1,496,619        1,922,744
                                                   -----------      -----------
        Total liabilities                           67,575,817       74,943,004
                                                   -----------      -----------
Stockholders' equity:
  Preferred stock, par value $1.00 per share; 
    12,000,000 shares authorized: 
    7,436,095 and 9,208,851 shares issued and 
    outstanding, respectively (Note 3)               7,436,095        9,208,851
  Class A common stock, $0.50 per share; 
    2,000,000 shares authorized: 
    999,998 issued and outstanding                     499,999          499,999
  Class B common stock, $0.50 per share; 
    48,000,000 shares authorized: 
    33,230 and 19,604 shares issued and, 
    outstanding, respectively                           16,615            9,802
  Additional Paid in Capital (Note 3)                2,728,369        1,668,803
  Unrealized gains (losses) on investments 
    (net of deferred income taxes (provision) 
    benefit of $(208,872) and $122,565, 
    respectively)                                      405,456         (237,920)
  Retained earnings                                 11,268,274       10,685,955
                                                   -----------      -----------
        Total stockholders' equity/surplus as 
          regards policyholders                     22,354,808       21,835,490
                                                   -----------      -----------
 
Total liabilities and stockholders' equity         $89,930,625      $96,778,494
                                                   ===========      ===========
</TABLE>

              The accompanying notes are an integral part of the 
                      consolidated financial statements.

                                       18
<PAGE>
 
Medical Defense Holding Co.

Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                    1997             1996               1995
<S>                                                             <C>               <C>                <C>        
Revenues: 
  Premiums earned, including retrospective premium
    adjustments of $857,000, $196,034, and $70,000, 
    respectively                                                $ 12,091,778      $ 13,200,021       $ 15,183,259 
  Investment income                                                5,278,764         5,583,656          5,810,039 
  Net realized investment gains                                      107,234            94,918            218,615 
  Other income                                                           586               825                467
                                                                ------------      ------------       ------------
      Total revenues                                              17,478,362        18,879,420         21,212,380 
                                                                ------------      ------------       ------------
Expenses: 
  Losses and loss adjustment expenses, net of change in 
    reinsurance recoverables of ($578,000), ($432,000), 
    and ($522,000), respectively                                  13,300,937        20,379,346         16,158,522 
  Amortization of policy acquisition costs                           154,784           374,546             59,921 
  Other underwriting and insurance expenses                        2,207,116         2,396,302          2,585,322 
  Investment expenses                                                267,947           286,894            286,762 
  Other operating expenses                                           182,548           147,961             57,212
                                                                ------------      ------------       ------------
      Total expenses                                              16,113,332        23,585,049         19,147,739
                                                                ------------      ------------       ------------
        Income (loss) before provision for 
          federal income taxes                                     1,365,030        (4,705,629)         2,064,641
                                                                ------------      ------------       ------------
Provision for federal income taxes: 
  Current                                                            (89,852)       (2,084,000)         1,088,686 
  Deferred                                                           872,563         2,879,413           (840,423)
                                                                ------------      ------------       ------------
        Total tax provision                                          782,711           795,413            248,263 
                                                                ------------      ------------       ------------
          Net income (loss)                                     $    582,319      $ (5,501,042)      $  1,816,378
                                                                ============      ============       ============
Earnings per common share and common 
  share equivalent (Note 12):
  Basic earnings per common share                               $       0.56      $      (5.39)       $      1.18 
                                                                ============      ============       ============
  Diluted earnings per common share and 
    common share                                                $       0.03      $   n/a(1)         $      0.05 
                                                                ============      ============       ============
</TABLE>

(1) Anti-dilutive

              The accompanying notes are an integral part of the 
                      consolidated financial statements. 

                                      19
<PAGE>
 
Medical Defense Holding Co.

Consolidated Statements of Changes in
Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                            1997                  1996                  1995
<S>                                                   <C>                   <C>                   <C>
Stockholders' equity, January 1                       $    21,835,490       $    29,557,098
Surplus as regards policyholders, January 1                                                       $    22,931,598
 
Changes in surplus/stockholders' equity:
  Net income (loss)                                           582,319            (5,501,042)            1,816,378
 
  Issuance of 999,998 shares common stock Class A                                                         499,996
  
  Purchase of 2,781,338 shares of preferred stock                                (1,112,535)
  Purchase of 1,765,943 shares of preferred stock            (706,377)
 
  Change in unrealized gains and losses on fixed
    maturity investments (net of related deferred 
    tax (provision) credits of $(331,437), 
    $570,804 and $(2,219,853), respectively)                  643,376            (1,108,031)            4,309,126
                                                      ---------------       ---------------       ---------------
 
Stockholders' equity, December 31                     $    22,354,808       $    21,835,490       $    29,557,098
                                                      ===============       ===============       ===============
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       20
<PAGE>
 
Medical Defense Holding Co.

Consolidated Statements of Cash Flow
for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                                                               1997          1996          1995
<S>                                                                                         <C>          <C>            <C>
Operating activities:
  Net income (loss)                                                                         $   582,319   $(5,501,042)  $ 1,816,378

  Adjustments to reconcile net income to net cash (used)
      provided by operating activities:
    Realized investment gains                                                                  (107,234)      (94,918)     (218,615)
    Depreciation and amortization of deferred policy acquisition costs                          266,590       480,341       150,739
    Provision (benefit) for deferred income tax                                                 872,563     2,879,413      (840,423)

  Change in assets and liabilities:
    Accrual and amortization of investment income                                              (64,631)        43,980       197,536
    Premiums receivable from policyholders                                                     374,915        656,928     2,110,509
    Policy acquisition costs deferred                                                         (154,784)      (254,019)     (180,448)
    Reinsurance recoverable on loss and loss expenses:
      Paid claims                                                                                2,798         (2,798)    2,304,696
      Unpaid claims                                                                            578,000        432,000       522,000
    Unpaid losses and loss adjustment expenses                                              (4,550,676)    (2,455,000)     (143,000)
    Unearned premiums                                                                       (1,512,136)      (483,303)   (1,154,845)
    Retrospective premium due reinsurers                                                      (857,000)      (225,449)     (390,956)
    Amounts withheld or retained by Company on account of others                               (21,250)       (92,958)       78,321
    Income tax refundable                                                                    2,017,345     (3,019,698)    1,328,686
    Other assets                                                                                 2,044        349,601      (205,653)
    Other liabilities                                                                         (426,125)       176,076       264,861
                                                                                            -----------   -----------   -----------
        Net cash (used) provided by operating activities                                    (2,997,262)    (7,110,846)    5,639,786
                                                                                            -----------   -----------   -----------

Investing activities:
  Proceeds from:
    Fixed maturity investments :
      Sales                                                                                  10,277,261     5,599,375    10,006,129
      Maturities                                                                              8,152,884     7,466,549     5,551,096

    Short-term investments - Maturities                                                      17,750,000    26,519,421     4,340,000

  Purchase of investments:
    Fixed maturity investments                                                              (12,845,507)   (9,428,393)  (17,869,313)
    Short-term investments                                                                  (20,168,339)  (23,231,664)   (8,795,496)
  Purchases of property and equipment                                                           (22,353)     (139,798)      (45,270)
                                                                                            -----------   -----------   -----------
      Net cash provided used) by investing activities                                         3,143,946     6,785,490    (6,812,854)
                                                                                            -----------   -----------   -----------
Financing activities:
  Proceeds from sale of common stock                                                                                        499,996
     Purchase of preferred stock (Note 3)                                                      (706,377)   (1,112,535)
                                                                                            -----------   -----------   -----------
      Net cash (used) provided by financing activities                                         (706,377)   (1,112,535)      499,996
                                                                                            -----------   -----------   -----------
        Net (decrease) in cash and cash equivalents                                            (559,693)   (1,437,891)     (673,072)

Cash and cash equivalents, beginning of period                                                3,514,854     4,952,745     5,625,817
                                                                                            -----------   -----------   -----------
Cash and cash equivalents, end of period                                                    $ 2,955,161   $ 3,514,854   $ 4,952,745
                                                                                            ===========   ===========   ===========
Federal income taxes (recovered) paid                                                       $(2,107,197)  $   935,698   $  (231,000)
                                                                                            ===========   ===========   ===========
</TABLE>

        The accompanying notes are an integral part of the consolidated
                             financial statements.

                                      21
<PAGE>
Medical Defense Holding Co.

Notes to Consolidated Financial Statements
 
1.   Organization and Related Matters:

     Medical Defense Holding Co. (the "Company") is a Missouri general business
     corporation formed on November 28, 1994, for the purpose of facilitating
     the consummation of a series of transactions whereby Medical Defense
     Associates ("MDA") converted from a mutual assessment insurance
     organization under Chapter 383 RSMo to a wholly-owned stock insurance
     company subsidiary of the Company. MDA's conversion was completed on June
     26, 1995 in accordance with an agreement and plan of conversion dated
     November 29, 1994. The agreement and plan of conversion was approved by
     eligible policyholders at a special meeting on April 3, 1995.

     MDA was organized in 1976 as a mutual assessment insurance organization for
     the purpose of providing protection against loss from medical professional
     liability claims for Missouri health care professionals. MDA's wholly-owned
     subsidiary, Medical Defense Services Corp.("MDS") provides management
     services primarily to MDA. MDS's wholly-owned subsidiary, Medical Defense
     Insurance Company ("MDIC"), is a stock insurance company organized under
     Chapter 379 RSMo for the purpose of providing protection against loss from
     medical professional liability claims. MDIC is licensed to operate in
     Missouri and Kansas but only wrote business in Kansas from its inception in
     1982 until September 1, 1988 when it ceased writing business. In 1994, MDIC
     again began writing policies in Kansas.


