<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 (FEE REQUIRED).
                  For the fiscal year ended December 31, 1996

                                      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)
 
                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)

     (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 17, 1997 there were 9,202,038 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 33,230 shares outstanding of the Registrant's Class B
Common Stock, $.50 par value.

     DOCUMENTS INCORPORATED BY REFERENCE: None
--------------------------------------------------------------------------------
<PAGE>
 
                          MEDICAL DEFENSE HOLDING CO.

                               Table of Contents

<TABLE>
<CAPTION>

Item                                                                        Page
----                                                                        ----
<S>                                                                         <C> 

                                    PART I

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

Item  2.   Properties...................................................    8

Item  3.   Legal Proceedings............................................    8

Item  4.   Submission of Matters to a Vote of Security Holders..........    8



                                    PART II

Item  5.   Market for the Registrant's Common Stock and Related 
            Stockholder Matters.........................................    8

Item  6.   Selected Financial Data......................................    9

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

Item  8.   Financial Statements and Supplementary Data..................   14

Item  9.   Changes in and Disagreements with Accountants on Accounting 
            and Disclosures.............................................   36


                                   PART III

Item 10.   Directors and Executive Officers of the Registrant...........   36

Item 11.   Executive Compensation.......................................   38

Item 12.   Security Ownership of Certain Beneficial Owners and
            Management..................................................   39

Item 13.   Certain Relationships and Related Transactions...............   40


                                    PART IV

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

Signatures..............................................................   42
</TABLE>
<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, 1996, MDA had 1,459 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.

                                       1
<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.

                                       2
<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, 1996, 1995, and 1994:

            Reconciliation of Loss Reserves (gross of reinsurance)
                                (in thousands)
<TABLE>
<CAPTION>

                                                                               1996      1995       1994
                                                                             --------  ---------  ---------
<S>                                                                          <C>       <C>        <C>
     Unpaid losses and loss adjustment expenses,
       beginning of year...........................................          $65,660    $65,803   $70,436
                                                                             -------    -------   -------

     Losses and loss adjustment expenses incurred
       related to:
         Current year..............................................           15,802    18,115     16,628
         Prior years...............................................            4,145    (2,478)    (4,124)
                                                                             -------   -------    -------
         Total incurred............................................           19,947    15,637     12,504
                                                                             -------   -------    -------
     Losses and loss adjustment expenses payments,
       excluding the change in outstanding claim
       drafts, for claims incurred during:
         Current year..............................................              749     1,333        965
         Prior years...............................................           21,653    14,447     16,172
                                                                             -------   -------    -------
         Total paid................................................           22,402    15,780     17,137
                                                                             -------   -------    -------

     Unpaid losses and loss adjustment expenses,
       end of year.................................................          $63,205   $65,660    $65,803
                                                                             =======   =======    =======
</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, 1996. 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.

                                       3
<PAGE>
 
                   Loss Reserve Development Table, continued


     The most recent seven years, 1990 through 1996, 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>
 
<S>                        <C>        <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>       <C>       <C>
                             Net        Net       Net      Net    Direct   Direct   Direct   Direct   Direct    Direct    Direct
                             1986      1987      1988     1989     1990     1991     1992     1993     1994      1995      1996
                           --------   -------   -------  -------  -------  -------  -------  -------  -------   -------   -------
Reserve for unpaid.......  $ 50,129   $42,312   $49,965  $66,984  $79,456  $76,515  $70,223  $70,326  $65,785   $65,606   $62,970
Cumulative Paid
  End of Year:
1........................     9,818    13,630     6,240   12,607   17,210   19,070   11,682   18,528   14,779    21,967        --
2........................    22,677    19,111    17,291   26,719   32,208   28,142   29,017   31,097   31,823
3........................    34,407    28,899    25,912   37,626   38,022   41,127   39,101   43,342
4........................    42,941    33,769    30,907   40,093   47,882   49,277   46,472
5........................    47,235    37,323    32,380   43,907   52,389   54,653
6........................    49,678    38,456    34,816   47,579   57,189
7........................    50,963    40,484    38,257   51,077
8........................    52,637    43,050    41,415
9........................    55,090    46,160
10.......................    58,178
 
 
Re-estimated Liability:
1........................    47,034    52,721    53,801   66,511   72,994   71,098   66,291   68,666   63,695    70,101        --
2........................    58,234    55,650    55,584   61,105   69,179   67,965   64,076   66,191   66,385
3........................    66,134    56,810    51,579   59,313   66,734   66,781   62,601   67,699
4........................    66,831    54,105    49,949   56,606   66,477   66,267   62,990
5........................    64,665    52,481    45,762   56,715   66,428   67,541
6........................    62,674    49,420    46,072   57,276   67,148
7........................    60,225    49,928    46,544   58,003
8........................    60,662    50,179    47,441
9........................    61,055    51,075
10.......................    62,028
Cumulative Redundancy
  (Deficiency)...........   (11,899)   (8,763)    2,524    8,981   12,308    8,974    7,233    2,627     (600)   (4,495)       --
</TABLE>

     NOTE: The figures presented on the Loss Reserve Development Table for years
1990 through 1996 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 1986 through 1989 have not been restated and are net of
the effects of reinsurance. Restatement of the 1986 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.

                                       4
<PAGE>
 
                         Discounting of Loss Reserves

     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 1996 was
to increase total reserves for loss and loss adjustment expenses by $1,394,000,
with a corresponding decrease to surplus as regards policyholders. Discount
factors and the discount taken for the five-year period ending December 31, 1995
were as follows:

<TABLE>
<CAPTION>

             Year          Discount Factor         Discount Taken
            ------         ---------------         --------------

            <S>     <C>                            <C>
             1992             5.0%                     $5,975,000
             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
</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;

                                       5
<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.


          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 two
years. However, the Company continues to intensify its services to policyholders
in an attempt to maintain or increase market share.

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

                                       6
<PAGE>
 
     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, 1996, MDS had 31 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, 1996, 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.

                                       7
<PAGE>
 
     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, 1996.


     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, 1996.



                                    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 17, 1997, there were approximately one thousand three hundred
ninety (1,390) holders of Preferred Stock, ten (10) holders of Class A Common
Stock and two (2) holders of Class B Common Stock.

          DIVIDENDS

     The Company did not pay or declare dividends during 1996. 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.

