<PAGE>

                                       
                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D. C.  20549
                                       
                                   FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       
                                      OR

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

                       COMMISSION FILE NUMBER:   0-25508

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

            MINNESOTA                                      41-1440870
 --------------------------------          -------------------------------------
 (State or other jurisdiction of            (I.R.S. Employer Identification No.)
  incorporation or organization

                  8500 NORMANDALE LAKE BOULEVARD,  SUITE 1400
                           BLOOMINGTON, MN  55437
             (Address of principal executive offices and zip code)
                                       
     Registrant's telephone number, including area code:    (612) 893-0403
                                       
      Securities registered pursuant to 12(b) of the Act:    None
                                       
Securities registered pursuant to 12(g) of the Act: Common Stock, no par value
                                   Series A Junior Participating Preferred Stock


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.
                         Yes  X     No
                            -----     -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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 )

As of March 10, 1998, 11,907,823 shares of Common Stock, no par value, were
outstanding.  As of March 10, 1998, assuming as fair value the last sale price
of $8.625 per share on The Nasdaq Stock Market, the aggregate fair value of
shares held by non-affiliates was approximately $78,701,000.
                                       
                     DOCUMENTS INCORPORATED BY REFERENCE:

The Company's Proxy Statement for its annual meeting of shareholders to be held
in May 1998, a definitive copy of which will be filed with the Securities and
Exchange Commission within 120 days of December 31, 1997, is incorporated by
reference in Part III of this Report on Form 10-K.

<PAGE>

                               TABLE OF CONTENTS
                               -----------------
<TABLE>
<CAPTION>

PART I                                                                       PAGE
------                                                                       ----
 <C>      <S>                                                                 <C>

 Item 1.  Business                                                             3
          Executive Officers of the Registrant                                 9
 Item 2.  Properties                                                          10
 Item 3.  Legal Proceedings                                                   10
 Item 4.  Submission of Matters for a Vote of Security Holders                10


PART II
-------
 Item 5.  Market for Registrant's Common Equity and Related 
             Stockholder Matters                                              10
 Item 6.  Selected Financial Data                                             11
 Item 7.  Management's Discussion and Analysis of Financial Condition and
             Results of Operations                                            12
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk          22
 Item 8.  Financial Statements and Supplementary Data                         22
 Item 9.  Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure                                            40


PART III
--------
 Item 10. Directors and Executive Officers of the Registrant                  40
 Item 11. Executive Compensation                                              40
 Item 12. Security Ownership of Certain Beneficial Owners and Management      40
 Item 13. Certain Relationships and Related Transactions                      40


PART IV
-------
 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K    41
 Signatures                                                                   43

</TABLE>

                                      2

<PAGE>

                                    PART I

ITEM 1.   BUSINESS
------------------

OVERVIEW

     RTW, Inc. (the "Company") provided comprehensive management products and
services to employers for their workers' compensation programs in Minnesota,
Wisconsin, Colorado, Missouri, Illinois, Michigan and Massachusetts during
1997.  The Company also had obtained licenses but was not yet operating in
Pennsylvania, Connecticut, Tennessee and South Dakota.  The Company believes
its proprietary management approach substantially reduces wage replacement
costs and medical expenses resulting from workplace injuries.  The Company
focuses on controlling costs by returning injured employees to work as soon as
possible and by actively managing all participants in the workers' compensation
system, including employers, employees and medical care providers, as well as
legal and judicial participants in the workers' compensation system. Elements
of the Company's management approach include:

       -  thorough on-site evaluation of potential customers;
       
       -  active training of customers in the Company's procedures;

       -  prompt identification of potentially high-cost injuries; and

       -  rapid intervention in, and intensive management of, potentially 
          high-cost injuries.

     The Company also uses management techniques such as designated health care
providers, medical fee schedule review, utilization review and peer review to
control medical costs.  In order to benefit directly from the use of its
proprietary methods, the Company combines its management services with workers'
compensation insurance products underwritten by its wholly-owned subsidiary,
American Compensation Insurance Company ("ACIC").

INDUSTRY

     Workers' compensation benefits are mandated and regulated by individual
states, and every state requires employers to provide wage replacement and
medical benefits to work accident victims regardless of fault.  Virtually all
employers in the United States are required either to purchase workers'
compensation insurance from a private insurance carrier, to obtain coverage
from a state managed fund or, if permitted by their state, to be self-insured.
Workers' compensation laws generally mandate two types of benefits for injured
employees: (i) indemnity payments that consist of temporary wage replacement or
permanent disability payments and (ii) medical benefits that include expenses
related to diagnosis and treatment of the injury as well as rehabilitation, if
necessary.  On an industry-wide basis, indemnity payments represent
approximately 60% of benefits paid, while medical benefits account for the
remaining 40%.

     Workers' compensation costs grew approximately 11.5% annually from 1960 to
1990.  Premium growth flattened from 1991 to 1992 and has since declined by
approximately 8% through 1996.  Estimated insurance premiums and self-insurance
costs totaled approximately $53 billion nationwide in 1996. This $53 billion
includes:  (i) the traditional, or private residual market, estimated at $25
billion, including commercial insurers and state operated assigned risk pools
established for high risk employers; (ii) state funds, estimated at $10
billion, operated in 27 states in order to increase competition and stabilize
the market; and (iii) self-funded employers, estimated at $18 billion.

     Indemnity payments, which are established by legislative action, have
risen, in part, because of higher wage levels and increased state mandated
benefits.  Medical expenses have also increased due to the general rise in the
cost of health care and the statutory requirement that employers provide
coverage of all compensable medical costs, without any copayment by the
employee.  The Company believes the most significant factor affecting the cost
of workers' compensation, however, results from incentives in the system for
injured employees to remain away from work and to continue collecting indemnity
payments and receiving medical treatment beyond the point that is necessary.

                                      3

<PAGE>

     The Company believes that workers' compensation insurance companies have
not effectively controlled costs in the industry.  Traditional insurance
company practices have focused on managing specific aspects of the system, such
as workplace safety, and on implementing certain medical cost containment
measures.

     While traditional efforts have reduced costs in certain areas, the Company
believes these efforts have not had a significant effect on the overall system
because they have not focused effectively on controlling indemnity payments.
In addition, the Company believes traditional efforts have addressed only
certain components of the workers' compensation system, and have not provided a
comprehensive management approach specifically designed for the workers'
compensation system.

THE COMPANY'S MANAGEMENT APPROACH

     The Company seeks to control workers' compensation costs through a
proprietary management approach that is specifically designed for the workers'
compensation system.  The Company's management strategy seeks to reduce
workers' compensation costs significantly through early intervention in each
employee injury and intensive management of all participants in the system,
including employers, injured employees and medical care providers, as well as
legal and judicial participants in the workers' compensation system.  Through
early intervention, the Company promptly identifies cases that have the
potential to result in significant expenses and acts to control these expenses
before they are incurred.  The Company focuses on controlling indemnity
payments for lost wages, the largest component of workers' compensation costs,
by quickly returning employees to work.  As part of this strategy, the Company
attempts to return an injured employee to his or her original position if the
employee is capable, or to place the employee in a transitional, light-duty
position until the employee is able to resume his or her former position.  By
promptly returning an employee to work, the Company has found that not only
indemnity payments, but also medical expenses per injury, are substantially
reduced.  In addition, the Company uses management techniques such as
designated health care providers, medical fee schedule review, utilization
review and peer review to control medical costs.

     The Company uses six-person operating teams to implement its management
approach.  An operating team handles all of the claims for a specific group of
customers and is accountable within the Company for the loss experience of
these customers.  Each team generally consists of three nurses, a statutory
claims administrator, an assistant claims administrator and a clerical support
person.  A team's nurses are responsible for evaluating the medical condition
of an injured employee and monitoring the employee's medical treatment.  The
claims administrators are responsible for determining the eligibility of
claims, paying benefits in a timely manner and following statutory requirements
for administration of claims.  The operating teams meet regularly to discuss
strategies for managing difficult claims and to review strategies and
procedures that have been particularly successful in resolving disputes.

     The following sections summarize the Company's approach to managing the
various participants in the system.

     EMPLOYERS.  Generally, each customer is assigned to an operating team
responsible for managing the customer relationship.  Prior to accepting an
employer as a customer, members of an operating team conduct a risk assessment
and provide an explanation of the Company's methods and procedures to the
employer.  The risk assessment forms a part of the Company's underwriting
process and includes an evaluation of the employer's willingness to follow the
Company's procedures.  Before the Company accepts an employer as a customer,
the Company and the employer sign an agreement in which the employer agrees to
comply with the Company's early intervention methods and to provide
transitional, light-duty work for injured employees until such time as they are
able to resume their normal positions.  To ensure that the Company's early
intervention techniques succeed, the Company requests prompt notification from
the employer of all injuries, typically 24 to 48 hours after the employer
learns of the injury.

     The operating team is responsible for implementing a workers' compensation
program for the customer, training the customer's personnel in the Company's
methods and procedures and managing all reported injuries for this customer.
The operating team meets with the customer, provides loss reports showing
current claims status, conducts an annual account review and maintains active
communications on open injury matters.  The operating team may make workplace
safety recommendations or retain a workplace safety engineering firm to assist
its customers to remedy work conditions that the operating team determines
constitute an inappropriate risk.  In 

                                      4

<PAGE>

addition, the operating team may recommend to the Company's management the 
cancellation or non-renewal of the policy for a customer that fails to comply 
with the Company's procedures.  To date, there have not been a material 
number of policy cancellations or non-renewals due to the failure by 
customers to comply with the Company's policies.

     EMPLOYEES.  The Company focuses on identifying injuries that have the
greatest potential to result in significant expenses and acts quickly to
control expenses resulting from these injuries.  The Company's experience has
been that approximately 15% of all injuries result in 85% of all workers'
compensation expenses and that early identification of, and intervention in,
these cases can lead to significant cost savings.  Within 48 hours of notice of
an injury, the operating team typically evaluates several factors, including
the type of injury, the employee's history of injuries and whether the employee
is absent from work, to determine whether the injury is likely to involve
significant expenses.  In potentially high-cost cases, a member of the
operating team intervenes quickly by meeting with the injured employee to
assess the injury, assisting the injured employee in obtaining medical care and
rehabilitation and developing a plan to get the employee back to work as soon
as is appropriate.  If the employee cannot immediately return to his or her
original position, the employer is required, according to the terms of the
insurance agreement, to provide a transitional light-duty job that is
consistent with the limits defined by the employee's medical care provider.  If
the employee refuses this transitional position, the Company may terminate
indemnity payments, but is required to continue to provide appropriate medical
benefits.

     MEDICAL CARE PROVIDERS.  The operating teams actively assess each injury,
monitor and manage the medical treatment and review the medical expenses of
each employee's injury.  Each injury report is reviewed by one of the Company's
nurses.  The nurse typically contacts the physician treating the employee in
cases that involved days off from work or injuries that could involve
significant expense.  In these cases, the physician is asked to provide his or
her diagnosis, plan of treatment and assessment of the employee's physical
capabilities for transitional work.  The Company has contracts with medical and
chiropractic physicians to provide consulting services and assessment of
proposed treatment plans for injured employees to the operating teams.  These
physicians also discuss injured employee treatment plans with the employee's
medical care providers.  The goal is to ensure both an accurate diagnosis and
treatment of the injury and an understanding of the nature and extent of the
limits the diagnosis places on the employee's ability to return to work in
either the original job or a transitional, light-duty position.  The operating
team also monitors the health care provided to the injured employee to ensure
that the employee receives proper treatment for the injury and that the
employee does not receive services or procedures that are excessive,
unnecessary or unrelated to the particular injury.  In addition, when the
operating team believes the diagnosis of an injury or the proposed
rehabilitation treatment is not appropriate, the operating team will arrange
for a second opinion with an independent medical examiner.

     The medical cost management team reviews all bills submitted by medical
care providers to determine if the amounts charged for the treatments are
appropriate according to statutory fee schedules.

     In Minnesota, Illinois and many other states, the Company cannot require
that an injured employee go to a specific physician or seek treatment from a
specific provider.  Nevertheless, the Company attempts to assist the injured
employee in the selection of appropriate medical care providers.  In Colorado,
Missouri and Michigan (for the first ten days after the injury) the Company can
require injured employees to go to a physician within a designated network of
medical care providers.

     MANAGEMENT OF LEGAL AND JUDICIAL PARTICIPANTS.  The Company, through early
intervention, seeks to limit the number of disputes with injured employees.  As
part of its early intervention process, the Company identifies injuries that
are not eligible for medical or indemnity payments, and denies the claim.  The
Company may also deny a claim for indemnity payments when it determines that no
further payments are appropriate (for example, when an employee has been
offered transitional, light-duty work and has refused it).  In these and other
sets of circumstances, the employee may engage a lawyer to represent his or her
interests.  Generally, if the parties are unable to resolve the matter, the
workers' compensation law mandates arbitration, subject to judicial review.
For cases that involve adversary proceedings, the Company engages one of
several lawyers who are familiar with the Company's philosophy and actively
seeks to resolve the dispute with the employee's attorney.  The Company's
policy is to contest all cases where the Company believes benefits are not
appropriate under applicable law.

                                      5

<PAGE>

CUSTOMERS

     The Company targets employers and associations that operate in industries
with relatively high workers' compensation costs, such as manufacturing,
retail, wholesale, health care or hospitality industries, and employers with a
history of workers' compensation claim costs higher than the average in their
industry.

     The Company's average annual premium decreased to $22,000 in 1997 from
$24,000 in 1996 and $52,000 in 1995 due primarily to increased association
business with smaller average individual member premiums written in 1997 and
1996 and decreases in premium rates on new and renewal policies.  The Company's
ten largest customers accounted for approximately $5.3 million or 6.7% of the
Company's premiums in force in 1997 as compared to $5.1 million or 7.4% of
premiums in force in 1996 and $4.8 million or 9.3% of premiums in force in
1995.  No customer accounted for more than 5% of in force premiums in 1997,
1996 or 1995.  Approximately 78% of the policies scheduled to expire in 1997
were renewed by the Company's customers whereas approximately 83% were renewed
in 1996.

     Currently, all of the Company's customers are in Minnesota, Wisconsin,
Colorado, Missouri, Illinois, Kansas, Michigan, Indiana, Massachusetts, Rhode
Island, Connecticut and  New Hampshire.  In addition to these states, the
Company is also currently licensed in Pennsylvania, Tennessee, South Dakota,
Iowa and Maryland.  The Company is applying for authorization to begin
insurance operations in 10 additional jurisdictions.  The Company expects it
will primarily enter states that have a workers' compensation regulatory
structure that allows the Company to set its own premium rates and that also
have a substantial portion of the employers in that state insured through a
state sponsored fund.  The Company currently has no intention to expand
operations internationally but will reevaluate the circumstances as
opportunities arise.

PRODUCTS

     Substantially all of the Company's workers' compensation products and
services are guaranteed-cost insurance policies.  Under a guaranteed-cost
policy, the customer purchases an insurance policy underwritten by ACIC and
pays the Company a premium based on the customers' aggregate payroll.  The
Company assumes responsibility for all the indemnity and medical costs
associated with the customers' workers' compensation injuries and works closely
with the customer in managing the employer's entire workers' compensation
program.

     The Company determines the premium to be charged a customer based on
several factors, including:  (i) the expected dollar loss per $100 of payroll
for the customers' industry, (ii) the customer's experience modifier, a
measurement of the difference between the customer's past claims experience and
its industry average and (iii) an upward or downward adjustment to the premium
by the Company based on its assessment of the risks associated with providing
the coverage for the specific customer and on competitive market prices.  A
customer's expected dollar loss and experience modifier are each determined by
an independent rating agency established by its state, based on a three-year
average of the claims experience of the customer and its industry.

     In addition to standard guaranteed-cost policies, the Company offers, on a
limited basis, a deductible guaranteed-cost policy under which the customer is
responsible for all medical and indemnity expenses up to a specific dollar
amount, while the Company is responsible for medical and indemnity expenses
over this level.  The Company provides the same comprehensive management
services for the deductible guaranteed-cost policies and the standard
guaranteed-cost policies.

SALES AND MARKETING

     The Company's workers' compensation products and services are sold by
independent insurance agencies, including several large national agencies, as
well as one- or  two-person agencies.  Agencies are paid a commission, which
averaged 7.8% of the Company's gross premiums earned in 1997 compared to 7.3%
of gross premiums earned in 1996.  The Company's ten highest producing agencies
accounted for approximately $21.1 million or 26.9% of premiums in force in 1997
compared to $25.7 million or 37.0%  of premiums in force in 1996.  No agency
accounted for more than 4.3% of premiums in force in 1997 and 6.2% of premiums
in force in 1996.  The Company continually markets its products and services to
its agencies to keep them aware of developments in the Company's business.
Each state's management group and underwriting team is responsible for
establishing and maintaining agency relationships.
                                      6

<PAGE>

REINSURANCE

     The Company shares the risks and benefits of the insurance it underwrites
through reinsurance.  The Company has in effect "excess of loss" policies under
which the Company pays a reinsurer a percentage of its gross premiums earned,
and the reinsurer agrees to assume all risks relating to injuries over a
specific dollar amount on a per occurrence basis.  The 1997 and 1996 per
occurrence levels in Minnesota were $1,080,000 and $1,040,000, respectively.
The Company selected $280,000 for its retention level in Minnesota for 1998.
The excess of loss coverage in Minnesota is provided by a state established
organization, the Minnesota Workers' Compensation Reinsurance Association.  In
non-Minnesota states, excess of loss coverage is purchased through private
reinsurers.  In 1997, the Company purchased non-Minnesota excess of loss
policies primarily through General Reinsurance Corporation, rated A++
(Superior) by A.M. Best. The excess of loss policies in effect during 1997
provided reinsurance up to $9.5 million in excess of $500,000 per person per
any one loss and up to $40 million in excess of $10 million per occurrence
ultimate net loss. This excess of loss coverage continues into 1998, was
effective January 1, 1997, and replaced excess of loss policies which were
terminated on December 31, 1996. The non-Minnesota excess of loss policies in
effect during 1996 and 1995 provided reinsurance up to $9.5 million in excess
of $500,000 per person per any one loss and up to $49.5 million in excess of
$500,000 per occurrence ultimate net loss. Transatlantic Reinsurance Company,
rated A+ (Superior) by A.M. Best, is the only reinsurance company that received
more than 15% of the premiums paid for reinsurance coverage under the 1996 and
1995 excess of loss coverage.