2.   Summary of Significant Accounting Policies:

     The following is a description of the significant accounting policies under
     generally accepted accounting principles followed by the Company in the
     preparation of the accompanying consolidated financial statements:

     A. Pervasiveness of Estimates: The preparation of consolidated financial
        statements in conformity with generally accepted accounting principles
        requires management to make estimates and assumptions that affect the
        reported amounts of assets and liabilities at the date of the
        consolidated financial statements and the reported amounts of revenues
        and expenses during the reporting period. Actual results could differ
        from those estimates.

     B. Principles of Consolidation: The consolidated financial statements of
        the Company include Medical Defense Holding Co. and its wholly-owned
        subsidiaries, MDA, MDS and MDIC. As described in Note 1, the Company
        acquired MDA on June 26, 1995. The accompanying statements which pertain
        to preacquisition periods have been prepared as if the companies were
        combined throughout those periods. All significant intercompany
        transactions have been eliminated.

     C. MDA Statutory Net Income and Surplus: The accompanying financial
        statements have been prepared in conformity with generally accepted
        accounting principles which vary in certain respects from accounting
        practices prescribed or permitted by the Missouri Department of
        Insurance statutory accounting practices.

                                      22
<PAGE>
 
Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued



2.   Summary of Significant Accounting Policies, continued:

     C.   MDA Statutory Net Income and Surplus, continued: A reconciliation of
          net income for the years 1997, 1996 and 1995 and surplus as regards
          policyholders at December 31, 1997, 1996 and 1995 reported by MDA on a
          generally accepted accounting principles (GAAP) basis which includes
          its wholly-owned subsidiaries MDS and MDIC, to the amounts reported by
          MDA on a statutory basis which includes equity in MDS and MDIC is as
          follows:


<TABLE>
<CAPTION>
        Net (Loss) Income
 
      Year ended December 31              1997           1996          1995
        
 
      <S>                            <C>              <C>         <C> 
       GAAP net income (loss)         $   341,567    $(5,649,894)   $ 1,570,789
       Change in deferred
        acquisition costs                                120,528       (120,528)
       Deferred income taxes              872,563      2,879,413       (840,423)
                                      -----------    -----------    -----------
 
       Statutory net income (loss)    $ 1,214,130    $(2,649,953)   $   609,838
                                      ===========    ===========    ===========

 
        Surplus as Regards Policyholders
 
       Year ended December 31             1997           1996          1995
       
 
       GAAP basis                     $19,007,534    $19,829,961    $26,427,657
       Nonadmitted assets for
        statutory reporting                              (25,886)       (23,422)
       Unrealized losses (gains)         (602,879)       370,151     (1,304,624)
       Deferred acquisition costs                                      (120,528)
       Discount of reserves             1,393,000      2,090,000      2,787,000
       Deferred income taxes                    0     (1,204,000)    (3,512,609)
                                      -----------    -----------    -----------
       Statutory surplus as regards
        policyholders                 $19,797,655    $21,060,226    $24,253,474
                                      ===========    ===========    ===========
</TABLE>


          The maximum amount of dividends which can be paid by Missouri
          insurance companies without prior approval of the Insurance
          Commissioner is subject to statutory provisions. Dividends paid by MDA
          to the Company during 1997 and 1996 were $2,100,000 and $0,
          respectively. The maximum dividend payout which may be made in 1998,
          without prior approval of the Missouri Department of Insurance, is
          $1,979,766.

                                       23
<PAGE>
 
Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued


2.   Summary of Significant Accounting Policies, continued:

     D.   Premium Revenues and Related Expenses: Premiums are recognized as
          income over the terms of the related insurance policies. The unearned
          premium reserve represents the portion of the premiums written that
          relate to the unexpired terms of policies in force. Such reserves are
          computed on a pro rata method.

          The Company operates as a direct writer of professional liability
          insurance and thus does not incur sales commissions or other variable
          sales costs directly related to premium production which are normally
          associated with deferred acquisition costs. Subsequent to completion
          of MDA's conversion to a stock insurance company, as discussed in Note
          1, all MDA premiums written are subject to Missouri premium taxes.
          Deferred acquisition costs recorded during 1997 and 1996 relate
          entirely to Missouri premium taxes. Such deferred costs are amortized
          over the terms of the underlying policies, written off when policies
          are canceled and tested for recoverability out of the unearned premium
          reserve annually.

     E.   Unpaid Losses and Loss Adjustment Expenses: As more fully described in
          Note 10, the reserves for losses and loss adjustment expenses include
          amounts determined on the basis of individual claims and actuarially
          determined estimates of future losses. The methods of making such
          estimates and for establishing the resulting liabilities are
          continually reviewed and updated based upon current circumstances and
          any adjustments resulting therefrom are reflected in current
          operations.

          Losses and loss adjustment expenses incurred, and the liabilities for
          unpaid losses and loss adjustment expenses are shown gross of any
          reinsurance recoveries from other companies. In the event that any
          reinsuring company was unable or unwilling to meet its obligations
          under existing agreements, MDA would become liable.

     F.   Investments: Statement of Financial Accounting Standards No. 115,
          Accounting for Certain Investments in Debt and Equity Securities
          ("SFAS"), requires companies to classify securities into three
          categories. Held-to-maturity debt securities that the Company has the
          positive intent and ability to hold to maturity, are to be reported at
          amortized cost. Debt and equity securities that are bought and held
          principally for the purpose of selling them in the near term are
          classified as trading securities and are to be reported at fair value,
          with unrealized gains and losses included in earnings. Debt and equity
          securities not classified in the other two categories are classified
          as available-for-sale securities and reported at fair value, with
          unrealized gains and losses excluded from earnings, and reported as a
          separate component of surplus as regards policyholders.

                                       24
<PAGE>
 
Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued


2.  Summary of Significant Accounting Policies, continued:

     F.   Investments, continued: The Company has classified all investments in
          fixed maturities as available for sale and carries such investments at
          market value as a result of the Company's willingness to sell
          investments based on market conditions and interest rate changes.
          Should the Company experience declines in market value that are other
          than temporary, the difference between amortized cost and market would
          be recognized through current earnings.

          Fair value is defined as market value based on third-party quoted
          market prices of the securities or when unavailable, on similar
          securities.

          Investment income includes amortization of premium and accretion of
          discount relating to fixed maturities acquired at other than par
          value.

          At December 31, 1997 and 1996, short-term investments consist of
          certificates of deposit which mature between three months and one
          year, a repurchase agreement investing exclusively in securities
          issued and guaranteed by the U.S. Treasury, and U.S. Treasury Bills
          with original maturities between three months and one year. The
          carrying amounts reported in the balance sheet for these instruments
          is their estimated fair values.

          Gains or losses on sales of investments are determined on a specific
          cost identification basis.

     G.   Property and Equipment: Property and equipment are carried at cost
          less accumulated depreciation. Depreciation is computed over the
          estimated useful lives of the assets using the modified accelerated
          cost recovery method. Maintenance, repairs and minor renewals are
          charged to expense as incurred while renewals and betterments are
          capitalized.

          The cost and related allowance for depreciation of assets sold or
          retired are removed from the related accounts and the resulting gains
          or losses are reflected in operations.

     H.   Federal Income Taxes: The Company employs the provisions of Statement
          of Financial Accounting Standards No. 109, Accounting for Income Taxes
          ("SFAS 109"). SFAS 109 requires recognition of deferred tax assets and
          liabilities for the expected future tax consequences of events that
          have been included in the financial statements or tax returns. Under
          this method, deferred tax assets and liabilities are determined based
          upon the differences between the financial statement and tax bases of
          assets and liabilities using enacted tax rates in effect for the year
          in which the differences are expected to reverse.

     I.   Cash Equivalents: Cash equivalents represent bank repurchase
          agreements or certificates of deposit with original maturity dates
          within 90 days.

                                       25
<PAGE>
 
Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued


3.   Capital Stock:

     During 1995 the Company issued 11,999,991 shares of $1.00 par value
     redeemable convertible preferred stock, with limited voting rights, to the
     eligible policyholders of MDA in exchange for their mutual policyholders'
     rights in MDA. Each share of preferred stock is convertible into two shares
     of Medical Defense Holding Co. Class B Common Stock, at the holder's
     option, and may be converted at any time prior to redemption. Holders of
     preferred stock have limited voting rights as set forth in the Company's
     Articles of Incorporation. Such voting rights primarily deal with a change
     in control or a sale of a major portion of the Company's assets. Each share
     of preferred stock is redeemable, at the Company's option, after three
     years from the date of issuance, at a price per share of $1.00. The
     preferred stock does not provide a stated dividend; however, no dividends
     may be paid on any Company common stock while there are preferred stock
     shares outstanding. In 1997, 6,813 shares of preferred stock were converted
     to 13,626 shares of Class B common stock. In 1995, 9,802 shares of
     preferred stock were converted to 19,604 shares of Class B common stock.