                                       8
<PAGE>
 
     Item 6.  Selected Financial Data
     --------------------------------


                 MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES

     The following Selected Consolidated Financial Data is prepared in
accordance with generally accepted accounting principles. 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 included elsewhere herein.
<TABLE>
<CAPTION>
 
                                                        Year Ended December 31,
                                           ------------------------------------------------
<S>                                        <C>       <C>       <C>       <C>       <C>
 
                                             1996      1995      1994      1993      1992
                                             ----      ----      ----      ----      ----    
 
                                                 (in thousands, except per share data)
 
Statement of Operations Data:
 Net premiums written...................   $12,521   $ 13,960  $ 14,257  $ 15,697  $ 14,839
                                           =======   ========  ========  ========  ========
 Net premiums earned....................    13,200     15,183    13,508    15,654    14,663
 Investment income......................     5,584      5,810     5,583     5,850     6,535
 Net realized capital gains and other           95        219       247     2,110     1,407
  income................................   -------   --------  --------  --------  --------
   Total revenues.......................    18,879     21,212    19,338    23,614    22,605
                                           -------   --------  --------  --------  --------
 Losses and loss adjustment expenses....    20,379     16,159    14,727    12,475    12,862
 Other operating expenses...............     3,206      2,989     3,128     2,255     2,078
                                           -------   --------  --------  --------  --------
   Total expenses.......................    23,585     19,148    17,855    14,730    14,940
                                           -------   --------  --------  --------  --------
 Income (Loss) before income taxes......    (4,706)     2,065     1,482     8,884     7,665
  
Income tax expense......................       795        248       586     2,662     1,863
                                           -------   --------  --------  --------  --------
   Net income (loss)....................   $(5,501)  $  1,816  $    896  $  6,222  $  5,802
                                           =======   ========  ========  ========  ========
 
Per common share: (1)
 Earnings...............................   $ (0.23)  $   0.05       n/a       n/a       n/a
                                           =======   ========  ========  ========  ========
 
Balance Sheet Data (at year end):
 Investments............................   $83,299   $ 91,748  $ 78,371  $ 90,673  $ 82,282
 Total Assets...........................    96,778    108,199   102,301   110,008   105,624
 Unpaid losses and loss adjustment
  expenses..............................    63,205     65,660    65,803    70,436    71,213
 Unearned premiums......................     7,572      8,055     9,210     8,457     8,491
 Stockholders' equity...................    21,835     29,557    22,932    27,090    21,466
</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.

                                       9
<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, 1996 and 1995 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 sound pricing structure.

     Results of Operations

     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.

                                      10
<PAGE>
 
     Results of Operations, continued

     The Company recorded a 9.7% or $1,874,850 increase in total revenues during
1995 as compared to 1994. This increase was primarily the result of three
factors. First, based on revised actuarial estimates, the Company reduced by
$800,000 its estimate of the unearned premium reserve for future utilization of
the death, disability, and retirement benefit, included as a part of MDA's
claims-made policies, which resulted in an increase in premiums earned of
$800,000. Secondly, MDA instituted a 14% rate increase effective January 1, 1995
on all of MDA's new and renewal business which, coupled with other routine
changes in MDA's book of business, resulted in an increase in premiums earned
during 1995 of approximately $875,000 when compared to 1994. Finally, the
Company's investment income and net realized investment gains increased in 1995
approximately $200,000 over the previous year. This increase was due to the
Company increasing its total invested assets during 1995 as other assets such as
premiums receivable and reinsurance receivables were collected and converted to
invested assets.

     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.

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

     During 1995, total expenses for the Company increased $1,292,514 or 7.2%
compared to 1994. This increase was primarily the net result of an approximate
$1.4 million increase in loss and loss adjustment expenses and a decrease in
other expenses of about $140,000. The reserves for loss and loss adjustment
expenses are based on actuarially determined estimates and any change to the
estimated total reserve is reflected in current earnings. For 1995 total
incurred direct loss and loss adjustment expenses are estimated at $18,115,000.
This is an increase of $1,487,000 from the initial estimated incurred direct
loss and loss adjustment expenses of $16,628,000 for 1994. The decrease in other
expenses was the net result of small increases in deferred acquisition costs and
miscellaneous holding company expenses which totaled approximately $110,000 and
a decrease in other expenses of approximately $250,000 which was the result of
various MDA demutualization and conversion expenses incurred in 1994 in excess
of related amounts incurred in 1995.

     As a result of the items discussed above, 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.

     For the year ended December 31, 1995, the Company's income before provision
for income taxes increased $582,336 compared to the year ended December 31,
1994. The Company's total tax provision for 1995 was $248,263 which was a
decrease of $337,651 compared to 1994. The decrease in the Company's tax
provision for 1995, when compared to 1994, was primarily the result of
differences in loss and loss adjustment expense reserve discounting for tax
purposes. As a result, the Company's net income for 1995 was $1,816,378 compared
to $896,391 for 1994.

                                      11
<PAGE>
 
     Financial Condition

     Total consolidated assets of the Company at December 31, 1996 were
$96,778,494 which was a decrease of approximately $11.4 million or 10.6% as
compared to December 31, 1995. This decrease was primarily due to an increase of
approximately $6.6 million in the payment of claim loss and loss adjustment
expenses when compared to amounts paid in 1995, a $2.0 million decline in
premiums from policyholders due to the decline in total policyholders, the
purchase of approximately 2.8 million shares of the Company's outstanding
preferred stock for approximately $1.1 million, a decline in the net after-tax
market value of the Company's fixed-income investment portfolio of approximately
$1.1 million due to generally higher interest rate yields at the end of 1996
compared to the end of 1995 which has an inverse effect on the market value of
bonds held in the Company's investment portfolio, and an approximate $0.6
million in paid federal income taxes relating to 1995. Over 89% of the Company's
total assets at December 31, 1996 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, 1996 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, 1996 were
$74,943,004 decreased $3,699,108 from the previous year end. This decrease was
the result of the increase in claim payments resulting in an approximate $2.5
million decline in unpaid losses and loss adjustment expenses, the decrease in
income taxes payable of approximately $0.6 million, and a decline of
approximately $0.5 million in the unearned premium reserve which was primarily
due to the decrease in policyholders. Over 84% of the Company's total
liabilities at December 31, 1996 relate to reserves for unpaid losses and loss
adjustment expenses, which declined approximately $2.5 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 decreased $7,721,608 as of December 31, 1996, which
was a decline of 26.1% from December 31, 1995. This decrease was due to the net
loss in 1996 of $5,501,042, the purchase of the Company's preferred stock for
$1,112,535, and the net decline in the unrealized gains and losses on fixed
maturity investments of $1,108,031, all discussed earlier.

     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 $2,106,023.

