EXHIBIT 13.1

Corporate Profile

Atlantic  American  Corporation is an insurance holding company involved through
its subsidiary companies in well-defined  specialty markets of the life, health,
property and casualty insurance industries.

Selected Financial Data
(In Thousands, Except Per Share Data)
                                          Year Ended December 31,
--------------------------------------------------------------------------------
                                  1996      1995      1994      1993      1992
--------------------------------------------------------------------------------
Insurance premiums.............$ 86,025  $ 43,373  $ 41,701  $ 40,944  $ 42,764
Investment income..............  11,457     6,566     6,628     6,048     6,399
Realized investment gains,
  net..........................   1,589     1,731       870       744     4,091
--------------------------------------------------------------------------------
  Total revenue................  99,071    51,670    49,199    47,736    53,254
--------------------------------------------------------------------------------
Insurance benefits and
  losses incurred..............  54,281    24,689    21,955    25,364    33,616
Other expenses.................  36,975    23,897    20,727    21,905    20,430
--------------------------------------------------------------------------------
  Total benefits and
    expenses...................  91,256    48,586    42,682    47,269    54,046
--------------------------------------------------------------------------------
                                  7,815     3,084     6,517       467      (792)
Debt conversion expense........      -         -         -         -        (98)
Income tax provision
  (benefit)....................     204       (34)   (1,632)     (989)       -
--------------------------------------------------------------------------------
  Income (loss) from continuing
    operations.................   7,611     3,118     8,149     1,456      (890)
  (Loss) income from discon-
    tinued operations, net.....  (4,447)  (10,094)    1,121     1,543        96
--------------------------------------------------------------------------------
  Income (loss) before extraor-
    dinary gain and cumulative
    effect of change in
    accounting principle for
    income taxes...............   3,164    (6,976)    9,270     2,999      (794)
Extraordinary gain.............      -         -        100       897       279
--------------------------------------------------------------------------------
  Income (loss) before
    cumulative effect of change
    in accounting principle for
    income taxes...............   3,164    (6,976)    9,370     3,896      (515)
  Cumulative effect of change
    in accounting principle for
    income taxes...............      -         -         -       (519)       -
--------------------------------------------------------------------------------
    Net income (loss)..........$  3,164  $ (6,976) $  9,370  $  3,377  $   (515)
================================================================================

Net income (loss) per common share data:
  Continuing operations........$    .32  $    .15  $    .43  $    .06  $   (.07)
  Discontinued operations......    (.23)     (.54)      .06       .09       .01
  Extraordinary gain...........      -         -         -        .05       .01
  Cumulative effect of change
    in accounting principle
    for income taxes...........      -         -         -       (.03)       -
--------------------------------------------------------------------------------
    Net income (loss)..........$    .09  $   (.39) $    .49  $    .17  $   (.05)
================================================================================
Weighted average common shares
  outstanding..................  18,856    18,671    18,511    18,476    17,680
Book value per share...........$   2.29  $   1.61  $   1.47  $   1.24  $   1.01
Common shares outstanding......  18,684    18,679    18,414    18,399    18,399
Total assets ..................$252,994  $245,494  $148,740  $154,822  $159,698
Total long-term debt...........$ 25,994  $ 31,569  $ 24,327  $ 21,827  $ 19,327
Total shareholders' equity.....$ 59,136  $ 46,478  $ 30,022  $ 25,806  $ 21,601

                                       
<PAGE>
President's Message

To Our Shareholders:

Atlantic  American  Corporation's  outstanding  year  can  be  credited  to  our
dedication to building one of the best niche insurance companies in the country.
By  positioning  the  Company  as a  specialty  underwriter  of niche  insurance
products and markets,  Atlantic American  Corporation  produced record financial
results  during  each  quarter of 1996,  resulting  in an  outstanding  year-end
performance.

Net income from continuing operations increased 144% in 1996 to $7.6 million, or
$0.32  per  share.   Revenues  increased  92%  to  $99.1  million.   There  were
approximately  $1.0  million,  or $0.05  per  share,  of  non-recurring  charges
associated  with the Company's  realignment.  Even with these charges,  Atlantic
American Corporation produced a strong 20% return on equity on its common stock.
We also attribute  this  outstanding  performance  to the benefits  derived from
implementing  our  strategy  to  position  Atlantic  American  as a 'pure  play'
insurance  company.  Our focus on higher return specialty  insurance markets and
the divestiture of our non-core operations has allowed us to repay approximately
$9 million in debt over the past year.

Atlantic  American's  management  team has been  aggressive  in  building a more
competitive  and  financially   strong   company.   Through  several   strategic
initiatives  we have  furthered our goal of seeking to maximize the value of our
shareholders'  investments in the Company. The completed sale of Leath furniture
in April 1996 has afforded the Company  complete  focus on its core  business --
insurance.  The bottom line was  affected by the  operation  of Leath  Furniture
through the of disposition, but will not affect our future reported earnings.

In addition,  we are very proud to report that as of December 31, 1996, Atlantic
American  Corporation  has  complete  ownership  of  all  of  its  subsidiaries,
subsidiaries:  American Southern  Insurance  Company,  American Safety Insurance
Company,  Atlantic  American  Life  Insurance  Company,  Bankers  Fidelity  Life
Insurance  Company,  and  Georgia  Casualty & Surety  Company.  During  1996 the
company  purchased  the  remainingpublicly-held  shares of Bankers  Fidelity and
followed up with the purchase of theshares of Georgia Casualty not already owned
by the  Company.  Furthermore,  at theclose of the year,  the Board of Directors
approved  the merger of Atlantic  American  Life  Insurance  Company and Bankers
Fidelity  Life  Insurance  Company,  with Bankers  Fidelity  being the surviving
company. These combined initiatives have streamlined  operations,  reduced costs
and expenses, and created management efficiencies that will positively influence
the Company in 1997 and beyond.

                                       1
<PAGE>
President's Message (Continued)


Despite strong,  industry-wide  pricing  pressures,  all of our companies remain
profitable and continue to grow. Since becoming a dedicated  insurance  company,
we have  witnessed an overall  increase in premiums from all of our  operations.
Our life  insurance  operations  reported a 29%  increase in total new  business
written and for the first time in several years, we reported an increase of 1.7%
in total  annualized  premiums,  as our new life  insurance  premiums  more than
exceeded the anticipated decrease in our supplemental health insurance premiums.
Furthermore,  our  life  insurance  operations  received  5 new  licenses  to do
business in the states of Maryland,  Montana,  Nevada,  North Dakota and Oregon,
bringing that division's total market penetration to twenty-eight states.

Georgia  Casualty's  premiums  increased 2.7% this year.  Although the company's
voluntary  business  increased  17%,  this  increase was  primarily  offset by a
reduction in the amount of our  direct-assignment  premiums due to the dwindling
number  businesses which obtain workers'  compensation  coverage in the residual
market. Since that portion of Georgia Casualty's business has now stabilized, we
expect the Company's reportable growth to once again gain momentum this year. In
addition, we have recently been informed that Georgia Casualty received a rating
increase  from A.M. Best to B+ (very good).  Consequently,  all of our insurance
companies are now rated either B+ (very good) or A- (excellent) by A.M. Best and
are positioned to further  increase their ratings as time and our results allow.
We remain committed to improving our ratings in 1997 and beyond.

We are  particularly  proud of the  performance of American  Southern  Insurance
Company,  which was acquired at the close of 1995. It is in an enviable position
as one of the most successful  property and casualty insurance  companies in the
country,  adding  considerable  financial  strength and  reputation  to Atlantic
American Corporation. American Southern's specialization in insurance coverages
for public  entity  automobile  fleets,  as well as large  accounts  that can be
specially priced and customized,  diversifies Atlantic American Corporation into
a highly  desirable niche market and allows American  Southern to provide unique
benefits and services to its insurance customers.  This, in turn, gives American
Southern a  competitive  advantage  as a true value added  provider of insurance
products and services.  For the year, American Southern  contributed revenues of
$45.8 million, or 46% of Atlantic American Corporation's total revenue.

A  substantial  capital  investment  in our  infrastructure,  especially  in the
management  information  systems of Georgia Casualty and Bankers  Fidelity,  has
been committed to further their growth. Over the past three years, approximately
$1.0  million per year has been  allocated  to upgrade  these  systems to better
support management,  employees, agents and policyholders.  The majority of these


                                       2
<PAGE>
President's Message (Continued)


expenditures are now behind us, and both companies expect to realize significant
efficiency gains from these investments in the future. Our systems should enable
us to grow our  business  and  maintain the high level of service our agents and
insureds expect without a significant  increase in the costs of  administration.
We will continue to improve our information  systems as needed,  while we pursue
the Company's  objective to be at the  forefront of technical  efficiency in our
industry and to ensure that we provide the highest quality service to our agents
and policyholders.

Total shareholders'  equity increased  dramatically in 1996 to $59.1 million, or
$2.29 per common share,  from $46.5 million,  or $1.61 per share,  in 1995. This
represents a 27%  increase in total  equity and a 42%  increase  per share.  The
value of our common  stock also  advanced  from 2 5/16 per share at December 31,
1995, to 3 1/16 at year-end 1996,  increasing our total market capitalization to
$57.2 million from $43.2 million, a 32% appreciation.

While  1996  was  a  year  of  primarily  internal   development,   growth,  and
consolidation,  Atlantic  American  Corporation  continues to look for potential
acquisition   candidates  that  will  complement  and  grow  the  Company  while
maximizing  shareholder  value. An attractive  candidate must be profitable with
existing  management  expertise and products that will support and grow our core
insurance  business.  Opportunities  that we would  consider  exploring  include
acquiring  companies or blocks of business that can geographically  increase our
market share,  companies that have the  distribution  capacity to cross-sell our
products or services, or companies that have an identifiable market niche in the
industry.

Charles  West has  announced  that he will retire from our Board of Directors at
the annual  meeting  this year.  Charles  has served as a director  of  Atlantic
American for 17 years,  joining us in July 1980, and has been extremely  helpful
in planning the growth of Atlantic  American and charting a steady course during
some difficult years. The financial health and vigor of Atlantic  American today
are due in no small  part to his sound  advice  in the  past.  He will be sorely
missed.  All of his  colleagues  on the Board and all of us here at the  Company
wish him well in his retirement from the Board and with his many new endeavors.

In closing, we would like to thank all of our employees,  agents,  policyholders
and especially  the  shareholders  who have helped  position  Atlantic  American
Corporation for its future successes.






J. Mack Robinson                          Hilton H. Howell, Jr.
Chairman                                  President and Chief Executive Officer




                                       3
<PAGE>


                                                                Accident Expense
                                                                          Cancer
                                                               Disability Income
                                                             Medicare Supplement
                                                     Hospital Surgical Indemnity
                                                               Medical Indemnity
                                                                Nursing Facility
                                                                      Whole Life
                                                                Joint Whole Life
                                                                      Level Term



<PAGE>
OPERATIONS


Life and Health Division

Atlantic  American's  two  life  insurance  companies,  Atlantic  American  Life
Insurance  Company and Bankers  Fidelity Life  Insurance  Company,  successfully
completed a planned merger  effective  January 1, 1997 and will go forward under
the banner of Bankers  Fidelity Life. The merger will result in a more efficient
company as well as enhance the financial strength of this important  subsidiary,
and will provide Atlantic American Corporation with a vigorous competitor in the
life and supplemental  health insurance  markets with  consolidated  capital and
surplus in excess of $25  million.  The enhanced  financial  strength of Bankers
Fidelity will improve the company's  competitive  posture in established markets
as well as enhance its continuing  progress in achieving  favorable ratings from
the A.M. Best Company and other industry rating firms.  In addition,  the merger
will  facilitate  the planned  expansion  of the company into new markets in the
midwestern and western United States through  improved  marketing  efficiencies,
streamlined product development and reduced expenses.