     During 1994, 1993 and 1992, the Company maintained a quota-share
reinsurance agreement with Reliance Insurance Company ("Reliance") under which
the Company ceded to Reliance a percentage of all written premium dollars, and
Reliance assumed that same percentage of all risks and related costs.  The
Company did not have any quota-share reinsurance agreements in effect for 1997,
1996 or 1995 and has none in effect for 1998.  Reliance currently is rated A-
(Excellent) by A.M. Best.

     A.M. Best ratings are ratings based on a comparative analysis of the
financial condition and operating performance of insurance companies.  A.M.
Best ratings are based upon factors of concern to insureds and are not directed
toward the protection of investors.  See "Competition."

COMPETITION

     The workers' compensation industry is highly competitive.  The Company
competes with large insurance companies, managed health care organizations,
state sponsored insurance pools and risk management consultants.  Unlike the
Company, which offers only workers' compensation products and services, these
competitors may offer additional products and services to employers, including
other forms of insurance.  As a consequence, these competitors may have certain
advantages in pricing their workers' compensation products.  In addition,
certain of these competitors are offering a management approach similar to that
offered by the Company.  Many of the Company's competitors have greater
financial and operating resources than the Company.

     Competitive factors in the industry include premium rates, level of
service and ability to reduce claims expense.  The Company believes that its
workers' compensation insurance products are competitively priced and its
premium rates are typically lower than those for customers assigned to the
state sponsored risk pools.  The Company also believes that its level of
service and its ability to reduce claims are strong competitive factors that
have enabled it to retain existing customers and attract new customers.

     Large insurance companies exit and enter the workers' compensation market
in different states depending on their appraisal of current market conditions.
As a result, many insurance companies stopped underwriting workers'
compensation insurance during the early 1990's due to rising costs that were
not matched by reductions in statutory benefits or higher premium rates.  In
1997, 1996 and 1995, the Company experienced increased market pressure as new
carriers, including large insurance companies and single line workers'
compensation insurance companies, entered the market.

     These large insurance companies compete primarily with the Company for
customers that have lower past claims experience or lower experience
"modifiers."  In Minnesota, decreases in statutory benefits during the past
three years have made it more attractive for large insurance companies to
underwrite workers' compensation policies for these lower experience modifier
customers.  As a result, the Company has experienced increased 

                                      7
<PAGE>

competition for the renewal of workers' compensation policies with customers 
that have reduced their experience modifiers, and it expects to continue to 
experience increased competition from large insurance companies.

     An additional competitive factor results from the fact that some employers
will not purchase workers' compensation products from carriers with an A.M.
Best rating less than "A".  In addition, certain insurance carriers that write
umbrella policies will not provide coverage to an employer if a portion of the
employer's underlying insurance policy, such as the workers' compensation
portion is written by a carrier with a less than "A" rating.  Although some
rated insurance carriers currently provide umbrella policies to customers of
the Company, the Company believes that its B++ letter rating from A.M. Best may
make it difficult, in certain instances, for the Company to provide its
products to certain employers.

     The Company's insurance subsidiary was assigned an initial rating of B++
(Very Good) on a scale of A++ (Superior) to F (In Liquidation) on December 16,
1996.  This rating was reaffirmed in January 1998.  A Best's Rating is assigned
after an extensive quantitative and qualitative evaluation of the Company's
financial condition and operating performance.  A.M. Best ratings are based
upon factors of concern to insureds and are not directed toward the protection
of investors.  Furthermore, A.M. Best ratings are not ratings of the Company or
any of its securities. A.M. Best ratings include Secure Ratings, consisting of
A++ and A+ (Superior); A and A- (Excellent); B++ and B+ (Very Good); Vulnerable
Ratings, consisting of B and B- (Adequate); C++ and C+ (Fair); C and C-
(Marginal); D (Very Vulnerable); E (Under State Supervision); and F (In
Liquidation).

DATA MANAGEMENT

     In 1997 and 1996, the Company contracted with unrelated third parties for
certain computer information systems and other software licenses.  In 1996, the
Company developed and implemented its own proprietary claims management and
medical fee adjudicating systems to manage claims, audit medical fees, pay
claims, provide reports to policyholders and analyze claims data.  These
systems replaced third party contracts for claims management and medical fee
adjudicating systems.  In 1995, the Company developed and implemented its own
proprietary policy management system to process insurance applications and
issue policies and endorsements.  This system replaced a third party contract
for a policy management system.  The Company continues to utilize third party
software to maintain financial information, prepare accounting reports and
financial statements, perform billing and collections, pay vendors and track
agent commissions.  The Company also contracts with a third party provider of
payroll services for payroll, benefit and human resource software services.
The Company utilizes other licensed software from national vendors to maintain
its financial records, file statutory statements with insurance regulators and
perform other general business.

EMPLOYEES

     The Company had 302 full-time employees at December 31, 1997.  Of the
Company's employees, approximately 126 work in the Company's administrative and
financial functions and 176 serve on approximately 29 different operating
teams.  None of the Company's employees are subject to collective bargaining
agreements.  The Company believes its employee relations are good.

REGULATION

     The Company's insurance subsidiary is subject to substantial regulation by
the governmental agencies in the states in which it operates, and will be
subject to such regulation in any state in which it provides workers'
compensation products and services in the future.  State regulatory agencies
have broad administrative power with respect to all aspects of the business of
the Company, including premium rates, benefit levels, policy forms, dividend
payments, capital adequacy and the amount and type of its investments.  These
regulations are primarily intended to protect covered employees and
policyholders rather than the insurance company.  Both the legislation covering
insurance companies and the regulations adopted by state agencies are subject
to change.

     Workers' compensation coverage is a creation of state law, subject to
change by the state legislature, and is influenced by the political processes
in each state.  Several states have mandated that employers receive coverage
only from state operated funds.  New laws affecting the workers' compensation
system in Minnesota, Colorado, Missouri, Illinois, Michigan and Massachusetts
and any other state where the Company may operate in the future, 

                                      8
<PAGE>

including laws that require all employers to participate in state sponsored 
funds or that mandate premium reductions, could have a material adverse 
effect on the Company.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following are the executive officers of the Company:

<TABLE>
<CAPTION>

Name                     Age      Position
----                     ---      --------
<C>                      <C>   <S>

David C. Prosser         73    Chairman of the Board
Carl B. Lehmann          43    President and Chief Executive Officer
Vina L. Marquart         46    Chief Operating Officer - Operations
Alfred L. LaTendresse    49    Chief Financial Officer, Secretary and Treasurer
Marguerite K. Downey     47    Vice President, Chief Information Officer
Daniel R. Haag           41    Vice President, Human Resources

</TABLE>

     David C. Prosser, the founder of the Company and Chairman of the Board,
served as President and Chief Executive Officer through January 1998, and has
been a Director of the Company since its formation in 1983.  From 1965 through
1985, Mr. Prosser was the owner and President of Vocational Personnel Services,
Inc., which merged into the Company in 1986.

     Carl B. Lehmann became a Director of the Company in November 1997 and was
appointed President and Chief Executive Officer in January 1998.  Mr. Lehmann
served as President of the Stored Value Group, a division of American Express
Travel Related Services, Inc. (AMEX) from 1993 to 1997.  Prior to that time,
Mr. Lehmann served as Vice President of various departments at AMEX from 1987
to 1993 and Citicorp Retail Services from 1984 to 1987.

     Vina L. Marquart joined the Company in 1984 as a Workers' Compensation
Manager, served as Vice President, Operations beginning in 1990 and became
Chief Operating Officer - Operations in October 1996.  Ms. Marquart served as a
Director of the Company from October 1990 until January 1995.  Ms. Marquart is
a member of the American Association of Occupational Health Nursing and
Minnesota Association of Occupational Health Nursing.  She has held a
registered nursing license since 1974.

     Alfred L. LaTendresse joined the Company as Chief Financial Officer in
1990 and became Secretary and Treasurer in October 1990.  Mr. LaTendresse
served as a Director of the Company from July 1993 until January 1995.  Prior
to joining the Company, Mr. LaTendresse served as the Chief Financial Officer
for several companies since 1982.  Mr. LaTendresse is a member in the American
Institute of Certified Public Accountants and the Minnesota Society of
Certified Public Accountants.

     Marguerite K. Downey joined the Company in December 1997 as Vice
President, Chief Information Officer.  Prior to joining the Company, Ms. Downey
served as the Vice President of Technology for Performark, Inc. from 1996 to
1997 and as the Vice President, Information Services for Fortis from 1988 to
1996.  Ms. Downey also served in other information system positions at Fortis
from 1972 to 1988.

     Daniel R. Haag joined the Company in June 1996 as the Director of Human
Resources and became Vice President, Human Resources in August 1996.  Prior to
joining the Company, Mr. Haag served as the Director of Human Resources,
Scholastic and Recognition Division for Jostens in 1994 and 1995 and served in
numerous human resource positions with SPX Corporation from 1979 to 1994
including Director of Human Resource positions for SPX divisions from 1990 to
1994.

                                      9

<PAGE>

ITEM 2.   PROPERTIES
--------------------

The following is a summary of properties leased by the Company at December 31,
1997:

<TABLE>
<CAPTION>

                                                           Area leased
Location and description                                 (in square feet)          Termination
------------------------                                 ----------------          -----------
 <S>                                                        <C>                   <C>

 Bloomington, Minnesota;  Headquarters space                41,918                September 1999 (1)
 Brainerd, Minnesota;  Minnesota satellite office            4,274                October 2000
 Denver, Colorado;  Colorado office space                   19,779                February 2000
 St. Louis, Missouri;  Missouri office space                 9,591                September 2000
 Overland Park, Kansas; Missouri office space                3,604                November 2002
 Detroit, Michigan;  Michigan office space                  11,008                June 2002
 Boston, Massachusetts; Massachusetts office space          12,381                May 2002

</TABLE>

(1)  The Company amended its lease in February 1997 to increase the area leased
     in its Headquarters space by 6,013 square feet to 41,918 square feet. This
     amendment extends to March 2000 only for the new space leased.


ITEM 3.   LEGAL PROCEEDINGS
---------------------------

     In the ordinary course of administering its workers' compensation
management program, the Company is routinely involved in the adjudication of
claims resulting from workplace injuries.  The Company is not involved in any
legal or administrative claims that it believes are likely to have a material
adverse effect on the Company's operations or financial condition.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------------------

     None.


                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-------------------------------------------------------------------------------

The Company's shares are publicly traded on The Nasdaq Stock Market under the
symbol RTWI. The table below sets forth the range of high and low sales prices
for the Company's stock for each quarter during the past two years. All amounts
presented reflect the effect of a 3-for-2 stock split in the form of a 50
percent stock dividend to shareholders of record in 1996.  On March 1, 1998,
the Company had approximately 3,000 shareholders.

<TABLE>
<CAPTION>

                                        First          Second         Third          Fourth
 Fiscal Year:                          Quarter        Quarter        Quarter        Quarter
 ------------                          -------        -------        -------        -------
 <S>           <C>                      <C>            <C>            <C>            <C>
 1997          High                     19 1/4         10 3/8          9 7/8          9 3/4
               Low                       7              7 3/8          6 7/8          5 1/4
 1996          High                     24 7/8         33 1/2         33             28 1/8
               Low                      16 1/3         23 2/3         23 3/4         14 3/4

</TABLE>

The Company has never paid cash dividends on its common stock.  The Company
currently intends to retain any and all income for use in its business and does
not anticipate paying cash dividends in the foreseeable future.  Any future
determination as to payment of dividends will depend on the financial condition
and results of operations of the Company and such other factors deemed relevant
by the Board of Directors.  Under the Indenture dated December 1, 1994, under
which the Company issued our $10.0 million in Senior Notes, the Company is
prohibited from paying cash dividends unless it is able to maintain compliance
with certain covenants after paying dividends.

                                      10

<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

The consolidated statements of income data set forth below for each of the 
three years in the period ended December 31, 1997, and the consolidated 
balance sheet data at December 31, 1997 and 1996, are derived from, and are 
qualified by reference to, the audited consolidated financial statements 
included elsewhere in this Form 10-K.  The consolidated statements of income 
data set forth below for each of the two years in the period ended December 
31, 1994, and the consolidated balance sheet data at December 31, 1995, 1994 
and 1993, are derived from audited consolidated financial statements not 
included herein.  The information set forth below should be read in 
conjunction with "Management's Discussion and Analysis of Financial Condition 
and Results of Operations" and the Company's consolidated financial 
statements and related notes included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>

                                             1993         1994         1995          1996          1997
                                           -------      -------      --------      --------      --------
                                                            (In thousands, except per share data)
<S>                                        <C>          <C>          <C>           <C>           <C>
Total revenues                             $ 7,828      $28,241      $ 49,433      $ 68,725      $ 88,263
Income from operations                       2,571        7,879        12,569        14,808         9,446
Net income                                   1,450        4,195         7,058         8,982         5,799
Basic income per share (1)                    0.18         0.49          0.67          0.76          0.49
Diluted income per share (1)                  0.18         0.49          0.64          0.74          0.48
Premiums in force at year end               29,000       39,900        51,700        69,500        78,400
Total assets                                28,224       56,765       101,124       123,731       141,986
Notes payable                                  933        9,993         8,891         6,739         4,875
Total shareholders' equity                   2,466        6,136        41,438        51,311        58,357

</TABLE>

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

(1) Adjusted to reflect a three-for-two stock split in May 1996 and a five-
    for-one stock split in 1995.  For additional information relating to
    income per share, see Note 2 of Notes to Consolidated Financial
    Statements.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION

OVERVIEW

THE COMPANY - RTW, Inc. (RTW) and its wholly owned insurance subsidiary, 
American Compensation Insurance Company (ACIC), provide disability management 
services to employers.  Collectively, "we", "our" and "us"  will refer to 
these entities in this "Management's Discussion and Analysis of Financial 
Condition and Results of Operations".

     We developed a proprietary management system, the RTW 
SOLUTION-Registered Trademark-, designed to lower employers' workers' 
compensation costs and return injured employees to work as soon as possible.  
We combine our management system with insurance products underwritten by our 
insurance subsidiary to offer services to customers.  We currently provide 
workers' compensation management services solely to employers insured through 
our insurance subsidiary.  We operated in Minnesota, Colorado, Missouri, 
Michigan, Massachusetts, Illinois and Wisconsin during 1997.

OPERATING RESULTS - The following table provides an overview of our key 
operating results (000's):

<TABLE>
<CAPTION>

                                            YEAR ENDED DECEMBER 31,
                                        1997         1996          1995
                                       -------      -------      --------
<S>                                    <C>          <C>          <C>
Premiums in force at year-end          $78,400      $69,500      $51,700
Total revenues                          88,263       68,725       49,433
Net income                               5,799        8,982        7,058

</TABLE>

     We continued our focus on growth in 1997 resulting in a 12.8% growth in 
premiums in force.  This focus, combined with increased earnings on our 
investment portfolio, resulted in record revenues of $88.3 million in 1997, 

                                      11

<PAGE>

a 28.4% growth over 1996.  Several years of price declines and increased 
competition resulted in a decrease in net income from 1996.  Factors 
affecting our 1997 results include:

  -    Continued price declines due to legislative benefit changes and increased
       competition in our markets;
  -    Increased final audit premiums;
  -    Declining average cost per claim;
  -    Increased agent commissions as a percent of premiums earned;
  -    Increased operating costs resulting from opening the Michigan office in
       late 1996 and the Massachusetts office in the second quarter of 1997; and
  -    Decreased effective income tax rates resulting from the decrease in net
       income.

TOTAL REVENUES:  Our total revenues include premiums earned and investment 
income.

  PREMIUMS EARNED - Premiums on workers' compensation insurance policies are 
  our largest source of revenue. Premiums earned are the gross premiums 
  earned by us on in force workers' compensation policies, net of the effects 
  of ceded premiums under reinsurance agreements.

     Reinsurance agreements allow us to share certain risks with other 
  insurance companies.  The primary purpose of ceded reinsurance is to 
  protect us from potential losses in excess of the level we are willing to 
  accept. Our primary ceded reinsurance is excess of loss coverage that 
  limits our per incident exposure. We expect the companies to which we have 
  ceded reinsurance to honor their obligations.  In the event that these 
  companies are unable to honor their obligations to us, we will be required 
  to pay these obligations ourselves. We are not aware of any developments 
  with respect to any of our reinsurers that would prevent them from honoring 
  any of their obligations to us.

  INVESTMENT INCOME - Our investment income includes earnings on our 
  investment portfolio and realized capital gains and losses from sales of 
  investments.

TOTAL EXPENSES:  Our expenses include claim and claim settlement expenses, 
policy acquisition costs, general and administrative expenses, interest 
expense and income taxes.

  CLAIM AND CLAIM SETTLEMENT EXPENSES - Claim expenses refer to amounts 
  that we paid or expect to pay to claimants for events that have occurred. 
  The costs of investigating, resolving and processing these claims are 
  referred to as claim settlement expenses. We record these expenses, net of 
  amounts recoverable under reinsurance contracts, to claim and claim 
  settlement expenses in the Consolidated Statements of Income.

  POLICY ACQUISITION COSTS - Policy acquisition costs are costs directly 
  related to writing an insurance policy and consist of commissions, state 
  premium taxes, underwriting personnel costs and expenses, sales and 
  marketing costs and other underwriting expenses, offset by ceding 
  commissions received from our reinsurers. Ceding commissions are amounts 
  that reinsurers pay to us for placing reinsurance with them. Ceding 
  commissions represent adjustments based on actual claim and claim 
  settlement expenses related to premiums ceded in prior years. Under 
  reinsurance agreements, our ceding commission is adjusted to the extent 
  that actual claim and claim settlement expenses vary from levels specified 
  in the agreement.

  GENERAL AND ADMINISTRATIVE EXPENSES - Our general and administrative 
  expenses include personnel costs, office rent, certain state administrative 
  charges based on premiums and other costs and expenses not specific to 
  claim and claim settlement expenses or policy acquisition costs.

  INTEREST EXPENSE - We incurred interest charges on our Senior Notes and 
  our Series 1991A and 1991B Notes.  The Series 1991A and 1991B Notes were 
  paid in full in December 1996. The Senior Notes mature in series during the 
  years 1995 through 1999.