     The Company's consolidated net cash flow provided by operating activities
decreased by $12,750,632 for the year ended December 31, 1996 compared to the
previous year. This decrease was primarily the result of several factors
including a decrease in net income for 1996 compared to 1995 of approximately
$7.3 million, a decrease in unpaid loss and loss adjustment expenses during 1996
compared to 1995 of approximately $2.5 million, and the collection in 1995 of
amounts recorded as receivable from reinsurers which accounted for approximately
$2.2 million of the variation from 1995. For the year ended December 31, 1995
net cash flow provided by operating activities increased by $8,623,699 compared
to the change in the previous year. This increase was due to the increase in net
income for 1995 compared to 1994 of approximately $920,000, the collection in
1995 of amounts recorded as receivable from reinsurers during 1994 accounting
for approximately $4.6 million of the variation, a decline in premiums
receivable from insureds of about $1.9 million which was primarily the result of
changes in payment options available to policyholders and other routine changes
in MDA's book of business, and a decrease in paid loss and loss adjustment
expenses during 1995 compared to 1994 of approximately $1.4 million.

                                      12
<PAGE>
 
     Liquidity and Capital Resources, continued

     During 1996, due to cash flow used by operating activities, the Company's
net cash flow provided from investing activities was $6,785,490, 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.

     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. 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.

                                      13
<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..........................................   15
 
Consolidated Balance Sheets as of December 31, 1996 and 1995...............   16
 
Consolidated Statements of Operations for the years ended December 31,
   1996, 1995 and 1994.....................................................   18
 
Consolidated Statements of Changes in Stockholders' Equity for the years
   ended December 31, 1996, 1995 and 1994..................................   19
 
Consolidated Statements of Cash Flow for the years ended December 31,
   1996, 1995 and 1994.....................................................   20
 
Notes to Consolidated Financial Statements.................................   21
 
Schedules:
 
     Report of Independent Accountants on Supplemental Schedules...........  S-1
 
I  - Summary of Investments as of December 31, 1996, 1995 and 1994.........  S-2
      
II - Condensed Financial Information of Registrant (Parent Company Only)
        for the year ended December 31, 1996 and 1995......................  S-3
 
IV - Reinsurance Schedule for the years ended December 31, 1996, 1995
        and 1994...........................................................  S-6
 
V  - Valuation and Qualifying Accounts Gross of Reinsurance for the
        years ended December 31, 1996, 1995 and 1994.......................  S-7
 
VI - Supplemental Information Concerning Property/Casualty Insurance
        Operations as of December 31, 1996, 1995 and 1994 and for the 
        years then ended...................................................  S-8
</TABLE>

                                      14
<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, 1996 and 1995,
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, 1996. 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, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.


 

                                                  COOPERS & LYBRAND L.L.P.


St. Louis, Missouri
February 21, 1997

                                      15
<PAGE>
 
Medical Defense Holding Co.

Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>


                     ASSETS                            1996             1995
<S>                                              <C>              <C>
Investments:
  Fixed maturity investments, at market
   value (amortized cost of $79,151,698
   and $82,944,882, respectively)                $  78,789,906    $   84,258,601

  Short-term investments, at market                  4,508,740         7,489,028
                                                 -------------    --------------
       Total investments                            83,298,646        91,747,629


Other assets:
  Cash and cash equivalents                          3,514,854         4,952,745

  Accrued investment income                          1,054,327         1,158,529

  Premium receivable                                 1,895,965         2,552,893

  Reinsurance recoverable on loss and
   loss expenses:
    Paid claims                                          2,798

    Unpaid claims                                    1,951,000         2,383,000

  Deferred policy acquisition costs                                      120,527

  Property and equipment, net of accumulated
   depreciation of $1,163,536 and
   $1,074,167, respectively                          1,117,542         1,083,539


  Federal income tax:
    Current - refundable                             2,401,224

    Deferred                                         1,204,000         3,512,609


  Other assets                                         338,138           687,739
                                                 -------------    --------------


       Total assets                              $  96,778,494    $  108,199,210
                                                 =============    ==============
</TABLE>

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

                                      16
<PAGE>
 
<TABLE>
<CAPTION>


     LIABILITIES AND STOCKHOLDERS' EQUITY                  1996             1995

<S>                                                     <C>             <C>
Liabilities:
  Claims and policy liabilities:
  Unpaid losses and loss adjustment expenses            $63,205,000     $ 65,660,000
  Unearned premiums                                       7,571,534        8,054,837
                                                        -----------     ------------
    Total claims and policy liabilities                  70,776,534       73,714,837

Other liabilities:
  Retrospective premium due reinsurers                    1,970,047        2,195,496
  Amounts withheld or retained by Company
     for account of others                                  273,679          366,637

  Income taxes payable                                                       618,474
  Other liabilities                                       1,922,744        1,746,668
                                                        -----------     ------------
          Total liabilities                              74,943,004       78,642,112
                                                        -----------     ------------
Stockholders' equity:
  Preferred stock, par value $1.00 per share;
      12,000,000 shares authorized:
      9,208,851 and 11,990,189 shares issued and
      outstanding, respectively (Note 3)                  9,208,851       11,990,189
  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:
      19,604 shares issued and outstanding                    9,802            9,802
  Additional Paid in Capital (Note 3)                     1,668,803
  Unrealized gains (losses) on investments
      (net of deferred income taxes benefit
      (provision) of $122,565 and $(448,239),
      respectively)                                        (237,920)         870,111
  Retained earnings                                      10,685,955       16,186,997
                                                        -----------     ------------

         Total stockholders' equity/surplus as
             regards policyholders                       21,835,490       29,557,098
                                                        -----------     ------------

      Total liabilities and stockholders' equity        $96,778,494     $108,199,210
                                                        ===========     ============


</TABLE>

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

                                      17
<PAGE>
 
Medical Defense Holding Co.