     On August 8, 1997, MDHC initiated a tender offer for up to 5,000,000 shares
     of the Company's $1.00 par value redeemable preferred stock at a price
     ranging from $0.30 to $0.40 per share, utilizing a method commonly referred
     to as a Dutch auction. This offer closed on October 3, 1997, with the
     Company accepting 1,721,445 tendered shares at a price of $0.40 per share.
     The tender offer was completed on October 16, 1997, with the Company's
     payment of $688,578 for all preferred shares accepted for purchase. In
     addition, during December 1997, the Company purchased 44,498 shares of its
     convertible preferred stock, at a total purchase price of $17,799, from a
     small number of shareholders, at their request, at a price of $0.40 per
     share. The difference between the payment and the par value of the stock
     has been credited to additional paid-in capital.

     On September 12, 1996, MDHC initiated a tender offer for up to 5,000,000
     shares of the Company's $1.00 par value redeemable preferred stock at a
     price ranging from $0.30 to $0.40 per share, utilizing a method commonly
     referred to as a Dutch auction. This offer closed on November 1, 1996, with
     the Company accepting 2,781,338 tendered shares at a price of $0.40 per
     share. The tender offer was completed on November 15, 1996, with the
     Company's payment of $1,112,535 for all preferred shares accepted for
     purchase. The difference between the payment and the par value of the stock
     has been credited to additional paid-in capital.

     The Company has issued shares of $0.50 par value Class A common stock, in
     accordance with an agreement and plan of conversion dated November 29,
     1994, in exchange for cash. Class A common stock is not redeemable and is
     entitled to fifty votes per share on all matters.

     The Company has issued shares of $0.50 par value Class B common stock in
     accordance with the conversion rights of the convertible preferred stock.
     Class B common stock is not redeemable and is entitled to one vote per
     share on all matters.

                                       26
<PAGE>
 
Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued


4.   Investments:

     The following information summarizes the difference between amortized cost
     and market value of fixed maturities investments:


<TABLE>
<CAPTION>
                                                                Gross         Gross          Estimated
                                              Amortized       Unrealized    Unrealized         Market
      December 31, 1997                          Cost           Gains         Losses           Value
<S>                                         <C>               <C>          <C>              <C> 
 
     U.S. Treasury debt securities and
        obligations of U.S.
        Government corporations and
        agencies                            $36,435,311         $417,449      $ 85,125     $36,767,635
     Corporate debt securities                5,126,604           81,809         2,942       5,205,471
     Mortgage-backed securities              27,129,137          270,152        92,807      27,306,482
     Other debt securities                    4,786,852           40,073        14,676       4,812,249
                                            -----------         --------      --------     -----------
 
                                            $73,477,904         $809,483      $195,550     $74,091,837
                                            ===========         ========      ========     ===========

</TABLE>


<TABLE>
<CAPTION>
                                                                Gross         Gross          Estimated
                                              Amortized       Unrealized    Unrealized         Market
      December 31, 1996                          Cost           Gains         Losses           Value
<S>                                         <C>               <C>          <C>              <C> 
 
     U.S. Treasury debt securities and
        obligations of U.S.
        Government corporations and
        agencies                            $40,130,465         $207,149      $336,604     $40,001,010 
     Corporate debt securities                6,371,525           78,063        37,161       6,412,427 
     Mortgage-backed securities              29,829,606          188,864       434,881      29,583,589 
     Other debt securities                    2,820,102           13,306        40,528       2,792,880   
                                            -----------         --------      --------     -----------
                                                                                                                   
                                            $79,151,698         $487,382      $849,174     $78,789,906
                                            ===========         ========      ========     ===========
 
</TABLE> 

     The change in net unrealized holding gain or loss on available for sale
     securities, net of deferred taxes, for the years ended December 31, 1997,
     1996 and 1995 are as follows:


<TABLE>
<CAPTION>
                              1997            1996             1995
 <S>                      <C>              <C>              <C>    
                           $ 643,376      $ (1,108,031)     $ 4,309,126
                           =========      ============      ===========
</TABLE>
                                                                               

                                       27
<PAGE>
 
Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued


4.   Investments, continued:

     The amortized cost and estimated market value of debt securities by
     estimated and contractual maturity are shown as follows:

<TABLE>
<CAPTION>
        
                                                                  Estimated
                                                 Amortized          Market
          December 31, 1997                        Cost              Value
                                                            
<S>                                             <C>              <C>
     Due in one year or less                    $ 9,302,759       $ 9,322,741
     Due after one year through five years       33,333,631        33,490,968
     Due after five years through ten years      23,737,086        24,122,023
     Due after ten years                          7,104,428         7,156,105
                                                -----------       -----------
                                                            
                                                $73,477,904       $74,091,837
                                                ===========       ===========
</TABLE>

     For purposes of the above, bonds without prepayment characteristics have
     been included at their stated maturity date. Bonds with prepayment features
     are included at their estimated maturity date as supplied by the Company's
     investment adviser. Accordingly, actual maturities may differ from
     estimates.

     Accrued investment income at December 31, is as follows:

<TABLE>
<CAPTION>
                                          1997                 1996
 
     <S>                                   <C>                   <C>
     U.S. Treasury securities           $705,909            $  726,630
     Corporate bonds                     114,506               140,595
     Mortgage-backed securities          159,026               174,860
     Other debt securities                19,392                12,242
                                        --------            ----------
 
                                        $998,833            $1,054,327
                                        ========            ==========
</TABLE>

     Securities on Deposit With Statutory Authorities: MDA had a U.S. Treasury
     Note with a par value of $1,400,000 at December 31, 1997, on deposit with
     the state of Missouri. In addition, MDA had on deposit U.S. Treasury Notes
     with a par value totaling $5,000,000 at December 31, 1997, on deposit with
     the state of Missouri in compliance with a joint custody agreement with the
     Missouri Department of Insurance. This joint custody agreement relates to
     the release of MDA's former members' assessment liabilities relative to
     assessable insurance policies issued by MDA prior to the conversion date
     (Note 1).

     To comply with the Missouri Department of Insurance, MDIC had a U.S.
     Treasury Note with a par value of $850,000 as of December 31, 1997 and
     1996, on deposit with the state of Missouri.

                                       28
<PAGE>
 
Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued


4.   Investments, continued:

     Escrow Funds: Pursuant to the settlement agreement for a specific claim,
     MDA has deposited $400,000 in escrow to guarantee future annuity payments.
     MDA receives all earnings on the escrowed funds. At December 31, 1997 and
     1996, the escrowed funds were invested in a $400,000 par value U.S.
     Treasury Note with a fair value of $406,248 and $400,876, respectively,
     which is included with investments on the balance sheet. This U.S. Treasury
     note matures April 30, 2001.


     Net investment income by source for each of the three years ended December
     31, was as follows:


<TABLE>
<CAPTION>
                                          1997          1996         1995
<S>                                    <C>         <C>           <C>    
 
     Investment income:
       Fixed maturity investments      $4,834,942    $5,111,510   $5,285,665
       Short-term investments             443,822       472,146      524,374
                                       ----------    ----------   ----------

          Total investment income       5,278,764     5,583,656    5,810,039
                    
 
     Less investment expenses             267,947       286,894      286,762
                                       ----------    ----------   ----------
 
          Net investment income        $5,010,817    $5,296,762   $5,523,277
                                       ==========    ==========   ==========

</TABLE>

     Realized gains on investments reflected in the results of operations for
     each of the three years ended December 31, are as follows:


<TABLE>
<CAPTION>
                                          1997          1996         1995
 
<S>                                    <C>           <C>           <C>
     Sale of fixed maturity 
      investments: 
       Realized gains                  $  117,871    $  103,817   $  220,862
       Realized losses                    (10,637)       (8,899)      (2,247)
                                       ----------    ----------   ----------

          Net realized gains           $  107,234    $   94,918   $  218,615
                                       ==========    ==========   ==========
</TABLE>

                                       29
<PAGE>

Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

 
5.   Concentrations of Credit Risk:

     The Company maintains the following assets, at amortized cost, issued by
     single entities in excess of 10% of stockholders' equity at December 31:


<TABLE>
<CAPTION>
                                                   1997          1996
 <S>                                           <C>             <C>
  
     Commerce Bank of Springfield -
       Collateralized repurchase agreement      $ 2,295,000      $ 3,315,000
                                                ===========      ===========
</TABLE>

     All premiums are receivable from physicians, surgeons, dentists, and
     related health care providers, primarily concentrated in Missouri.

     See Note 8 regarding reinsurance.


6.   Management Contract:

     MDA and MDIC entered into contracts in 1983 with MDS whereby MDS performs
     management and administrative services on behalf of the insurance
     companies.

     MDS has a noncontributory defined contribution pension plan covering
     substantially all employees of the affiliated group. As a matter of policy,
     pension costs are funded as they accrue. Pension expense was $210,602,
     $175,968 and $203,710 in 1997, 1996 and 1995, respectively. MDS also has a
     401(k) savings plan covering substantially all employees of the affiliated
     group which the Company provides a 100% matching contribution up to 6% of
     compensation subject to current IRS limitations. The 401(k) savings plan
     expense for 1997, 1996 and 1995 totaled $82,323, $85,042 and $79,985,
     respectively.


7.   Deferred Policy Acquisition Costs:

     Changes in deferred policy acquisition costs at December 31, are summarized
     as follows:


<TABLE>
<CAPTION>
                                                    1997            1996
 
<S>                                             <C>             <C>  
        Deferred, January 1                      $       0        $ 120,527
 
        Additions - Premium tax                    154,784          254,019
        Less - Amortization and write-off
         to expense                                154,784          374,546
                                                 ---------        ---------
 
       Deferred, December 31                     $       0        $       0
                                                 =========        =========
</TABLE>

                                       30
<PAGE>

Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

 
8.   Reinsurance:

     MDA reinsured all occurrence basis policies issued after October 31, 1980
     and all claims-made policies issued before November 1, 1987. MDA ceased
     reinsuring claims-made policies as of November 1, 1987. All claims related
     to occurrence policies issued after October 31, 1980 and claims-made
     policies before November 1, 1987 are still reinsured. The Company is liable
     for reinsured amounts in the event a reinsurer is unable to pay its portion
     of the losses. The recoverable related to the policies is an asset on the
     balance sheet.