  INCOME TAXES - We incur federal income taxes on our combined service 
  organization (RTW) operations and insurance (ACIC) operations.  We incur 
  state income taxes on the results of our service organization's operations 
  and incur premium taxes in lieu of state income taxes for substantially all 
  of our insurance operations.  In certain instances, we may incur state 
  income taxes on our insurance operations. Additionally, certain provisions 
  of the Internal Revenue Code adversely affect our taxable income by 
  accelerating recognition and payment of income taxes.  Adjustments to book 
  income generating current tax liabilities include limitations 

                                      12

<PAGE>

  on the deductibility of unpaid claim and claim settlement expenses, 
  limitations on the deductibility of unearned premium reserves and 
  limitations on deductions for bad debt reserves.

  In the following pages, we take a look at the 1997, 1996 and 1995 results 
for these areas and also explain key balance sheet accounts in greater detail.

RESULTS OF OPERATIONS

The following table summarizes the components of our revenues and premiums in 
force (000's):

<TABLE>
<CAPTION>

                                          YEAR ENDED DECEMBER 31,
                                      1997         1996         1995
                                    -------      -------      -------
<S>                                 <C>          <C>          <C>
Gross premiums earned               $81,385      $63,755      $47,507
Premiums ceded                         (342)        (697)      (2,099)
                                    -------      -------      -------
  Premiums earned                    81,043       63,058       45,408
Investment income                     7,220        5,667        4,025
                                    -------      -------      -------
     Total revenues                 $88,263      $68,725      $49,433
                                    -------      -------      -------
                                    -------      -------      -------

Premiums in force at year-end         1997         1996         1995
                                    -------      -------      -------
 Minnesota                          $44,400      $52,400      $47,700
 Colorado                            12,900       12,000        4,000
 Missouri                            12,700        4,700            -
 Michigan                             5,200          400            -
 Illinois                             1,600            -            -
 Massachusetts                        1,400            -            -
 Wisconsin                              200            -            -
                                    -------      -------      -------
     Total premiums in force        $78,400      $69,500      $51,700
                                    -------      -------      -------
                                    -------      -------      -------

</TABLE>

GROSS PREMIUMS EARNED:  The premium we charge a policyholder is a function of
their payroll, industry and prior workers' compensation claims experience. In
underwriting a policy, we receive policyholder payroll estimates for the
ensuing year. We record premiums written on an installment basis matching
billing to the policyholder and earn premiums on a daily basis over the life of
each insurance policy based on the payroll estimate. We record the excess of
premiums billed over premiums earned for each policy as unearned premiums on
our balance sheet. When a policy expires, we audit employer payrolls for the
policy period and adjust the estimated payroll to its actual value.  The result
is a "final audit" adjustment recorded to premiums earned when the adjustment
becomes known.

  Our gross premiums earned in 1997 increased 27.6% to $81.4 million from $63.8
million in 1996.  This increase resulted, in part, from the 12.8% increase in
premiums in force to $78.4 million at December 31, 1997 from $69.5 million at
December 31, 1996.  Additionally, gross premiums earned increased as we
recognized $7.5 million of final audit premiums in 1997 compared to $500,000
recognized in 1996.

  Gross premiums earned in 1996 increased 34.2% to $63.8 million from $47.5
million in 1995.  This increase resulted from the 34.4% increase in premiums in
force to $69.5 million at December 31, 1996 from $51.7 million at December 31,
1995.  Additionally, final audit premiums decreased to $500,000 in 1996 from
$1.2 million in 1995.

  Underlying these increases in gross premiums earned is another trend.  The
premium rate that we charge policyholders per payroll dollar has declined for
several years. This is the result, in part, of the following:

  -  Many state legislatures where we provide coverage have reduced 
     benefits that injured employees are paid, resulting in lower loss costs 
     of workers' compensation insurance and decreased corresponding premiums 
     to the policyholder;

  -  As the loss cost structure of workers' compensation has declined, more 
     insurance companies have entered or re-entered the workers' compensation 
     insurance market, resulting in increased competition; and

  -  We continue to experience reduced pricing on renewal policies due, in 
     part, to our success in lowering our policyholders' loss experience 
     which then improves their claims history, lowering the premium that they 
     have to pay for insurance.  The improvement that we do for our customers 
     also has the effect of making them more desirable to our competition, 
     thus increasing price competition on these accounts.

                                      13

<PAGE>

PREMIUMS CEDED:  We pay reinsurers, under excess of loss reinsurance 
policies, to limit our per incident exposure and record this cost as a 
reduction to gross premiums earned. We are required to purchase excess of 
loss coverage for Minnesota policies from the Minnesota Workers' Compensation 
Reinsurance Association (WCRA). Our selected retention levels in Minnesota 
were approximately $1.1 million in 1997, $1.0 million in 1996 and $450,000 in 
1995. In other states, we have chosen to limit our per incident exposure to 
$500,000 and purchased this coverage from various reinsurers.

  Premiums ceded to reinsurers decreased 50.9% to a cost of $342,000 in 1997 
from a cost of $697,000 in 1996. The decrease in premiums ceded resulted from 
(i) reduced premium rates in 1997 from 1996 for our selected excess of loss 
reinsurance coverage levels in Minnesota, (ii) reduced premiums for excess of 
loss coverage in other states, and (iii) the recognition of a refund received 
from the WCRA of $358,000 in 1997.

  Premiums ceded to reinsurers decreased 66.8% to a cost of $697,000 in 1996 
from a cost of $2.1 million in 1995. The decrease in premiums ceded to 
reinsurers resulted from (i) the increase to approximately $1.0 million in 
1996 from $450,000 in 1995 in the Minnesota retention level under the WCRA 
excess of loss reinsurance coverage, (ii) reduced rates charged for excess of 
loss reinsurance in Minnesota during 1996, (iii) the recognition of a benefit 
of $251,000 in the second quarter of 1996 due to an over-estimate of ceded 
premiums at December 31, 1995, and (iv) the decrease in ceded premium cost in 
other states due to exceeding the minimum premium threshold.

1998 OUTLOOK:  The 1998 outlook for gross premiums earned and premiums ceded 
include the following factors:

  -    We expect continued growth in premiums in force in our non-Minnesota
       markets which will lead to growth in gross premiums earned;

  -    We expect continued downward pressure on the amount we charge for our
       products and services; and

  -    Premiums ceded will increase due to reducing our selected retention level
       in Minnesota from approximately $1.1 million to $280,000. This reduction
       will result in additional excess of loss policy cost.

INVESTMENT INCOME:  We currently invest entirely in fixed maturity 
investments and classify our investments as available-for-sale. We intend to 
hold our available-for-sale investments to maturity but may sell before 
maturity in response to changes in interest rates, prepayment risk and 
funding sources or terms, or to address liquidity needs. Our primary 
investment objective is to maintain a diversified, high quality, fixed 
investment portfolio structured to maximize our after-tax investment income 
without taking inappropriate credit risk. For further discussion of 
investments, see the "Investments" section of this Management's Discussion 
and Analysis.

  Investment income increased 27.4% to $7.2 million in 1997 from $5.7 million 
in 1996, due to increased funds available for investment and net capital 
gains totaling $399,000 realized on securities sold. Funds available for 
investment increased to $112.3 million at December 31, 1997 from $89.8 
million at December 31, 1996, due to increased net cash provided by operating 
activities, resulting primarily from (i) the difference in timing between the 
receipt of premiums and the payment of claim and claim settlement expenses 
and (ii) net cash provided by investment income. Investment yields increased 
to 6.3% in 1997 from 6.2% in 1996 due to portfolio diversification during 
1997. The investment yield realized in future periods will be affected by 
yields attained on new investments.

  Investment income increased 40.8% to $5.7 million in 1996 from $4.0 million 
in 1995, due to increased funds available for investment and increased yields 
on amounts invested. Funds available for investment increased to $89.8 
million at December 31, 1996 from $68.5 million at December 31, 1995, due to 
increased net cash provided by operating activities, resulting primarily from 
(i) the difference in timing between the receipt of premiums and the payment 
of claim and claim settlement expenses and (ii) net cash provided by 
investment income. Investment yields increased to 6.2% in 1996 from 6.1% in 
1995 due to higher interest rates on U.S. government securities purchased in 
1996 from rates on U.S. government securities purchased in prior years.

1998 OUTLOOK:  In December 1997, we reclassified our entire held-to-maturity 
portfolio, invested in U.S. government securities to available-for-sale 
investments. We reclassified these securities to enable us to more actively 
manage our investment yield and overall portfolio risk. The held-to-maturity 
portfolio had a net unrealized gain of approximately $900,000 at December 
31, 1997 while the total portfolio net unrealized gain at December 31, 1997 
was $1.4 million. Barring significant changes in interest rates or 
operational cash flows, we expect that the 1998 after-tax yield from our 
investment portfolio will be affected by the following:

  -    Increased funds will become available for investment due to increased net
       cash provided by operating and investment activities;

                                      14

<PAGE>

  -    Realized gains may increase as we diversify the previously classified 
       held-to-maturity securities from U.S. government securities to other 
       fixed maturity securities; and

  -    We will broaden our investment portfolio in 1998 to include fixed
       maturity tax-exempt securities to increase after-tax yields. Fixed
       maturity tax-exempt securities may have the effect of reducing investment
       income recognized but are expected to contribute more to after-tax net
       income as a result of the treatment they receive for federal tax
       purposes.

CLAIM AND CLAIM SETTLEMENT EXPENSES:  Claim and claim settlement expenses are
our largest expense and result in our largest liability. We establish reserves
that reflect our estimates of the total claim and claim settlement expenses we
will ultimately have to pay under our workers' compensation insurance policies.
These include claims that have been reported but not settled and claims that
have been incurred but not yet reported to us. For further discussion of
reserve determination, see the "Unpaid Claim and Claim Settlement Expenses"
section of this Management's Discussion and Analysis.

  Claim and claim settlement expenses increased to $55.5 million in 1997 from
$39.1 million in 1996.  As a percent of premiums earned, claim and claim
settlement expenses increased to 68.5% in 1997 from 62.0% in 1996. These
changes are due to the following:

  -    Premiums earned increased to $81.0 million in 1997 from $63.1 million in
       1996 resulting in increased claim and claim settlement expenses as we
       provided coverage for more employers;

  -    During 1997, we reduced our estimate of the pre-1997 liability for unpaid
       claim and claim settlement expenses by $3.1 million as a result of
       favorable claims experience for those periods. This reduction was $5.0
       million less than the reduction that we recorded in 1996. At
       December 31, 1997, we had gross reserves for unpaid claim and claim
       settlement expenses of $61.1 million including $36.7 million for 1997
       claims and $24.4 million for claims relating to years prior to 1997;

  -    Reduced premiums due to legislative changes in estimated loss costs,
       increased competition and improving customer loss experience, have
       resulted in an increase in claim and claim settlement expenses as a
       percentage of premiums earned; and

  -    Average claim cost continued to decrease in 1997 due to realized
       operating efficiencies and effectiveness and legislative changes in
       benefits to claimants. These decreases did not keep pace, however,  with
       decreases in pricing.

  Claim and claim settlement expenses increased to $39.1 million in 1996 from 
$28.1 million in 1995.  As a percent of premiums earned, claim and claim 
settlement expenses increased to 62.0% in 1996 from 61.8% in 1995.  These 
changes are due to the following:

  -    Premiums earned increased to $63.1 million in 1996 from $45.4 million in
       1995 resulting in increased claim and claim settlement expenses as we
       provided coverage for more employers;

  -    Operating results for 1996 claim and claim settlement expenses in
       Colorado were higher than expected;

  -    During the fourth quarter of 1996, we experienced the four largest claims
       in our history, incurring approximately $2.0 million of expense. Three of
       these occurred in Minnesota and one occurred in Missouri;

  -    Average claim cost decreased in 1996 from 1995 due to realized operating
       efficiencies and effectiveness and legislative changes in benefits to
       claimants; and

  -    During 1996, we reduced our estimate of the pre-1996 liability for unpaid
       claim and claim settlement expenses by $8.1 million as a result of
       favorable claims experience for those periods. This reduction was $6.6
       million greater than the reduction that we recorded in 1995.

1998 OUTLOOK:  We expect that claim and claim settlement expenses will be 
affected by the following factors:

  -    Average claim costs are expected to have downward pressure in 1998 as a
       result of increases in operating efficiency and effectiveness realized
       through enhancements to our internal processes and procedures, including
       changes to our propriety computer systems.  We also expect that
       legislative changes in estimated loss costs will create further downward
       pressure on average claim costs;

                                      15

<PAGE>

  -    Inflation will put pressure on the medical and indemnity
       components of claim and claim settlement expenses; and

  -    Continued application of our claims management technology and methods to
       all open claims at December 31, 1997 will benefit future periods. The
       magnitude of that benefit cannot be quantified at this time.

  The ultimate result of the above factors, combined with the change in 
premium rates, on 1998 claim and claim settlement expenses as a percent of 
premiums earned is unknown at this time.

POLICY ACQUISITION COSTS.  The following table summarizes policy acquisition 
costs (000's):

<TABLE>
<CAPTION>

                                                      YEAR ENDED DECEMBER 31,
                                                1997            1996           1995
                                               -------       --------       --------
<S>                                            <C>           <C>            <C>
Commission expense                             $ 6,369       $  4,670       $  2,443
Premium tax expense                              1,651          1,312            955
Other policy acquisition costs                   3,637          2,216          1,024
                                               -------       --------       --------
   Direct policy acquisition costs              11,657          8,198          4,422

Ceding commissions resulting from unpaid
 claim and claim settlement liability
 adjustments from 1992 to 1994                       1        (1,871)        (1,733)
                                               -------       --------       --------
   Policy acquisition costs                    $11,658       $  6,327       $  2,689
                                               -------       --------       --------
                                               -------       --------       --------

</TABLE>

Policy acquisition costs increased to $11.7 million in 1997 from $6.3 million 
in 1996 and $2.7 million in 1995. As a percent of gross premiums earned, 
policy acquisition costs increased to 14.3% in 1997 from 9.9% in 1996 and 
5.7% in 1995.  These increases reflect the following:

- Commission expense increased to 7.8% of gross premiums earned in 1997 
  from 7.3% in 1996 and 5.1% in 1995. The increased commission percent is the 
  result of marketing programs we initiated during 1995 and the first quarter 
  of 1996, including volume based incentive programs and higher commissions 
  for new business, that increased commission rates to agents resulting in 
  increased average commissions and increased commission expense. 
  Additionally, as we entered new markets, we introduced higher commission 
  rates to attract business from established agents. These rates have 
  continued into current policy periods and will have a greater impact on the 
  commission expense percent as the non-Minnesota states continue to grow 
  relative to Minnesota.  In all of our markets, we believe the commission 
  rates we pay are marketplace competitive;

- Premium tax expense remained consistent at 2.0% of gross premiums earned 
  in 1997 compared to 2.1% in 1996 and 2.0% in 1995. Premium tax expense was 
  slightly higher in 1996 due to higher premium tax rates paid for premiums 
  earned in Colorado. The rates in Colorado decreased from 2.25% in 1996 to 
  2.15% in 1997 and will be 2.10% in 1998;

- Other policy acquisition costs increased to 4.5% of gross premiums 
  earned in 1997 from 3.5% in 1996 and 2.2% in 1995, due to increased focus 
  on marketing programs as we expanded into new states and continued to grow in
  our more established markets and increased personnel costs necessary for 
  the growth in premiums in force; and

- Total ceding commissions decreased to a cost of $1,000 from benefits of 
  $1.9 million in 1996 and $1.7 million in 1995. We recognized adjustments to 
  our claims experience for accident years 1992 through 1994 resulting in the 
  1996 and 1995 benefits realized.

1998 OUTLOOK:  We expect that policy acquisition costs as a percent of gross
premiums earned will stabilize or remain relatively constant as a percent of
gross premiums earned during 1998 due to the following:

- We expect commission expense as a percent of gross premiums earned to
  increase during 1998 as the non-Minnesota states continue to grow in size
  relative to Minnesota;

- We expect premium tax expense as a percent of gross premiums earned in
  1998 to remain consistent with 1997; and

- We expect that other policy acquisition costs will decrease as a result 
  of increases in operating efficiency and effectiveness in 1998 realized 
  through enhancements to our internal processes and procedures, including 
  changes to our propriety computer systems. We also expect that these costs 
  will decrease as a percent of gross premiums 

                                      16

<PAGE>

  earned as we increase premiums in force and generate additional revenues to 
  cover the relatively fixed policy acquisition costs.

GENERAL AND ADMINISTRATIVE EXPENSES.  Our general and administrative expenses 
increased to $11.6 million in 1997 from $8.5 million in 1996 and $6.1 million 
in 1995. As a percent of gross premiums earned, general and administrative 
expenses increased to 14.3% in 1997 from 13.3% in 1996 and 12.9% in 1995. 
These increases reflect:

  -    expenses incurred for expansion in Michigan and Massachusetts in 1997,
       Missouri in 1996 and Colorado in 1995, not offset by revenues from
       premiums in force in those states;

  -    additional personnel costs for new employees resulting from the growth in
       in force premium;

  -    higher compensation for existing employees; and

  -    increased fees for professional services, primarily legal and consulting
       services.

1998 OUTLOOK:  We expect that general and administrative expenses will be 
affected by the following:

  -    We expect to aggressively manage general and administrative expenses,
       specifically legal and consulting expenses to decrease relative costs
       during 1998;

  -    We have no plans to open new state offices in 1998 and expect growth in
       premiums in force in Michigan and Massachusetts will result in
       additional revenues to cover the fixed costs in those states;

  -    We expect to increase operational efficiency during 1998 through
       enhancements to our internal processes and procedures, including changes
       to our internal propriety computer systems; and

  -    We will limit our salary increases.

INTEREST EXPENSE:  We paid interest at rates ranging from 9.00% to 9.50% on 
the outstanding balance on our Senior Notes during 1997.

  Interest expense decreased to $777,000 in 1997 from $1.1 million in 1996 
and $1.3 million in 1995 due to principal payments on the Senior Notes in 
December 1997, 1996 and 1995 and payments on the Series 1991A and 1991B Notes 
in December 1996 and 1995. The Series 1991A and 1991B Notes were paid in full 
in 1996.

1998 OUTLOOK:  Interest expense on the Senior Notes is expected to decrease 
from $777,000 in 1997 to $546,000 in 1998 as a result of principal payments 
of $2.0 million made in December 1997.