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

<TABLE>
<CAPTION>
                                                                          1996            1995            1994
<S>                                                                  <C>             <C>             <C> 
Revenues:
  Premiums earned, including retrospective premium
      adjustments of $196,034, $70,000, and $45,330,
      respectively                                                   $  13,200,021   $  15,183,259   $  13,507,848
  Investment income                                                      5,583,656       5,810,039       5,582,945
  Net realized investment gains                                             94,918         218,615         246,272
  Other income                                                                 825             467             465
                                                                     -------------   -------------   -------------
      Total revenues                                                    18,879,420      21,212,380      19,337,530
                                                                     -------------   -------------   -------------
Expenses:
  Losses and loss adjustment espenses, net of 
      reinsurance recoveries of ($432,000), ($522,000),                 
      and ($2,223,000), respectively                                    20,379,346      16,158,522      14,727,455
  Amortization of policy acquisition cost                                  374,546          59,921
  Other underwriting and insurance expenses                              2,396,302       2,585,322       2,834,996
  Investment expenses                                                      286,894         286,762         272,172
  Other operating expenses                                                 147,961          57,212          20,602
                                                                     -------------   -------------   -------------
      Total expenses                                                    23,585,049      19,147,739      17,855,225
                                                                     -------------   -------------   -------------
          Income (loss) before provision for
              federal income taxes                                      (4,705,629)      2,064,641       1,482,305
                                                                     -------------   -------------   -------------
Provision for federal income taxes:
   Current                                                              (2,084,000)      1,088,686          41,000
   Deferred                                                              2,879,413        (840,423)        544,914
                                                                     -------------   -------------   -------------
          Total tax provision                                              795,413         248,263         585,914
                                                                     -------------   -------------   -------------
              Net income (loss)                                      $  (5,501,042)  $   1,816,378   $     896,391
                                                                     =============   =============   =============
Earnings per common share and common
    equivalent share (Note 12):
  Primary - Weighted average shares                                     24,300,846      24,999,980               -
                                                                     =============   =============   =============
  Net income (loss) per common share                                 $       (0.23)  $        0.05   $           -
                                                                     =============   =============   =============
</TABLE>

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

                                      18
<PAGE>
Medical Defense Holding Co.

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

<TABLE>
<CAPTION>

                                                         1996            1995            1994
<S>                                                  <C>             <C>              <C>
Stockholders' equity, January 1                      $  29,557,098

Surplus as regards policyholders, January 1                          $  22,931,598    $27,089,837

Changes in surplus/stockholders' equity:
 Net (loss) income                                      (5,501,042)      1,816,378        896,391

 Issuance of 999,998 shares common stock Class A                           499,996              3

 Purchase of 2,781,338 shares of preferred stock        (1,112,535)

 Change in unrealized gains and losses on fixed
     maturity investments (net of related deferred
     tax credits (provision) of $570,804,
     $(2,219,853) and $2,603,902, respectively)         (1,108,031)      4,309,126     (5,054,633)
                                                                                      -----------

Surplus as regards policyholders, December 31                                         $22,931,598
                                                     -------------   -------------    ===========

Stockholders' equity, December 31                    $  21,835,490   $  29,557,098
                                                     =============   =============
</TABLE>

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

                                       19
<PAGE>

Medical Defense Holding Co.

<TABLE>
<CAPTION>

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

<S>                                                                            <C>               <C>               <C>
Operating activities:
  Net income                                                                    $   (5,501,042)    $    1,816,378    $     896,391

  Adjustments to reconcile net income to net cash (used)
       provided by operating activities:
     Realized investment gains                                                         (94,918)          (218,615)        (246,272)
     Depreciation and amortization of deferred policy acquisition costs                480,341            150,739          102,487
     Provision (benefit) for deferred income tax                                     2,879,413           (840,423)         544,914

  Change in assets and liabilities:
     Accrual and amortization of investment income                                      43,980            197,536          109,091
     Premiums receivable from policyholders                                            656,928          2,110,509          240,989
     Policy acquisition costs deferred                                                (254,019)          (180,448)
     Reinsurance recoverable on loss and loss expenses:
       Paid claims                                                                      (2,798)         2,304,696       (2,304,696)
       Unpaid claims                                                                   432,000            522,000        2,223,000
     Unpaid losses and loss adjustment expenses                                     (2,455,000)          (143,000)      (4,633,000)
     Unearned premiums                                                                (483,303)        (1,154,845)         753,127
     Retrospective premium due reinsurers                                             (225,449)          (390,956)        (414,154)
     Amounts withheld or retained by Company on account of others                      (92,958)            78,321           24,978
     Income tax                                                                     (3,019,698)         1,328,686         (639,998)
     Other assets                                                                      349,601           (205,653)        (361,615)
     Other liabilities                                                                 176,076            264,861          720,845
                                                                                --------------     --------------    -------------


       Net cash (used) provided by operating activities                             (7,110,846)         5,639,786       (2,983,913)
                                                                                 -------------     --------------    -------------


Investing activities:
  Proceeds from:
     Fixed maturity investments:
       Sales                                                                         5,599,375         10,006,129       11,215,139
       Maturities                                                                    7,466,549          5,551,096        6,196,139

     Short-term investments - Maturities                                            26,519,421          4,340,000        8,005,000

  Purchase of investments:
     Fixed maturity investments                                                     (9,428,393)       (17,869,313)     (17,787,670)
     Short-term investments                                                        (23,231,664)        (8,795,496)      (2,940,000)
  Purchases of property and equipment                                                 (139,798)           (45,270)          (6,443)
                                                                                --------------     --------------    -------------
       Net cash provided (used) by investing activities                              6,785,490         (6,812,854)       4,682,165
                                                                                --------------     --------------    -------------
Financing activities:
  Proceeds from sale of common stock                                                                      499,996                3
  Purchase of preferred stock (Note 3)                                              (1,112,535)

       Net cash (used) provided by financing activities                             (1,112,535)           499,996                3
                                                                                --------------     --------------    -------------

           Net (decrease) increase in cash and cash equivalents                     (1,437,891)          (673,072)       1,698,255
Cash and cash equivalents, beginning of period                                       4,952,745          5,625,817        3,927,562
                                                                                --------------     --------------    -------------

Cash and cash equivalents, end of period                                        $    3,514,854     $    4,952,745    $   5,625,817
                                                                                ==============     ==============    =============

Federal income taxes paid (recovered)                                           $      935,698     $     (231,000)   $     831,500
                                                                                ==============     ==============    =============
</TABLE>

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

                                       20
<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.