     A reserve for estimated retrospective premium due reinsurers has been
     established for the excess of the anticipated reinsurance premium payable
     over the amount paid to date for reinsurance treaty years 1980 through
     1987. The ultimate reinsurance premium to be paid is based on an actuarial
     evaluation of the ultimate loss developments for claims arising during
     those treaty years. Changes in the estimated amount due reinsurers is
     reflected in current operations.

     All reinsurance contracts are with Lloyd's Underwriters and related
     syndicates.

     MDIC reinsured all claims-made policies from February 14, 1983 through
     August 14, 1987. As of December 31, 1996, MDIC had no outstanding claims
     that were anticipated to involve reinsurers.

                                       31
<PAGE>

Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

 
9.   Federal Income Tax:

     The Company files a consolidated federal income tax return. The following
     table accounts for the differences between the actual tax provision and the
     amounts obtained by applying the statutory U.S. federal income tax rate to
     income before income taxes:


<TABLE>
<CAPTION>
                                       1997                               1996                                  1995
                              ------------------------          ---------------------------           -------------------------
 
                               Income       Effective            Income          Effective              Income       Effective
                                Taxes       Tax Rate              Taxes           Tax Rate              Taxes         Tax Rate
<S>                          <C>           <C>                 <C>              <C>                    <C>          <C> 
 
     Pre-tax income (loss)
       calculated at
       statutory tax
       rates                   $464,110        34.00%          $(1,599,914)        34.00%              $701,978        34.00%
     Nondeductible
       reorganization
       costs                                                                                             98,036         4.75
     Other permanent
       differences               47,367         3.47                20,623         (0.44)               (32,047)       (1.56)
     Change in valuation
       allowance                271,234        19.87             2,374,704        (50.47)              (519,704)      (25.17)
                               --------        -----            ----------        ------              ---------       ------
     Provision for income
       taxes                   $782,711        57.34%           $  795,413        (16.91)%            $ 248,263        12.02%
                               ========        =====            ==========        =======             =========        ======
</TABLE>

                                       32
<PAGE>

Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

9.   Federal Income Tax, continued:

     The components of the net deferred tax asset at December 31, 1997 and 1996
     are as follows:
<TABLE>
<CAPTIONS>
                                                  1997                                 1996
                                    ---------------------------------   ----------------------------------
          <S>                        <C>               <C>                <C>                <C>

                                       Deferred            Deferred          Deferred          Deferred
                                          Tax                Tax               Tax                Tax
                                         Asset            Liability           Asset            Liability

          Tax discounting of loss
              reserves               $   3,571,217                        $    4,069,721
          Tax acceleration of
              unearned premium             412,039                               514,864
          Unrealized gain/loss                                 208,872           122,565
                                    --------------     ---------------    --------------     -------------

                                     $   3,983,256     $       208,872    $    4,707,150     $
                                    ==============     ===============    ==============     =============
          Net deferred federal
              income tax asset       $   3,774,384                        $    4,707,150

          Valuation allowance           (3,774,384)                           (3,503,150)
                                    --------------                        --------------

          Net realized deferred
              asset                 $           0                        $    1,204,000
                                    ==============                        ==============
          </TABLE>

     The valuation allowance represents the difference between the total
     deferred tax asset related to loss reserve discounting required by the
     Internal Revenue Service and the amount that is more likely than not to be
     realized. Medical malpractice is a long tail line of business. The
     Company's payout pattern as well as the industry payout pattern for this
     line of business is expected to be 15 years or longer.

     Management evaluates the payout pattern based on advice from its outside
     actuary concerning trends in claim frequencies and severities and needed
     changes in future premium rates, industry trends and experience of direct
     Missouri competitors in these matters.

                                      33
<PAGE>
 

Medical Defense Holding co.

Notes to Consolidated Financial Statements, Continued


9.   Federal Income Tax, continued:

     Projection of future income is inherently uncertain and the achievability
     of any projection is made more difficult by the length of the discount
     period. Historical losses cannot be adjusted precisely to future cost
     levels and the impacts of future emergence of new classes of losses or
     types of losses which may not be represented sufficiently in the Company's
     data base or which are not yet quantifiable, cannot be precisely
     anticipated. Utilizing an outside actuary, management believes that it can
     reasonably estimate the amount of the loss reserves which will likely
     settle in future years. Based on this estimate, management can determine
     how much of the discount will likely reverse and could be recovered, if
     necessary, from taxes paid in the carryback period. The 1997 Tax Act
     changed the carryback period for net operating losses from three years to
     two years effective for tax years beginning after August 5, 1997. This
     change impacted the amount of taxes recoverable from carrybacks as no taxes
     were paid in 1996 and 1997.

     Management does not believe it can reasonably determine the amount of loss
     reserve deferred tax benefit which can be recovered from future taxable
     income arising more than two years beyond the carryback period using a more
     likely than not standard.

     The change in the valuation allowance is as follows:

<TABLE>
<CAPTION>
                       1997                 1996                 1995

                   <S>               <C>                <C>
                   $    271,234      $     2,374,704    $        (519,704)
                   ============      ===============    =================
</TABLE>

10.  Unpaid Losses and Loss Adjustment Expenses:

     The Company's reserves for loss and loss adjustment expenses represent the
     estimated ultimate cost of all losses and loss adjustment expenses which
     are unpaid at the balance sheet date.

     The reserves include estimates of future trends in claim frequency,
     severity and cash flow, which could vary as the losses are ultimately
     settled; thus, the ultimate liability may be in excess of, or less than,
     the amounts provided in the accompanying financial statement.

     Company management and their independent actuary believe the reserves are
     reasonably stated to cover the ultimate net cost of losses and related loss
     adjustment expenses which are unpaid at December 31, 1997 and 1996,
     respectively; however, as the reserves are based on estimates, there can be
     no assurance that the ultimate liability will not differ from such
     estimates. Developments on 1995 and prior years are due primarily to
     increases in claim severity that have been considered in ultimate loss
     projections at December 31, 1997 and 1996.

     MDIC's reserves for loss and loss adjustment expenses have not been
     actuarially reviewed due to the few number of claims outstanding. MDIC's
     reserves represent less than 1% of total reserves for the periods
     represented by the financial statements.

                                       34
<PAGE>


Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

10.  Unpaid Losses and Loss Adjustment Expenses, continued:

     Activity in the liability for unpaid claims and claim adjustment expenses
     is summarized as follows:


<TABLE>
<CAPTION>
                                                              1997                  1996
<S>                                                   <C>                   <C>
Balance at January 1                                  $    63,205,000       $    65,660,000
Less reinsurance recoverables                               1,951,000             2,383,000
                                                      ---------------       ---------------
Net balance at January 1                                   61,254,000            63,277,000
                                                      ---------------       ---------------
Incurred related to:
    Current year                                           13,505,569            15,802,388
    Prior years                                              (204,632)            4,576,958
                                                      ---------------       ---------------
       Total incurred                                      13,300,937            20,379,346
                                                      ---------------       ---------------
Paid related to:
    Current year                                              265,569               749,388
    Prior years                                            17,008,044            21,652,958
                                                      ---------------       ---------------
       Total paid                                          17,273,613            22,402,346
                                                      ---------------       ---------------
Net balance at December 31                                 57,281,324            61,254,000
Plus reinsurance recoverables                               1,373,000             1,951,000
                                                      ---------------       ---------------
Balance at December 31                                $    58,654,324       $    63,205,000
                                                      ===============       ===============
</TABLE>
11.  Commitments and Contingencies:

     The Company is party to a number of insurance claims arising in the normal
     course of business. While the results of litigation cannot be predicted
     with certainty, management, based upon the advice of Company's counsel,
     believes that the final outcome of such litigation will not have a material
     adverse effect on the consolidated financial position or results of
     operations of the Company.

     Under employment agreements with certain officers and directors, payments
     totaling approximately $500,000 are to be made if the number of insureds
     fall below 913. Such payments are forfeited in whole or part if the
     individual does not remain employed for a period of 36 months following the
     payment date.

                                       35
<PAGE>

Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued
 
12.  Net Income Per Common Share:

     In February of 1997, the Financial Accounting Standards Board published
     Statement of Financial Accounting Standard No. 128, Earnings Per Share
     ("SFAS 128"), which requires certain changes in the reporting of earnings
     per share. The Company was required to adopt SFAS 128 at December 31, 1997.
     Additionally, the Company was required to restate 1996 and 1995 earnings
     per share data as previously presented.

     SFAS 128 requires the computation of basic earnings per share ("EPS") and
     diluted EPS. Basic EPS is computed by dividing income (loss) available to
     common shareholders by the weighted-average number of common shares
     outstanding for the period. Diluted EPS is computed by dividing income
     (loss) available to shareholders by the weighted-average number of common
     shares plus the weighted-average number of common share equivalents
     outstanding for the period. Anti-dilutive amounts are not shown which was
     the case for the year ended December 31, 1996.