Market  segmentation  in the Life  Company  continues to evolve.  The  company's
decision to penetrate new markets in recent years resulted in a firm presence in
four distinct market segments -- the senior, niche, family and payroll deduction
markets.  The company's  primary  product focus in each of these markets is life
insurance and supplemental health insurance.


Bankers Fidelity's niche markets continue to generate stable revenue.  Utilizing
a 10-Pay  whole life plan and annuity  rider,  the  company  targets the college
preparatory and military  markets.  This product line provides for an early paid
up life policy and substantial cash  accumulation  through the annuity rider. In
the college  preparatory  market,  an emphasis is placed on cash accumulation in
order to manage the high costs  associated with higher  education which enhances
the company's  position as a qualified  student lender.  In the military market,
this product  line is targeted  toward  recruits as a means to build  retirement
savings and, like the college preparatory market,  supplement the cost of higher


                                       5
<PAGE>


Asphalt Paving                          Insulation Installer
Auto Dismantler                         Landscaping/Lawn Care
Boat Builder                            Machine Shop
Building Materials Dealer               Metal Goods Fabricator
Cabinet Shops/Woodworking               Metal Goods Manufacturer
Community Action                        Metal Shop
  Committees                            Meat Product Processor
Cleaning Products/Soap                  Millwright
Concrete Construction (Light)           Mobile Home Manufacturer
Concrete Products: Block,               Painter
  Brick, Mix                            Pallet Manufacturer
Concrete Paving                         Paper Manufacturer/Processor
Cotton Gin                              Paper Hanger
Equipment Manufacturing                 Plastic Goods Manufacturer
Electrical Contractor                   Plumber
Employment Agency                       Prefab Metal Building
Floor Covering Contractor                 Manufacturer
Frame Carpentry                         Sawmill
Furniture Manufacturer/                 Telephone Utility
  Dealer                                Tent/Awning Maker
Glass Dealers/Installer                 Trim Carpenter
Grading/Land Clearing                   Wholesaler
Heating/Air-Conditioning                Wood Products Manufacturer
Home Health-Care
<PAGE>
Operations (Continued)


education  after  completion of their  military  service.  The  company's  niche
markets utilize a tightly controlled  distribution  system with a heavy emphasis
on agent training in order to insure proper market conduct.

The family market is served through  traditional  life products and supplemental
health products such as accident and cancer insurance. We believe this market is
under  served  as more  and  more of our  competitors  concentrate  on  high-end
markets.  Our ongoing  commitment to serving the needs of the traditional family
market  should  provide for  continuing  increases  in premium  income from this
market in the years ahead.

Emerging  trends  indicate  that the  payroll  deduction  market,  or  work-site
marketing,  is the  fastest  growing  entity  in  the  delivery  of  traditional
insurance  products.  While  Bankers  Fidelity  has  offered all of its life and
supplemental  health products  through payroll  deduction for a number of years,
the company began a re-engineering  process of this division more than two years
ago with the end result being the  introduction  this year of our Benefits  Plus
series of payroll  deduction  products.  Much of the groundwork was accomplished
through our association with an experienced,  outside consultant whose knowledge
of the payroll  deduction  market was  instrumental  in the  development  of new
products  as  well  as  the  repackaging  of  proven   products.   Through  this
relationship,  Benefits  Plus was brought to market  offering  full  Section 125
support as well as new products such as Term Ten and Term Ten Plus  competitive,
ten-year  level  term  products,  Flex-I-Care  Plus  - a  no  nonsense,  medical
indemnity  plan  designed to provide  benefits for  physician  office visits and
emergency room care. Optional benefits for this product include lump-sum,  first
day hospital  coverage,  daily hospital indemnity and accidental death benefits.
In addition, our proven products such as accident expense, cancer and disability
have been repackaged to enhance the new look of this series.

Overall,  Banker's  Fidelity is solidly  positioned for continued  growth in its
chosen markets.  The company's  planned  expansion into new states, as well as a
defined,  focused  approach  to each of its  markets,  resulted  in a solid  29%
increase in new sales during 1996,  when the life insurance  industry as a whole
only experienced  growth in the 5% range. We expect the Life Company's new sales
to  continue to grow in the 20% range for the  foreseeable  future and to play a
vital role in Atlantic American Corporation's continued growth.

Property and Casualty Division

With the addition of the American Southern Insurance  Company,  the property and
casualty  division of Atlantic  American  Corporation  now represents 68% of the
company's total revenues and is the single largest  contributor to the company's



                                       7
<PAGE>
Operations (Continued)


profitability.  American  Southern  has a  strong  tradition  as one of the most
successful property and casualty insurance companies in the industry, offering a
variety of property  and  casualty  coverages  with an  emphasis  on  commercial
automobile liability. Public-entity business, as well as large accounts that can
be specially priced and customized,  make up the majority of American Southern's
automobile liability book of business.  These specialized product offerings give
American Southern a competitive advantage by allowing it great flexibility and a
unique variable cost structure.

These strengths have attributed to American Southern's  outstanding  performance
in its first full year as a  subsidiary  of Atlantic  American,  but the primary
reason for its fine performance can be attributed to its experienced  management
team and the strong  relationships that they have established with their clients
over the years.  The  company  has also taken  steps to enhance  its  ability to
expand its customer base by recently adding an additional marketing executive to
its existing marketing team.

American  Southern  exemplifies  the  type of  company  that  Atlantic  American
Corporation considers in a potential acquisition. It has an excellent product, a
dedicated and  experienced  management  group,  and a solid  customer base which
immediately contributed to Atlantic American's financial performance.

Georgia  Casualty & Surety  Company,  which will celebrate its 50th  anniversary
next year, focuses on workers'  compensation and commercial  coverages in select
jurisdictions and industries in the southeastern United States. Georgia Casualty
has always taken a proactive position with its insureds to utilize all available
cost  containment  techniques  to control the ultimate  costs of their  workers'
compensation programs. These initiatives include sponsoring educational programs
on work-site safety,  utilizing medical peer review,  enforcing fee schedule and
PPO reductions and emphasizing  early medical  intervention with serious claims.
These  efforts,  among many others,  have helped  Georgia  Casualty  control and
contain the cost of workers' compensation for its clients. By ensuring that each
injured worker gets the best medical care at the earliest  possible time so that
lost time from work is reduced to an absolute minimum, Georgia Casualty has been
able to reduce its insureds' ultimate claims costs which will soon improve their
premium costs. This successful approach has allowed Georgia Casualty to grow its
voluntary  book of business by 17% in a very soft market and improve its margins
at the same time.

Georgia Casualty  targets  manufacturing  businesses,  service  industries,  and
various  construction  industries;  however, our underwriting team, most of whom
have been with our company over twenty  years,  have the  technical and regional
knowledge  necessary to allow Georgia Casualty to write diverse accounts in many
specialized industries overlooked by our competition. This underwriting approach
has produced outstanding results and has allowed Georgia Casualty to continue to
grow with  outstanding  loss ratios in virtually all lines of business.  Georgia
Casualty  has  also  benefited  from  its  regional  emphasis.  By  keeping  its
underwriting  concentration  in a region it knows well,  Georgia  Casualty has a
competitive  advantage  in being able to respond  quickly  and with  specialized
knowledge of our customers, their businesses and their locality.

Georgia Casualty and American  Southern,  two companies with a focused vision on
their markets and customers,  will continue to make significant contributions to
the growth and profitability of Atlantic American Corporation.






                                       8
<PAGE>
                                      DIRECTORS

                                  J. MACK ROBINSON
                                      Chairman
                            Atlantic American Corporation

                                HILTON H. HOWELL, JR.
                        President and Chief Executive Officer
                            Atlantic American Corporation

                                  SAMUEL E. HUDGINS
                     Principal, Percival Hudgins & Company, LLC

                                  D. RAYMOND RIDDLE
                    Retired Chairman and Chief Executive Officer
                          National Service Industries, Inc.

                                HARRIETT J. ROBINSON
                       Director, Delta Life Insurance Company

                                  SCOTT G. THOMPSON
                        President and Chief Financial Officer
                         American Southern Insurance Company

                                   CHARLES B. WEST
                            Chairman, West Lumber Company

                               WILLIAM H. WHALEY, M.D.
                       William H. Whaley, M.D., P.C., F.A.C.P.

                                    DOM H. WYANT
                       Of Counsel, Jones, Day, Reavis & Pogue


                                      OFFICERS

                                  J. MACK ROBINSON
                                      Chairman

                                HILTON H. HOWELL, JR.
                        President and Chief Executive Officer

                                   JOHN W. HANCOCK
                         Senior Vice President and Treasurer

                                  CLARK W. BERRYMAN
                        Vice President, Information Services

                                    JANIE L. RYAN
                                 Corporate Secretary

                                 MICHAEL J. BRASSER
                      Assistant Vice President, Internal Audit

                                       9
<PAGE>
                 ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

                               ASSETS                         December 31,
--------------------------------------------------------------------------------
                                                            1996         1995
--------------------------------------------------------------------------------
Cash, including short-term investments of
   $41,614 and $12,498..............................     $ 45,499     $ 15,069

Investments ........................................      142,485      168,117

Receivables:
   Reinsurance......................................       26,854       22,467

   Other (net of allowance for doubtful accounts:
      $1,151 and $1,260)............................       16,301       18,567

Deferred acquisition costs..........................       15,179       14,899

Other assets........................................        4,576        4,125

Goodwill............................................        2,100        2,250
--------------------------------------------------------------------------------
    Total assets....................................     $252,994     $245,494
================================================================================

                        LIABILITIES AND SHAREHOLDERS' EQUITY


Insurance reserves and policy funds ................     $149,198     $143,847

Accounts payable and accrued expenses...............        9,049        8,010

Debt payable ($1,058 and $6,358 due to affiliates)..       35,611       44,921

Net obligation to discontinued operations...........           -           953

Minority interest...................................           -         1,285
--------------------------------------------------------------------------------
    Total liabilities...............................      193,858      199,016
--------------------------------------------------------------------------------
Commitments And Contingencies
Shareholders' equity:
  Preferred stock, $1 par, 4,000,000 shares authorized:

    Series A preferred, 30,000 shares issued and
       outstanding, $3,000 redemption value..........          30           30

    Series B preferred, 134,000 shares issued and
       outstanding, $13,400 redemption value.........         134          134

  Common stock, $1 par,  30,000,000 shares authorized;  
    18,712,167 shares issued in 1996 and 1995 and 
    18,684,217 shares outstanding in 1996 and
    18,679,400 shares outstanding in 1995..........        18,712       18,712

  Additional paid-in capital.......................        54,062       46,531

  Accumulated deficit..............................       (31,426)     (34,446)

  Net unrealized investment gains..................        17,713       15,589

  Treasury stock, at cost, 27,950 shares in 1996
     and 32,767 shares in 1995.....................           (89)         (72)
--------------------------------------------------------------------------------
     Total shareholders' equity....................        59,136       46,478
--------------------------------------------------------------------------------
     Total liabilities and shareholders' equity          $252,994     $245,494
================================================================================
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                       10
<PAGE>
                 ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

                             Year Ended December 31,
--------------------------------------------------------------------------------
Revenue:                                         1996        1995        1994
--------------------------------------------------------------------------------
  Insurance premiums.......................    $86,025     $43,373     $41,701
  Investment income........................     11,457       6,566       6,628
  Realized investment gains, net ..........      1,589       1,731         870
--------------------------------------------------------------------------------
      Total revenue........................     99,071      51,670      49,199
--------------------------------------------------------------------------------
Benefits and expenses:
  Insurance benefits and losses incurred...     54,281      24,689      21,955
  Commissions and underwriting expenses....     26,959      15,249      13,355
  Interest expense.........................      3,292       2,458       1,968
  Other....................................      6,724       6,190       5,404
--------------------------------------------------------------------------------
      Total benefits and expenses..........     91,256      48,586      42,682
--------------------------------------------------------------------------------
      Income before income tax provision
         (benefit), discontinued operations
         and extraordinary gain............      7,815       3,084       6,517