                                      21
<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 1996, 1995 and 1994 and surplus as regards
          policyholders at December 31, 1996, 1995 and 1994 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                            1996           1995           1994
<S>                                                     <C>            <C>           <C>
           GAAP net (loss) income                       $(5,649,894)   $ 1,570,789   $   947,680
           Change in deferred acquisition costs             120,528       (120,528)  
           Discount of reserves                                                         (176,000)
           Deferred income taxes                          2,879,413       (840,423)      244,042
                                                        ------------   ------------  -----------
                                                                                     
           Statutory net (loss) income                  $(2,649,953)   $   609,838   $ 1,015,722
                                                        ===========    ===========   ===========

               Surplus as Regards Policyholders

           Year ended December 31

           GAAP basis                                   $19,829,961    $26,427,657   $22,931,595
           Nonadmitted assets for statutory reporting       (25,886)       (23,422)     (359,121)
           Unrealized losses (gains)                        370,151     (1,304,624)    3,439,015
           Deferred acquisition costs                                     (120,528)
           Discount of reserves                           2,090,000      2,787,000     3,484,000
           Deferred income taxes                         (1,204,000)    (3,512,609)   (3,142,573)
                                                        ------------   -----------   -----------
                                                        
           Statutory surplus as regards policyholders   $21,060,226    $24,253,474   $26,352,916
                                                        ===========    ===========   ===========
</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 1996 and 1995 were $0 and $2,600,000,
          respectively. The maximum dividend payout which may be made in 1997
          is $2,106,000.

                                      22
<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 1996 and 1995 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: In May 1993, the Financial Accounting Standards Board
          published SFAS 115 which requires certain changes in the accounting
          and reporting on certain investments in debt and equity securities.
          Among other things, SFAS 115 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.

                                      23
<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. The
          adoption of SFAS 115 in 1994 had no financial statement impact as the
          Company previously carried such investments at market under SFAS 60.
          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 or when unavailable, on similar investments.

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

          At December 31, 1996 and 1995, 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
          approximate their 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 straight-line 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 certificates of deposit
          with original maturity dates within 90 days.

                                      24
<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 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. 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 1995, 9,802 shares
     of preferred stock were converted to 19,604 shares of Class B common stock.

     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.


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, 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>

                                      25
<PAGE>

Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

4.   Investments, continued:
<TABLE>
<CAPTION>
                                                                                Gross          Gross        Estimated
                                                               Amortized     Unrealized     Unrealized       Market
                December 31, 1995                                 Cost          Gains          Losses         Value
     <S>                                                    <C>            <C>            <C>            <C>
     U.S. Treasury debt securities and
          obligations of U.S.
          Government corporations and
          agencies                                          $  40,744,234  $     927,384  $      77,008  $  41,594,610
     Corporate debt securities                                  6,582,096        218,052          7,370      6,792,778
     Mortgage-backed securities                                32,741,359        418,313        148,756     33,010,916
     Other debt securities                                      2,877,193         16,484         33,380      2,860,297
                                                            -------------  -------------  -------------  -------------

                                                            $  82,944,882  $   1,580,233  $     266,514  $  84,258,601
                                                            =============  =============  =============  =============
</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, 1996,
     1995 and 1994 are as follows:

<TABLE>
<CAPTION>

<S>                          <C>               <C>           <C>
                                    1996           1995           1994

                             $    (1,108,031)  $  4,309,126  $  (5,054,633)
                             ===============   ============  =============
</TABLE>
     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, 1996                        Cost          Value
<S>                                                 <C>            <C>
     Due in one year or less                        $   7,522,826  $   7,478,960
     Due after one year through five years             45,582,427     45,387,871
     Due after five years through ten years            20,362,226     20,282,559
     Due after ten years                                5,684,219      5,640,516
                                                    -------------  -------------

                                                    $  79,151,698  $  78,789,906
                                                    =============  =============
</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.

                                      26
<PAGE>
 
Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued


4.   Investments, continued:

     Accrued investment income at December 31, is as follows:

<TABLE>
<CAPTION>
                                                           1996          1995
<S>                                                  <C>           <C> 
     U.S. Treasury securities                        $    726,630  $    801,524
     Corporate bonds                                      140,595       147,178
     Mortgage-backed securities                           174,860       193,528
     Other debt securities                                 12,242        15,374 
     Short-term investments                                     -           925
 
                                                      ------------  ------------
               
                                                      $  1,054,327  $  1,158,529
                                                      ============  ============
</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, 1996, 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, 1996, 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, 1996 and
     1995, on deposit with the state of Missouri.

     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, 1996 and
     1995, the escrowed funds were invested in a $400,000 par value U.S.
     Treasury Note with a fair value of $400,876 and $408,248, respectively,
     which is included with investments on the balance sheet. This U.S. Treasury
     note matures April 30, 2001.

                                      27
<PAGE>

Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

4.   Investments, continued:

     Net investment income by source for each of the three years ended December
     31, was as follows:
<TABLE>
<CAPTION>
                                              1996         1995           1994
<S>                                     <C>           <C>           <C>
     Investment income:
       Fixed maturity investments       $  5,111,510  $  5,285,665  $  5,215,182
       Short-term investments                472,146       524,374       367,763
                                        ------------  ------------  ------------
        Total investment income            5,583,656     5,810,039     5,582,945

     Less investment expenses                286,894       286,762       272,172
                                        ------------  ------------  ------------
        Net investment income           $  5,296,762  $  5,523,277  $  5,310,773
                                        ============  ============  ============
</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>

                                              1996         1995           1994
<S>                                     <C>           <C>           <C> 
     Sale of fixed maturity investments:
       Realized gains                   $    103,817  $    220,862  $   261,210
       Realized losses                        (8,899)       (2,247)     (14,938)
                                        ------------  ------------  -----------
         Net realized gains             $     94,918  $    218,615  $   246,272
                                        ============  ============  ===========
</TABLE>

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>

                                                           1996           1995
<S>                                                   <C>           <C>
     Commerce Bank of Springfield -
        Collateralized repurchase agreement           $  3,315,000  $  4,725,000
                                                      ============  ============
</TABLE>
     All premiums are receivable from physicians, surgeons, dentists, and
     related health care providers, primarily concentrated in Missouri.

     See Note 8 regarding reinsurance.

                                      28
<PAGE>

Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

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 $175,968,
     $203,710 and $202,471 in 1996, 1995 and 1994, 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 1996, 1995 and 1994 totaled $85,042, $79,985 and $79,165,
     respectively.

7.   Deferred Policy Acquisition Costs:

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

<TABLE>
<CAPTION>

                                                               1996        1995
<S>                                                       <C>         <C>
     Deferred, January 1                                  $  120,527  $        -

     Additions - Premium tax                                 254,019     180,448
     Less - Amortization and write-off to expense            374,546      59,921
                                                          ----------  ----------

     Deferred, December 31                                $        0  $  120,527
                                                          ==========  ==========
</TABLE>
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.

                                      29
<PAGE>
 
Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

8.   Reinsurance, continued:

     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.