INCOME TAXES:  The provision for income taxes was $2.9 million in 1997, $4.7 
million in 1996 and $4.2 million in 1995. As a percent of income before 
income taxes, the provision for income taxes decreased to 33.1% in 1997 from 
34.5% in 1996 and 37.5% in 1995. The decrease in 1997 is the result of 
decreased taxable net income from the service organization (RTW) in 1997 
which is subject to both federal and state income taxes and decreases in the 
profitability of ACIC which paid state income taxes in 1995 in addition to 
premium taxes.

1998 OUTLOOK:  We expect that the provision for income taxes will continue to 
decrease as a percent of income before taxes during 1998 as we include 
non-taxable municipal fixed investments in our investment portfolio. The 
ultimate decrease is unknown at this time.

INVESTMENTS

Our portfolio consisted entirely of taxable fixed maturity securities at 
December 31, 1997 and included U.S. government securities (60.8%), corporate 
securities (20.0%), mortgage-backed securities (12.9%) and asset-backed 
securities (6.3%). After several years of purchasing solely U.S. government 
securities, we engaged an investment manager in the second quarter of 1997 to 
diversify our portfolio to other fixed maturity investments and maximize our 
after-tax investment income without taking inappropriate credit risk. We 
manage our fixed maturity portfolio conservatively, investing exclusively in 
investment grade (BBB or better rating from Standard and Poor's) securities. 
In 1998, we expect to further diversify our portfolio to investment grade 
tax-exempt securities. We do not invest in derivative securities. 
Additionally, in December 1997, we reclassified our entire held-to-maturity 
portfolio, invested in U.S. government securities with a historical cost, net 
of amortization, of $53.8 million and a fair value of $54.7 million, to 
available-for-sale investments. We reclassified these securities to enable us 
to more actively manage our investment yield and overall portfolio risk.

                                      17

<PAGE>

  Funds provided by our operating cash flows and investment cash flows are 
the source of growth in our investment portfolio. Operating cash flows 
consist of the excess of premiums collected over claim and claim settlement 
expenses and other operating expenses paid. Investment cash flows consist of 
income on existing investments and proceeds from sales and maturities of 
investments. Our investment portfolio grew 25.0% or $22.5 million to $112.3 
million at December 31, 1997 from $89.8 million at December 31, 1996 as a 
result of these factors. During 1997, we invested solely in 
available-for-sale securities and intend to continue this investment strategy 
for the foreseeable future.

  We record investments on our balance sheet at fair value, with the 
corresponding appreciation or depreciation from amortized cost recorded in 
shareholders' equity net of taxes. Because value is based on the relationship 
between the portfolio's stated yields and prevailing market yields at any 
given time, interest rate fluctuations can have a swift and significant 
impact on the carrying value of these securities. As a result of the 
increased holdings in securities classified as available-for-sale, and thus 
carried at fair value, we expect to encounter larger adjustments in 
shareholders' equity as market interest rates and other factors change.

UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES

Our "unpaid claim and claim settlement expenses" represent established, 
undiscounted reserves for the estimated total unpaid cost of claim and claim 
settlement expenses, which cover events that occurred in 1997 and prior 
years. These reserves reflect our estimates of the total costs of claims that 
were reported, but not yet paid, and the cost of claims incurred but not yet 
reported (IBNR). For reported claims, we establish reserves on a "case" 
basis. For IBNR claims, we estimate reserves using established actuarial 
methods. Both our case and IBNR reserve estimates reflect such variables as 
past claims experience, current claim trends and prevailing social, economic 
and legal environments. Due to commencing operations in 1992, we have limited 
historical data to estimate our reserves for unpaid claim and claim 
settlement expenses and accordingly supplement our experience with external 
industry data, as adjusted, to reflect anticipated differences between our 
results and the industry.  We reduce the unpaid claim and claim settlement 
expenses for estimated amounts of subrogation.

  We believe our reserves for unpaid claim and claim settlement expenses are 
adequate to cover the ultimate costs of claim and claim settlement expenses. 
The ultimate cost of claim and claim settlement expenses may differ from the 
established reserves, particularly when claims may not be settled for many 
years.  Reserves for unpaid claim and claim settlement expenses and 
assumptions used in their development are continually reviewed.  We record 
adjustments to prior estimates of unpaid claim and claim settlement expenses 
to operations in the year in which the adjustments are made. See Notes 1 and 
5 of Notes to Consolidated Financial Statements.

  The following two tables reconcile the beginning and ending insurance 
reserves, displayed individually for each of the last three years. 

  The following table sets forth reserves on a gross (before reinsurance) basis
(000's):

<TABLE>
<CAPTION>

                                                                YEAR ENDED DECEMBER 31,
                                                           1997           1996          1995
                                                          -------       --------      -------
<S>                                                       <C>           <C>           <C>
GROSS RESERVES FOR CLAIM AND CLAIM SETTLEMENT EXPENSES:
Gross reserves for claim and claim settlement expenses,
  beginning of year                                       $49,256       $ 37,138      $28,165
Provision increases (decreases) for claim and claim
  settlement expenses:
    Current year                                           60,265         49,440       30,137
    Prior years                                            (4,394)       (11,051)      (4,701)
                                                          -------       --------      -------
      Total provision                                      55,871         38,389       25,436
Payments for claim and claim settlement expenses:
    Current year                                           23,529         16,239        8,860
    Prior years                                            20,529         10,032        7,603
                                                          -------       --------      -------
      Total payments                                       44,058         26,271       16,463
                                                          -------       --------      -------
Gross reserves for claim and claim settlement expenses,
    end of year                                           $61,069       $ 49,256      $37,138
                                                          -------       --------      -------
                                                          -------       --------      -------

</TABLE>

                                      18

<PAGE>

The following table sets forth reserves on a net (after reinsurance) basis 
(000's):

<TABLE>
<CAPTION>

                                                                 YEAR ENDED DECEMBER 31,
                                                            1997           1996          1995
                                                          -------        -------        -------
<S>                                                       <C>            <C>            <C>
NET RESERVES FOR CLAIM AND CLAIM SETTLEMENT EXPENSES:
Net reserves for claim and claim settlement expenses,
  beginning of year                                       $43,073        $28,826        $14,263
Provision increases (decreases) for claim and claim
  settlement expenses:
    Current year                                           58,675         47,155         29,536
    Prior years                                            (3,085)        (8,075)        (1,474)
                                                          -------        -------        -------
      Total provision                                      55,590         39,080         28,062
Payments for claim and claim settlement expenses:
    Current year                                           23,529         16,238          8,860
    Prior years                                            19,439          8,595          4,639
                                                          -------        -------        -------
      Total payments                                       42,968         24,833         13,499
                                                          -------        -------        -------
Net reserves for claim and claim settlement expenses,
    end of year                                           $55,695        $43,073        $28,826
                                                          -------        -------        -------
                                                          -------        -------        -------

</TABLE>

  As determined under Generally Accepted Accounting Principles (GAAP), the 
1997 year-end reserves of $61.1 million for claim and claim settlement 
expenses were $5.4 million more than the reserves of $55.7 million recorded 
on the basis of statutory accounting principles for reports provided to state 
regulatory authorities. The difference is the reinsurance recoverable from 
third-party reinsurance carriers totaling $5.4 million that reduces reserves 
for statutory reporting and is recorded as an asset, reinsurance recoverables, 
for GAAP reporting.

  The following loss reserve development table sets forth the change, over 
time, of reserves established for claim and claim settlement expenses at the 
end of the last six years. The following loss reserve development table is 
cumulative and, therefore, ending balances should not be added since the 
amount at the end of each calendar year includes activity for both current 
and prior years (000's):

<TABLE>
<CAPTION>

 DECEMBER 31,
                                               1997         1996         1995         1994         1993          1992
                                              -------      -------      -------      -------      -------       ------
<S>                                           <C>          <C>          <C>          <C>          <C>           <C>
LOSS RESERVE DEVELOPMENT:
Gross reserves for unpaid claim and claim
  settlement expenses                         $61,069      $49,256      $37,138      $28,165      $13,279       $2,688
Deduct reinsurance recoveries                   5,374        6,183        8,312       13,902        9,593        1,886
                                              -------      -------      -------      -------      -------       ------
Net reserves for unpaid claim and
    claim settlement expenses                 $55,695      $43,073      $28,826      $14,263      $ 3,686       $  802
                                              -------      -------      -------      -------      -------       ------
                                              -------      -------      -------      -------      -------       ------
Paid (cumulative) as of:
    One year later                                         $19,439      $ 8,595      $ 4,639      $ 1,436       $  583
    Two years later                                                      12,894        6,476        2,150          678
    Three years later                                                                  7,863        2,348          815
    Four years later                                                                                2,654          856
    Five years later                                                                                               925
Reserves re-estimated as of:
    End of year                               $55,695      $43,073      $28,826      $14,263      $ 3,686       $  802
    One year later                                          39,988       20,751       12,789        3,784        1,075
    Two years later                                                      18,469        9,318        3,416        1,008
    Three years later                                                                  8,984        2,782          950
    Four years later                                                                                2,861          912
    Five years later                                                                                               949
Initial reserves in excess of (less than) re-estimated reserves
    Amount                                                 $ 3,085      $10,357      $ 5,279      $   825       $ (147)
    Percent                                                    7.2%        35.9%        37.0%        22.4%       (18.3%)

</TABLE>
                                   19

<PAGE>

  The following table is derived from the loss reserve development table and 
summarizes the effect of reserve re-estimates, net of reinsurance, on 
calendar year operations for the same six-year period ended December 31, 
1997. The total of each column details the amount of reserve re-estimates 
made in the indicated calendar year and shows the accident years to which the 
re-estimates are applicable.  The amounts in the total accident year column 
represent the cumulative reserve re-estimates for the indicated accident
year (000's).

<TABLE>
<CAPTION>

                                                                                             CUMULATIVE
                                                                                            RE-ESTIMATES
                                                                                              FOR EACH
                                                         CALENDAR YEAR                        ACCIDENT
                                      1997        1996      1995        1994       1993         YEAR
                                    ------      ------     ------      -----      -----      -------
<S>                                 <C>         <C>        <C>         <C>        <C>        <C>
EFFECT OF RESERVE RE-ESTIMATES ON
   CALENDAR YEAR OPERATIONS:
       Accident Years:
           1992                     $   (37)    $    38    $    58     $   67      $ (273)    $   (147)
           1993                         (42)        596        310       (165)                     699
           1994                         413       2,837      1,106                               4,356
           1995                       1,948       4,604                                          6,552
           1996                         803                                                        803
                                     ------      ------     ------      -----       -----      -------
           Total                    $ 3,085     $ 8,075    $ 1,474     $  (98)     $ (273)    $ 12,263
                                     ------      ------     ------      -----       -----      -------
                                     ------      ------     ------      -----       -----      -------

</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Liquidity refers to our ability to generate sufficient cash flows to meet the 
short and long-term cash requirements of our operations. Capital resources 
represent those funds deployed or available to be deployed to support our 
business operations.

  Our primary sources of cash from operations are premiums collected and 
investment income. Our investment portfolio is also a source of liquidity, 
through the sale of readily marketable fixed maturity investments, as well as 
longer-term investments that have appreciated in value. Our primary cash 
requirements consist of payments for (i)  claim and claim settlement 
expenses, (ii) policy acquisition costs, (iii) general and administrative 
expenses, (iv) capital expenditures, (v) income taxes, and (vi) debt service 
or principal repayment on our outstanding Senior Notes. We generate positive 
net cash from operations due, in part, to timing differences between the 
receipt of premiums and the payment of claim and claim settlement expenses. 
Cash generated is either invested in short-term cash and cash equivalents or 
longer term available-for-sale securities pending future payments for such 
expenses as indemnity, medical benefits and other operating expenses. Cash 
and cash equivalents consist primarily of U. S. government securities 
acquired under repurchase agreements with maturities of 90 days or less, with 
the remaining balances in cash and a money market fund that invests in 
short-term government securities.

  Cash provided by operating activities in 1997 was $20.4 million. This is 
primarily a result of our net income of $5.8 million, an increase of $11.8 
million in unpaid claim and claim settlement expenses which are non-cash 
accruals for future claims, and an decrease of $2.6 million in amounts due 
from reinsurers. Net cash used in investing activities was $23.3 million, 
primarily the result of purchases of $62.4 million of available-for-sale 
investments, $2.4 million in purchases of furniture and equipment offset by 
proceeds from sales of available-for-sale investments of $39.1 million and 
maturities of $2.5 million of held-to-maturity investments. Net cash used in 
financing activities was $1.7 million, primarily due to payments totaling 
$2.0 million on outstanding Senior Notes in December 1997.

  Our need for additional capital is primarily the result of regulations 
which require certain ratios of capital to premiums written.  As we grew, 
additional capital was required to support the higher premium levels. As a 
result, we raised approximately $27.0 million in April 1995 through an 
initial public offering and contributed $18.0 million in 1995 to our 
insurance subsidiary.  In the future, we expect that our need for additional 
capital will be primarily related to the growth of our insurance subsidiary 
and the need to maintain appropriate capital to premium ratios as defined by 
state regulatory bodies. As an alternative to raising additional capital, we 
believe we could secure quota-share or other reinsurance which would have the 
effect of reducing the ratio of premiums to capital and could be used to 
satisfy state regulatory requirements.

  State insurance regulations limit distributions, including dividends, from 
our insurance subsidiary to us. The maximum amount of dividends that can be 
paid by ACIC to us in any year is equal to the greater of: (i) 10% of ACIC's 
statutory surplus as of the end of the previous fiscal year, or (ii) the 
statutory net gain from operations (not 

                                      20

<PAGE>


including realized capital gains) of ACIC in its most recent fiscal year. 
Based on this limitation, the maximum dividend that ACIC could pay to us in 
1998, without regulatory approval, is approximately $4.5 million. (See Note 9 
of Notes to Consolidated Financial Statements.)  ACIC may be subject to more 
restrictive limitations on dividends as we enter additional states. ACIC has 
never paid a dividend to us and, for the foreseeable future, we intend to 
retain capital in the insurance subsidiary to enable us to expand our 
operations.

    We believe that cash flow generated by our operations and our cash and 
investment balances will be sufficient to fund continuing operations, 
principal repayments and debt service on our outstanding Senior Notes, 
including principal repayments of $2.5 million due in December 1998, and 
capital expenditures for the next 12 months.

NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement of 
Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive 
Income, and Statement of Financial Accounting Standards No. 131 (SFAS 131), 
Disclosures About Segments of an Enterprise and Related Information.  SFAS 
130 and SFAS 131 are effective for years beginning after December 15, 1997.  
We do not expect these standards to have an impact on our Consolidated 
Financial Statements

IMPACT OF THE YEAR 2000 ON COMPUTER APPLICATIONS

The year 2000 is a critical year for computer applications.  Many computer
programs were historically written using two digits rather than four to define
the appropriate year.  As a result, many computer programs that have date
sensitive fields may recognize a date using "00" as the year 1900 rather than
the year 2000.  This could result in system failures or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in other critical business
activities.

     Our insurance subsidiary operations began in 1992.  Since 1992, we have
developed our own internal computer systems to manage our claims and related
claim settlement expenses and administer our policy information.  These
computer systems are year 2000 compliant.  Additionally, during 1998 we will
implement third party provided general ledger and accounts payable software and
develop internally a billing and cash receipt system which will be year 2000
compliant.  These system replacements and software development are occurring as
a part our ongoing operations and are not specifically occurring as a result of
the year 2000 issue. We anticipate that our computer hardware and software
systems will be fully year 2000 compliant in 1998 and we are taking steps to
ensure that our significant vendors are compliant during 1999.

     The cost of any hardware and software changes required to comply with the
year 2000, other than those contemplated as routine upgrades in our operations,
are not expected to have a material adverse effect on our results of
operations.

NAIC RISK-BASED CAPITAL STANDARDS

The National Association of Insurance Commissioners ("NAIC") has risk-based 
capital standards to determine the capital requirements of a property and 
casualty insurance carrier based upon the risks inherent in its operations. 
These standards require the computation of a risk-based capital amount which 
is then compared to a carrier's actual total adjusted capital. The 
computation involves applying factors to various financial data to address 
four primary risks: asset risk, insurance underwriting risk, credit risk and 
off-balance sheet risk. These standards provide for regulatory intervention 
when the percent of total adjusted capital to authorized control level 
risk-based capital is below certain levels. Based upon the risk-based capital 
standards, our percent of total adjusted capital is substantially in excess 
of authorized control level risk-based capital.

REGULATION

Our insurance subsidiary is subject to substantial regulation by governmental 
agencies in the states in which we operate, and will be subject to such 
regulation in any state in which we provide workers' compensation products 
and services in the future.  State regulatory agencies have broad 
administrative power with respect to all aspects of our business, including 
premium rates, benefit levels, policy forms, dividend payments, capital 
adequacy and the amount and type of investments.  These regulations are 
primarily intended to protect covered employees and policyholders rather than 
the insurance company. Both the legislation covering insurance companies and 
the regulations adopted by state agencies are subject to change.  At December 
31, 1997, our insurance subsidiary was licensed to do business in Minnesota, 


                                     21

<PAGE>


Colorado, Missouri, Michigan, Massachusetts, Pennsylvania, Illinois, Kansas, 
Connecticut, South Dakota, Tennessee and Wisconsin.  We received Indiana, 
Iowa, Rhode Island and Maryland licenses so far in 1998.

     The NAIC is in the process of codifying statutory accounting principles. 
The ultimate completion date is expected in 1999 and impact of this project 
on current statutory policies and practices is unknown.