     All of the Company's preferred stock are convertible to common stock at a
     ratio of two shares of common stock to one share of preferred stock, and
     therefore, are considered common stock equivalents. The Company's preferred
     stock has no stated dividend rate, and therefore, these securities have no
     effect on computing basic EPS.

     As discussed in Note 3, on October 16, 1997 and November 15, 1996, the
     Company purchased 1,721,445 and 2,781,338 shares of its convertible
     preferred stock. In addition, during December 1997, the Company purchased
     44,498 shares of its convertible preferred stock from a small number of
     shareholders.

     On June 26, 1995, MDA was converted to a stock insurance company and became
     a wholly owned subsidiary of MDHC. Therefore the net income of $617,713
     recorded by MDA as of June 30, 1995, is virtually entirely attributable to
     preconversion results and, therefore, is excluded for 1995 earnings per
     share presentation purposes.

                                      36
<PAGE>

Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued


12.  Net Income Per Common Share, continued:

     Basic and diluted earnings per share for the three years ended December 31,
     is as follows:

<TABLE> 
<CAPTION> 
                                             1997        1996           1995
<S>                                     <C>         <C>            <C> 
Net income (loss)                        $  582,319  $ (5,501,042)  $ 1,816,378
                                          
Less net income of subsidiary through
 June 30, 1995                                                         (617,713)
                                         ----------  ------------   -----------
  Adjusted net income                    $  582,319  $ (5,501,042)  $ 1,198,665
                                         ==========  ============   ===========
Weighted average common shares
 outstanding                              1,031,025     1,019,602     1,019,602
 

Weighted average common stock options
 expressed as common stock equivalents   17,688,120    23,281,244    23,980,378
                                         ----------  ------------   -----------
 
Weighted average common and equivalent
 shares outstanding                      18,719,145    24,300,846    24,999,980
                                         ==========  ============   ===========
 
Basic earnings per share                 $     0.56  $      (5.39)  $      1.18
                                         ==========  ============   ===========
 
Diluted earnings per share               $     0.03  $   n/a(1)     $      0.05
                                         ==========  ============   ===========
</TABLE>

(1) Anti-dilutive
 
13. Retained Earnings:


     Retained earnings at December 31, is derived as follows:

<TABLE> 
<CAPTION> 
                                                        1997          1996
<S>                                                <C>           <C> 
Unassigned surplus/retained earnings at January 1   $ 10,685,955  $16,186,997
   
Net income                                               582,319   (5,501,042)
                                                    ------------  ----------- 
Retained earnings at December 31                    $ 11,268,274  $10,685,955
                                                    ============  ===========  
</TABLE> 

                                      37
<PAGE>
 
     Item 9.  Changes in and Disagreements with Accountants on Accounting and
     ------------------------------------------------------------------------
     Disclosures
     -----------

     There have been no changes in nor any disagreements with accountants on
accounting and financial disclosure within the three year period ended December
31, 1997.

                                   PART III

     Item 10. Directors and Executive Officers of the Registrant
     -----------------------------------------------------------

     IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

     The board of directors of the Company consists of six (6) persons, all of
whom are currently directors, executive officers, or both, of the Company,
MDA, MDS and MDIC.

     The directors and executive officers of the Company are currently as
follows:

<TABLE>
<CAPTION>
                                                                                    Period as a
                                                                                    Director of the
     Name                    Age   Principal Occupation    Position                 Company
     ----                    ---   --------------------    --------                 ---------------
<S>                          <C>  <C>                      <C>                     <C>
     Ronald G. Benson         57   Obstetrician/            Chairman of the Board,  1994 to date
                                   Gynecologist             President and Chief
                                                            Executive Officer
 
     Gary L. Robinson         61   Obstetrician/            Vice President          1994 to date
                                   Gynecologist
 
     John J. Stamatis         56   Thoracic and Cardio-     Vice President          1994 to date
                                   vascular Surgeon
 
     David W. Brown           59   Orthopedic Surgeon       Treasurer               1994 to date
 
     Arlen D. Winsky          60   Plastic Surgeon          Secretary               1994 to date
 
     Geri H. Morrison         42   Chief Operating Officer  Assistant Secretary     1994 to date
                                                            and Chief Operating
                                                            Officer
 
     Samuel J. Pippin         42   Director of Accounting   Principal Financial
                                                            Officer and Principal
                                                            Accounting Officer
</TABLE> 

     The officers of the Company are to be elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the board of directors of the company.
 
     FAMILY RELATIONSHIPS

     Geri H. Morrison and Robert E. Morrison are married to each other. In
addition to being a Director and Chief Operating Officer of the Company, Ms.
Morrison is a Director of MDA and MDIC and Chief Operating Officer of MDA, MDS
and MDIC. Mr. Morrison is a Director of MDA and MDIC.

                                       38
<PAGE>
 
     BUSINESS EXPERIENCE

     Ronald G. Benson, M.D., age 57, has been a member of the Board of Directors
of the Company since 1994, MDA since 1976 and of MDS and MDIC since 1982.  He
has served as Chairman of the Board of Directors of the Company since 1994, MDA
since 1983 and of MDS and MDIC since 1982.  He has served as President and Chief
Executive Officer of the Company since 1994. Since 1976, he has served as
President of MDA and as Chief Executive Officer of MDA since 1989.  He has
served as the Chairman of the Board of Directors since 1982, President since
1992, and Chief Executive Officer of MDS since 1989.  He has served as Chairman
of the Board of Directors of MDIC since 1982, Chief Executive Officer of MDIC
since 1989, and President of MDIC since 1992.  Dr. Benson is an
obstetrician/gynecologist practicing in Springfield, Missouri.

     Gary L. Robinson, M.D., age 61, has been a member of the Board of Directors
of the Company since 1994, MDA since 1976 and of MDS and MDIC since 1982.  He
has served as Vice President of the Company since 1994, MDA since 1976 and as
Vice President of MDS and MDIC since 1982.  Dr. Robinson is an
obstetrician/gynecologist practicing in Springfield, Missouri, and is affiliated
with the Family Residency Program at Cox Health Systems in Springfield,
Missouri.

     John J. Stamatis, M.D., age 56, has been a member of the Board of Directors
of the Company since 1994, MDA since 1976 and of MDS and MDIC since 1982.  He
has served as Vice President of the Company since 1994, MDA since 1979 and of
MDS and MDIC since 1982.  Dr. Stamatis is a thoracic and cardiovascular surgeon
practicing in Springfield, Missouri.

     David W. Brown, M.D., age 59, has been a member of the Board of Directors
of the Company since 1994, MDA since 1976 and of MDS and MDIC since 1982.  He
has served as Treasurer of the Company since 1994, MDA since 1979 and of MDS and
MDIC since 1982.  Dr. Brown is an orthopedic surgeon practicing in Springfield,
Missouri.

     Arlen D. Winsky, M.D., age 60, has been a member of the Board of Directors
of the Company since 1994, MDA since 1976 and of MDS and MDIC since 1982.  He
has served as Secretary of the Company since 1994, MDA since 1976 and of MDS and
MDIC since 1982.  He was also Treasurer of MDA from 1976 to 1979.  Dr. Winsky is
a plastic surgeon practicing in Springfield, Missouri.

     Geri H. Morrison, CPA, MBA, age 42, has been a member of the Board of
Directors, Assistant Secretary and Chief Operating Officer of the Company since
1994.  She has been Chief Operating Officer of MDA, MDS and MDIC since 1989.
She has been Assistant Treasurer of MDA since 1988 and Assistant Secretary of
MDS and MDIC since 1992.  She has been a director of MDA since 1995 and of MDIC
since 1991.  Ms. Morrison received a B.S. in Accounting from Southwest Missouri
State University in 1980 and an M.B.A. from Drury College in 1993.  Ms. Morrison
was Comptroller from 1987 to 1988, and Chief Financial Officer from 1988 to
1989, for MDA, MDS and MDIC.  Prior to that time, Ms. Morrison was with Baird,
Kurtz & Dobson in Springfield, Missouri.

     Samuel J. Pippin, CPA, MBA, age 42, has been Principal Financial Officer
and Principal Accounting Officer of the Company since 1994.  Mr. Pippin has been
Director of Accounting and Finance of MDA, MDS and MDIC since 1989.  He has been
Assistant Secretary of MDA since 1993 and Assistant Treasurer of MDIC since
1992.  He has been a director of MDA since 1995 and of MDIC since 1991.  Mr.
Pippin received a B.S. in Accounting from Southwest Missouri State University in
1985 and an M.B.A. from Drury College in 1995.  Prior to that time, Mr. Pippin
was employed with Baird, Kurtz & Dobson in Springfield, Missouri.

                                      39
<PAGE>
 
     Item 11.  Executive Compensation
     --------------------------------

     Cash Compensation

     The following table sets forth information concerning compensation paid for
each of the three years ended December 31, 1997 with respect to the Company's
chief executive officer and each other executive officer whose aggregate annual
salary and bonus exceed $100,000.

<TABLE>
<CAPTION>
                                             Annual Compensation
                                         ---------------------------
                                                                       All Other
Name and Principal Position              Year   Salary    Bonus       Compensation
---------------------------              ----   ------    -----       ------------
<S>                                      <C>   <C>       <C>          <C>
Ronald G. Benson, M.D.,                  1997  $132,959  $75,000 (1)   $37,625 (2)
 Chairman of the Board,                  1996  $129,387  $75,000 (1)   $36,850 (2)
 President and Chief Executive Officer   1995  $125,867  $75,000 (1)   $32,703 (3)

Geri H. Morrison, CPA, MBA,              1997  $149,877  $80,381 (4)   $37,615 (2)
  Chief Operating Officer                1996  $151,449  $80,387 (4)   $31,106 (2)
                                         1995  $131,123  $80,378 (4)   $23,676 (5)
</TABLE>


     (1)   Reflects contribution to the five-year compensation plan instituted
           in 1993. See "Executive Compensation Plan" below for additional
           detail.