9.  Federal Income Tax:

    The Company files a consolidated federal income tax return. Pursuant to a
    tax allocation agreement, the Company has followed a policy of allocating a
    portion of its consolidated income tax provision to all consolidated
    entities in amounts generally equivalent to the provision (benefit) which
    would result if each entity filed a separate 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>
                                     1996                           1995                           1994
                             -----------------------        ----------------------          ---------------------
                              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                   $ (1,599,914)   (34.00)%        $  701,978      34.00%       $  503,984      34.00%
Nondeductible
     reorganization
     costs                                                       98,036       4.75           187,380      12.64
Tax-exempt interest                                                                          (46,835)     (3.16)
Other permanent
     differences                   20,623      0.45             (32,047)     (1.56)           40,336       2.72
Change in valuation
     allowance                  2,374,704     50.94            (519,704)    (25.17)          (98,951)     (6.68)
                             ------------    ------          ----------     ------         ---------       -----
Provision for income
     taxes                   $    795,413     17.39%         $  248,263      12.02%       $  585,914      39.52%
                             ============     =====          ==========     ======         =========      =====
</TABLE>
                                      30

<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, 1996 and 1995
     are as follows:

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

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


<S>                                             <C>             <C>           <C>           <C>
          Tax discounting of loss
             reserves                           $  4,069,721                  $ 4,582,544
          Tax acceleration of
             unearned premium                        514,864                      547,729
          Deferred policy
             acquisition costs                                                               $ 40,979
          Unrealized gain/loss                       122,565                                  448,239
                                                ------------    ------------  -----------    --------

                                                $  4,707,150    $          -  $ 5,130,273    $489,218
                                                ============    ============  ===========    ========

          Net deferred federal
             income tax asset                   $  4,707,150                  $ 4,641,055

          Valuation allowance                     (3,503,150)                  (1,128,446)
                                                ------------                  -----------
          Net realized deferre
             asset                              $  1,204,000                  $ 3,512,609
                                                ============                  ===========
</TABLE>

     The valuation allowance represents the difference betw een 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.

                                       31
<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 the next three 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 three-year carryback
     period.


     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 three years in the future using a more likely than
     not standard.

     The change in the valuation allowance is as follows:

<TABLE>
<CAPTION>
 
           <S>          <C>          <C>
                1996         1995         1994
 
           $2,374,704   $ (519,704)  $  (98,951)
           ==========   ==========   ==========
</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, 1996 and 1995,
     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, 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.

                                      32
<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>
                                             1996           1995

     <S>                                <C>            <C>
     Balance at January 1               $  65,660,000  $  65,803,000
     Less reinsurance recoverables          2,383,000      2,905,000
                                        -------------  -------------

     Net balance at January 1              63,277,000     62,898,000
                                        -------------  -------------

     Incurred related to:
          Current year                     15,802,388     18,115,000
          Prior years                       4,576,958     (1,956,478)
                                        -------------  -------------

            Total incurred                 20,379,346     16,158,522
                                        -------------  -------------

     Paid related to:
          Current year                        749,388      1,333,057
          Prior years                      21,652,958     14,446,465
                                        -------------  -------------

            Total paid                     22,402,346     15,779,522
                                        -------------  -------------

     Net balance at December 31            61,254,000     63,277,000
     Plus reinsurance recoverables          1,951,000      2,383,000
                                        -------------  -------------

     Balance at December 31             $  63,205,000  $  65,660,000
                                        =============  =============

  
</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.

                                       33
<PAGE>
 
Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

12.  Net Income Per Common Share:

     Net income per common share is computed using net income divided by the
     weighted average number of common shares and common share equivalents
     outstanding. All of the Company's outstanding shares of preferred stock are
     convertible to common stock at a ratio of two shares of common stock for
     each one share of preferred stock. Since the Company's preferred stock has
     no stated dividend rate, and thus, no effective yield, these securities are
     considered common stock equivalents for the purpose of computing net income
     per common share.

     As discussed in Note 3, on November 15, 1996, the Company completed the
     purchase of 2,781,338 shares of its convertible preferred stock. The
     average weighted number of common stock equivalents outstanding for 1996
     reflects the purchase of these shares as of November 15, 1996.

     Other than the preferred stock discussed above, the Company does not have
     any other potentially dilutive stocks. Therefore, the computations for
     fully diluted net income per common share are not presented since the
     results do not differ from primary net income per common share.

     Net income per share information is not computed for the period ending
     December 31, 1994, as the conversion of MDA to a stock insurance company
     and a wholly-owned subsidiary of MDHC was not completed until June 26,
     1995, and therefore, all of the earnings for those periods are attributable
     to the preconversion earnings of MDA. In addition, the net income of
     $617,713 recorded by the subsidiary as of June 30, 1995, is virtually
     entirely attributable to preconversion results and, therefore, is also
     excluded for 1995 earnings per share presentation purposes.

     Net income per common share for the two years ended December 31, is as
     follows:

<TABLE>
<CAPTION>
                                                                       1996            1995

     <S>                                                         <C>             <C>
     Net income (loss)                                           $  (5,501,042)  $   1,816,378

     Less net income of subsidiary through
          June 30, 1995                                                               (617,713)
                                                                 -------------   -------------
              Adjusted net income                                $  (5,501,042)  $   1,198,665
                                                                 ==============  =============

     Weighted average common shares
          outstanding                                                1,019,602       1,019,602

     Weighted average common stock options
          expressed as common stock equivalents                     23,281,244      23,980,378
                                                                 -------------    ------------

     Weighted average common and equivalent
          shares outstanding                                        24,300,846      24,999,980
                                                                 =============    ============

     Net income per common share                                 $       (0.23)   $       0.05
                                                                 =============    ============

</TABLE>

                                      34
<PAGE>

Medical Defense Holding Co.

Notes to Consolidated Financial Statements, Continued

13.  Retained Earnings:

     Retained earnings at December 31, is derived as follows:

<TABLE>
<CAPTION>
 
 
                                                      1996             1995
 
     <S>                                        <C>             <C>
     Unassigned surplus/retained earnings at    $  16,186,997   $   26,370,610
      January 1

     Less preferred stock issued at date of
        conversion, including 9,802 shares
        subsequently converted
        (Note 1)                                                   (11,999,991)

     Net income                                    (5,501,042)       1,816,378
                                                -------------   --------------

     Retained earnings at December 31           $  10,685,955   $   16,186,997
                                                =============   ==============
</TABLE>

                                      35
<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, 1996.