FORWARD LOOKING STATEMENTS

Information included in this annual report which can be identified by the use
of forward-looking terminology such as "may", "will", "expect", "anticipate",
"estimate", or "continue" or the negative thereof or other variations thereon
or comparable terminology constitutes forward-looking information.  The
following important factors, among others, in some cases have affected and in
the future could affect our actual results and could cause our actual financial
performance to differ materially from that expressed in any forward-looking
statement:  (i) competition from traditional workers' compensation insurance
carriers, (ii) our ability to manage both our existing claims and our new
claims in an effective manner, (iii) our ability to further penetrate our
existing markets, (iv) changes in workers' compensation regulation by states,
including changes in mandated benefits or insurance company regulation, (v) our
ability to retain our existing customers at favorable beneficial premium rates
when their policies renew, and (vi) our ability to expand into new states and
attract customers in those states, and (vii) our ability to successfully
introduce new products and services.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS


FINANCIAL STATEMENTS                                                        Page

    Independent Auditors' Report                                             23
    Consolidated Balance Sheets - December 31, 1997 and 1996                 24
    Consolidated Statements of Income - Years Ended December 31, 1997, 
    1996 and 1995                                                            25
    Consolidated Statements of Shareholders' Equity - Years Ended 
    December 31, 1997, 1996 and 1995                                         26
    Consolidated Statements of Cash Flows - Years Ended December 31, 
    1997, 1996 and 1995                                                      27
    Notes to Consolidated Financial Statements - Years Ended December 31, 
    1997, 1996 and 1995                                                      28
                                       

                                     22

<PAGE>
                         INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
RTW, Inc.
Minneapolis, Minnesota

     We have audited the accompanying consolidated balance sheets of RTW, 
Inc. and subsidiary (the Company) as of December 31, 1997 and 1996 and the 
related statements of income, shareholders' equity, and cash flows for each 
of the three years in the period ended December 31, 1997.  These consolidated 
financial statements are the responsibility of the Company's management.  Our 
responsibility is to express an opinion on these consolidated 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 consolidated 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
consolidated financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

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

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
January 23, 1998


                                     23

<PAGE>


                                   RTW, INC.
                          CONSOLIDATED BALANCE SHEETS
                          DECEMBER 31, 1997 AND 1996
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>

                                                                                 1997        1996
                                                                              ----------  ----------
                                          ASSETS
<S>                                                                           <C>         <C>
Investments:
  Available-for-sale, at fair value, amortized cost of $110,880 and $35,854   $  112,294  $   35,872
  Held-to-maturity, at amortized cost, fair value of $54,396 in 1996                 -        53,977
                                                                              ----------  ----------
      Total investments                                                          112,294      89,849
Cash and cash equivalents                                                          5,798      10,410
Accrued investment income                                                          1,836       1,724
Premiums receivable, less allowance of $182 and $105                               5,763       4,476
Reinsurance recoverables                                                           5,374       6,183
Reinsurance receivables                                                              743       2,555
Deferred policy acquisition costs                                                  1,559       1,624
Furniture and equipment, net                                                       4,927       3,423
Other assets                                                                       3,692       3,487
                                                                              ----------  ----------
    Total assets                                                              $  141,986  $  123,731
                                                                              ----------  ----------
                                                                              ----------  ----------

                             LIABILITIES AND SHAREHOLDERS' EQUITY

Unpaid claim and claim settlement expenses                                    $   61,069  $   49,256
Unearned premiums                                                                 13,580      13,308
Accrued expenses and other liabilities                                             4,105       3,117
Notes payable                                                                      4,875       6,739
                                                                              ----------  ----------
    Total liabilities                                                             83,629      72,420

Shareholders' equity:
  Common stock, no par value; authorized 25,000,000 shares;
      issued and outstanding 11,841,000 and 11,808,000 shares                     28,976      28,610
  Retained earnings                                                               28,489      22,690
  Unrealized gain on available-for-sale investments, net of tax                      892          11
                                                                              ----------  ----------
    Total shareholders' equity                                                    58,357      51,311
                                                                              ----------  ----------
    Total liabilities and shareholders' equity                                $  141,986  $  123,731
                                                                              ----------  ----------
                                                                              ----------  ----------

</TABLE>


See notes to consolidated financial statements.

                                     24

<PAGE>


                                   RTW, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>

                                                           1997           1996           1995
                                                        ---------      ---------      ---------  
<S>                                                     <C>            <C>            <C>
Revenues:
   Premiums earned                                      $  81,043      $  63,058      $  45,408
   Investment income                                        7,220          5,667          4,025
                                                        ---------      ---------      ---------  
       Total revenues                                      88,263         68,725         49,433

Expenses:
   Claim and claim settlement expenses                     55,543         39,080         28,062
   Policy acquisition costs                                11,658          6,327          2,689
   General and administrative expenses                     11,616          8,510          6,113
                                                        ---------      ---------      ---------  
       Total expenses                                      78,817         53,917         36,864
                                                        ---------      ---------      ---------  
           Income from operations                           9,446         14,808         12,569

   Interest expense                                           777          1,086          1,285
                                                        ---------      ---------      ---------  
           Income before income taxes                       8,669         13,722         11,284

   Provision for income taxes                               2,870          4,740          4,226
                                                        ---------      ---------      ---------  
Net income                                               $  5,799       $  8,982       $  7,058
                                                        ---------      ---------      ---------  
                                                        ---------      ---------      ---------  

Income per share:
   Basic income per share                                 $  0.49        $  0.76        $  0.67
                                                        ---------      ---------      ---------  
                                                        ---------      ---------      ---------  
   Diluted income per share                               $  0.48        $  0.74        $  0.64
                                                        ---------      ---------      ---------  
                                                        ---------      ---------      ---------  

Weighted average shares outstanding:
   Basic shares outstanding                            11,833,000     11,774,000     10,607,000
                                                       ----------     ----------     ----------  
                                                       ----------     ----------     ----------  
   Diluted shares outstanding                          12,079,000     12,137,000     10,959,000
                                                       ----------     ----------     ----------  
                                                       ----------     ----------     ----------  

</TABLE>

See notes to consolidated financial statements.


                                     25

<PAGE>


                                   RTW, INC.
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    UNREALIZED
                                                                                   APPRECIATION
                                                                                  (DEPRECIATION)
                                                                                  ON SECURITIES        TOTAL
                                                           COMMON       RETAINED    AVAILABLE-     SHAREHOLDERS'
                                                            STOCK       EARNINGS     FOR-SALE         EQUITY
                                                         --------       --------   ------------   ------------
<S>                                                      <C>            <C>        <C>            <C>
Balance at January 1, 1995                               $    199       $  5,951   $        (14)  $      6,136
   Net income                                                 -            7,058            -            7,058
   Net proceeds from initial public offering               27,039            -              -           27,039
   Reclassification of ESOP liability                         322            699            -            1,021
   Change in unrealized gains on available-
      for-sale investments, net of taxes
      of $70                                                  -              -              138            138
   Qualified stock options and warrants
       exercised                                               48            -              -               48
   Retirement of common stock                                  (2)           -              -               (2)
                                                         --------       --------   ------------   ------------

Balance at December 31, 1995                               27,606         13,708            124         41,438

   Net income                                                 -            8,982            -            8,982
   Change in unrealized gains on available-
      for-sale investments, net of a tax
      benefit of $63                                          -              -             (113)          (113)
   Non-qualified stock options exercised,
      including tax benefit of $510                           608            -              -              608
   Qualified stock options and warrants
      exercised                                                32            -              -               32
   Issuance of shares to ESOP                                 236            -              -              236
   Issuance of shares under ESPP                              129            -              -              129
   Retirement of common stock                                 (1)            -              -               (1)
                                                         --------       --------   ------------   ------------

Balance at December 31, 1996                               28,610         22,690             11         51,311

   Net income                                                 -            5,799            -            5,799
   Change in unrealized gains on available-
      for-sale investments, net of taxes
      of $515                                                 -              -              881            881
   Qualified stock options exercised                            1            -              -                1
   Issuance of non-qualified options                           96            -              -               96
   Issuance of shares to ESOP                                 115            -              -              115
   Issuance of shares under ESPP                              154            -              -              154
                                                         --------       --------   ------------   ------------

Balance at December 31, 1997                             $ 28,976       $ 28,489   $        892   $     58,357
                                                         --------       --------   ------------   ------------
                                                         --------       --------   ------------   ------------

</TABLE>

See notes to consolidated financial statements.



                                     26

<PAGE>


                                   RTW, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                        1997           1996          1995
                                                                     ---------      ---------     ---------
<S>                                                                  <C>            <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Reconciliation of net income to net cash provided
   by operating activities:
       Net income                                                    $  5,799       $  8,982      $  7,058
       Adjustments to reconcile net income to net
       cash provided by operating activities:
           Gains on available-for-sale-investments                       (399)           -             -
           Depreciation and amortization                                1,237          1,071           933
           Deferred income taxes                                         (200)          (767)         (992)
           Changes in assets and liabilities:
               Amounts due from reinsurers                              2,621          1,143         5,131
               Unpaid claim and claim settlement expenses              11,813         12,118         8,973
               Unearned premiums, net of premiums receivable           (1,015)         2,129         1,669
               Other, net                                                 517         (1,540)       (1,847)
                                                                     --------       --------      --------
                   Net cash provided by operating activities           20,373         23,136        20,925

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of held-to-maturity investments                              -              -         (27,828)
   Maturities of held-to-maturity investments                           2,500          3,500           500
   Purchases of available-for-sale investments                        (62,403)       (25,273)       (8,176)
   Proceeds from sales of available-for-sale investments               39,095            -             -
   Purchases of furniture and equipment                                (2,447)        (2,047)       (1,265)
                                                                     --------       --------      --------
                   Net cash used in investing activities              (23,255)       (23,820)      (36,769)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments on notes payable                                           (2,000)        (2,362)       (1,362)
   Proceeds from initial public offering                                  -              -          29,900
   Equity financing costs                                                 -              -          (2,861)
   Stock options and warrants exercised                                     1            130            48
   Issuance of common stock to ESOP                                       115            236           -
   Issuance of common stock under ESPP                                    154            129           -
   Retirement of common stock                                             -               (1)           (2)
                                                                     --------       --------      --------
                   Net cash provided by (used in) 
                   financing activities                                (1,730)        (1,868)       25,723
                                                                     --------       --------      --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   (4,612)        (2,552)        9,879
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                         10,410         12,962         3,083
                                                                     --------       --------      --------

CASH AND CASH EQUIVALENTS AT END OF YEAR                             $  5,798       $ 10,410      $ 12,962
                                                                     --------       --------      --------
                                                                     --------       --------      --------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid during the year for:
      Interest                                                       $    664       $    898      $  1,042
                                                                     --------       --------      --------
                                                                     --------       --------      --------

      Income taxes                                                   $  3,536       $  6,338      $  5,285
                                                                     --------       --------      --------
                                                                     --------       --------      --------

</TABLE>

See notes to consolidated financial statements.


                                     27

<PAGE>


                                   RTW, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION - RTW, Inc. (RTW) provides workers' compensation insurance
coverage to employers through its wholly-owned insurance subsidiary, American
Compensation Insurance Company (ACIC).  Collectively, "we", "our" and "us"
will refer to these entities in these "Notes to Consolidated Financial
Statements".

    We benefit from our ability to reduce workers' compensation costs and 
provide employers the ability to control their workers' compensation 
programs.  We are domiciled in Minnesota and were licensed in Minnesota, 
Colorado, Missouri, Pennsylvania, Michigan, Massachusetts, Illinois, Kansas, 
Connecticut, Tennessee, South Dakota, and Wisconsin at December 31, 1997.  We 
also received our license to write workers' compensation insurance coverage 
for companies covered under the Longshoreman's Act in 1997 and received Iowa, 
Indiana and Maryland licenses in January 1998.  We wrote policies primarily 
in Minnesota, Colorado, Missouri, Illinois, Michigan, Massachusetts and 
Wisconsin during 1997.

    In April 1995, we raised $27,039,000 (net of underwriting discounts and 
other offering expenses totaling $2,861,000) through an initial public 
offering of 3,450,000 shares of common stock at $8.67 per share.  We 
contributed $18,000,000 of the net proceeds of the offering to ACIC to expand 
operations to other states, as well as to support the increase of premium in 
Minnesota.  We retained the remaining net proceeds for working capital and 
general corporate purposes in RTW, including, if appropriate, additional 
future contributions to ACIC.

    The following explain the accounting policies we use to arrive at some of 
the more significant amounts in our financial statements.

ACCOUNTING PRINCIPLES - We prepare our financial statements in accordance 
with general accepted accounting principles (GAAP).  We follow the accounting 
standards established by the Financial Accounting Standards Board and the 
American Institute of Certified Public Accountants.

CONSOLIDATION - Our consolidated financial statements include RTW and ACIC.  
We eliminate all intercompany accounts and transactions in consolidation.

USE OF ESTIMATES -  We make estimates and assumptions that affect the 
reported amounts of assets and liabilities, the disclosure of contingent 
assets and liabilities at the financial statement date and the recorded 
amounts of revenues and expenses during the reporting period.  Our most 
significant estimates are those relating to our unpaid claim and claim 
settlement expenses and accrual for premium adjustments.  We continually 
review our estimates and assumptions and make adjustments as necessary, but 
actual results could vary significantly from what we envisioned when we made 
these estimates.

INVESTMENTS - We invest entirely in fixed maturity investments and classify 
our investments as available-for-sale or held-to-maturity in accordance with 
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for 
Certain Investments in Debt and Equity Securities". We do not classify any of 
our securities as trading securities.

AVAILABLE-FOR-SALE INVESTMENTS:  We intend to hold our available-for-sale 
investments to maturity, but may sell before maturity in response to changes 
in interest rates, prepayment risk and funding sources or terms, or to 
address liquidity needs.  Our available-for-sale investments are carried at 
fair value with unrealized gains or losses, net of deferred taxes, reported 
as a separate component of shareholders' equity.

HELD-TO-MATURITY INVESTMENTS:  Our held-to-maturity investments in 1996 
consisted solely of U.S. government securities and were carried at amortized 
cost.  In December 1997, we reclassified our entire held-to-maturity 
portfolio, invested in U.S. government securities with a historical cost, net 
of amortization of $53.8 million and a fair value of $54.7 million, to 
available-for-sale investments.  We reclassified these securities to enable 
us to more actively manage our investment yield and overall portfolio risk.

REALIZED INVESTMENT GAINS AND LOSSES:  We include realized investment gains 
and losses in the "Investment income" section of our Consolidated Statements 
of Income.  Cost of investments sold is determined by the specific 
identification method.

                                      28

<PAGE>


    We continually monitor the difference between investment cost and fair 
value for each of our securities. If any security experienced a decline in 
value that is determined to be other than temporary, we would reduce the 
security's carrying value for the decline and record a realized loss in the 
Consolidated Statements of Income. No securities were reduced for declines in 
fair value in 1997 or 1996.

CASH AND CASH EQUIVALENTS - We generally consider all highly liquid 
investments with a maturity of three months or less when purchased to be cash 
equivalents.

DEFERRED POLICY ACQUISITION COSTS - The costs directly related to writing an 
insurance policy are referred to as policy acquisition costs and consist of 
commissions, state premium taxes and other direct underwriting expenses. 
Although these costs arise when we issue a policy, we defer certain costs, 
principally commissions and state premium taxes, and amortize these costs to 
expense as premium revenue is recognized.

    If deferred policy acquisition costs were to exceed the sum of unearned 
premiums and related anticipated investment income less expected claim and 
claim settlement expenses, we would immediately expense the excess costs.

DEPRECIATION - We depreciate furniture and equipment on a straight-line basis 
over the estimated useful lives of the assets (five to ten years). 
Accumulated depreciation in 1997 and 1996 was $2,309,000 and $1,366,000, 
respectively.

UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES - Claim expenses refer to amounts 
that we paid or expect to pay to claimants for events that have occurred.  
The costs of investigating, resolving and processing these claims are 
referred to as claim settlement expenses.  We record these expenses, net of 
amounts recovered under reinsurance contracts, to "Claim and claim settlement 
expenses" in the Consolidated Statements of Income.

    Our "Unpaid claim and claim settlement expenses" represent established, 
undiscounted reserves for the estimated total unpaid cost of claim and claim 
settlement expenses, which cover events that occurred in 1997 and prior 
years. These reserves reflect our estimates of the total costs of claims that 
were reported, but not yet paid, and the cost of claims incurred but not yet 
reported.  Our estimates consider such variables as past loss experience, 
current claim trends and prevailing social, economic and legal environments. 
We have limited historical data to estimate our reserves for unpaid claim and 
claim settlement expenses due to commencing operations in 1992 and supplement 
our experience with external industry data, as adjusted, to reflect 
anticipated differences between our results and the industry.   We reduce the 
unpaid claim and claim settlement expenses for estimated amounts of 
subrogation.

    We believe our reserves for unpaid claim and claim settlement expenses 
are adequate to cover the ultimate costs of claim and claim settlement 
expenses. The ultimate cost of claim and claim settlement expenses may differ 
from the established reserves, particularly when claims may not be settled 
for many years.  Reserves for unpaid claim and claim settlement expenses and 
assumptions used in their development are continually reviewed.  We record 
adjustments to prior estimates of unpaid claim and claim settlement expenses 
to operations in the year in which the adjustments are made.

DEBT ISSUE COSTS - We report debt issue costs associated with the Senior 
Notes payable as a reduction in notes payable and amortize the cost over the 
term of the Senior Notes.

PREMIUMS EARNED - Premiums on workers' compensation insurance policies are 
our largest source of revenue.  We record premiums written on an installment 
basis matching billing to the policyholder and earn premiums on a daily basis 
over the life of each insurance policy.  Premiums earned includes an estimate 
for earned but unbilled audit premiums. We record the excess of premiums 
billed over premiums earned for each policy as unearned premiums on our 
balance sheet.

NOTE 2 - INCOME PER SHARE

Effective December 1997, we adopted SFAS No. 128, "Earnings Per Share."  SFAS 
No. 128 requires dual presentation of a basic income per share (IPS), which 
excludes dilution, and a diluted IPS, which reflects the potential dilution 
that could occur if actions taken in respect of dilutive securities resulted 
in the issuance of common stock.  Dilutive securities consist of stock 
options and warrants.  Basic IPS is computed by dividing net income by the 
weighted average number of common shares outstanding for the period.  Diluted 
IPS is computed by dividing net income by the weighted average number of 
common shares and dilutive securities outstanding for the period.  Dilutive 
securities issued after April 1995 are considered outstanding from the date 
of grant after applying the treasury stock method for determining the 
dilutive effect. Dilutive securities issued prior to that date are considered 
outstanding for all periods after applying the treasury stock method for 
determining the dilutive effect.