Income tax provision (benefit).............        204         (34)     (1,632)
--------------------------------------------------------------------------------
Income from continuing operations..........      7,611       3,118       8,149
(Loss) income from discontinued
   operations, net.........................     (4,447)    (10,094)      1,121
--------------------------------------------------------------------------------
      Income (loss) before extraordinary
         gain..............................      3,164      (6,976)      9,270
Extraordinary gain ........................         -           -          100

      Net income (loss) before preferred
      stock dividends......................      3,164      (6,976)      9,370
Preferred stock dividends..................     (1,521)       (315)       (315)
--------------------------------------------------------------------------------
      Net income (loss) applicable to
         common stock......................    $ 1,643     $(7,291)    $ 9,055
================================================================================
Weighted average common shares outstanding.     18,856      18,671      18,511
================================================================================
Net income (loss) per common share data:
   Continuing operations...................    $   .32     $   .15     $   .43
   Discontinued operations.................       (.23)       (.54)        .06
   Extraordinary gain......................         -           -           -
--------------------------------------------------------------------------------
      Net income (loss)....................    $   .09     $  (.39)    $   .49
================================================================================

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

                                       11
<PAGE>
<TABLE>
                           ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


                                                                                                    Net
                                                                      Additional                 Unrealized
                                               Preferred   Common      Paid-In   Accumulated     Investment  Treasury
                                                Stock(1)    Stock      Capital     Deficit         Gains       Stock      Total
------------------------------------------------------------------------------------------------------------------------------------
<S><C>                                         <C>        <C>         <C>        <C>            <C>         <C>         <C>      
(In Thousands, Except Per Share Data)
Balance, December 31, 1993..................    $   30    $ 18,399    $ 33,600    $ (36,822)    $ 10,599    $    -      $ 25,806
   Net income...............................        -           -           -         9,370           -          -         9,370
   Cash dividends paid on preferred stock...        -           -         (315)          -            -          -          (315)
   Stock options exercised..................        -           15           4           -            -          -            19
   Decrease in unrealized investment gains..        -           -           -            -        (4,858)        -        (4,858)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994..................        30      18,414      33,289      (27,452)       5,741         -        30,022
   Net loss.................................        -           -           -        (6,976)          -          -        (6,976)
   Cash dividends paid on preferred stock...        -           -         (315)          -            -          -          (315)
   Purchase of 78,148 shares for treasury ..        -           -           -            -            -        (174)        (174)
   Issuance of 343,606 shares for employee
      benefit plans and stock options.......        -          298         291          (18)          -         102          673
   Conversion of debt payable to preferred
      stock.................................       134          -       13,266           -            -          -        13,400
   Increase in unrealized investment gains..        -           -           -            -         9,848         -         9,848
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995..................       164      18,712      46,531      (34,446)      15,589        (72)      46,478
   Net income...............................        -           -           -         3,164           -          -         3,164
   Cash dividends paid on preferred stock...        -           -         (315)          -            -          -          (315)
   Dividends accrued on preferred stock.....        -           -       (1,206)          -            -          -        (1,206)
   Purchase of 104,635 shares for treasury..        -           -           -            -            -        (338)        (338)
   Issuance of 109,452 shares for employee
      benefit plans and stock options.......        -           -            6         (144)          -         321          183
   Gain on sale of subsidiary...............        -           -        9,046           -            -          -         9,046
   Increase in unrealized investment gains..        -           -           -            -         2,124         -         2,124
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996..................    $  164    $ 18,712    $ 54,062    $ (31,426)    $ 17,713    $   (89)    $ 59,136
====================================================================================================================================

<FN>
(1)  Includes Series A and B preferred stock

</FN>
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                       12

<PAGE>
                 ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                   Year Ended December  31,
--------------------------------------------------------------------------------
(In Thousands, Except per Share Data)            1996         1995      1994
--------------------------------------------------------------------------------
Cash flows from operating activities:
  Net income (loss)..........................  $  3,164    $ (6,976)   $  9,370
  Adjustments to reconcile net income
    (loss) to net cash provided (used) by
    operating activities:
      Amortization of deferred acquisition
        costs................................     8,184       3,721       3,008
      Acquisition costs deferred.............    (8,464)     (2,985)     (2,895)
      Realized investment gains..............    (1,589)     (1,731)       (870)
      Increase (decrease) in reserves........     5,352      (1,203)    (12,939)
      Loss (income) from discontinued
        operations, net......................     4,447      10,094      (1,121)
      Depreciation and amortization..........     1,102         547         370
      Deferred income taxes..................        -           -       (1,000)
      Minority interest......................        -          285          63
      (Increase) decrease in receivables, net    (3,870)        997      (3,793)
      Extraordinary gain from extinguishment
        of debt..............................        -           -         (100)
      (Decrease) increase in other
        liabilities..........................      (694)        177         472
      Other, net.............................       811         319        (366)
--------------------------------------------------------------------------------
        Net cash provided (used) by
          continuing operations..............     8,443       3,245      (9,801)
--------------------------------------------------------------------------------
        Net cash (used) provided by
          discontinued operations............    (5,902)     (9,177)      2,291
--------------------------------------------------------------------------------
        Net cash provided (used) by operating
          activities.........................     2,541      (5,932)     (7,510)
--------------------------------------------------------------------------------
Cash flows from investing activities:
  Proceeds from investments sold.............    44,445      21,027      17,805
  Proceeds from investments matured, called
    or redeemed..............................    40,868      17,004       7,099
  Investments purchased......................   (54,632)    (32,909)    (32,514)
  Acquisition of minority interest...........      (846)     (1,012)         -
  Sale of Leath Furniture, Inc., net.........     3,646          -           -
  Acquisition of American Southern Insurance
    Company, net of $5,497 of cash acquired..        -      (17,273)         -
  Additions to property and equipment........    (1,616)     (1,107)     (1,270)
--------------------------------------------------------------------------------
    Net cash provided (used) by continuing
      operations.............................    31,865     (14,270)     (8,880)
--------------------------------------------------------------------------------
    Net cash used by discontinued operations.      (440)     (2,551)     (6,691)
--------------------------------------------------------------------------------
    Net cash provided (used) by investing
      activities.............................    31,425     (16,821)    (15,571)
--------------------------------------------------------------------------------
Cash flows from financing activities:
  Proceeds from issuance of notes payable ...        -           -          675
  Proceeds from issuance of bank financing...    11,352      22,642          -
  Preferred stock dividends..................      (315)       (315)       (315)
  Proceeds from exercise of stock options....        85         600          19
  Purchase of treasury shares................      (338)       (174)         -
  Repayments of debt.........................   (20,662)       (675)         -
--------------------------------------------------------------------------------
    Net cash (used) provided by continuing
      operations.............................    (9,878)     22,078         379
--------------------------------------------------------------------------------
    Net cash provided by discontinued
      operations.............................     6,342       9,345       4,303
--------------------------------------------------------------------------------
    Net cash (used) provided by financing
      activities.............................    (3,536)     31,423       4,682
--------------------------------------------------------------------------------
    Net increase (decrease) in cash and
      cash equivalents.......................    30,430       8,670     (18,399)
--------------------------------------------------------------------------------
  Cash and cash equivalents at beginning of year:
    Continuing operations....................    15,069       4,016      22,318
    Discontinued operations..................        -        2,383       2,480
--------------------------------------------------------------------------------
      Total..................................     5,069       6,399      24,798
--------------------------------------------------------------------------------
  Cash and cash equivalents at end of year:
    Continuing operations....................    45,499      15,069       4,016
    Discontinued operations..................        -           -        2,383
--------------------------------------------------------------------------------
      Total..................................  $ 45,499    $ 15,069    $  6,399
================================================================================
Supplemental cash flow information:
  Cash paid for interest.....................  $  3,763    $  3,096    $    900
================================================================================
  Cash paid for income taxes.................  $    116    $    128    $    115
================================================================================
  Debt to seller for purchase of American
    Southern Insurance Company...............  $     -     $ 11,352    $     -
================================================================================
  Debt payable converted to preferred stock..  $     -     $ 13,400    $     -
================================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                       13
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1195 AND 1994 (Dollars in Thousands, Except Per Share Data)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The  accompanying  consolidated  financial  statements  have  been  prepared  in
conformity  with  generally  accepted  accounting  principles  ("GAAP").   These
financial  statements include the accounts of Atlantic American Corporation (the
"Company") and its  majority-owned  subsidiaries.  Leath  Furniture,  LLC (f/k/a
Leath  Furniture,  Inc.),  previously  a  majority  owned  subsidiary,  has been
reflected as discontinued  operations in the accompanying  financial  statements
(see Note 8) through the date of its divestiture on April 8, 1996 (see Note 13).
All significant  intercompany  accounts and transactions have been eliminated in
consolidation.

At December 31, 1996, the Company had five insurance subsidiaries, which include
American  Southern  Insurance  Company and its wholly owned subsidiary  American
Safety Insurance Company (collectively known as "American  Southern"),  Atlantic
American Life Insurance  Company,  Bankers  Fidelity Life Insurance  Company and
Georgia  Casualty & Surety Company.  American  Southern was acquired on December
31, 1995 (see Note 7). Assets and liabilities are not classified,  in accordance
with  insurance  industry  practice,  and certain  prior year  amounts have been
reclassified to conform to the 1996 presentation.

Premium Revenue and Cost Recognition
Life insurance  premiums are recognized as revenues when due,  whereas  accident
and health premiums are recognized over the premium paying period.  Benefits and
expenses are associated  with earned  premiums so as to result in recognition of
profits over the lives of the contracts in proportion to premiums  earned.  This
association is accomplished by the provision of a future policy benefits reserve
and the deferral and subsequent  amortization of the costs of acquiring business
(principally commissions,  advertising and certain issue expenses).  Traditional
life insurance and long-duration  health insurance  deferred policy  acquisition
costs are  amortized  over the  estimated  premium-paying  period of the related
policies  using  assumptions  consistent  with  those used in  computing  policy
benefit  reserves.  The  deferred  policy  acquisition  costs for  property  and
casualty and  short-duration  health  insurance are amortized over the effective
period of the related insurance policies.  Deferred policy acquisition costs are
expensed  when such  costs are  deemed not to be  recoverable  from the  related
unearned premiums and investment income.

Property and casualty  insurance premiums are recognized as revenue ratably over
the contract period.  The Company provides for insurance  benefits and losses on
accident,  health, and casualty claims based upon: (a) management's  estimate of
ultimate  liability and claim adjusters'  evaluations for unpaid claims reported
prior to the close of the accounting  period,  (b) estimates of incurred but not
reported claims based on past  experience,  and (c) estimates of loss adjustment
expenses.  The  estimated  liability is  continually  reviewed and updated,  and
changes to the  estimated  liability are recorded in the statement of operations
in the year in which such changes are known.

Goodwill
Goodwill resulting from the acquisition of American Southern is amortized over a
15  year  period  using  the  straight-line  method.  The  Company  periodically
evaluates  whether  events and  circumstances  have  occurred  that indicate the
remaining estimated useful life of goodwill may warrant revision. Should factors
indicate that goodwill be evaluated  for possible  impairment,  the Company will
compare the  recoverability  of goodwill to a projection of American  Southern's
undiscounted  income  over  the  estimated  remaining  life of the  goodwill  in
assessing whether the goodwill is recoverable.

Investments
All of the Company's debt and equity  securities are classified as available for
sale and are carried at market value.  Mortgage loans, policy and student loans,
and real estate are carried at  historical  cost. If a decline in the value of a
common  stock,  preferred  stock,  or  publicly  traded  bond  below its cost or
amortized  cost is  considered  to be other than  temporary,  a realized loss is
recorded to reduce the carrying  value of the  investment  to its  estimated net
realizable value, which becomes the new cost basis.