                                   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          56  Obstetrician/            Chairman of the Board,  1994 to date
                                    Gynecologist             President and Chief
                                                             Executive Officer

     Gary L. Robinson          60  Obstetrician/            Vice President          1994 to date
                                    Gynecologist

     John J. Stamatis          55  Thoracic and Cardio-     Vice President          1994 to date
                                    vascular Surgeon

     David W. Brown            58  Orthopedic Surgeon       Treasurer               1994 to date

     Arlen D. Winsky           59  Plastic Surgeon          Secretary               1994 to date

     Geri H. Morrison          41  Chief Operating Officer  Assistant Secretary     1994 to date
                                                             and Chief Operating
                                                             Officer

     Samuel J. Pippin          41  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.

                                      36
<PAGE>
 
          BUSINESS EXPERIENCE

     Ronald G. Benson, 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 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 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 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 55, 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 58, 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 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 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 41, 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 41, 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.

                                      37
<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, 1996 with respect to the Company's
chief executive officer and each other executive officer whose annual salary and
bonus, taken on a consolidated basis, 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.,            1996          $129,387          $75,000 (1)          $36,850 (2)
 Chairman of the Board,            1995          $125,867          $75,000 (1)          $32,703 (3)
 President and Chief               1994          $122,581          $75,000 (1)          $28,485 (4)
  Executive Officer

Geri H. Morrison, CPA, MBA,        1996          $151,449          $80,387 (5)          $31,106 (2)
 Chief Operating Officer           1995          $131,123          $80,378 (5)          $23,676 (6)
                                   1994          $124,075          $80,338 (5)          $17,620 (7)
</TABLE>

     (1)  Reflects contribution to the five-year executive 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 $3,600 in MDA director's fees and contributions to the two
          MDS qualified defined contribution plans.

     (5)  Includes $65,000 contribution to the five-year executive compensation
          plan instituted in 1993. See "Executive Compensation Plan" below for
          additional detail.

     (6)  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.

     (7)  Reflects contributions to the two MDS qualified defined contribution
          plans.

     Since July of 1995 the six Directors of the Company each has received $700
per month compensation for their service in that capacity.

     The nine Directors of MDA each receives $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.

                                      38
<PAGE>
 
          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 of compensation they receive for the plan year. MDS will make 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.

          Executive Compensation Plan

     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 terminates on December 31, 1997. The Board of
Directors of MDS designated by resolution those employees of MDS who may
participate in the Secular Trust. 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. 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. The employee designates the
beneficiary of the Trust maintained pursuant to the Secular Trust. An employee's
participation in the Secular Trust terminates upon the employee's termination of
employment with MDS.



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

<TABLE>
<CAPTION>
                                   PREFERRED STOCK    CLASS A COMMON STOCK
                                  -----------------   --------------------
                                  # OF     % OF ALL     # OF     % OF ALL
                                  SHARES    SHARES      SHARES    SHARES
                                  ------   --------     ------   --------
<S>                               <C>      <C>          <C>      <C>

     RONALD G. BENSON              38,399   0.417%      142,857   14.286%
     GARY L. ROBINSON              15,474   0.168%      142,857   14.286%
     JOHN J. STAMATIS              30,574   0.332%      142,857   14.286%
     DAVID W. BROWN                30,429   0.330%      142,857   14.286%
     ARLEN D. WINSKY               20,765   0.225%      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   1.472%      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 17, 1997, two shareholders had converted a total of 16,615
shares of Preferred Stock to 33,230 shares of Class B Common Stock. As of March
17, 1997, that constituted all of the shares of Class B Common Stock issued and
outstanding.

                                      39
<PAGE>
 
     Item 13. Certain Transactions and Relationships
     -----------------------------------------------

     During all or some portion of 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.

 
                                      40
<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.

                     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
               1996.

     (c)  Exhibits

               See Item 14(a)3 above.


                                      41
<PAGE>
 
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
Dated: March 17, 1997                      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.
 
Signature                      Title                            Date
---------                      -----                            ----
 
 
  /s/ Ronald G. Benson         President, Director and          March 17, 1997
---------------------------    Chairman of the Board 
Ronald G. Benson               (Principal Executive Officer)
 
 
  /s/ Arlen D. Winsky          Secretary and Director           March 17, 1997
---------------------------
Arlen D. Winsky
 
 
                               Vice President and Director      March __, 1997
---------------------------
Gary L. Robinson
 
 
  /s/ John J. Stamatis         Vice President and Director      March 17, 1997
---------------------------
John J. Stamatis
 
 
  /s/ David W. Brown           Treasurer and Director           March 17, 1997
---------------------------
David W. Brown
 
 
  /s/ Geri H. Morrison         Assistant Secretary, Chief       March 17, 1997
---------------------------    Operating Officer and Director
Geri H. Morrison             
 
 
  /s/ Samuel J. Pippin         Director of Accounting and       March 17, 1997
---------------------------    Finance (Principal Financial
Samuel J. Pippin               Officer and Principal Accounting
                               Officer)
 

                                      42
<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 1996 to security
holders in April, 1997.  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.


                                      43
<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 21, 1997



                                      S-1
<PAGE>
 
                                                                      SCHEDULE I


                 MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES

                            SUMMARY OF INVESTMENTS

                    As of December 31, 1996, 1995 and 1994

                            (Dollars in Thousands)
                                   _________
<TABLE>
<CAPTION>
 
 
                                              1996                           1995                           1994
                                  -----------------------------  -----------------------------  -----------------------------
                                                       Balance                        Balance                        Balance
                                  Amortized   Market    Sheet    Amortized   Market    Sheet    Amortized   Market    Sheet
                                    Cost      Value     Amount     Cost      Value     Amount     Cost      Value     Amount
                                  ---------  --------  --------  ---------  --------  --------  ---------  --------  --------
<S>                               <C>        <C>       <C>       <C>        <C>       <C>       <C>        <C>       <C>
Fixed Maturities:            
  Bonds:                     
    United States Government 
      and Government Agencies
      and Authorities               $69,960   $69,585   $69,585    $73,486   $74,606   $74,606    $69,518   $64,918   $64,918
                             
    Corporate Securities              6,372     6,412     6,412      6,582     6,793     6,793      8,792     8,326     8,326
                             
    Other debt securities             2,820     2,793     2,793      2,877     2,860     2,860      2,332     2,187     2,187
                                    -------   -------   -------    -------   -------   -------    -------   -------   -------
        Total fixed maturities       79,152    78,790    78,790     82,945    84,259    84,259     80,642    75,431    75,431
                             
  Short-term investments              4,507     4,509     4,509      7,484     7,489     7,489      2,940     2,940     2,940
                                    -------   -------   -------    -------   -------   -------    -------   -------   -------
        Total investments           $83,659   $83,299   $83,299    $90,429   $91,748   $91,748    $83,582   $78,371   $78,371
                                    =======   =======   =======    =======   =======   =======    =======   =======   =======
</TABLE>