                                      29

<PAGE>


The following is a reconciliation of the numerators and denominators of basic 
and diluted income per share:

<TABLE>
<CAPTION>
                                                               1997            1996           1995
                                                           -----------     -----------    -----------
<S>                                                        <C>             <C>            <C>
Net Income - basic and diluted income per share (000's)    $     5,799     $     8,982    $     7,058
                                                           -----------     -----------    -----------
                                                           -----------     -----------    -----------
Basic weighted average shares outstanding                   11,833,000      11,774,000     10,607,000

Effect of dilutive securities
    Warrants                                                       -             4,000         55,000
    Stock options                                              246,000         359,000        297,000
                                                           -----------     -----------    -----------
Diluted weighted average shares outstanding                 12,079,000      12,137,000     10,959,000
                                                           -----------     -----------    -----------
                                                           -----------     -----------    -----------
Basic income per share                                           $0.49           $0.76          $0.67
                                                           -----------     -----------    -----------
                                                           -----------     -----------    -----------
Diluted income per share                                         $0.48           $0.74          $0.64
                                                           -----------     -----------    -----------
                                                           -----------     -----------    -----------
</TABLE>

    Options to purchase 105,250 shares of common stock at prices ranging from 
$9.00 to $28.75 were outstanding during 1997 but were not included in the 
computation of diluted IPS because the options' exercise price was greater 
than the average market price of the common shares. These options were still 
outstanding at the end of 1997.  Additionally, in January 1998, we granted 
options to purchase 150,000 shares of common stock at $7.00 under the 1994 
Stock Plan.

NOTE 3 - INVESTMENTS

VALUATION OF INVESTMENTS - The following tables present amortized cost, gross 
unrealized gains and losses, and estimated fair values of investments (000's):

<TABLE>
<CAPTION>
                                                                            Gross         Gross         Estimated
                                                          Amortized      Unrealized     Unrealized         Fair
1997                                                         Cost           Gains         Losses          Value
                                                          ---------      ----------     ----------     -----------
<S>                                                       <C>            <C>            <C>            <C> 
Available-for-sale securities:
   U.S. government securities                             $  66,916      $  1,345       $  (18)        $  68,243
   Corporate securities                                      22,582           355         (428)           22,509
   Asset-backed securities                                    6,997            44           -              7,041
   Mortgage-backed securities                                14,385           120           (4)           14,501
                                                          ---------      ----------     ----------     -----------
      Total investments                                   $ 110,880      $  1,864       $ (450)        $ 112,294
                                                          ---------      ----------     ----------     -----------
                                                          ---------      ----------     ----------     -----------

<CAPTION>
                                                                            Gross         Gross         Estimated
                                                          Amortized      Unrealized     Unrealized         Fair
1996                                                         Cost           Gains         Losses          Value
                                                          ---------      ----------     ----------     -----------
<S>                                                       <C>            <C>            <C>            <C> 
Available-for-sale securities:
   U.S. government securities                             $  35,854      $    128       $  (110)       $  35,872

Held-to-maturity securities
   U.S. government securities                                53,977           732          (313)          54,396
                                                          ---------      ----------     ----------     -----------
      Total investments                                   $  89,831      $    860       $  (423)       $  90,268
                                                          ---------      ----------     ----------     -----------
                                                          ---------      ----------     ----------     -----------

</TABLE>

STATUTORY DEPOSITS - Included in investments are U.S. government securities 
on deposit with various regulatory authorities as required by law with a fair 
value of $2,828,000 and $2,073,000 in 1997 and 1996, respectively.

                                      30



<PAGE>


FIXED MATURITIES BY MATURITY DATE - The following table presents the amortized
cost and fair value of investments by contractual maturity in 1997.  Actual
maturities may differ from those stated as a result of calls and prepayments
(000's):

<TABLE>
<CAPTION>
                                                                    ESTIMATED
                                                      AMORTIZED        FAIR
MATURING:                                                COST          VALUE
--------                                             ----------     ----------
<S>                                                  <C>             <C>
One year or less                                      $  13,436      $  13,463
Over one year through five years                         52,552         53,536
Over five years through ten years                        28,007         28,285
Over ten years                                            2,500          2,509
Mortgage-backed securities with various maturities       14,385         14,501
                                                     ----------     ----------
         Total investments                           $  110,880     $  112,294
                                                     ----------     ----------
                                                     ----------     ----------
</TABLE>


INVESTMENT INCOME -- Investment income includes income from the following 
sources (000's):


<TABLE>
<CAPTION>
                                                             1997           1996           1995
                                                         --------       --------       --------
<S>                                                      <C>            <C>            <C>
Held-to-maturity and available-for-sale investments      $  6,129       $  5,004       $  3,337
Short-term investments                                        692            663            591
Realized investment gains                                     479              -              -
Realized investment losses                                   (80)              -              -
Other                                                           -              -             97
                                                         --------       --------       --------
         Total investment income                         $  7,220       $  5,667       $  4,025
                                                         --------       --------       --------
                                                         --------       --------       --------
</TABLE>

      There were no significant investment expenses associated with the above 
investment income in 1997 or 1996 and there were no sales of securities 
during 1996 or 1995.

NOTE 4 -- REINSURANCE

Our financial statements reflect the effects of ceded reinsurance transactions.
The primary purpose of ceded reinsurance is to protect us from potential losses
in excess of the level that we are willing to accept.

      We report reinsurance transactions on a "gross" basis on the balance 
sheet, resulting in reinsurance receivable amounts on unpaid claim and claim 
settlement expenses recorded as assets.  We estimate amounts recoverable from 
reinsurers in a manner consistent with the claim liability associated with 
the reinsured policy.

      We ceded Minnesota claims in excess of $1,080,000, $1,040,000 and 
$450,000 per occurrence during 1997, 1996 and 1995, respectively, to the 
Minnesota Workers' Compensation Reinsurance Association. Non-Minnesota state 
claims in excess of $500,000 were ceded to various reinsurers in 1997, 1996 
and 1995.

      Reinsurance contracts do not relieve us from our obligations to
policyholders.  We expect reinsurers to which we have ceded reinsurance to
honor their obligations.  Failure of these reinsurers to honor their
obligations could result in losses to us. We do not anticipate any such losses,
and accordingly, no provision for amounts deemed uncollectible are included in
our financial statements.  We attempt to minimize our exposure to significant
losses from reinsurer insolvency by monitoring the financial condition of our
reinsurers.  Reinsurance receivables associated with reinsurers are as follows
(000's):

<TABLE>
<CAPTION>
                                                                             1997          1996
                                                                            -------       -------
<S>                                                                         <C>           <C>   
      Quota-share reinsurance for 1992 to 1994 through a single insurer     $   723       $  1,673
      Excess of loss reinsurance through various reinsurers                   4,651          4,510
                                                                            -------        --------
           Reinsurance receivable                                           $ 5,374       $  6,183
                                                                            -------        --------
                                                                            -------        --------
</TABLE>


                                      31

<PAGE>


The effect of ceded reinsurance on premiums written, premiums earned and claim
and claim settlement expenses are as follows (000's):


<TABLE>
<CAPTION>
                                                          1997           1996           1995
                                                        ---------      ---------      --------
<S>                                                     <C>            <C>            <C>
Premiums written:
   Direct                                               $  81,657      $  67,457      $  50,070
   Ceded                                                     (342)          (697)        (2,099)
                                                        ---------      ---------      ---------
      Net premiums written                              $  81,315      $  66,760      $  47,971
                                                        ---------      ---------      ---------
                                                        ---------      ---------      ---------
Premiums earned:
   Direct                                               $  81,385      $  63,755      $  47,507
   Ceded                                                     (342)          (697)        (2,099)
                                                        ---------      ---------      ---------
      Net premiums earned                               $  81,043      $  63,058      $  45,408
                                                        ---------      ---------      ---------
                                                        ---------      ---------      ---------
Claim and claim settlement expenses:
   Direct                                               $  55,825      $  38,389      $  25,436
   Ceded                                                     (282)           691          2,626
                                                        ---------      ---------      ---------
      Net claim and claim settlement expenses           $  55,543      $  39,080      $  28,062
                                                        ---------      ---------      ---------
                                                        ---------      ---------      ---------
</TABLE>

Reinsurance receivables consist of the following at 
December 31 (000's):

<TABLE>
<CAPTION>
                                                                           1997         1996
                                                                          ------       ------
<S>                                                                       <C>           <C>
   Reinsurance receivables from paid claim and claim settlement expenses  $   743       $    75

   Ceding commission receivable                                                -          2,480
                                                                          -------       ------
      Reinsurance receivables                                             $   743       $ 2,555
                                                                          -------      -------
                                                                          -------      -------
</TABLE>
     
   Ceding commissions earned, which is based upon final settlement of 
claim and claim settlement expenses, will range between 10% and 48% during 
accident years 1994 and 1993 and 15% and 25% during accident year 1992. 
Ceding commissions earned of $1,871,000, and $1,733,000 for fiscal years 1996 
and 1995, respectively, are reported as a reduction in policy acquisition 
costs in the Consolidated Statements of Income.

NOTE 5 - UNPAID CLAIM AND CLAIM SETTLEMENT EXPENSES

The following table represents a reconciliation of beginning and ending unpaid
claim and claim settlement expense reserves for each of the last three years
(000's):

<TABLE>
<CAPTION>
                                                          1997           1996            1995
                                                        ---------      ---------       --------
<S>                                                     <C>            <C>            <C>
Balance at January 1                                    $  49,256      $  37,138      $  28,165
   Less reinsurance recoverables                            6,183          8,312         13,902
                                                        ---------      ---------       --------
Net balance at January 1                                   43,073         28,826         14,263

Incurred related to:
   Current year                                            58,675         47,155         29,536
   Prior years                                             (3,085)        (8,075)        (1,474)
                                                        ---------      ---------       --------
      Total incurred                                       55,590         39,080         28,062

Paid related to:
   Current year                                            23,529         16,238          8,860
   Prior years                                             19,439          8,595          4,639
                                                        ---------      ---------       --------
      Total paid                                           42,968         24,833         13,499
                                                        ---------      ---------       --------
Net balance at December 31                                 55,695         43,073         28,826
   Plus reinsurance recoverables                            5,374          6,183          8,312
                                                        ---------      ---------       --------
Balance at December 31                                  $  61,069      $  49,256      $  37,138
                                                        ---------      ---------       --------
                                                        ---------      ---------       --------
</TABLE>

   Changes in estimates of unpaid claim and claim settlement expenses for 
prior years decreased the provision for claim and claim settlement expenses 
by $3,085,000, $8,075,000 and $1,474,000 in 1997, 1996 and 1995, 
respectively. The incurred related to prior years in 1997, 1996 and 1995 
reflects our ability to manage and close prior year claims more favorably 
than initially anticipated.


                                       32

<PAGE>


NOTE 6 - NOTES PAYABLE

Unsecured notes payable consist of the following (000's):

<TABLE>
<CAPTION>
                                                            1997          1996
                                                          -------       -------
<S>                                                       <C>           <C>
Senior Notes payable with principal maturities and 
monthly interest due as follows:

Maturity                               Interest Rate
--------                               -------------
December 15, 1997                          9.00%                         $ 2,000
December 15, 1998                          9.25%          $  2,500         2,500
December 15, 1999                          9.50%             2,500         2,500
                                                          --------       -------
Notes payable -- Principal                                   5,000         7,000
Less: Unamortized debt issue cost                             (125)         (261)
                                                          --------       -------
Notes payable                                             $  4,875      $  6,739
                                                          --------       -------
                                                          --------       -------
</TABLE>

   We may redeem some or all of the Senior Notes payable on any interest 
date at the principal amount of the redeemed notes plus accrued interest and 
a premium of 2% through December 15, 1998 and 1% thereafter.

SENIOR NOTES PAYABLE -- The Senior Notes payable contain various restrictive
provisions which require that certain financial ratios, primarily debt coverage
and net worth restrictions, be met before incurring additional indebtedness or
paying dividends or other distributions to shareholders. At December 31, 1997,
we were in compliance with these covenants.

   Based on borrowing rates currently available us for loans with similar 
terms and average maturities (prime at December 31, 1997 and 1996 was 8.50% 
and 8.25%, respectively), the fair value of notes payable was approximately 
$5,116,000 and $7,254,000 at December 31, 1997 and 1996, respectively.

NOTE 7 -- INCOME TAXES

We compute the provision for income taxes under the liability method.  This 
means deferred income taxes reflect the estimated future tax effects of 
temporary differences between the carrying value of assets and liabilities 
for financial reporting purposes and the carrying value of assets and 
liabilities for income tax purposes.

The provision for income taxes consists of the following (000's):

<TABLE>
<CAPTION>
                                                           1997           1996           1995
                                                         --------       -------       ---------
<S>                                                      <C>            <C>            <C> 
Current:
   Federal                                               $  3,714       $  5,165       $  4,787
   State                                                     (129)           342            501
                                                         --------       --------       --------
      Total current tax expense                             3,585          5,507          5,288
Deferred:
   Federal                                                   (721)          (650)          (949)
   State                                                        6           (117)          (113)
                                                         --------       --------       --------
      Total deferred tax benefit                             (715)          (767)        (1,062)
                                                         --------       --------       --------
      Provision for income taxes                         $  2,870       $  4,740       $  4,226
                                                         --------       --------       --------
                                                         --------       --------       --------
</TABLE>

Our provision for income taxes differs from the statutory rate of 35% of pretax
income as follows (000's):

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

Federal income tax expense at statutory rates             $ 3,034       $ 4,803        $  3,949
Increase (reduction) in income taxes resulting from:
   State income taxes, net of federal income tax benefit      (64)          126             310
   Other                                                     (100)         (189)            (33)
                                                         --------       -------       ---------
      Total                                              $  2,870       $ 4,740        $  4,226
                                                         --------       -------       ---------
                                                         --------       -------       ---------
</TABLE>


                                       33

<PAGE>


   Differences between the tax basis of assets and liabilities and their 
reported amounts in the Consolidated Financial Statements that will result in 
taxable or deductible amounts in future years are called temporary 
differences. The tax effects of temporary differences that gave rise to net 
deferred tax asset balances, included within other assets, are as follows 
(000's):

<TABLE>
<CAPTION>
                                                           1997           1996
                                                        --------       --------
<S>                                                     <C>            <C>
Unpaid claim and claim settlement expenses              $  3,512       $  2,731
Unearned premiums                                          1,002          1,001
Other                                                        202            124
                                                        --------       --------
   Deferred tax assets                                     4,716          3,856

Deferred policy acquisition costs                           (575           (611)
Unrealized gain on securities                               (522)            (7)
Depreciation                                                (447)          (266)
                                                        --------       --------
   Deferred tax liabilities                               (1,544)          (884)
                                                        --------       --------
   Net deferred tax assets                              $  3,172       $  2,972
                                                        --------       --------
                                                        --------       --------
</TABLE>

   No valuation allowance was provided against the deferred tax assets 
recorded in 1997 or 1996, as we expect to generate sufficient taxable income 
in the future to offset reversing temporary differences.

   Income taxes receivable at December 31, 1997 and 1996 were approximately
$1,011,000 and $1,059,000, respectively.

NOTE 8 -- EMPLOYEE BENEFITS AND PLANS

STOCK BASED COMPENSATION -- We account for our stock-based compensation 
plans, the RTW, Inc. 1995 Employee Stock Purchase Plan and Trust (ESPP) and 
the 1994 Stock Plan, using Accounting Principles Board Opinion No. 25 (APB 
25), "Accounting for Stock Issued to Employees," and related Interpretations. 
Under APB 25, compensation cost for stock options is measured as the excess, 
if any, of the quoted market price of our stock at the date of the grant over 
the amount an employee must pay to acquire the stock.

1995 EMPLOYEE STOCK PURCHASE PLAN -- The ESPP provides employees the 
opportunity to purchase shares of our stock at option prices as set forth in 
the plan.  We reserved 75,000 shares for distribution under the plan. The 
ESPP terminates in ten years and will be carried out in phases, each 
consisting of one year or a period of time approved by the board of 
directors.  Any employee completing two weeks of service prior to commencing 
a phase of the plan may participate. Employees may elect to contribute from 
$10 to 10% of monthly salary to the plan through payroll withholdings.  The 
following summarizes shares purchased and purchase prices for each phase 
completed through 1997:

                                                     SHARES         PURCHASE
                                                   PURCHASED          PRICE
                                                   ---------        --------
Phase:
   Beginning April 1995, expiring April 1996         14,891            $8.67
   Beginning April 1996, expiring April 1997         20,092            $7.65

The third one year phase began in April 1997 and expires in April 1998.

Our liability for employee contributions withheld at December 31, 1997 and 1996
for the purchase of shares in April 1998 and April 1997 under the ESPP were
approximately $202,000 and $154,000, respectively.

1994 STOCK PLAN -- The 1994 Stock Plan provides for awards of incentive and 
non-qualified stock options.  In January 1997 the shares reserved for 
distribution under the plan were increased to 1,500,000.  Option price, 
option term, vesting provisions and other limits and restrictions are 
determined at the time of grant by the board of directors or, if established, 
by a separate committee. The exercise price for all options granted was the 
market price of the common stock at the date of grant.


                                       34

<PAGE>


Options granted, exercised, canceled and outstanding under the 1994 Stock Plan
are as follows:

<TABLE>
<CAPTION>


                                                                 QUALIFIED                      NON-QUALIFIED
                                                          -------------------------       -------------------------
                                                                            WEIGHTED                      WEIGHTED 
                                                                             AVERAGE                       AVERAGE
                                                          OPTION            EXERCISE       OPTION          EXERCISE
                                                          SHARES             PRICE         SHARES            PRICE
                                                         --------           ---------     -------         --------
<S>                                                      <C>                <C>         <C>               <C>  
Balance, January 1, 1995:                                  75,000             $2.67         3,750            $2.67

   Granted                                                 85,875              9.49           -                -
   Exercised                                                 (300)             8.67           -                -
                                                         --------           ---------     -------         --------
Balance, December 31, 1995:                               160,575              8.06         3,750             2.67

   Granted                                                 60,000             21.13           -                -
   Exercised                                               (2,400)             8.67           -                -
   Canceled                                                  (300)             8.67           -                -
                                                         --------           ---------     -------         --------
Balance, December 31, 1996                                217,875              8.34         3,750             2.67

   Granted                                                112,500             10.68       510,000             6.93
   Exercised                                                 (150)             8.67           -                -
   Canceled                                               (10,975)            18.10           -                -
                                                         --------           ---------     -------         --------
Balance, December 31, 1997                                319,250            $10.21       513,750            $6.90
                                                         --------           ---------     -------         --------
                                                         --------           ---------     -------         --------
</TABLE>


   Each of the qualified options expire ten years from the date of grant,
subject to continued employment with us.  Each of the non-qualified options
expire ten years from the date of grant.  Certain of the options are subject to
vesting provisions which restrict exercise of the option.