The cost of  securities  sold is based on  specific  identification.  Unrealized
gains  (losses)  in the value of bonds and  common  and  preferred  stocks,  are
accounted  for as a direct  increase  (decrease)  in  shareholders'  equity and,
accordingly, have no effect on net income (loss).


                                       14
<PAGE>
NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes
Deferred income taxes represent the expected  future tax  consequences  when the
reported  amounts of assets and  liabilities  are recovered or paid.  They arise
from  differences  between the  financial  reporting and tax basis of assets and
liabilities  and are  adjusted  for changes in tax laws and tax rates when those
changes are enacted.  The  provision  for income taxes  represents  the total of
income taxes paid or payable for the current  year,  plus the change in deferred
taxes during the year.

Net Income (Loss) Per Common Share
Net income  (loss) per common  share is  computed  on the basis of the  weighted
average number of common shares and common equivalent shares  outstanding during
the year applied to net income (loss) after  preferred  dividends.  The weighted
average number of shares outstanding was 18,856,000 in 1996,  18,671,000 in 1995
and  18,511,000  in 1994.  The  effect  of  convertible  subordinated  notes and
convertible preferred stock was anti-dilutive in each of these years.

Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and investments in short-term,
highly liquid securities which have original  maturities of three months or less
from date of purchase.

Use of Estimates in the Preparation of Financial Statements
The  preparation  of  financial  statements  in  conformity  with GAAP  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates, although, in the opinion of management, such differences would not be
significant.

NOTE 2.  INVESTMENTS

Investments are comprised of the following:
                                                     1996
--------------------------------------------------------------------------------
                                             Gross         Gross
                               Carrying    Unrealized    Unrealized    Amortized
                                 Value       Gains         Losses        Cost
--------------------------------------------------------------------------------
Bonds:
  U.S. Treasury Securities
    and Obligations of
    U.S. Government Corpora-
      tions and Agencies......$ 67,370     $    275      $    443      $ 67,538
  Obligations of states and
    political subdivisions....   3,496           86           168         3,578
  Corporate securities........  14,717          272           272        14,717
  Mortgage-backed securities
    (government guaranteed)...   5,727           -             51         5,778
--------------------------------------------------------------------------------
                                91,310     $    633      $    934      $ 91,611

  Common and preferred stocks.  37,762     $ 19,348      $  1,334      $ 19,748
  Mortgage loans (estimated
    fair value of $7,732).....   6,812
  Policy and student loans....   6,555
  Real estate.................      46
--------------------------------------------------------------------------------
    Investments............... 142,485
  Short-term investments......  41,614
--------------------------------------------------------------------------------
    Total investments.........$184,099
================================================================================

                                                     1995
--------------------------------------------------------------------------------
                                             Gross         Gross
                               Carrying    Unrealized    Unrealized    Amortized
                                 Value       Gains         Losses        Cost
--------------------------------------------------------------------------------
Bonds:
  U. S. Treasury Securities
    and Obligations of
    U. S. Government Corpora-
      tions and Agencies......$ 70,553     $    408      $     19      $ 70,164
  Obligations of states and
    political subdivisions....  21,947            6           270        22,211
  Corporate securities........  19,817          386            77        19,508
  Mortgage-backed securities
    (government guaranteed)...     996           -             36         1,032
--------------------------------------------------------------------------------
                               113,313     $    800      $    402      $112,915

Common and preferred stocks ..  42,116     $ 15,824      $    633      $ 26,925
Mortgage loans (estimated
  fair value of $7,291).......   6,952
Policy and student loans......   5,690
Real estate...................      46
--------------------------------------------------------------------------------
   Investments................ 168,117
Short-term investments........  12,498
--------------------------------------------------------------------------------
   Total investments..........$180,615
================================================================================


  
                                       15
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1195 AND 1994 (Dollars in Thousands, Except Per Share Data)

NOTE 2.  INVESTMENTS (CONTINUED)

Bonds  having an  amortized  cost of $13,578  and $13,373  were on deposit  with
insurance regulatory authorities at December 31, 1996 and 1995, respectively, in
accordance with statutory requirements.

The amortized  cost and carrying  value of bonds and  short-term  investments at
December 31, 1996 by contractual maturity are as follows.  Actual maturities may
differ from contractual  maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

                                                      Carrying     Amortized
                                                       Value         Cost
                                                  ------------------------------
Due in one year or less..........................  $  56,732     $  56,905
Due after one year through five years............     19,439        19,416
Due after five years through ten years...........     37,666        37,804
Due after ten years..............................     13,360        13,322
Varying maturities...............................      5,727         5,778
                                                  ------------------------------
   Totals........................................  $ 132,924     $ 133,225
                                                  ==============================

Investment income was earned from the following sources:

                                                1996         1995         1994
--------------------------------------------------------------------------------
Bonds.......................................  $ 6,728      $ 3,549      $ 3,267
Common and preferred stocks.................    1,622        1,205        1,603
Mortgage loans..............................      863          791          722
CDs and commercial paper....................    1,443          548          604
Other.......................................      801          473          432
--------------------------------------------------------------------------------
    Total investment income.................   11,457        6,566        6,628
    Less investment expenses................     (452)        (424)        (465)
--------------------------------------------------------------------------------
Net investment income.......................  $11,005      $ 6,142      $ 6,163
================================================================================

<TABLE>
A summary of realized investment gains (losses) follows:

                                   1996                                       1995                                    1994
------------------------------------------------------------------------------------------------------------------------------------
                                           Limited                                    Limited
                      Stocks    Bonds    Partnership    Total    Stocks    Bonds    Partnership    Total    Stocks    Bonds   Total
------------------------------------------------------------------------------------------------------------------------------------
<S><C>               <C>       <C>       <C>           <C>       <C>       <C>      <C>            <C>      <C>       <C>    <C>
Gains............... $1,910    $  73       $  17       $2,000    $1,743    $  35    $  363         $2,141   $1,150    $  5   $1,155
Losses..............   (411)      -           -          (411)      (73)      (9)       -             (82)    (260)    (25)    (285)
Write-downs.........     -        -           -            -       (162)    (166)       -            (328)      -       -        -
------------------------------------------------------------------------------------------------------------------------------------
  Total realized
    investment gains
    (losses), net... $1,499    $  73       $  17       $1,589    $1,508    $(140)   $  363         $1,731   $ 890    $ (20)  $  870
====================================================================================================================================

</TABLE>
Proceeds  from  the  sale of  common  and  preferred  stocks,  bonds  and  other
investments are as follows:

                                               1996         1995          1994
--------------------------------------------------------------------------------
   Common and preferred stocks.............. $ 9,734      $10,199      $ 9,163
   Bonds....................................  25,335        1,730           -
   Student loans............................   6,053        7,278        7,845
   Other investments........................   3,323        1,820          797
--------------------------------------------------------------------------------
             Total proceeds                  $44,445      $21,027      $17,805
================================================================================

The single investment which exceeds 10% of shareholders'  equity at December 31,
1996 was a common stock  investment in the Wachovia  Corporation with a carrying
value of $18,506 and a cost basis of $3,428.

The Company's  bond  portfolio  included 97% of investment  grade  securities at
December 31, 1996 as defined by the NAIC.

NOTE 3.  INSURANCE RESERVES AND POLICY FUNDS

The following table presents the Company's reserves for life,  accident,  health
and casualty losses as well as loss adjustment expenses.

                                                             Amount of Insurance
                                                                   in Force
                                                             -------------------
                                         1996        1995      1996       1995
                                       -----------------------------------------
  Future policy benefits
   Life insurance policies
    Individual and group life:
     Ordinary......................... $ 22,451   $ 20,806   $256,482   $221,450
     Mass market......................    9,364      9,578     21,409     22,896
    Individual annuities..............      856        887         -          -
                                       -----------------------------------------
                                         32,671     31,271   $277,891   $244,346
                                                             ===================
   Accident and health insurance
     policies.........................    3,714      5,034
                                       --------------------
                                         36,385     36,305
  Unearned premiums...................   25,100     24,140
  Losses and claims...................   84,074     79,514
  Other policy liabilities............    3,639      3,888
                                       --------------------
   Total policy liabilities........... $149,198   $143,847
                                       ====================

Annualized  premiums for accident and health insurance policies were $15,884 and
$16,595 at December 31, 1996 and 1995, respectively.


                                      16

<PAGE>
NOTE 3. INSURANCE RESERVES AND POLICY FUNDS (CONTINUED)

Future Policy Benefits -

Liabilities  for life  insurance  future policy  benefits are based upon assumed
future  investment  yields,  mortality  rates and withdrawal  rates after giving
effect to  possible  risks of  adverse  deviation.  The  assumed  mortality  and
withdrawal  rates are based upon the Company's  experience.  The interest  rates
assumed for life, accident and health are generally: (i) 2.5% to 5.5% for issues
prior to 1977, (ii) 7% graded to 5.5% for 1977 through 1979 issues, (iii) 9% for
1980 through 1987 issues, and (iv) 7% for 1988 and later issues.

Morbidity  assumptions  for hospital  indemnity  insurance are based on the 1974
hospital  and  surgical  tables  and  the  1959  DBD  tables,   while  morbidity
assumptions for Medicare supplement  insurance are based on industry studies and
the  Company's   experience.   Hospital   indemnity   mortality  and  withdrawal
assumptions  are based on the Ultimate 65-70 tables and the Linton Lapse tables.
Medicare  supplement  mortality and withdrawal  assumptions are based on Company
experience.

Losses and Claim Reserves -

Until  September 30, 1991,  the Company  participated  in the National  Workers'
Compensation Reinsurance Pool, which is a national reinsurance fund for policies
allocated to insurers under various states' workers'  compensation assigned risk
laws for companies that cannot otherwise obtain coverage.  On December 30, 1994,
the Company  satisfied its obligation with respect to all outstanding and future
claims associated with the Company's participation for a cash payment of $9,057.
The redundancy in the losses and claims reserves, as a result of its settlement,
of $4,870 reduced the 1994 provision for insurance  benefits and losses incurred
by a corresponding amount.

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

                                                           1996           1995
--------------------------------------------------------------------------------
Balance at January 1..................................  $ 79,514       $ 40,730
Less:  Reinsurance recoverables.......................   (22,467)       (12,334)
--------------------------------------------------------------------------------
    Net balance at January 1..........................    57,047         28,396
--------------------------------------------------------------------------------

Incurred related to:
  Current year........................................    57,481         17,017
  Prior years.........................................    (4,802)         5,364
--------------------------------------------------------------------------------
    Total incurred....................................    52,679         22,381
--------------------------------------------------------------------------------

Paid related to:
  Current year........................................    28,279         13,743
  Prior years.........................................    24,227          8,398
--------------------------------------------------------------------------------
    Total paid........................................    52,506         22,141
--------------------------------------------------------------------------------

Reserves acquired due to acquisition, net.............        -          28,411
--------------------------------------------------------------------------------
Net balance at December 31............................    57,220         57,047
Plus: Reinsurance recoverables................ .......    26,854         11,893
      Reinsurance recoverables acquired due to
        acquisition...................................        -          10,574
--------------------------------------------------------------------------------
Balance at December 31................................  $ 84,074       $ 79,514
================================================================================

Following  is a  reconciliation  of total  incurred  claims  to total  insurance
benefits and losses incurred:

                                                            1996         1995
--------------------------------------------------------------------------------
Total incurred claims.................................  $ 52,679       $ 22,381
Cash surrender value and matured endowments...........     1,522            975
Death benefits........................................        80          1,333
--------------------------------------------------------------------------------
       Total insurance benefits and losses incurred...  $ 54,281       $ 24,689
================================================================================

NOTE 4.  REINSURANCE

In accordance with general practice in the insurance  industry,  portions of the
life,  property and  casualty  insurance  written by the Company are  reinsured;
however,  the Company  remains  contingently  liable with respect to reinsurance
ceded should any reinsurer be unable to meet its obligations.  Approximately 79%
of the reinsurance  receivables are due from three reinsurers as of December 31,
1996.   Reinsurance   receivables  of  $14,400  are  with  National  Reinsurance
Corporation,  "A++"  (Superior),  $3,600 are with First  Colony  Life  Insurance
Company,  "A++"  (Superior),  and  $3,200  are with  Pennsylvania  Manufacturers
Association  Insurance Company,  "A+" (Superior).  In the opinion of management,
the Company's reinsurers are financially stable and allowances for uncollectible
amounts  are  established  against  reinsurance  receivables,   if  appropriate.
Premiums  assumed of $25,800  include a state  contract  for premiums of $15,400
(17.9% of total earned premiums). The contract had a five-year term at inception
and was renewed for a second  five-year  term that will expire January 31, 1998.