                                      S-2
<PAGE>
 
                                                                     SCHEDULE II


                 MEDICAL DEFENSE HOLDING CO. AND SUBSIDIARIES

                 Condensed Financial Information of Registrant

                                 Balance Sheet

                             (Parent Company Only)

                          December 31, 1996 and 1995

                            (dollars in thousands)
<TABLE>
<CAPTION>
                                                              1996        1995
                                                              ----        ----
  <S>                                                       <C>         <C>
  Assets:                                                 
    Cash and cash equivalents............................   $   316     $   347
    Investment in subsidiaries...........................    17,644      26,487
    Federal income tax recoverable.......................     2,379
    Other Assets.........................................     1,501       2,724
                                                            -------     -------
      Total assets.......................................   $21,840     $29,558
                                                            =======     =======
                                                        
  Liabilities:                                            
    Accrued Liabilities..................................   $     5     $     1
                                                            -------     -------
      Total liabilities..................................         5           1
                                                            -------     -------
                                                        
  Stockholder's equity:                                   
    Preferred Stock......................................     9,209      12,000
    Common Stock.........................................       510         500
    Additional paid-in capital...........................     1,669
    Retained earnings....................................    10,447      17,057
                                                            -------     -------
      Total stockholder's equity.........................    21,835      29,557
                                                            -------     -------
                                                        
  Total liabilities and stockholders' equity.............   $21,840     $29,558
                                                            =======     =======

</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, 1996 and 1995

                 (dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                          1996         1995
                                                        --------      ------
Revenues:
<S>                                                     <C>           <C>
  Earnings of subsidiaries............................  $(5,494)      $1,825
  Investment Income...................................      142           27
                                                        -------       ------
    Total revenues....................................   (5,352)       1,852

Total expenses........................................      125           36
                                                        -------       ------

Income (loss) before taxes............................   (5,477)       1,816

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

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

Net income per share..................................  $ (0.23)      $ 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, 1996 and 1995

                            (dollars in thousands)

<TABLE>
<CAPTION>

Cash flows from operating activities:                      1996          1995
                                                           ----          ----
  <S>                                                      <C>           <C>
  Net income (loss)...................................   $ (5,501)     $ 1,816
                                                         --------      -------
  Adjustments to reconcile net income to net cash
    provided by operating activities:
  Dividends received from subsidiaries over
    subsidiaries' earnings............................      5,494          778

  Changes in other assets and accrued liabilities.....       (274)         (36)
                                                         --------      -------
    Net cash provided by operating activities.........       (281)       2,558
                                                          --------      -------
Cash flows from investing activities:
  Proceeds from short-term investments................     13,300            0

  Purchase of short-term investments..................    (11,937)      (2,711)
                                                         --------      -------

    Net cash used by investing activities.............      1,363       (2,711)
                                                         --------      -------
Cash flows from financing activities:
  Purchase of preferred stock.........................      1,113            0
  Proceeds from common stock issued...................          0          500
                                                         --------      -------

    Total cash provided...............................         31          347

Cash and cash equivalents, beginning of period........        347            0
                                                         --------      -------

Cash and cash equivalents, end of period..............   $    316      $   347
                                                         ========      =======
</TABLE>

------------

     Notes to Condensed Financial Information of Registrant.

     (1)  The Company was formed on November 28, 1994 and did not engage in any
          significant activity prior to its acquisition of Medical Defense
          Associates on June 26, 1995, therefore, the financial statements for
          years prior to 1995 have been omitted.

     (2)  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, 1996, 1995 and 1994

                            (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>
1996
  Medical Malpractice     $12,526      $(196)        $-0-   $12,722          0%
                          =======      =====         ====   =======          =
                                                                              
1995                                                                          
  Medical Malpractice     $13,890      $ (70)        $-0-   $13,960          0%
                          =======      =====         ====   =======          =
                                                                              
1994                                                                          
  Medical Malpractice     $14,212      $ (45)        $-0-   $14,257          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, 1996, 1995 and 1994

                            (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                    1995       Expenses     Accounts    Expenses Paid   to Reinsurers       1996
-------------------------  ------------  -----------  ----------  ---------------  --------------  ------------
<S>                        <C>           <C>          <C>         <C>              <C>             <C>
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
 
                                                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
 
                                                Additions                   Deductions
                                         -----------------------  ------------------------------
                             Balance,    Charged to   Charged to    Losses and     Retrospective     Balance,
                           December 31,   Costs and     Other     Loss Adjustment  Premiums Paid   December 31,
Description                    1993       Expenses     Accounts    Expenses Paid   to Reinsurers       1994
-------------------------  ------------  -----------  ----------  ---------------  --------------  ------------
Unpaid losses and loss
  adjustment expenses           $70,436     $12,504                       $17,137                       $65,803
 
Retrospective premiums
  payable to reinsurers         $ 3,001     $   (45)                                        $370        $ 2,586

</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, 1996, 1995 and 1994

                            (Dollars in Thousands)
                                 -------------

<TABLE>
<CAPTION>
 
                                                  1996       1995        1994
                                                  ----       ----        ----  
<S>                                             <C>        <C>         <C>
Deferred policy acquisition costs               $   375    $    60     $     0
                                                                
Reserve for unpaid losses                                       
  and loss adjustment expenses                   63,205     65,660      65,803
                                                                
Unearned premiums                                 7,572      8,055       9,210
                                                                
Earned premiums (gross of reinsurance)           13,004     15,113      13,463
                                                                
Net investment income                             5,297      5,523       5,311
                                                                
Losses and loss adjustment                                      
  expenses (gross of reinsurance)                             
  incurred related to:                                        
    Current years                                15,802     18,115      16,628
    Prior years                                   4,145     (2,478)     (4,124)
                                                                
Paid losses and loss adjustment                                 
  expenses                                       22,402     15,780      17,137
                                                                
Gross premiums written                           12,526     13,890      14,212
</TABLE>


                                      S-8
<PAGE>
 
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>

Exhibit                                                                    Page
  No.                             Description                               No.
  ---                             -----------                               ---
<C>       <S>                                                              <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.
  ---                             -----------                               ---
<C>       <S>                                                              <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.)................................................
 
  11.1    -- Statement re computation of per share earnings................
 
  21.1    -- Subsidiaries of the registrant................................
 
  28.1    -- Information from reports furnished to state insurance 
             regulatory authorities........................................
</TABLE>