The following table summarizes the options outstanding and exercisable in 1997:


<TABLE>
<CAPTION>
                                                          OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                                                   -----------------------------------------      -----------------------
                                                                      WEIGHTED  AVERAGE                         WEIGHTED
                                                   NUMBER         --------------------------      NUMBER        AVERAGE 
                                                     OF           CONTRACTUAL       EXERCISE        OF          EXERCISE
EXERCISE PRICE RANGE                               OPTIONS           LIFE            PRICE        OPTIONS        PRICE
--------------------                               -------        -----------       --------      -------       --------
<S>                                                <C>            <C>               <C>           <C>           <C>
Qualified options:
   $  2.67 - $  9.00                               161,500          7.3 years         $5.84        77,100          $6.33
     10.75 -   19.33                               147,750          8.7 years         13.91        15,750          17.40
     22.88 -   28.75                                10,000          8.6 years         26.14         2,000          26.14
   -----------------                               -------         ----------        -------       ------        -------
   $  2.67 - $ 28.75                               319,250          8.0 years        $10.21        94,850          $8.59
   -----------------                               -------         ----------        -------       ------        -------
   -----------------                               -------         ----------        -------       ------        -------

Non-qualified options:
             $  2.67                                 3,750          6.8 years         $2.67         3,750          $2.67
  $  6.75  -   15.88                               510,000          9.9 years          6.93        10,000          15.88
  ------------------                               -------         ----------        -------       ------        -------
  $  2.67  - $ 15.88                               513,750          9.9 years         $6.90        13,750         $12.27
  ------------------                               -------         ----------        -------       ------        -------
  ------------------                               -------         ----------        -------       ------        -------
</TABLE>

NON-QUALIFIED COMMON STOCK OPTIONS -- Certain non-qualified options were 
issued prior to the onset of the 1994 Stock Plan.  These non-qualified 
options are all exercisable.  Non-qualified options granted, exercised and 
outstanding are as follows:

<TABLE>
<CAPTION>
                                                                                          WEIGHTED
                                                                                          AVERAGE
                                                          OPTION          EXERCISE        EXERCISE
                                                          SHARES           PRICE           PRICE
                                                         --------       --------------    ---------
<S>                                                      <C>            <C>               <C> 
Balance, January 1, 1995                                  413,903       $  0.53 - 2.00       $2.00

   Exercised in 1995                                       (1,403)                0.53        0.53
                                                         --------       --------------    ---------

Balance, December 31, 1995                                412,500                 2.00        2.00

   Exercised in 1996                                      (49,000)                2.00        2.00
                                                         --------       --------------    ---------

Balance, December 31, 1996 and 1997                       363,500                $2.00       $2.00
                                                         --------       --------------    ---------
                                                         --------       --------------    ---------
</TABLE>


                                      35

<PAGE>


   The weighted average remaining contractual life for these outstanding 
and exercisable options is 5.9 years.  Each of the non-qualified options 
expires ten years from the date of grant subject to early termination when 
the optionee leaves our employment.

   For the remaining outstanding non-qualified stock options, we are 
permitted a tax deduction equal to the difference between the option exercise 
price and the fair value on the option exercise date.  Upon exercise, the 
proceeds and the amount of the deduction are recorded to common stock.  In 
1996, we recorded a reduction in income taxes payable and increased common 
stock by $510,000 to reflect exercises during the year.  No exercises 
occurred in 1997.  Future exercises of these non-qualified options will 
reduce future taxes payable based on the fair value of the options on the 
date of exercise.

PRO FORMA INFORMATION -- Had we calculated compensation expense for our option
grants under the 1994 Stock Plan and stock purchases under the ESPP based on
the fair value method described in SFAS No. 123, "Accounting for Stock-Based
Compensation," our net income, basic net income per share and dilutive net
income per share would approximate the following pro forma amounts (in 000's,
except per share data):

<TABLE>
<CAPTION>
                                                           1997           1996           1995
                                                         --------       --------        -------
<S>                                                      <C>            <C>            <C> 
Net income:
   As reported                                            $  5,799       $  8,982       $  7,058
   Pro forma                                              $  5,238       $  8,788       $  6,924

Basic net income per share:
   As reported                                            $  0.49        $  0.76        $  0.67
   Pro forma                                              $  0.44        $  0.74        $  0.65

Dilutive net income per share:
   As reported                                            $  0.48        $  0.74        $  0.64
   Pro forma                                              $  0.43        $  0.72        $  0.63
</TABLE>

   The pro forma effect on net income for 1997, 1996 and 1995 is not 
representative of the pro forma effect on net income in future years because 
it does not include pro forma compensation expense related to pre-1995 option 
grants.

   The weighted average fair value of options granted under the ESPP and 
1994 Stock Plan during 1997, 1996 and 1995 is estimated at $4.06, $12.36 and 
$5.29, respectively, on the date of grant using the Black-Scholes 
option-pricing model with the following assumptions:  no dividend yield;  
volatility of 76.1% in 1997 and 65.3% in 1996 and 1995;  risk-free interest 
rates ranging from 5.41% to 7.70%; and an expected life of 1 to 5 years.

EMPLOYEE CONTRACTS -- We entered into a three-year employment agreement with 
our new President and Chief Executive Officer (CEO) beginning January 15, 
1998. Under this agreement, he receives a base salary of $400,000, subject to 
review annually for increase by our board of directors. In addition to base 
salary, he is eligible for bonuses, reimbursements and fringe benefits 
including a $1,000,000 term life insurance policy and an additional payment 
sufficient to reimburse him for a long-term disability policy paying monthly 
benefits of $5,000.  We also provide this individual with health, dental, 
life and disability insurance consistent with that provided other officers. 
Under this agreement, we have agreed to indemnify him for his actions on 
behalf of us. In the event of termination without cause or resignation for 
good reason, we are obligated to continue to pay his then-current base salary 
and bonuses for the remaining term of the agreement or twelve months, 
whichever is shorter.

   We entered into an Employment and Salary Continuation Agreement with our 
former President and CEO beginning November 1993 and ending November 1998. 
Under this agreement, he receives a base salary of $357,500, which is 
increased each year by a cost of living adjustment or other amount as 
determined by our board of directors. In addition to base salary, he is 
eligible for bonuses, reimbursements and fringe benefits including the use of 
and insurance for an automobile.  We also provide him with health and dental 
insurance. Under this agreement, we have agreed to indemnify him for his 
actions on behalf of us. In the event of his disability, we are obligated to 
continue to pay his then-current base salary and bonuses consistent with 
other officers for the remaining term of the Agreement.

401(K) RETIREMENT PLAN -- We sponsor a defined contribution retirement plan 
under Section 401(K) of the Internal Revenue Code for eligible employees. 
Employees become eligible to participate in the 401(K) on the first day of 
the calendar quarter after completing of 3 months service and attaining age 
21. Our contributions to the plan are 


                                      36

<PAGE>


discretionary and are based on contributions made by employees to the plan. 
Expense recognized under the plan for 1997, 1996 and 1995, was $94,000, 
$52,000 and $35,000, respectively.

EMPLOYEE STOCK OWNERSHIP PLAN -- We maintain an Employee Stock Ownership Plan 
(ESOP) for our qualified employees. Any employee who had attained age 21 and 
was employed on May 1, 1993 became a participant in the ESOP on its effective 
date, May 1, 1993. All other employees are eligible to participate in the 
ESOP on the first day of the calendar quarter after completing 1,000 hours of 
service during 12 consecutive months with us and attaining age 21.  Our 
contributions to the plan are discretionary. We may contribute cash or shares 
of our common stock.

   In March 1997, we contributed 13,205 shares to the plan for fiscal 1996 at 
a fair value of $8.75 per share.  In January 1996, we contributed 12,196 
shares to the plan for fiscal 1995 at a fair value of $19.33 per share.  
Compensation expense recognized under the plan for 1996 and 1995 was $116,000 
and $236,000, respectively.  No expense was recorded in 1997.

COMBINED RETIREMENT PLAN -- In January 1998, we combined our 401(K) 
Retirement Plan and ESOP into a single retirement plan, the KSOP.  The KSOP 
retains the features of each separate plan except for eligibility and vesting 
provisions. Under the plan, employees become eligible to participate in the 
plan on the first day of the month after beginning employment.

OTHER EMPLOYEE BENEFIT PLANS -- We maintained bonus plans in 1997, 1996 and 
1995 under which all employees, including officers, were eligible for a bonus 
based on our operating results.  These bonuses aggregated $643,000, $498,000, 
and $350,000 in 1997, 1996 and 1995, respectively.

NOTE 9 -- SHAREHOLDERS' EQUITY

On April 25, 1996, our board of directors approved a 3-for-2 stock split in 
the form of a 50 percent stock dividend to shareholders of record on the 
close of business on May 6, 1996.  The shares were distributed to 
shareholders on May 17, 1996.  Additionally, on February 2, 1995, we declared 
a five-for-one stock split, effective as of that date.  All share and per 
share amounts have been adjusted to reflect the effect of the stock splits.

SHAREHOLDER RIGHTS PLAN -- In April 1997, we adopted a shareholder rights 
plan and declared a dividend of one right for each outstanding share of 
common stock to shareholders of record at the close of business on June 30, 
1997.  The rights become exercisable only after any person or group (the 
"Acquiring Person") becomes the beneficial owner of 15% or more of the voting 
power of our common stock.  Certain shares held by our Chairman and his wife 
are excluded from the computation for determining whether a person is an 
Acquiring Person. Each right entitles its registered holder to purchase from 
us one one-hundredth share of a new Series A Junior Participating Preferred 
Stock, no par value, at a price of $85 per one one-hundredth share, subject 
to adjustment.  If any Acquiring Person acquires beneficial ownership of 15% 
or more of our voting power, each right will entitle its holder (other than 
such Acquiring Person) to purchase, at the then current purchase price of the 
right, that number of shares of our common stock having a market value of two 
times the purchase price of the right, subject to certain possible 
adjustments.  In addition, if we are acquired in a merger or other business 
combination transaction, each right will entitle its holder to purchase, at 
the then current purchase price of the right, that number of common shares of 
the acquiring company having a market value of two times the purchase price 
of the right.  Following the acquisition of a beneficial ownership of 15% or 
more of our outstanding common stock by any Acquiring Person and prior to an 
acquisition by any Acquiring Person of 50% or more of our outstanding common 
stock, our board of directors may exchange the outstanding rights (other than 
rights owned by such Acquiring Person), in whole or in part, at an exchange 
ratio of one share of common stock, or one one-hundredth share of Preferred 
Stock (or equivalent securities) per right, subject to adjustment. We may 
redeem the rights, in whole, at $.001 per right, at any time prior to an 
acquisition by any Acquiring Person of 15% or more of our outstanding common 
stock and prior to the expiration of the rights.  The rights expire on 
April 17, 2007, unless extended or earlier redeemed by us.

DIVIDEND RESTRICTIONS -- Dividends are paid as determined by our board of 
directors. No dividends have ever been paid us.

   Our ability to pay cash dividends to shareholders may depend upon the 
amount of dividends received from our insurance subsidiary.  ACIC's ability 
to pay dividends is restricted by law or subject to approval of the insurance 
regulatory authorities of Minnesota.

   Under Minnesota insurance law regulating the payment of dividends by ACIC, 
any such payments must be an amount deemed prudent by ACIC's board of 
directors and, unless otherwise approved by the Commissioner of the 

                                      37

<PAGE>


Minnesota Department of Commerce (CMDC), must be paid solely from the 
adjusted earned surplus of ACIC.  Adjusted earned surplus means the earned 
surplus as determined in accordance with statutory accounting practices 
(unassigned funds), less 25% of the amount of such earned surplus which is 
attributable to unrealized capital gains. Further, without approval of the 
CMDC, ACIC may not pay a dividend in any calendar year which, when combined 
with dividends paid in the preceding twelve months, exceeds the greater of (i)
10% of ACIC's statutory capital and surplus at the prior year end or (ii) 
100% of ACIC's statutory net gain from operations (not including realized 
capital gains) for the prior calendar year. For 1998, dividends in excess of 
$4,537,000 would require prior consent of the CMDC.

STATUTORY SURPLUS AND STATUTORY NET INCOME - Our insurance subsidiary is 
required to file financial statements with state regulatory agencies.  The 
accounting principles used to prepare the statutory financial statements 
follow prescribed accounting practices which differ from GAAP.  Statutory 
policyholders' surplus in 1997 and 1996, and statutory net income for 1997, 
1996 and 1995 are as follows (000's):

<TABLE>
<CAPTION>
                                                         STATUTORY      STATUTORY
                                                       POLICYHOLDERS'      NET
                                                          SURPLUS        INCOME
                                                       --------------   --------- 
<S>                                                    <C>              <C>
December 31, 1997                                       $  45,367       $  5,871
December 31, 1996                                          39,543          6,658
December 31, 1995                                                          4,551
</TABLE>


STOCK WARRANTS -- The Series 1991B notes payable, paid in full in December 1996,
included attached warrants to purchase our common stock at an exercise price of
$.53 per share.  All remaining warrants were exercised in 1996.

NOTE 10 -- COMMITMENTS AND CONTINGENCIES

OPERATING LEASES - We conduct our operations in leased office facilities under
operating lease agreements. The agreements provide for monthly base lease
payments plus contingent rentals based on an allocable portion of certain
operating expenses incurred by the lessor.

   Future minimum (base) rental payments required under the leases, as of 
December 31, 1997, are as follows (000's):

                  1998                                   $  1,454
                  1999                                      1,353
                  2000                                        717
                  2001                                        530
                  2002                                        249
                                                         --------
                                                         $  4,303
                                                         --------
                                                         --------

   Rent expense, including contingent rentals, was $1,776,000, $1,063,000 and
$803,000 for 1997, 1996 and 1995, respectively.


                                      38

<PAGE>


NOTE 11 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following tables present unaudited quarterly results of operations for the
eight quarters ended December 31, 1997:

<TABLE>
<CAPTION>
                                                          FIRST         SECOND         THIRD          FOURTH
                                                         QUARTER       QUARTER        QUARTER         QUARTER
                                                        --------       --------       --------        --------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                     <C>            <C>            <C>             <C>    

1997

Premiums in force                                      $  72,600      $  72,700      $  75,500      $  78,400
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
Revenues:
   Gross premiums earned                               $  19,308      $  19,814      $  20,279      $  21,984
   Premiums ceded                                           (105)          (162)           144           (219)
                                                        --------       --------       --------       --------
      Premiums earned                                     19,203         19,652         20,423         21,765
   Investment income                                       1,567          1,610          1,906          2,137
                                                        --------       --------       --------       --------
      Total revenues                                      20,770         21,262         22,329         23,902

Expenses:
   Claim and claim settlement expenses                    12,980         12,886         14,250         15,427
   Policy acquisition costs                                2,614          2,992          2,876          3,176
   General and administrative expenses                     2,848          2,872          2,329          3,567
                                                        --------       --------       --------       --------
      Total expenses                                      18,442         18,750         19,455         22,170
                                                        --------       --------       --------       --------
Income from operations                                  $  2,328       $  2,512       $  2,874       $  1,732
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
Net income                                              $  1,340       $  1,466       $  1,705       $  1,288
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
Basic income per share                                   $  0.11        $  0.12        $  0.14        $  0.11
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
Diluted income per share                                 $  0.11        $  0.12        $  0.14        $  0.11
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
1996
Premiums in force                                      $  56,100      $  62,200      $  66,500      $  69,500
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
Revenues:
   Gross premiums earned                               $  14,040      $  15,242      $  17,161      $  17,312
   Premiums ceded                                           (276)           102           (247)          (276)
                                                        --------       --------       --------       --------
   Premiums earned                                        13,764         15,344         16,914         17,036
   Investment income                                       1,288          1,378          1,465          1,536
                                                        --------       --------       --------       --------
      Total revenues                                      15,052         16,722         18,379         18,572

Expenses:
   Claim and claim settlement expenses                     7,858          8,503         10,025         12,694
   Policy acquisition costs                                1,420          1,877          2,132            898
   General and administrative expenses                     1,844          2,108          1,815          2,743
                                                        --------       --------       --------       --------
      Total expenses                                      11,122         12,488         13,972         16,335
                                                        --------       --------       --------       --------
Income from operations                                  $  3,930       $  4,234       $  4,407       $  2,237
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
Net income                                              $  2,283       $  2,481       $  2,582       $  1,636
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
Basic income per share                                   $  0.19        $  0.21        $  0.22        $  0.14
                                                        --------       --------       --------       --------
Diluted income per share                                 $  0.19        $  0.20        $  0.21        $  0.13
                                                        --------       --------       --------       --------
                                                        --------       --------       --------       --------
</TABLE>

Our premiums in force have increased in each of the last eight quarters. 
Quarterly revenues are affected by (i) premiums in force at the beginning of 
the quarter, (ii) new policies written in the quarter, (iii) final audit 
premiums recognized during the quarter, and (iv) our policy renewal rate in 
the quarter. Historically, a majority of new policies written and policy 
renewals have occurred in the first, second and fourth quarters.  In 
addition, our quarterly results for 1997 and 1996 were affected favorably by 
adjustments to the liability for unpaid claim and claim settlement expenses 
and ceding commissions relating to those years and prior years as follows 
(000's):


                                      39

<PAGE>


<TABLE>
<CAPTION>
                                                            FIRST        SECOND          THIRD          FOURTH
                                                           QUARTER       QUARTER        QUARTER         QUARTER
                                                           -------       -------        --------        -------
<S>                                                        <C>           <C>           <C>             <C>
1997

Claim and claim settlement expenses, net                   $  675         $  850         $  850         $  710
Policy acquisition costs                                       -              -              -              (1)
                                                           -------       -------        --------        -------
Quarterly effect on income from operations                 $  675         $  850         $  850         $  709
                                                           -------       -------        --------        -------
                                                           -------       -------        --------        -------
1996

Claim and claim settlement expenses, net                   $  425         $  650         $  608       $  6,392
Policy acquisition costs                                      225             50            142          1,454
                                                           -------       -------        --------        -------
Quarterly effect on income from operations                 $  650         $  700         $  750       $  7,846
                                                           -------       -------        --------        -------
                                                           -------       -------        --------        -------
</TABLE>


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

     None.


                                   PART III
                                       
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to Directors is contained in the Section entitled
"Election of Directors" in the Company's 1998 Proxy Statement and is
incorporated herein by reference.

Information with respect to Executive Officers of the Company is included in
PART I of this Report on Form 10-K.