                                       17
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1195 AND 1994 (Dollars in Thousands, Except Per Share Data)

NOTE 4. REINSURANCE (CONTINUED)

The Company has no assurance that the contract will be renewed for a third term.
However,  the Company's ten-year  experience in servicing this business provides
an advantage that could affect renewal.  The following table reconciles premiums
written to premiums  earned and summarizes the components of insurance  benefits
and losses incurred.

                                              1996          1995          1994
--------------------------------------------------------------------------------
      Premiums written................... $  70,295     $  46,773     $  45,230
      Plus - premiums assumed............    25,739            -             -
      Less - premiums ceded..............    (9,074)       (3,037)       (2,461)
--------------------------------------------------------------------------------
        Net premiums written.............    86,960        43,736        42,769
--------------------------------------------------------------------------------
      Change in unearned premiums........      (960)         (230)         (826)
      Change in unearned premiums ceded..        25          (133)         (242)
--------------------------------------------------------------------------------
         Net change in unearned premiums.      (935)         (363)       (1,068)
--------------------------------------------------------------------------------
         Net premiums earned............. $  86,025     $  43,373     $  41,701
================================================================================
      Provision for benefits and losses
         incurred........................ $  58,801     $  25,999     $  22,923
      Reinsurance loss recoveries........    (4,520)       (1,310)         (968)
--------------------------------------------------------------------------------
      Insurance benefits and losses
        incurred......................... $  54,281     $  24,689     $  21,955
================================================================================

NOTE 5.  INCOME TAXES

A  reconciliation  of the  differences  between  income  taxes on income  before
discontinued   operations  and  extraordinary  item,  computed  at  the  federal
statutory income tax rate is as follows:

                                              1996        1995        1994
--------------------------------------------------------------------------------
Federal income tax provision at
  statutory rate of 35%..................   $ 2,735     $ 1,079     $ 2,281
Tax exempt interest and dividends
  received deductions....................      (413)       (391)       (431)
Reduction of deferred taxes..............        -           -       (1,000)
Change in asset valuation allowance -
  Utilization of net operating loss......    (2,260)       (731)     (2,622)
Alternative minimum tax..................       142           9         140
--------------------------------------------------------------------------------
  Provision (benefit) for income taxes
    from continuing operations...........       204         (34)     (1,632)
  Provision for income taxes from
    discontinued operations..............        -           -        1,086
--------------------------------------------------------------------------------
      Total provision (benefit) for
        income taxes.....................   $   204     $   (34)    $  (546)
================================================================================

Deferred tax  liabilities and assets at December 31, 1996 and 1995 are comprised
of the following:

                                                          Tax Effect
                                                      1996           1995
--------------------------------------------------------------------------------
    Deferred tax liabilities:
      Deferred acquisition costs..............     $ (3,585)      $ (3,416)
      Net unrealized investment gains.........       (6,199)        (5,456)
--------------------------------------------------------------------------------
        Total deferred tax liabilities........     $ (9,784)      $ (8,872)
================================================================================

    Deferred tax assets:
      Net operating loss carryforwards.......      $ 17,856       $ 23,693
      Insurance reserves.....................         7,702          7,466
      Bad debts..............................           404            441
--------------------------------------------------------------------------------
        Total deferred tax assets............      $ 25,962       $ 31,600
--------------------------------------------------------------------------------

   Asset valuation allowance................       (16,178)        (22,728)
--------------------------------------------------------------------------------

    Net deferred tax assets..................      $     -        $      -
================================================================================

The components of the provision (benefit) are:

                                                       1996     1995      1994
--------------------------------------------------------------------------------
Continuing operations
   Current - Federal............................... $  204    $ (34)    $  (632)
   Deferred - Federal..............................     -        -       (1,000)
Discontinued operations
   Current:
      Federal......................................     -        -          816
      State........................................     -        -          270
--------------------------------------------------------------------------------
         Total..................................... $  204    $ (34)    $  (546)
================================================================================

The Internal  Revenue Service ("IRS")  examined the 1983 and 1984 federal income
tax returns of the Company, and the Company entered into litigation with the IRS
regarding  claims  for  additional  taxes  related   primarily  to  intercompany
reinsurance  transactions.  In 1994, the Company reached a favorable  settlement
with the IRS on all  disputed  matters,  and there was an  expiration  of a time
limitation with respect to another potential tax liability.  The settlement with
the IRS  resulted  in no tax  payments  by the  Company  and,  accordingly,  the
deferred tax reserves were reduced by $1,000.  However, in 1995 the Company made
an interest payment of $202 related to the case.

At  December  31,  1996,  the Company  has  regular  tax loss  carryforwards  of
approximately $51,018 expiring generally between 2000 and 2009.

The  Company  has  determined,  based  on its  earnings  history,  that an asset
valuation  allowance of $16,178 should be  established  against its net deferred
tax assets at  December  31,  1996.  The  Company's  asset  valuation  allowance
decreased by $6,550 during 1996,  due primarily to the  utilization  of net loss
carryforwards  in the current year from  profitable  operations  and the gain on
sale of the  discontinued  operations.  Due to the  uncertain  nature  of  their
ultimate  realization  based upon past  performance  and expiration  dates,  the
Company has established a full valuation  allowance  against these  carryforward
benefits and recognizes the benefits only as reassessment  demonstrates they are
realizable.  The Company's ability to generate taxable income from operations is
dependent upon various factors,  many of which are beyond management's  control.
Accordingly,  there can be no assurance  that the Company will  generate  future
taxable income based on historical  performance.  Therefore,  the realization of

                                       18
<PAGE>
NOTE 5. INCOME TAXES (CONTINUED)

the deferred  tax assets will be assessed  periodically  based on the  Company's
current  and  anticipated  results  of  operations.  The  Company  has a  formal
tax-sharing  agreement  with  each  of its  subsidiaries.  The  Company  files a
consolidated federal income tax return with its subsidiaries.

NOTE 6.  CREDIT ARRANGEMENTS

                                                                 1996     1995
--------------------------------------------------------------------------------
Arrangements with affiliates

  Notes payable  with  payment of $3,000 in 2001 and final
    payment of $2,300 in 2002 (weighted average interest
    rate of 9.5% at December 31, 1995)......................   $    -   $ 5,300
--------------------------------------------------------------------------------
      Total affiliated arrangements.........................   $    -   $ 5,300
================================================================================

Arrangements with non-affiliates

  8% Convertible subordinated notes due May 15, 1997 ($1,058
    held by affiliates at December 31, 1996  and 1995)......   $ 5,617  $ 5,627
  Note payable to bank due December 31, 2000 (interest rate 
    at prime,  8.25% and 8.50% at December 31, 1996 and 
    1995, respectively).....................................    18,642   22,642
  Note payable to bank at prime plus 1/2% (8.75%) due
   December 31, 2000........................................    11,352       -
  Note payable at prime (8.5%) and accrued interest
    due October 11, 1996....................................        -    11,352
--------------------------------------------------------------------------------
      Total non-affiliated arrangements.....................   $35,611  $39,621
================================================================================

Total arrangements
  Due within one year.......................................   $ 9,617  $13,352
================================================================================
  Long-term debt............................................   $25,994  $31,569
================================================================================

The 8%  convertible  subordinated  notes are  convertible  into an  aggregate of
513,000  shares of common  stock at a price of $10.94 per  share.  The notes are
redeemable at the Company's option at declining premiums until May 15, 1997. The
Company  anticipates  that  the  funds  to be  used  to  retire  the  $5,600  in
outstanding principal will come from internal funds and bank financing.

The note payable to bank due December  31,  2000,  is payable in four  quarterly
payments of $1,000 in 1997 through 2000 with the balance due at maturity.
Interest is paid quarterly in arrears.

The note payable to the seller of American Southern (see Note 7) due October 11,
1996,  was repaid  with an  additional  advance by the same bank which holds the
note due December 31, 2000. The rate on the advance is prime plus 1/2%, but will
change to the prime rate of interest  effective February 1, 1997, as the Company
repaid $4,000 on the original bank note before  January 31, 1997. The Company is
required to maintain certain financial covenants including, among others, ratios
that relate funded debt to consolidated total capitalization,  cash flow to debt
service,  as well as comply with  limitations on capital  expenditures  and debt
obligations. The Company was in compliance with all of the convenants associated
with the debt payable to bank at December 31, 1996.

Maturities

The Company's principal payments on credit arrangements  outstanding at December
31, 1996 are as follows:

        Year            Amount
        -----------------------
        1997           $ 9,617
        1998             4,000
        1999             4,000
        2000            17,994
        -----------------------
                       $35,611
        =======================

NOTE 7.  ACQUISITION OF AMERICAN SOUTHERN INSURANCE COMPANY

On December 31, 1995, the Company acquired a 100% ownership interest in American
Southern  for  approximately  $34,000  ($22,648  in cash and a note to seller of
$11,352).  Accordingly,  the assets and  liabilities  of American  Southern  are
included in the accompanying 1996 and 1995 balance sheets;  however, the results
of operations were only included  beginning  January 1, 1996.  American Southern
operates as a  multi-line  property  and casualty  insurance  company  primarily
engaged in the sale of state and municipality automobile insurance.

The acquisition was accounted for as a purchase  transaction  and,  accordingly,
the  purchase  price was  allocated  to assets  and  liabilities  based on their
estimated  fair  values  as of  the  date  of  acquisition.  The  excess  of the
consideration  paid over the estimated fair values of net assets acquired in the
amount of $2,250 was recorded as goodwill  and is  amortized on a  straight-line
basis over 15 years.

The following  unaudited pro forma summary combines the consolidated  results of
operations of the Company and American  Southern as if the acquisition had taken
place at the beginning of the  following  periods after giving effect to certain
adjustments.  These adjustments include adjustments to increase interest expense
on funds used by the Company to purchase American Southern,  the amortization of
goodwill,  a  reduction  in  American  Southern's  income tax expense due to the
Company's intercompany tax-sharing agreement and the effect of the conversion of

                                       19
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1195 AND 1994 (Dollars in Thousands, Except Per Share Data)

NOTE 7.  ACQUISITION OF AMERICAN SOUTHERN INSURANCE COMPANY (CONTINUED)

$13,400 in debt into 134,000  shares of Series B Preferred  Stock (see Note 11).
This pro forma  information  is not  necessarily  indicative  of the  results of
operations  that would have  occurred  had the  acquisition  taken  place at the
beginning of the periods.