     (2)   Includes $8,400 in Company director's fees, $3,600 in MDA director's
           fees and contributions to the two MDS qualified defined contribution
           plans.

     (3)   Includes $4,200 in Company director's fees, $3,600 in MDA director's
           fees and contributions to the two MDS qualified defined contribution
           plans.
         
     (4)   Includes $65,000 contribution to the five-year       
           executive compensation plan instituted in 1993.      
           See "Executive Compensation Plan" below for
           additional detail.

     (5)   Includes $4,200 in Company director's fees, $1,800 in MDA director's
           fees and contributions to the two MDS qualified defined contribution
           plans.

     The six Directors of the Company each receives $700 per month compensation
for their service in that capacity. The nine Directors of MDA each receive $300
per month compensation for their service in that capacity.

     Pension Plan

     In 1984, MDS adopted the "Medical Defense Services Corp. Integrated Money
Purchase Pension Plan And Trust Agreement" (the "Pension Plan"), which was
amended and restated in 1990. MDS makes contributions for each participant in an
amount equal to 10% of all compensation paid to the participant during the plan
year. The Pension Plan provides "integration level" contributions of an
additional 4.3% for all compensation above the integration level (currently set
at $35,000). Except for qualified "rollover contributions", the Pension Plan
does not permit or require participants to make voluntary contributions. All
employees who are 21 years of age and have attained 200 hours of service with
MDS are eligible to participate in the Pension Plan. Both MDA and MDIC are
participating employers in the Pension Plan.

     401(k) Plan

     Effective January 1, 1991, MDS adopted the "Medical Defense Services Corp.
401(k) Plan" (the "401(k) Plan"). Under the 401(k) Plan, employees may make
deferred salary contributions in an amount up to the limit allowed by applicable
law for the plan year. MDS makes a matching contribution of 100% of the amount
contributed by the employee, up to 6% of each employee's compensation for the
year. All employees who are 21 years of age and have two months of service with
MDS are eligible to participate in the 401(k) Plan. Both MDA and MDIC are
participating employers in the Pension Plan.

                                       40
<PAGE>
 
     Executive Compensation Plan and Executive Compensation Plan II

     In order to secure the continued employment of certain key employees, MDS
in 1993 adopted the "Medical Defense Services Corp. Executive Compensation Plan"
and related "Executive Compensation Trust Agreement" (collectively, the "Secular
Trust").  The Secular Trust terminated on December 31, 1997.  In order to
continue to secure the employment of certain key employees, MDS in December,
1997, adopted the "Medical Defense Services Corp. Executive Compensation Plan
II" and related "Executive Compensation Trust Agreement" (collectively, the
"Secular Trust II").  The Secular Trust II was effective January 1, 1998 and
terminates December 31, 2002.  The benefits and provisions of the Secular Trust
II are essentially the same as the Secular Trust.  The Board of Directors of MDS
designates by resolution those employees of MDS who may participate in the
Secular Trust and Secular Trust II.  An employee is entitled to participate only
if the employee is employed on December 31 of a Plan Year as that term is
defined in the Secular Trust/Secular Trust II.  Those employees who are entitled
to participate may receive a cash benefit or elect to have MDS pay such benefit
directly to a Trust maintained pursuant to the Secular Trust/Secular Trust II.
The employee designates the beneficiary of the Trust maintained pursuant to the
Secular Trust/Secular Trust II.  An employee's participation in the Secular
Trust/Secular Trust II terminates upon the employee's termination of employment
with MDS.



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

                                    PREFERRED STOCK   CLASS A COMMON STOCK
                                    ---------------   --------------------
<TABLE>
<CAPTION>
                                    # OF    % OF ALL     # OF    % OF ALL
                                   SHARES    SHARES     SHARES    SHARES
                                   ------   --------    ------   --------
<S>                                <C>      <C>         <C>      <C>
     RONALD G. BENSON              38,399   0.516%      142,857  14.286%
     GARY L. ROBINSON              15,474   0.208%      142,857  14.286%
     JOHN J. STAMATIS              30,574   0.411%      142,857  14.286%
     DAVID W. BROWN                30,429   0.409%      142,857  14.286%
     ARLEN D. WINSKY               20,765   0.280%      142,857  14.286%
     GERI H. MORRISON                 0     0.000%      142,857  14.286%
     ROBERT E. MORRISON               0     0.000%       35,714   3.571%
     SAMUEL J. PIPPIN                 0     0.000%       35,714   3.571%
     DAVID W. JACKSON                 0     0.000%       35,714   3.571%
     WILLIAM H. PENNINGER, JR         0     0.000%       35,714   3.571%
                                   -------  -----       ------- -------

                                   135,641  1.824%      999,998 100.000%
                                   =======  =====       ======= =======
</TABLE>

     None of the persons listed above owns any Class B Common Stock.  The
Company is not aware of any person or entity which owns or has beneficial
ownership of more than 5% of the Preferred Stock.  All of the holders of Class A
Common Stock are set forth above.

  As of March 9, 1998, three shareholders had converted a total of 26,700 shares
of Preferred Stock to 53,400 shares of Class B Common Stock.  As of March 9,
1998, that constituted all of the shares of Class B Common Stock issued and
outstanding.

                                      41
<PAGE>
 
     Item 13. Certain Transactions and Relationships
     -----------------------------------------------

     During all or some portion of 1997, 1996, and 1995, each of Ronald G.
Benson, Gary L. Robinson, John J. Stamatis, David W. Brown and Arlen D. Winsky
are or were named insureds under a policy or contract of professional liability
insurance issued by MDA for which premiums attributable to such individual were
earned by MDA.  All policies on which such persons were a named insured were
made in the ordinary course of business, did not involve more than the normal
underwriting risks or present other unfavorable features and were made on
substantially the same terms as those prevailing at the same time for comparable
policies issued to unaffiliated persons.

     Other than as stated above, none of the Directors or Executive Officers of
the Company, MDA, MDS or MDIC, or the corporations and firms with which such
persons are associated, currently maintains or has maintained since the
beginning of the last fiscal year, any significant business or personal
relationship with the Company or MDA other than such as may arise by virtue of
his or her position or positions with  the Company, MDA, MDS or MDIC.

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

     (a)  Financial Statements and Exhibits

               1. Financial Statements
 
                    See accompanying Index to Consolidated Financial Statements
                    in Item 8.

               2. Financial Statement Schedules

                    See accompanying Index to Consolidated Financial Statements
                    in Item 8. Schedules not in the accompanying index have been
                    omitted because they are not applicable.

               3. Exhibits
 
                    Exhibits required to be filed by Item 601 of Regulation S-K
                    are listed in the Exhibit Index attached hereto, which is
                    incorporated herein by reference. Set forth below is a list
                    of management contracts and compensatory plans and
                    arrangements required to be filed as exhibits to this form
                    by Item 14 (c).

                    10.3 -- Amended and Restated Employment Agreement between
                            Ronald G. Benson and Medical Defense Services Corp.,
                            dated January 1, 1993.
 
                    10.4 -- Amended and Restated Employment Agreement between
                            Geraldine Hatfield (Morrison) and Medical Defense
                            Services Corp., dated January 1, 1993

                    10.5 -- Amended and Restated Employment Agreement between
                            Arlen D. Winsky and Medical Defense Services Corp.,
                            dated January 1, 1993.

                    10.6 -- Amended and Restated Employment Agreement between
                            David W. Brown and Medical Defense Services Corp.,
                            dated January 1, 1993.

                    10.7 -- Amended and Restated Employment Agreement between
                            Gary L. Robinson and Medical Defense Services Corp.,
                            dated January 1, 1993.

                                      42

<PAGE>
 
     Item 14.  Exhibits, Financial Statement Schedules and Reports on form 8-K,
     ------------------------------------------------------------------------- 
continued:

                    10.8 --  Amended and Restated Employment Agreement between
                             John J. Stamatis and Medical Defense Services
                             Corp., dated January 1, 1993.

                    10.9 --  Medical Defense Services Corp. Integrated Money
                             Purchase Pension and Trust Agreement, between,
                             Medical Defense Services Corp. and Boatmen's Trust
                             Company, as amended, dated December 31, 1990.

                    10.10 -- Carnahan, Evans, Cantwell & Brown, P.C. Defined
                             Contribution Prototype Plan and Trust Agreement,
                             adopted December 31, 1990.

                    10.11 -- Medical Defense Services Corp. Executive
                             Compensation Plan, dated October 15, 1993.

                    10.13 -- Form of Employment Guaranty Agreement by Medical
                             Defense Holding Co. guaranteeing existing Medical
                             Defense Services Corp.'s employment agreements.

                    10.14 -- Medical Defense Services Corp. Executive
                             Compensation Plan II. 
                            
                             See Accompanying Exhibit Index for additional
                             Exhibits incorporated by reference.
                             

     (b)  Reports on Form 8-K

               No reports on Form 8-K were filed during the last quarter of
               1997.

     (c)  Exhibits

               See Item 14 (a) 3 above.