ITEM 11.  EXECUTIVE COMPENSATION

Information required under this item is contained in the Section entitled
"Executive Compensation and Other Information" in the Company's 1998 Proxy
Statement and is incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required under this item is contained in the Section entitled
"Security Ownership of Principal Shareholders and Management" in the Company's
1998 Proxy Statement and is incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required under this item is contained in the Section entitled
"Certain Transactions" in the Company's 1998 Proxy Statement and is
incorporated herein by reference.


                                      40

<PAGE>

                                    PART IV
                                       
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

  (a) DOCUMENTS FILED AS PART OF THIS REPORT

      (1) FINANCIAL STATEMENTS.  The following consolidated financial 
          statements of the Company are set forth on pages 22 through 40 of
          Part II, Item 8 of this Report.

          Independent Auditors' Report
          Consolidated Balance Sheets - December 31, 1997 and 1996
          Consolidated Statements of Income - Years Ended December 31, 1997,
            1996 and 1995
          Consolidated Statements of Shareholders' Equity - Years Ended
            December 31, 1997, 1996 and 1995
          Consolidated Statements of Cash Flows - Years Ended December 31,
            1997, 1996 and 1995
          Notes to Consolidated Financial Statements - Years Ended December 31,
            1997, 1996 and 1995

      (2) FINANCIAL STATEMENT SCHEDULES FOR THE THREE YEARS ENDED 
          DECEMBER 31, 1997

                                                                            Page
                                                                            ----
          Independent Auditors' Report on Schedules for the Years Ended
            December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . .  S-1
          Schedule I - Summary of Investments . . . . . . . . . . . . . . .  S-2
          Schedule II - Condensed Financial Information (Parent Company). .  S-3
          Schedule IV - Reinsurance . . . . . . . . . . . . . . . . . . . .  S-7
          Schedule V - Valuation and Qualifying Accounts. . . . . . . . . .  S-8
          Schedule VI - Supplemental Information Concerning Insurance
            Operations. . . . . . . . . . . . . . . . . . . . . . . . . . .  S-9

     All other schedules are omitted because they are not applicable or the
     required information is presented in the Financial Statements or the notes
     thereto.

  (b)   REPORTS ON FORM 8-K

        None.

  (c)   LISTING OF EXHIBITS (*indicates compensatory plan)

3.1     Amended Articles of Incorporation (1)
3.2     Amended Bylaws (1)
4.1     Indenture dated December 1, 1993 between RTW, Inc. and First Trust
        National Association, Trustee (2)
4.2     Registration Rights Agreement (2)
10.1*   Employment and Salary Continuation Agreement between RTW and David C.
        Prosser (2)
10.2*   Employment Agreement Letter dated November 24, 1997 between RTW and
        Carl B. Lehmann
10.3*   Employment Contract between RTW and J. Alexander Fjelstad, III (2)
10.4*   Stock Option Agreement between RTW and J. Alexander Fjelstad, III (2)
10.5*   Non-Qualified Stock Option Agreement dated November 24, 1997 between
        RTW and Carl B. Lehmann
10.6*   Letter Agreement dated January 15, 1998 Amending the Non-Qualified
        Stock Option Agreement between RTW and Carl B. Lehmann
10.7*   Incentive Stock Option Agreement dated January 15, 1998 between RTW
        and Carl B. Lehmann
10.8*   RTW, Inc. Employee Stock Ownership Plan (2)
10.9*   Amended RTW, Inc. 1994 Stock Plan (1)
10.10*  RTW, Inc. 1995 Employee Stock Purchase Plan (3)
10.11   Contract between RTW and ACIC dated January 1, 1992 (2)
10.12   Service Agreement between RTW and ACIC dated February 1, 1992 (2)
10.13*  Description of the 1998 Gain Sharing Program
10.14*  401(k) Plan Adoption Agreement (1)
11      Statement re Computation of Income Per Share

                                      41
<PAGE>

21      Subsidiaries of the Registrant:
         The Company has one wholly-owned subsidiary, American Compensation
         Insurance Company, a Minnesota corporation.
23      Consent of Deloitte & Touche LLP
24      Power of Attorney, included in Signature page
27.1    Financial Data Schedule - Year ended December 31, 1997
27.2    Restated Financial Data Schedules - Quarters ended March 31, 1997
         June 30, 1997 and September 30, 1997
27.3    Restated Financial Data Schedules - Quarters ended March 31, 1996,
         June 30, 1996 and September 30, 1996 and Year ended December 31, 1996
27.4    Restated Financial Data Schedule - Year ended December 31, 1995

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

(1)  Incorporated by reference to the Company's Registration Statement on Form
       S-1 (Reg. No. 33-89164).
(2)  Incorporated by reference to the Company's Registration Statement on Form
       SB-2 (Reg. No. 33-2002C).
(3)  Incorporated by reference to the Company's Registration Statement on Form
       S-8 (Reg. No. 33-91372).
(4)  Incorporated by reference to the Company's 1995 Report on Form 10-K.
(5)  Incorporated by reference to the Company's 1996 Report on Form 10-K.

                                      42
<PAGE>

                                  SIGNATURES
                                       
                                       
     Pursuant to the requirements of Section 15(d) or 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.

                              RTW, INC.

     Date:  March 20, 1998    By /s/ Carl B. Lehmann
                                 --------------------------------------------
                              Carl B. Lehmann
                              President, Chief Executive Officer and Director
                              (Principal Executive Officer)

                       SIGNATURES AND POWER OF ATTORNEY

     Pursuant to the requirements of the Securities Exchange Act of 1934, 
this Report has been signed by the following persons on behalf of the 
Registrant, in the capacities, and on the dates, indicated.  Each person 
whose signature appears below constitutes and appoints Carl B. Lehmann and 
Alfred L. LaTendresse as his true and lawful attorney-in-fact and agents, 
each acting alone, with full power of substitutions and resubstitution, for 
him and in his name, place, and stead, in any and all capacities, to sign any 
or all amendments to this Annual Report on Form 10-K and to file the same, 
with the exhibits thereto, and other documents in connection therewith, with 
the Securities and Exchange Commission.

     Date                     Signature and Title
     ----                     -------------------

     March 20, 1998           By /s/ Carl B. Lehmann
                                 --------------------------------------------
                              Carl B. Lehmann
                              President, Chief Executive Officer and Director
                              (Principal Executive Officer)

     March 20, 1998           By   /s/ Alfred L. LaTendresse
                                 --------------------------------------------
                              Alfred L. LaTendresse
                              Secretary, Treasurer and Chief FinancialOfficer
                              (Principal Financial and Accounting Officer)

     March 20, 1998           By   /s/ David C. Prosser
                                 --------------------------------------------
                              David C. Prosser
                              Chairman of the Board

     March 20, 1998           By   /s/  J. Alexander Fjelstad, III
                                 --------------------------------------------
                              J. Alexander Fjelstad, III
                              Director

     March 20, 1998           By   /s/  William Cooper
                                 --------------------------------------------
                              William Cooper
                              Director

     March 20, 1998           By   /s/  Mark E. Hegman
                                 --------------------------------------------
                              Mark E. Hegman
                              Director

     March 20, 1998           By   /s/  Steven M. Rothschild
                                 --------------------------------------------
                              Steven M. Rothschild
                              Director

                                       
                                      43
<PAGE>

                                       
                                       
                                       
                                       
                                       
                                       
                                       
                         INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders
RTW, Inc.
Minneapolis, Minnesota

We have audited the consolidated financial statements of RTW, Inc. and 
subsidiary (the Company) as of December 31, 1997 and 1996 and for each of the 
three years in the period ended December 31, 1997 and have issued our report 
thereon dated January 23, 1998.  Our audits also included the consolidated 
financial statement schedules listed in Item 14(a)(2) of this Report on Form 
10-K.  These consolidated financial statement schedules are the responsibility
of the Company's management.  Our responsibility is to express an opinion
based on our audits.  In our opinion, such consolidated financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
January 23, 1998







                                    S-1
<PAGE>

                                                                      SCHEDULE I

                                 RTW, INC.
                          SUMMARY OF INVESTMENTS
                             DECEMBER 31, 1997
                               (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                      AMOUNT AT
                                                                                     WHICH SHOWN
                                                        AMORTIZED        FAIR       IN THE BALANCE
           TYPE OF INVESTMENT                              COST          VALUE          SHEET
----------------------------------------                ---------      --------      ------------
<S>                                                    <C>            <C>           <C>
FIXED MATURITIES:
  Available-for-sale:
    United States government, government
      agencies and authorities                          $  66,916      $  68,243     $  68,243
    Corporate securities                                   22,582         22,509        22,509
    Asset-backed securities                                 6,997          7,041         7,041
    Mortgage-backed securities                             14,385         14,501        14,501
                                                        ---------      ---------     ---------
      Total Investments                                 $ 110,880     $  112,294    $  112,294
                                                        ---------      ---------     ---------
                                                        ---------      ---------     ---------
</TABLE>
                                     S-2
<PAGE>
                                                                     SCHEDULE II

                                   RTW, INC.
               CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
                                BALANCE SHEETS
                          DECEMBER 31, 1997 AND 1996
                                (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                           1997           1996
                                                         --------       --------
                                    ASSETS
<S>                                                     <C>            <C>
Cash and cash equivalents                                     936          6,888
Furniture and equipment, net                                4,927          3,423
Investment in and advances to subsidiary                   57,783         48,391
Income tax receivable                                         720             99
Other assets                                                  520            515
                                                         --------       --------
                                                         $ 64,886       $ 59,316
                                                         --------       --------
                                                         --------       --------
</TABLE>

                      LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S>                                                     <C>            <C>
Accrued expenses and other liabilities                   $  1,342       $  1,085
Deferred income taxes                                         312            181
Notes payable                                               4,875          6,739
                                                         --------       --------
    Total liabilities                                       6,529          8,005

Shareholders' equity                                       58,357         51,311
                                                         --------       --------

                                                         $ 64,886       $ 59,316
                                                         --------       --------
                                                         --------       --------
</TABLE>

See notes to condensed financial statements.

                                      S-3
<PAGE>
                                   RTW, INC.
               CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
                             STATEMENTS OF INCOME
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                            1997           1996           1995
                                                          --------       --------       --------
<S>                                                      <C>            <C>            <C>
Revenues:                                                 
  Intercompany fee income                                 $ 22,364       $ 17,699       $ 13,087
  Investment income                                            249            408            366
                                                          --------       --------       --------
    Total revenues                                          22,613         18,107         13,453

Expenses:
  General and administrative expenses                       23,097         15,555         10,731
                                                          --------       --------       --------
    Income (loss) from operations                             (484)         2,552          2,722

Interest expense                                               777          1,086          1,285
                                                          --------       --------       --------
Income (loss) before income taxes and equity in
  undistributed net income of subsidiary                    (1,261)         1,466          1,437
Provision for income taxes                                    (429)           614            605
                                                          --------       --------       --------
Income (loss) before equity in undistributed net
  income of subsidiary                                        (832)           852            832
Equity in undistributed net income of subsidiary             6,631          8,130          6,226
                                                          --------       --------       --------

Net income                                                $  5,799        $ 8,982       $  7,058
                                                          --------       --------       --------
                                                          --------       --------       --------
</TABLE>
See notes to condensed financial statements.

                                      S-4
<PAGE>
                                   RTW, INC.
               CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
                           STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                          1997           1996           1995 
                                                                        --------       --------       --------
<S>                                                                    <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Reconciliation of net income to net cash provided
  by operating activities:
    Net income                                                          $  5,799       $  8,982       $  7,058
    Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation and amortization                                        1,079            793            618
      Equity in net income from subsidiary                                (6,631)        (8,130)        (6,226)
      Deferred income taxes                                                  131            122             32
      Changes in assets and liabilities:
        Accrued expenses and other liabilities                               257            263            230
        Other, net                                                           351            345            (12)
                                                                        --------       --------       --------
          Net cash provided by operating activities                          986          2,375          1,700

CASH FLOWS FROM INVESTING ACTIVITIES:
  Investment in and advances to subsidiary                                (2,761)          (988)       (17,800)
  Purchases of furniture and equipment                                    (2,447)        (2,047)        (1,265)
                                                                        --------       --------       --------
          Net cash used in investing activities                           (5,208)        (3,035)       (19,065)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on notes payable                                               (2,000)        (2,362)        (1,362)
  Proceeds from initial public offering                                      -              -           29,900
  Equity financing costs                                                     -              -           (2,861)
  Stock options and warrants exercised                                         1            130             48
  Issuance of common stock to ESOP                                           115            236            -
  Issuance of common stock under ESPP                                        154            129            -
  Retirement of common stock                                                 -               (1)            (2)
                                                                        --------       --------       --------
          Net cash provided by (used in) financing activities             (1,730)        (1,868)        25,723
                                                                        --------       --------       --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      (5,952)        (2,528)         8,358
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                             6,888          9,416          1,058
                                                                        --------       --------       --------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                $    936       $  6,888       $  9,416
                                                                        --------       --------       --------
                                                                        --------       --------       --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Interest                                                            $    664       $    898       $  1,042
                                                                        --------       --------       --------
                                                                        --------       --------       --------
    Income taxes                                                        $     61       $     45       $    127
                                                                        --------       --------       --------
                                                                        --------       --------       --------
</TABLE>

See notes to condensed financial statements.

                                      S-5
<PAGE>
                                                                      SHEDULE II

                                   RTW, INC.
               CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


NOTE 1 - ACCOUNTING POLICIES

The accompanying condensed financial information should be read in 
conjunction with the consolidated financial statements and notes included in 
the RTW, Inc. 1997 Annual Report.


NOTE 2 - RELATED PARTY TRANSACTIONS

RTW provides American Compensation Insurance Company ("ACIC") with management 
services, including preparing and submitting filings, maintaining books and 
records, collecting premiums, administering and adjudicating claims, and 
performing other administrative services.  RTW receives 10% of ACIC's gross 
premiums earned each month for these services, which amounted to $8,057,000, 
$6,327,000 and $4,724,000 for the years ended December 31, 1997, 1996 and 
1995, respectively.  In addition, RTW receives 15% of ACIC's gross premiums 
earned for claims administration during the year in which the premiums are 
earned and a total of 4% of gross premiums earned in subsequent years which 
amounted to $14,307,000, $11,372,000 and $8,363,000 for the years ended 
December 31, 1997, 1996 and 1995, respectively.

RTW files a consolidated federal tax return with ACIC.  Taxes are allocated 
between the companies based on a tax allocation agreement under which 
allocation is made primarily on a separate return basis for taxes incurred 
with current credit for any net operating losses or other items utilized in 
the consolidated tax return.  This allocation is settled annually after 
completing and filing the federal tax return.

Amounts due (to) from ACIC related to the above transactions are included in 
the balance sheet account caption "Investment in and advances to subsidiary" 
and totaled approximately $6,208,000 and $2,558,000 at December 31, 1997 and 
1996, respectively.

                                     S-6
<PAGE>
                                                                     SCHEDULE IV
                                   RTW, INC.
                                  REINSURANCE
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               PREMIUMS EARNED                     
                                           --------------------------------------------------------     PERCENTAGE
                                                           CEDED TO         ASSUMED                      OF AMOUNT
                                                            OTHER         FROM OTHER                      ASSUMED
            DESCRIPTION                     DIRECT        COMPANIES       COMPANIES          NET          TO NET
-----------------------------------        --------       ---------       ----------      ---------      ----------
<S>                                       <C>            <C>               <C>            <C>
1997
  PREMIUMS - Workers' Compensation         $ 81,385       $   342           $  -           $ 81,043         0.00%

1996
  PREMIUMS - Workers' Compensation         $ 63,755       $   697           $  -           $ 63,058         0.00%

1995
  PREMIUMS - Workers' Compensation         $ 47,507       $ 2,099           $  -           $ 45,408         0.00%

</TABLE>
                                    S-7

<PAGE>

                                                                     SCHEDULE V

                                    RTW, INC.
                       VALUATION AND QUALIFYING ACCOUNTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>

                                                                               ADDITIONS
                                                                       --------------------------
                                                        BALANCE AT      CHARGED TO     CHARGED TO                   BALANCE AT
                                                        BEGINNING       COSTS AND        OTHER                         END
DESCRIPTION                                             OF PERIOD       EXPENSES       ACCOUNTS     WRITE-OFFS      OF PERIOD
--------------------------------------                -------------   ------------   ------------  -------------  ------------

<S>                                                     <C>            <C>            <C>           <C>            <C>
1997
   Allowance for Doubtful Accounts                      $      105     $      250     $      -      $      173     $      182

1996
   Allowance for Doubtful Accounts                      $       73     $      128     $      -      $       96     $      105

1995
   Allowance for Doubtful Accounts                      $        -     $      120     $      -      $       47     $       73

</TABLE>

                                      S-8

<PAGE>

                                                                     SCHEDULE VI

                                    RTW, INC.
              SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

               
                               (COLUMN C)                                                                     CLAIM AND CLAIM
                              RESERVES FOR                                                                  SETTLEMENT EXPENSES
                   DEFERRED   UNPAID CLAIM      DISCOUNT,                                                   INCURRED RELATED TO:
                    POLICY     AND CLAIM         IF ANY,                                                   ----------------------
                 ACQUISITION   SETTLEMENT      DEDUCTED IN     UNEARNED        EARNED        INVESTMENT     CURRENT      PRIOR
YEAR                COSTS       EXPENSES        COLUMN C       PREMIUMS       PREMIUMS         INCOME         YEAR       YEARS
-----          -------------  ------------    -------------  -----------     ----------      ----------    ---------    ---------
<S>              <C>           <C>             <C>            <C>             <C>             <C>          <C>           <C>

1997             $  1,559      $  61,069                -     $  13,580       $  81,043       $  6,971     $  58,675     $(3,085)


1996             $  1,624      $  49,256                -     $  13,308       $  63,058       $  5,259     $  47,155     $(8,075)


1995             $    858      $  37,138                -     $   9,606       $  45,408       $  3,659     $  29,536     $(1,474)

<CAPTION>

                AMORTIZATION
                 OF DEFERRED  PAID CLAIM
                   POLICY      AND CLAIM                    
                 ACQUISITION  SETTLEMENT       PREMIUMS     
YEAR               COSTS       EXPENSES        WRITTEN      
-----          -------------  ------------    ------------- 
<S>              <C>           <C>             <C>          

1997             $  11,658     $  42,968       $  81,315    


1996             $   6,327     $  24,833       $  66,760    


1995             $  2,689      $  13,499       $  47,971    

</TABLE>

                                     S-9