                                                      1995            1994
--------------------------------------------------------------------------------
Revenue...........................................$  95,855        $  90,040

Net (loss) income:
  Continuing operations...........................$   6,865        $  12,889
  Discontinued operations.........................  (10,094)           1,121
  Extraordinary gain..............................       -               100
--------------------------------------------------------------------------------
    Net (loss) income.............................$  (3,229)       $  14,110
================================================================================

Net (loss) income per common share data:
  Continuing operations...........................$     .29        $     .62
  Discontinued operations.........................     (.54)             .06
--------------------------------------------------------------------------------
    Net (loss) income.............................$    (.25)       $     .68
================================================================================

In connection with the December 31, 1995 acquisition of American  Southern,  the
following assets and liabilities were acquired:

  Cash, short-term investments and investments....$  72,414
  Receivables, net................................   16,716
  Deferred acquisition costs......................    2,082
  Goodwill........................................    2,250
  Other assets....................................      901
--------------------------------------------------------------------------------
    Total assets..................................   94,363
--------------------------------------------------------------------------------

  Unearned premiums...............................   16,170
  Losses and claims...............................   38,985
  Short-term debt.................................   11,352
  Other policy liabilities........................    1,600
  Other payables..................................    3,374
--------------------------------------------------------------------------------
    Total liabilities.............................   71,481
--------------------------------------------------------------------------------

  Net assets......................................$  22,882
================================================================================

NOTE 8.  DISCONTINUED OPERATIONS

Subsequent  to year end  1995,  the  Company  announced  its  intent to sell its
approximately  88%  interest in Leath  Furniture,  LLC (f/k/a  Leath  Furniture,
Inc.),  a  retail  furniture  chain.  Accordingly,  the  consolidated  financial
statements  report  separately  the net  assets and  operating  results of these
discontinued operations.  The Company completed the sale of its interest to Gulf
Capital  Services,  Ltd., a related party,  on April 8, 1996. The gain from this
transaction is reflected as a direct credit to additional paid-in capital.

The following  results of operations and financial  position are attributable to
discontinued operations:

                                                   1996       1995       1994
--------------------------------------------------------------------------------
Results of Operations:
  Net sales.....................................$ 45,502   $ 113,265   $117,554
================================================================================
  (Loss) income from discontinued operations....$ (7,885)  $  (6,656)  $  1,121
  (Provision) benefit for discontinued
    operations..................................$  3,438   $  (3,438)        -
--------------------------------------------------------------------------------
  Net (loss) income from discontinued
    operations..................................$ (4,447)  $ (10,094)  $  1,121
================================================================================
  Net (loss) income per share from
    discontinued operations.....................$   (.23)  $    (.54)  $    .06
================================================================================
Financial Position:
  Merchandise inventory.........................           $  26,089   $ 25,008
  Property and equipment, net...................              21,655     21,459
  Goodwill......................................               9,304     10,483
  Other assets..................................               8,447      7,774
  Total liabilities.............................             (66,448)   (56,705)
--------------------------------------------------------------------------------
Net assets of discontinued operations...........           $    (953)  $  8,019
================================================================================

NOTE 9.  COMMITMENTS AND CONTINGENCIES

Litigation

The Company and its subsidiaries are party to litigation occurring in the normal
course of business. In the opinion of management,  such litigation will not have
a material  adverse  effect on the  Company's  financial  position or results of
operations.

Operating Lease Commitments

The Company's  rental  expense,  including  common area  charges,  for operating
leases was $1,222, $1,013 and $1,080 in 1996, 1995 and 1994,  respectively.  The
Company's future minimum lease obligations under non-cancelable operating leases
are as follows:

                                   Year Ending
                                  December 31,
                           ---------------------------
                           1997.................$  808
                           1998.................   789
                           1999.................   771
                           2000.................   590
                           2001.................   544
                           Thereafter........... 1,378
                                                ------
                           Total............... $4,880
                                                ======

NOTE 10.  EMPLOYEE BENEFIT PLANS

Stock Options
In 1992, the shareholders  approved the Company's adoption of the 1992 Incentive
Plan ("1992 Plan").  The 1992 Plan originally  provided for a maximum of 400,000
stock  options  subject to  issuance.  The 1992 Plan was amended by the Board of
Directors  in 1995,  and  subsequently  ratified at the 1996  Annual  Meeting of
Shareholders,  to provide for an additional 400,000 stock options.  Prior to the
1992 Plan,  the  shareholders  had approved the Company's 1987 Stock Option Plan
("1987  Plan")  which  provided  for a maximum  of  500,000  options  subject to

                                       20
<PAGE>
NOTE 10.  EMPLOYEE BENEFIT PLANS (CONTINUED)

issuance.  No options have been issued under the 1987 Plan since the adoption of
the 1992 Plan. Any  unexercised  options under the 1987 Plan expire by the terms
of the plan on February 24, 1997.  The 1992 Plan provides that options of common
stock of the Company may be granted at an option  price not less than 85% of the
fair  market  value of the shares on the date of grant.  Options  granted  under
these plans expire five years from the date of grant. Vesting occurs at 50% upon
issuance of an option, and the remaining portion is vested at 25% in each of the
following  two years.  In 1996,  the  Company  adopted a  Director's  Plan which
granted 30,000 options with immediate vesting six months after the grant date.

A summary of the status of the Company's stock option plans at December 31, 1996
and 1995, is as follows:

                                            1996                  1995
                                    -------------------------------------------
                                            Weighted Avg.         Weighted Avg.
                                     Shares   Ex. Price    Shares   Ex. Price
                                    --------------------------------------------
  Options outstanding, beginning
    of year..........................430,141    $ 1.74     745,442    $ 1.76
  Options granted....................276,000      2.47     125,000      2.50
  Options exercised..................(76,750)     1.11    (309,651)     1.93
  Options canceled or expired........ (4,000)     1.44    (130,650)     2.08
                                     --------             ---------
  Options outstanding, end of year...625,391      2.14     430,141      1.74
                                     ========             =========
  Options exercisable................441,141      1.98     333,766      1.59

The Company  accounts for these plans in accordance  with APB Opinion No. 25 and
the disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS 123"), and accordingly no compensation cost has been recognized since the
option price  approximated  fair value. If compensation cost had been recognized
in accordance  with the  provisions of SFAS 123, the Company's net income (loss)
and earnings (loss) per share would have been as follows:

                                         1996      1995
                                       -------------------
      Net income (loss):
         As reported.................  $ 3,164   $ (6,976)
         Pro forma...................    2,899     (6,994)
      Earnings (loss) per share:
         As reported.................  $  0.09  $   (0.39)
         Pro forma...................     0.07      (0.39)

The method of accounting  set forth in SFAS 123 has only been applied to options
granted  after   January  1,  1995,   and  therefore  the  resulting  pro  forma
compensation  cost may not be  representative  of that to be  expected in future
years.

Of the 625,391 options  outstanding at December 31, 1996,  224,391 have exercise
prices between $1.00 and $1.875 with a weighted average exercise price of $1.54,
a weighted average remaining contractual life of 2.0 years and all are currently
exercisable.  125,000  options have an exercise  price of $2.50 with a remaining
contractual  life of 3.8 years and 93,750  are  currently  exercisable.  246,000
options have exercise prices between $2.375 and $3.3125 with a weighted  average
exercise price of $2.38, a weighted  average  remaining  contractual life of 4.2
years and 123,000 are currently  exercisable.  The remaining 30,000 options have
an exercise price of $3.25 with a remaining  contractual  life of 4.8 years, and
none are currently exercisable.

The  weighted  average  fair value of options  granted  estimated on the date of
grant using the Black-Scholes option pricing model is $1.11 and $1.25 for grants
in 1996 and  1995  respectively,  based on  expected  dividend  yields  of zero;
expected  lives of 5 years;  risk free  interest  rates of 6.13% and 5.79%;  and
expected  volatility of 39.80% and 48.75%, for the years ended Decmeber 31, 1996
and 1995, respectively.

401(k) Plan
The Company  initiated an employees'  savings plan under  Section  401(k) of the
Internal  Revenue  Code in May of 1995.  The plan covers  substantially  all the
Company's  employees,   except  employees  of  American  Southern.  The  Company
previously  had a profit sharing plan for its employees  which was  subsequently
amended and restated for 401(k) provisions.  Under the plan, employees generally
may elect to contribute up to 16% of their compensation to the plan. The Company
makes a matching  contribution to each employee in an amount equal to 50% of the
first 6% of such contributions.  The Company's matching contribution to the plan
has  been  funded  by  reissuance  of  the  Company's  treasury  stock  and  was
approximately $102 and $72 in 1996 and 1995, respectively.

Defined Benefit Pension Plans
The Company has two defined  benefit  pension  plans  covering the  employees of
American  Southern.  The  Company's  general  funding  policy  is to  contribute
annually the maximum amount that can be deducted for income tax purposes.

Net periodic pension cost for American  Southern's  qualified and  non-qualified
defined  benefit  plans  for the year  ended  December  31,  1996  included  the
following components:

                                       21
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1195 AND 1994 (Dollars in Thousands, Except Per Share Data)

NOTE 10.  EMPLOYEE BENEFIT PLANS (CONTINUED)


      Service costs                   $     103
      Interest costs                        204
      Actual return on plan assets         (185)
      Net amortization and deferral          14
      -------------------------------------------
                                      $     136
      ===========================================

The following  assumptions were used to measure the projected benefit obligation
for the benefit plans at December 31, 1996 and 1995:

                                                        1996         1995
--------------------------------------------------------------------------------
      Discount rate to determine the
        projected benefit obligation................    7.75%        7.25%
      Expected long-term rate of return on plan
        assets used to determine net periodic
        pension cost................................    8.00%        8.00%

The following  table sets forth the benefit plans' funded status at December 31,
1996 and 1995:

                                                            1996          1995
--------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
    Vested benefit obligation.......................     $  1,862     $  1,467
    Non-vested benefit obligation...................            7           26
--------------------------------------------------------------------------------
  Accumulated benefit obligation....................        1,869        1,493
  Effect of projected future compensation levels....          901          611
--------------------------------------------------------------------------------
  Projected benefit obligation......................        2,770        2,104
  Plan assets at fair value.........................        2,371        2,343
--------------------------------------------------------------------------------
  Projected benefit obligation in excess of
    (less than) plan assets.........................          399         (239)
  Unrecognized net loss.............................          272         (416)
  Unrecognized net transition obligation and prior
   service costs....................................           (9)         457
--------------------------------------------------------------------------------
  Accrued (prepaid) pension cost....................     $    118     $   (198)
================================================================================

NOTE 11.  PREFERRED STOCK

Annual  dividends  on the  Series  A  Convertible  Preferred  Stock  ("Series  A
Preferred  Stock")  are  $10.50  per  share  and are  cumulative.  The  Series A
Preferred  Stock  is  convertible  into  approximately  752,000  shares  of  the
Company's  common  stock  at a  conversion  price  of  $3.99  per  share  and is
redeemable at the Company's  option at declining  premiums until March 15, 1997,
and thereafter at $100 per share, plus unpaid dividends.

As part of the American  Southern  acquisition and effective  December 31, 1995,
the  Company  issued  134,000  shares of Series B  Preferred  Stock  ("Series  B
Preferred  Stock") having a stated value of $100 per share.  Annual dividends to
be paid are $9.00 per share and are cumulative.  The Series B Preferred Stock is
not  currently  convertible,  but may  become  convertible  into  shares  of the
Company's common stock under certain circumstances.  In such event, the Series B
Preferred  Stock  would  be  convertible  into  an  aggregate  of  approximately
3,358,000  shares of the common stock at a conversion  ratio of $3.99 per share.
The Series B Preferred Stock is redeemable at the option of the Company.