                                      43
<PAGE>
 

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

Dated: March 23, 1998                  MEDICAL DEFENSE HOLDING CO.
 


                                       By: /s/ RONALD G. BENSON
                                           -----------------------------
                                           Ronald G. Benson
                                           President, Director and
                                           Chairman of the Board
                                           (Principal Executive Officer)
 

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

<TABLE>
<CAPTION>
Signature                          Title                                   Date
---------                          -----                                   ----
<S>                                <C>                                     <C>
/s/ RONALD G. BENSON               President, Director and Chairman        March 23, 1998
------------------------------     of the Board (Principal Executive       
Ronald G. Benson                   Officer)                                
                                                                           
/s/ ARLEN D. WINSKY                Secretary and Director                  March 23, 1998
------------------------------                                             
Arlen D. Winsky                                                            
                                                                           
                                   Vice President and Director             March __, 1998
------------------------------                                             
Gary L. Robinson                                                           
                                                                           
/s/ JOHN J. STAMATIS               Vice President and Director             March 23, 1998
------------------------------                                             
John J. Stamatis                                                           
                                                                           
/s/ DAVID W. BROWN                 Treasurer and Director                  March 23, 1998
------------------------------                                             
David W. Brown                                                             
                                                                           
/s/ GERI H. MORRISON               Assistant Secretary, Chief Operating    March 23, 1998
------------------------------     Officer and Director                    
Geri H. Morrison                                                           
                                                                           
/s/ SAMUEL J. PIPPIN               Director of Accounting and Finance      March 26, 1998
------------------------------     (Principal Financial Officer and
Samuel J. Pippin                   Principal Accounting Officer)
</TABLE>

                                      44
<PAGE>
 

Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.

The Registrant currently plans to mail an Annual Report for 1997 to security
holders in April, 1998. At that time, four copies will be furnished to the
Securities and Exchange Commission. No proxy statement, form of proxy, or other
proxy soliciting material has been sent to the Registrant's security holders
with respect to any annual or other meeting of security holders.

                                      45
<PAGE>

 
Report of Independent Accountants


To the Board of Directors
Medical Defense Holding Co. and
  Subsidiaries:


Our report on the consolidated financial statements of Medical Defense Holding
Co. and Subsidiaries is included on page 15 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedules listed in the index on page 14 of this Form 10-K.

In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.


                                       COOPERS & LYBRAND L.L.P.

St. Louis, Missouri
February 13, 1998

                                      S-1
<PAGE>
 

                                                                      SCHEDULE I
                                                                                
                                        
                 MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES
                                        
                            SUMMARY OF INVESTMENTS

                    As of December 31, 1997, 1996 and 1995

                            (Dollars in Thousands)

                                   ---------

<TABLE>
<CAPTION>
                                                   1997                              1996
                                      -------------------------------   ------------------------------
                                                             Balance                          Balance
                                      Amortized    Market     Sheet     Amortized   Market     Sheet
                                        Cost       Value      Amount      Cost      Value      Amount
                                        ----       -----      ------      ----      -----      ------
<S>                                   <C>         <C>        <C>        <C>        <C>        <C>
Fixed Maturities:
  Bonds:
    United States Government
     and Government Agencies
     and Authorities                  $ 63,564    $ 64,074   $ 64,074   $ 69,960   $ 69,585   $ 69,585

    Corporate Securities                 5,127       5,206      5,206      6,372      6,412      6,412

    Other debt securities                4,787       4,812      4,812      2,820      2,793      2,793
                                      --------     -------   --------   --------   --------   --------

      Total fixed maturities            73,478      74,092     74,092     79,152     78,790     78,790

  Short-term investments                 7,242       7,243      7,243      4,507      4,509      4,509
                                      --------     -------   --------   --------   --------   --------

      Total investments               $ 80,720     $81,335   $ 81,335   $ 83,659   $ 83,299   $ 83,299
                                      ========     =======   ========   ========   ========   ========
</TABLE>

                                      S-2
<PAGE>
 

                                                                     SCHEDULE II
                                                                                
                                        
                 MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES
                                        
                 Condensed Financial Information of Registrant
                                        
                                 Balance Sheet

                             (Parent Company Only)

                          December 31, 1997 and 1996
                                        
                            (dollars in thousands)

<TABLE>
<CAPTION>
                                                            1997           1996
                                                            ----           ----
<S>                                                       <C>            <C>
Assets:                                                           
  Cash and cash equivalents....................           $   271        $   316
  Investment in subsidiaries...................            19,690         17,644
  Federal income tax recoverable...............               384          2,379
  Other Assets.................................             3,110          1,501
                                                          -------        -------
    Total assets...............................           $23,455        $21,840
                                                          =======        =======

Liabilities:                                                      
  Accrued Liabilities..........................           $     8        $     5
                                                          -------        -------
    Total liabilities..........................                 8              5
                                                          -------        -------

Stockholder's equity:                                             
  Preferred Stock..............................             7,436          9,209
  Common Stock.................................               517            510
  Additional paid-in capital...................             2,728          1,669
  Retained earnings............................            12,766         10,447
                                                          -------        -------
    Total stockholder's equity.................            23,447         21,835
                                                          -------        -------

Total liabilities and stockholders' equity.....           $23,455        $21,840
                                                          =======        =======
</TABLE>

See Notes to Condensed Financial Information of Registrant.

                                      S-3
<PAGE>
 
                                                                     SCHEDULE II
                                                                                
                                        
                  MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES
                                        
          Condensed Financial Information of Registrant - (Continued)

                            Statement of Operations

                             (Parent Company Only)

              For the Years Ended December 31, 1997, 1996 and 1995

                 (dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                  1997                      1996                      1995
                                                                  ----                      ----                      ----

<S>                                                         <C>                      <C>                        <C>  
Revenues:
     Earnings of subsidiaries............................   $         1,706          $        (5,494)           $         1,825
     Investment Income...................................               136                      142                         27
                                                            ---------------          ---------------            ---------------
          Total revenues.................................             1,842                   (5,352)                     1,852

Total expenses...........................................               160                      125                         36
                                                            ---------------          ---------------            ---------------
Income (loss) before taxes...............................             1,682                   (5,477)                     1,816

Federal income tax.......................................                 8                       24                          0
                                                            ---------------          ---------------            ---------------

Net income...............................................   $         1,674          $        (5,501)           $         1,816
                                                            ===============          ===============            ===============

Basic earnings per share.................................   $          1.65          $         (5.39)           $          1.18
                                                            ===============          ===============            ===============

Diluted earnings per share...............................   $          0.09          $      n/a                 $          0.05
                                                            ===============          ===============            ===============
</TABLE>

See Notes to Condensed Financial Information of Registrant.

                                      S-4
<PAGE>
 

                                                                     SCHEDULE II
                                                                                

                 MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES
                                        
          Condensed Financial Information of Registrant - (Continued)

                            Statement of Cash Flows

                             (Parent Company Only)

             For the Years Ended December 31, 1997, 1996 and 1995
                                        
                            (dollars in thousands)

<TABLE>
<CAPTION>
Cash flows from operating activities:                                          1997          1996         1995
                                                                               ----          ----         ----
<S>                                                                           <C>          <C>           <C>
  Net income (loss).....................................................      $ 1,674      $ (5,501)     $ 1,816
  Adjustments to reconcile net income to net cash provided by                                       
   operating activities:                                                                            
  Dividends received from subsidiaries over subsidiaries' earnings......          394         5,494          778
  Changes in other assets and accrued liabilities.......................           70          (274)         (36)
                                                                              -------      --------      -------
                                                                                                    
      Net cash provided by operating activities.........................        2,138          (281)       2,558
                                                                              -------      --------      -------
                                                                                                    
Cash flows from investing activities:                                                               
  Proceeds from short-term investments..................................        6,900        13,300            0
  Purchase of short-term investments....................................       (8,377)      (11,937)      (2,711)
                                                                              -------      --------      -------
                                                                                                    
      Net cash used by investing activities.............................       (1,477)        1,363       (2,711)
                                                                              -------      --------      -------
                                                                                                    
Cash flows from financing activities:                                                               
  Purchase of preferred stock...........................................         (706)       (1,113)           0
  Proceeds from common stock issued.....................................            0             0          500
                                                                              -------      --------      -------
                                                                                                    
      Net cash (used) provided by financing activities..................         (706)       (1,113)         500
                                                                              -------      --------      -------
                                                                                                    
      Total cash provided...............................................          (45)          (31)         347
                                                                                                    
Cash and cash equivalents, beginning of period..........................          316           347            0
                                                                              -------      --------      -------
                                                                                                    
Cash and cash equivalents, end of period................................      $   271      $    316      $   347
                                                                              =======      ========      =======
</TABLE>

     Notes to Condensed Financial Information of Registrant.

     (1) The condensed financial information of registrant should be read in
         conjunction with the Consolidated Financial Statements and Notes to
         Consolidated Financial Statements included elsewhere herein.