NOTE 12.  STATUTORY REPORTING

The assets,  liabilities  and results of  operations  have been  reported on the
basis  of  GAAP,  which  varies  from  statutory  accounting  practices  ("SAP")
prescribed  or permitted  by insurance  regulatory  authorities.  The  principal
differences between SAP and GAAP are that under SAP: (i) certain assets that are
nonadmitted assets are eliminated from the balance sheet; (ii) acquisition costs
for policies are  expensed as  incurred,  while they are deferred and  amortized
over the estimated life of the policies  under GAAP;  (iii) no provision is made
for deferred income taxes;  (iv) the timing of establishing  certain reserves is
different than under GAAP; (v) certain notes are considered  surplus rather than
debt; (vi) valuation allowances are established against  investments;  and (vii)
goodwill  is  limited  to 10% of an  insurer's  surplus,  subject  to a ten year
amortization period.

The amount of statutory  net income and surplus  (shareholders'  equity) for the
insurance subsidiaries for the years ended December 31 were as follows:

                                               1996        1995        1994
--------------------------------------------------------------------------------
Life and Health............................  $ 1,315     $ 3,021     $ 2,643
Property and Casualty......................    7,567       1,466(1)    5,091(1)
--------------------------------------------------------------------------------
  Net income...............................   $8,882     $ 4,487     $ 7,734
================================================================================
Life and Health............................   $25,792    $24,724     $19,858
Property and Casualty......................    42,416     38,995       9,663(1)
--------------------------------------------------------------------------------
  Surplus..................................   $68,208    $63,719     $29,521
================================================================================

(1) Excludes American Southern which was acquired effective December 31, 1995.

Under the  Insurance  Code of the State of  Georgia,  dividend  payments  to the
Company by its insurance subsidiaries have certain limitations without the prior
approval  of the  Insurance  Commissioner.  In 1996,  dividend  payments  by the
insurance companies in excess of $7,500 would have required prior approval.  The
Company received dividends of $6,850 and $2,684 in 1996 and 1995,  respectively,
from its insurance  subsidiaries.  Approval from the Insurance  Commissioner was
required for $2,250 of the 1996 dividend  paid by Atlantic  American Life due to
the  accumulated  statutory  deficit.  No  dividends  were  paid in 1994.  As of
December  31,  1996 and  1995,  the  Company's  subsidiaries  must  individually
maintain  minimum  statutory  capital and surplus of $3,000.  In 1997,  dividend
payments by the  insurance  companies in excess of $10,100  would  require prior
approval.


                                       22
<PAGE>
NOTE 12. STATUTORY REPORTING (CONTINUED)

For statutory  purposes,  in April of 1994, Georgia Casualty received permission
from the Georgia Insurance  Department to (1) close out its accumulated  deficit
in its unassigned funds account,  (2) have the Company  contribute its remaining
$11,200  in  surplus  notes to  capital,  and (3) in the future to pay up to the
maximum dividends allowed under the applicable regulations.  This transaction in
effect was a statutory recapitalization of the casualty subsidiary.

NOTE 13.  RELATED PARTY AND OTHER TRANSACTIONS

In the  normal  course  of  business,  and in  management's  opinion,  at  terms
comparable to those available from unrelated parties, the Company has engaged in
transactions with its Chairman and his affiliates.  These  transactions  include
leasing of office space, investing and financing. A brief description of each of
these is discussed below.

The Company leases approximately 54,637 square feet of office and covered garage
space from an affiliated company. In the years ended December 31, 1996, 1995 and
1994, the Company paid $957, $960, and $1,044, respectively, under the lease.

A majority  of the  financing  of the  Company  has  historically  been  through
affiliates of the Company or its Chairman,  in the form of debt and the Series A
Preferred Stock.  Effective December 31, 1995, the Company issued 134,000 shares
of Series B  Preferred  Stock in  exchange  for  cancellation  of  approximately
$13,400  in  outstanding  debt to the  Company's  Chairman  and  certain  of his
affiliates (see Note 11).

The Company has mortgage loans to finance  properties  owned by its discontinued
furniture  subsidiary.  At December  31, 1996 and 1995,  the balance of mortgage
loans owed to various of the  Company's  insurance  subsidiaries  was $6,391 and
$6,400,  respectively.  For 1996, 1995 and 1994,  interest on the mortgage loans
totaled $688, $730, and $650, respectively.

Certain  members  of  management  are on the  Board  of  Directors  of Bull  Run
Corporation and Gray Communications  Systems, Inc. At both December 31, 1996 and
1995,  the Company  owned  600,000  common  shares of Bull Run  Corporation  and
236,040 common shares of Gray Communications Systems, Inc.

On April 8, 1996,  the Company  completed  the sale of its 88% interest in Leath
Furniture, LLC (f/k/a Leath Furniture,  Inc.) to Gulf Capital Services, Ltd., in
exchange for $5,300.  Gulf Capital is  controlled  by certain  affiliates of the
Company.

Delta Life Insurance Company purchases credit life insurance  policies with face
amounts  greater  than $50  from  Atlantic  American  Life  Insurance.  Atlantic
American  Life  receives  premiums for these  policies  from Delta Life and pays
benefits directly to  policyholders.  At December 31, 1996 1995, the face amount
of these policies was $416 and $310, respectively and the reserve balance was $9
and $7, respectively.

NOTE 14.  SEGMENT INFORMATION

The  following  summary sets forth the Company's  business  segments by revenue,
income (loss) before income tax provision  (benefit),  discontinued  operations,
and extraordinary  gain and assets.  The Company,  after  discontinuation of its
furniture segment, operates in three segments:  Property and Casualty Insurance,
Life Insurance, and Accident and Health Insurance.

<TABLE>

                                     Property               Accident                                Adjustments
                                       and                    and       Discontinued                    and
                                     Casualty      Life      Health      Operations      Other      Eliminations      Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S> <C>                              <C>          <C>      <C>          <C>            <C>          <C>               <C>           
Revenue
   1996..............................$ 67,468     $ 14,450  $ 16,972      $     -      $    144      $      37           $ 99,071
   1995..............................  21,532(1)    12,435    18,508            -             2           (807)            51,670
   1994..............................  17,808(1)    11,225    20,745            -             2           (581)            49,199

Income (loss) before
  income tax provision (benefit),
  discontinued operations,
  and extraordinary gain
   1996..............................   8,834        2,012       431            -        (3,588)           126              7,815
   1995..............................   2,353(1)     2,033     1,025            -        (2,419)            92              3,084
   1994..............................   5,880(1)     1,199     1,100            -        (1,783)           121              6,517

Assets
   1996.............................. 160,502       74,798    15,884            -         1,810             -             252,994
   1995.............................. 150,505       71,532    19,603            -         3,854             -             245,494
   1994..............................  53,462(1)    61,703    22,339         8,019        3,217             -             148,740

<FN>
(1) Excludes American Southern which was acquired effective December 31, 1995.
</FN>
</TABLE>

                                       23
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1195 AND 1994 (Dollars in Thousands, Except Per Share Data)

NOTE 15.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth a summary of the quarterly  unaudited  results of
operations for the two years ended December 31, 1996 and 1995:

<TABLE>
                                                            1996                                         1995 (1)
------------------------------------------------------------------------------------------------------------------------------------
                                           First      Second      Third      Fourth      First      Second      Third      Fourth
                                          Quarter     Quarter    Quarter     Quarter    Quarter     Quarter    Quarter    Quarter
------------------------------------------------------------------------------------------------------------------------------------
<S><C>                                  <C>         <C>         <C>        <C>        <C>         <C>        <C>        <C>  
Revenue.................................$ 24,773    $ 24,414   $ 25,681    $ 24,203   $ 11,911    $ 12,772   $ 13,588   $ 13,399
Income:
  Income before income tax (provision)
    benefit, net........................$  1,977    $  1,849   $  2,169    $  1,820   $    228    $    723   $  1,207   $    926
  Income tax (provision) benefit, net...      -          (59)      (101)        (44)        (9)         -          -          43
------------------------------------------------------------------------------------------------------------------------------------
  Continuing operations.................   1,977       1,790      2,068       1,776        219         723      1,207        969
  Discontinued operations...............      -       (4,447)        -           -         225      (3,205)    (1,404)    (5,710)(2)
------------------------------------------------------------------------------------------------------------------------------------
    Net income (loss)...................$  1,977    $ (2,657)  $. 2,068    $  1,776   $    444    $ (2,482)  $   (197)  $ (4,741)
====================================================================================================================================
Per common share data:
  Continuing operations.................$    .08    $    .08   $    .09    $   .07    $   .01     $    .03   $    .06   $    .05
  Discontinued operations...............      -         (.24)        -          -         .01         (.17)      (.07)      (.30)
------------------------------------------------------------------------------------------------------------------------------------
   Net income (loss)....................$    .08    $   (.16)  $   .09     $   .07    $   .02    $    (.14)  $   (.01)  $   (.25)
====================================================================================================================================
<FN>
(1)Excludes American Southern which was acquired effective December 31, 1995.
(2)Includes provision for discontinued operations of $3,438 (see Note 8).
</FN>
</TABLE>
NOTE 16.  DISCLOSURES ABOUT FAIR VALUE FINANCIAL INSTRUMENTS

The  estimated  fair value  amounts have been  determined  by the Company  using
available market information and appropriate valuation  methodologies.  However,
considerable  judgment is necessary to interpret  market data and to develop the
estimates of fair value.  Accordingly,  the estimates  presented  herein are not
necessarily  indicative  of the  amounts  which the Company  could  realize in a
current  market  exchange.  The  use  of  different  market  assumptions  and/or
estimation  methodologies may have a material effect on the estimated fair value
amounts.

                                          1996                   1995
--------------------------------------------------------------------------------
                                     Carrying   Estimated   Carrying  Estimated
                                      Amount    Fair Value   Amount   Fair Value
--------------------------------------------------------------------------------
Assets:
  Cash and short-term investments....$45,499     $45,499     $15,069    $15,069
  Bonds.............................. 91,310      91,310     113,313    113,313
  Common and preferred stocks........ 37,762      37,762      42,116     42,116
  Mortgage loans.....................  6,812       7,732       6,952      7,291
  Insurance premiums receivable...... 13,485      13,485      11,878     11,878
Liabilities:
  Debt - affiliated..................  1,058         952       6,358      6,490
       - non-affiliated.............. 34,553      34,097      38,563     37,877
  Accounts payable and accrued
    liabilities......................  9,049       9,049       8,010      8,010


The fair value estimates as of December 31, 1996 and 1995 are based on pertinent
information  available  to  management  as of  the  respective  dates.  Although
management  is not aware of any  factors  that  would  significantly  affect the
estimated  fair  value  amounts,  current  estimates  of fair  value may  differ
significantly from amounts that might ultimately be realized.

The  following  describes  the  methods and  assumptions  used by the Company in
estimating fair values:

  Cash, Short-term Investments, Insurance Premiums Receivable, Payable, Accounts
  Payable, and Accrued Liabilities

    The carrying amount approximates fair value.

  Bonds, Common and Preferred Stocks

    The carrying amount is determined in accordance  with methods  prescribed by
    the National Association of Insurance Commissioners  ("NAIC"),  which do not
    differ  materially from nationally  quoted market prices.  The fair value of
    certain  municipal  bonds is  assumed  to be equal to  amortized  cost where
    market quotations exist.

  Mortgage Loans

    The fair values are  estimated  based on quoted  market  prices for those or
    similar investments.

  Debt Payable

    The fair value is estimated  based on the quoted  market prices for the same
    similar  issues or on the current  rates offered for debt having the same or
    similar returns and remaining maturities.

NOTE 17.  SUBSEQUENT EVENT

Effective January 1, 1997 the Company's two life and health insurance companies,
Bankers  Fidelity Life  Insurance  Company and Atlantic  American Life Insurance
Company,  were  consolidated in a merger,  with Bankers  Fidelity Life Insurance
Company being the surviving corporation.