                                      S-5
<PAGE>
 

                                                                     SCHEDULE IV
                                                                                
                                        
                 MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES
                                        
                                  REINSURANCE

             For the Years Ended December 31, 1997, 1996 and 1995

                            (Dollars in Thousands)

                                   ---------

<TABLE>
<CAPTION>
                                                                                  Percentage
                             Gross      Ceded to        Assumed          Net       of Amount
                          Premiums         Other     From Other     Premiums         Assumed
                           Written     Companies      Companies       Written         to Net
                          --------     ---------     ----------     ---------     ----------
<S>                       <C>          <C>           <C>            <C>           <C>
1997
  Medical Malpractice      $ 9,725        $(857)           $-0-       $10,582             0%
                           =======        ======           ====       =======            ===

1996
  Medical Malpractice      $12,526        $(196)           $-0-       $12,722             0%
                           =======        ======           ====       =======            ===

1995
  Medical Malpractice      $13,890        $ (70)           $-0-       $13,960             0%
                           =======        ======           ====       =======            ===
</TABLE>
                                                                                

Footnote:

  Medical Defense Holding Co. amounts ceded to other companies reflect current
  year adjustments in retrospectively rated reinsurance contracts which remain
  in effect for policies from November 1, 1980 through October 31, 1987.

                                      S-6
<PAGE>
 

                                                                      SCHEDULE V
                                                                                
                                        
                 MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES
                                        
                       VALUATION AND QUALIFYING ACCOUNTS

                             GROSS OF REINSURANCE

             For the Years Ended December 31, 1997, 1996 and 1995



                            (Dollars in Thousands)

                                   ---------

<TABLE>
<CAPTION>
                                                 Additions                   Deductions
                                           ----------------------  ------------------------------
                                 Balance,  Charged to  Charged to       Losses and  Retrospective      Balance,
                             December 31,   Costs and       Other  Loss Adjustment  Premiums Paid  December 31,
Description                          1996    Expenses    Accounts    Expenses Paid  to Reinsurers          1997
-----------                  ------------  ----------  ----------  ---------------  -------------  ------------
<S>                          <C>           <C>         <C>         <C>              <C>            <C>
Unpaid losses and loss       
  adjustment expenses             $63,205     $12,723                      $17,274                      $58,654
                             
Retrospective premiums       
  payable to reinsurers           $ 1,970     $  (857)                                                  $ 1,113
                             
<CAPTION>                    
                                                 Additions                   Deductions
                                           ----------------------  ------------------------------
                                 Balance,  Charged to  Charged to       Losses and  Retrospective      Balance,
                             December 31,   Costs and       Other  Loss Adjustment  Premiums Paid  December 31,
Description                          1995    Expenses    Accounts    Expenses Paid  to Reinsurers          1996
-----------                  ------------  ----------  ----------  ---------------  -------------  ------------

Unpaid losses and loss       
  adjustment expenses             $65,660     $19,947                      $22,402                      $63,205
                             
Retrospective premiums       
  payable to reinsurers           $ 2,195     $  (196)                                      $ (29)      $ 1,970
                             
<CAPTION>                    
                                                 Additions                   Deductions
                                           ----------------------  ------------------------------
                                 Balance,  Charged to  Charged to       Losses and  Retrospective      Balance,
                             December 31,   Costs and       Other  Loss Adjustment  Premiums Paid  December 31,
Description                          1994    Expenses    Accounts    Expenses Paid  to Reinsurers          1995
-----------                  ------------  ----------  ----------  ---------------  -------------  ------------

Unpaid losses and loss       
  adjustment expenses             $65,803     $15,637                      $15,780                      $65,660
                             
Retrospective premiums       
  payable to reinsurers           $ 2,586     $   (70)                                      $ 321       $ 2,195
</TABLE>
                                                                                
                                      S-7
<PAGE>
 

                                                                     SCHEDULE VI
                                                                                

                 MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES
                                        
                      SUPPLEMENTAL INFORMATION CONCERNING
                   PROPERTY & CASUALTY INSURANCE OPERATIONS

             For the Years Ended December 31, 1997, 1996 and 1995

                            (Dollars in Thousands)

                                   ---------

<TABLE>
<CAPTION>
                                                 1997        1996        1995
                                                 ----        ----        ----
<S>                                            <C>         <C>         <C>
Deferred policy acquisition costs              $    155    $    375    $     60
                                             
Reserve for unpaid losses                    
  and loss adjustment expenses                   58,654      63,205      65,660
                                             
Unearned premiums                                 6,059       7,572       8,055
                                             
Earned premiums (gross of reinsurance)           11,235      13,004      15,113
                                             
Net investment income                             5,011       5,297       5,523
                                             
Amortization of deferred acquisition costs          155         375          60
                                             
Losses and loss adjustment                   
     expenses (gross of reinsurance)         
     incurred related to:                    
  Current years                                  13,506      15,802      18,115
  Prior years                                      (783)      4,145      (2,478)
                                             
Paid losses and loss adjustment expenses         17,274      22,402      15,780
                                             
Gross premiums written                            9,725      12,526      13,890
</TABLE>
                                                                                
                                      S-8
<PAGE>

                                                     EXHIBIT INDEX
<TABLE>
<CAPTION>

Exhibit                                                                                                               Page
  No.                                                 Description                                                      No.
  ---                                                 -----------                                                      ---
<S>            <C>                                                                                                     <C>
  3.1    ---   Articles of Incorporation of Medical Defense Holding Co. (Filed as Exhibit 3.1 to the
               Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
               by reference.)............................................................................

  3.2    ---   Bylaws of Medical Defense Holding Co. (Filed as Exhibit 3.2 to the Registrant's
               Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)
               .........................................................................................

  4.1    ---   Right of First Refusal Agreement (Filed as Exhibit 4.1 to the Registrant's Registration
               Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.).............

  4.2    ---   Specimen Stock Certificate for Preferred Stock (Filed as Exhibit 4.2 to the Registrant's
               Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)
               .........................................................................................

  4.3    ---   Specimen Stock Certificate for Class A Common Stock (Filed as Exhibit 4.3 to the
               Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
               by reference.)............................................................................

  4.4    ---   Specimen Stock Certificate for Class B Common Stock (Filed as Exhibit 4.4 to the
               Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
               by reference.)............................................................................

  10.1   ---   1983 Management Agreement between Medical Defense Associates and Medical Defense Services
               Corp., as amended (Filed as Exhibit 10.1 to the Registrant's Registration Statement on
               Form S-1 (file #33-87444) and hereby incorporated by reference.)..........................

  10.2   ---   1983 Management Agreement between Medical Defense Insurance Company and Medical Defense
               Services Corp., as amended (Filed as Exhibit 10.2 to the Registrant's Registration
               Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.).............

  10.3   ---   Amended and Restated Employment Agreement between Ronald G. Benson and Medical Defense
               Services Corp., dated January 1, 1993 (Filed as Exhibit 10.3 to the Registrant's
               Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)
               ..........................................................................................

  10.4   ---   Amended and Restated Employment Agreement between Geraldine Hatfield (Morrison) and
               Medical Defense Services Corp., dated January 1, 1993 (Filed as Exhibit 10.4 to the
               Registrant's Registration Statement on Form S-1 (file #33-87444) and hereby incorporated
               by reference.)............................................................................

  10.5   ---   Amended and Restated Employment Agreement between Arlen D. Winsky and Medical Defense
               Services Corp., dated January 1, 1993 (Filed as Exhibit 10.5 to the Registrant's
               Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)
               ..........................................................................................

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

Exhibit                                                                                                               Page
  No.                                                 Description                                                      No.
  ---                                                 ------------                                                     ---

<S>            <C>                                                                                              <C>
  10.6     --- Amended and Restated Employment Agreement between David W. Brown and Medical Defense
               Services Corp., dated January 1, 1993 (Filed as Exhibit 10.6 to the Registrant's
               Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)

  10.7     --- Amended and Restated Employment Agreement between Gary L. Robinson and Medical Defense
               Services Corp., dated January 1, 1993 (Filed as Exhibit 10.7 to the Registrant's
               Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)

  10.8     --- Amended and Restated Employment Agreement between John J. Stamatis and Medical Defense
               Services Corp., dated January 1, 1993 (Filed as Exhibit 10.8 to the Registrant's
               Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)

  10.9     --- Medical Defense Services Corp. Integrated Money Purchase Pension and Trust Agreement,
               between, Medical Defense Services Corp. and Boatmen's Trust Company, as amended, dated
               December 31, 1990 (Filed as Exhibit 10.9 to the Registrant's Registration Statement on
               Form S-1 (file #33-87444) and hereby incorporated by reference.)..........................

 10.10     --- Carnahan, Evans, Cantwell & Brown, P.C. Defined Contribution Prototype Plan and Trust
               Agreement, adopted December 31, 1990 (Filed as Exhibit 10.10 to the Registrant's
               Registration Statement on Form S-1 (file #33-87444) and hereby incorporated by reference.)

 10.11     --- Medical Defense Services Corp. Executive Compensation Plan, dated October 15, 1993 (Filed
               as Exhibit 10.11 to the Registrant's Registration Statement on Form S-1 (file #33-87444)
               and hereby incorporated by reference.)....................................................

 10.12     --- Form of Deposit Agreement between Medical Defense Associates and Central Bank, Jefferson
               City, Missouri (Filed as Exhibit 10.12 to the Registrant's Registration Statement on Form
               S-1 (file #33-87444) and hereby incorporated by reference.)...............................

 10.13     --- Form of Employment Guaranty Agreement by Medical Defense Holding Co. guaranteeing
               existing Medical Defense Services Corp.'s employment agreements (Filed as Exhibit 10.13
               to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and
               hereby incorporated by reference.)........................................................

 10.14     --- Medical Defense Services Corp. Executive Compensation Plan II.............................

  11.1     --- Statement re computation of per share earnings............................................

  21.1     --- Subsidiaries of the registrant............................................................

   27      --- Financial Data Schedule...................................................................


</TABLE>