                                       24
<PAGE>
                       Management's Discussion and Analysis of
                    Financial Condition and Results of Operations

Management's discussion of financial condition and results of operations for the
three years ended  December 31,  1996,  1995,  and 1994  analyzes the results of
operations, consolidated financial condition, liquidity and capital resources of
Atlantic   American   Corporation  (the  "Company"  or  "Parent   Company")  and
consolidated   subsidiaries   American  Southern  Insurance  Company  ("American
Southern"),  Atlantic  American Life Insurance Company and Bankers Fidelity Life
Insurance  Company  (collectively  the "Life and Health  Division")  and Georgia
Casualty  & Surety  Company  ("Georgia  Casualty"  and  together  with  American
Southern, the "Casualty Division"). Effective January 1, 1997, Atlantic American
Life Insurance  Company was merged into Bankers Fidelity Life Insurance  Company
(see Note 17 of the Notes to Consolidated Financial  Statements).  The following
discussion  should  be read  in  conjunction  with  the  consolidated  financial
statements and notes thereto.

OVERVIEW

Atlantic  American  Corporation's net income for 1996 was $3.2 million ($.09 per
share),  compared to a net loss of $7.0 million ($.39 per share),  in 1995,  and
net income of $9.4 million ($.49 per share),  in 1994.  The increase in earnings
in 1996 was  attributable  to the insurance  operations  which had net income of
$7.6  million  compared  to $3.1  million  in 1995  and  $8.1  million  in 1994,
primarily  due to the  inclusion  of American  Southern's  1996  earnings  ($4.3
million).  1994  earnings  included  recognition  of redundant  reserves of $4.9
million  following  the  settlement  of a  significant  portion of the insurance
segment's workers' compensation insurance liabilities.

ACQUISITION

On December 31, 1995, the Company acquired American Southern for an aggregate of
$34.0 million. American Southern, a highly rated property and casualty insurance
company which specializes in state and municipality  automobile  insurance,  was
acquired to  complement  the  Company's  position as a niche  insurance  holding
company.  American  Southern's  balance  sheet  has  been  consolidated  in  the
Company's December 31, 1996 and 1995 balance sheets, while results of operations
and  cash  flows  are not  reflected  until  1996  (see  Note 7 of the  Notes to
Consolidated Financial Statements).

DISCONTINUED OPERATIONS

In  early  1996,  the  Company  announced  its  intent  to  sell  its  furniture
operations.  The furniture  division,  which consisted of Leath Furniture,  Inc.
("Leath") and its  subsidiaries,  Modernage  Furniture,  Inc. and Jefferson Home
Furniture  Company,  Inc.,  suffered  severe losses in light of an industry wide
downturn.  Management anticipated continued losses in the future and, therefore,
decided  to exit the  retail  furniture  business  and  concentrate  on its core
insurance  businesses  (see  Note  8 of  the  Notes  to  Consolidated  Financial
Statements). The Company completed the sale of its approximately 88% interest in
Leath on April 8, 1996,  to Gulf Capital  Services,  Ltd., a related  party (see
Note 13 of the Notes to Consolidated Financial Statements).

Leath's operating losses for 1995 totaled $6.7 million,  compared to earnings of
$1.1 million in 1994. The Company  recorded an additional  charge to earnings of
$3.4 million in 1995 for estimated  losses to be incurred prior to  disposition,
bringing the total loss from  discontinued  operations in 1995 to $10.1 million.
The losses  anticipated  prior to disposition were  inadequate,  and the Company
incurred an  additional  loss from  discontinued  operations  of $4.4 million in
1996. Previously separated  intersegment revenues attributable to mortgage loans
from the insurance companies to Leath have been included in investment income of
the continuing operations of the insurance segment.

RESULTS OF CONTINUING OPERATIONS

Revenue

The  Company  markets  insurance  through  various  distribution  channels.  The
following table summarizes the insurance premiums during each of the three years
ended December 31, 1996, 1995, and 1994 by company and line of business.
American Southern is included only for 1996.


                                       25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


                         Insurance Premium by Company by Line
                                    (in thousands)


                                           Year Ended December 31,
--------------------------------------------------------------------------------
                                 1996               1995               1994
--------------------------------------------------------------------------------
                           Amount   % of      Amount   % of      Amount   % of
                                    Total              Total              Total
--------------------------------------------------------------------------------
Life and Health Companies:
  Ordinary Life           $ 8,937   10.39%   $ 7,037   16.22%   $ 6,716   16.11%
  Mass Market Life          1,303    1.51%     1,260    2.91%     1,395    3.35%
-------------------------------------------------------------------------------
    Total Life             10,240   11.90%     8,297   19.13%     8,111   19.46%
-------------------------------------------------------------------------------
  Medicare Supplement      11,560   13.44%    11,882   27.39%    13,347   32.01%
  Convalescent Care/
    Short-Term Care           955    1.11%     1,191    2.75%     1,385    3.32%
  Medical Surgical            160    0.19%       211    0.49%       289    0.69%
  Cancer                    1,982    2.30%     2,221    5.12%     2,457    5.89%
  Hospital Indemnity          282    0.33%       337    0.77%       414    0.99%
  Accident Expense            677    0.79%       790    1.82%       892    2.14%
  Disability                  122    0.14%       142    0.33%       155    0.37%
--------------------------------------------------------------------------------
    Total Accident
      and Health           15,738   18.30%    16,774   38.67%    18,939   45.41%
--------------------------------------------------------------------------------
      Total Life and
        Health Companies   25,978   30.20%    25,071   57.80%    27,050   64.87%
--------------------------------------------------------------------------------
Georgia Casualty:
  Workers' Compensation    13,826   16.07%    14,954   34.48%    11,958   28.68%
  Business Automobile       2,550    2.96%     1,436    3.31%     1,054    2.53%
  General Liability         1,152    1.34%     1,025    2.36%     1,065    2.55%
  Property                  1,269    1.48%       887    2.05%       574    1.38%
--------------------------------------------------------------------------------
      Total Georgia
        Casualty           18,797   21.85%    18,302   42.20%    14,651   35.13%
--------------------------------------------------------------------------------
American Southern:
  Automobile Physical
    Damage                  4,865    5.66%
  Automobile Liability     30,889   35.91%
  General Liability         1,947    2.26%
  Property                  3,461    4.02%
  Surety                       88    0.10%
--------------------------------------------------------------------------------
      Total American
        Southern           41,250   47.95%
--------------------------------------------------------------------------------

Total Consolidated        $86,025  100.00%   $43,373  100.00%   $41,701  100.00%
================================================================================

Premium  revenues  increased  98% in 1996 to $86.0 million from $43.4 million in
1995 and $41.7  million  in 1994.  Inclusion  of  American  Southern's  earnings
accounted for 96.7% of the increased  premium revenue in 1996, or $41.3 million.
Medicare  supplement and workers'  compensation  have  historically  made up the
majority of insurance premium revenue, while the addition of American Southern's
automobile  liability  category  made it the largest  portion of 1996  premiums,
representing  35.9% of total premiums.  The Life and Health Division's  premiums
increased in 1996 by $907,000, after decreasing by $2.0 million in 1995 and $1.1
million in 1994. The main reason for the increase was a $1.9 million increase in
ordinary  life premiums in 1996,  combined with an accident and health  premiums
decrease of only $1.0  million in 1996.  Accident and health  premiums  improved
principally because Medicare supplement decreased only $322,000 in 1996 compared
to $1.5 million in 1995.  This was caused  mainly by the  introduction  of a new
Medicare  supplement  product with lower commissions and preferred  underwriting
classification.  For the first time since 1986, annualized premiums for the Life
and Health Division increased from the preceding year to $26.7 million for 1996,
compared  to  $26.3  million  for 1995  and  $28.7  million  for  1994.  Georgia
Casualty's  premiums  increased in 1996 to $18.8  million from $18.3  million in
1995 and $14.7  million in 1994.  increases  occurred  in all lines for  Georgia
Casualty in 1996 except workers'  compensation,  which declined to $13.8 million
from $15.0 million in 1995 and increased from $12.0 million in 1994. The decline
from 1995 was due to a decrease  of $1.6  million in net  earned  premiums  from
direct-assignment  workers' compensation  policies,  over which Georgia Casualty
has no control.

Investment  income increased to $11.5 million in 1996 while it remained constant
at $6.6 million for 1995 and 1994.  The  inclusion of American  Southern for the
first time in 1996 accounted for $4.3 million of the total increase.  Management
has continued to focus on  increasing  the  Company's  investments  in short and

                                       26
<PAGE>
medium maturity bonds and government  backed  securities.  The carrying value of
funds  available for  investment  (which include cash,  short-term  investments,
bonds,  and common  and  preferred  stocks)  at  December  31,  1996,  increased
approximately  $4.8  million  from  1995,  primarily  due to  cash  provided  by
operations of $8.4 million.

Realized  investment gains were $1.6 million for 1996,  compared to $1.7 million
for 1995 and $870,000  for 1994.  The changes in realized  investment  gains for
these periods were  primarily the result of  adjustments  made in the investment
portfolio to increase the yield on invested assets.

Benefits and Expenses

Total  insurance  benefits and losses  increased  to $54.3  million in 1996 from
$24.7 million in 1995 and $22.0 million in 1994. An increase of $27.9 million in
1996 was attributed to the Casualty Division, and $1.7 million was attributed to
the Life  and  Health  Division.  The  Casualty  Division's  increase  is due to
inclusion  of American  Southern's  benefits  and losses,  accounting  for $28.6
million of the increase, offset by a decrease in Georgia Casualty's benefits and
losses of  $698,000.  The Life and Health  Division's  1996  increase  is mainly
caused by an increase in  reserves  and claims  resulting  from  increased  life
premiums,  whereas 1995 reflected a decrease in reserves due to the  elimination
of a block of life insurance business sold through funeral homes.

As a percentage of premium revenue,  insurance  benefits and losses increased to
63.1%  in 1996  from  56.9%  in 1995 and  52.6%  in  1994.  The Life and  Health
Division's  percentages  increased  to  54.0%  in 1996  from  49.1%  in 1995 and
decreased from 57.1% in 1994. Georgia Casualty's  percentages decreased to 62.0%
in 1996 from 67.5% in 1995 and 77.2% in 1994. American Southern's percentage was
69.3% in its first year of operations as a subsidiary of the Company.

Commission  and  underwriting  expenses  increased to $27.0 million in 1996 from
$15.2  million in 1995 and $13.3  million in 1994.  The  inclusion  of  American
Southern accounted for $10.3 million of the $11.7 million increase in 1996. As a
percentage of premium revenue, commission and underwriting expenses decreased to
31.3% in 1996  from  35.2% in 1995 and  32.0%  in 1994.  The  Company  had a net
deferral of  deferred  acquisition  costs of $280,000 in 1996  compared to a net
amortization of deferred  acquisition  costs in 1995 of $736,000 and $113,000 in
1994.  The net deferral of  acquisition  costs in 1996 was due to increased life
sales, which have high first year commissions.  The increase in the amortization
of deferred  acquisition  costs in 1995 was due mainly to the elimination of the
block of funeral home business. Underwriting expenses increased to $13.4 million
in 1996 from $7.8 million in 1995 and $7.0 million in 1994. The increase in 1996
underwriting  expense was  primarily  attributable  to $4.3  million  from newly
acquired American Southern.  Commissions have risen in the past three years from
$6.4  million in 1994 and $6.7  million in 1995 to $13.8  million in 1996 due to
the increased premiums in the Casualty Division, increased life insurance sales,
and the  acquisition of American  Southern ($6.0 million of the 1996 increase in
commissions).

Interest expense increased to $3.3 million in 1996 from $2.5 million in 1995 and
$2.0  million in 1994.  The  increase  in 1996 was due to the  financing  of the
American  Southern  acquisition.  Other expense increased by $534,000 in 1996 to
$6.7 million, and by $786,000 in 1995 to $6.2 million from $5.4 million in 1994.
The primary  cause of the increase in other expense in 1996 was due to increased
expenses of the Parent Company, primarily due to legal expenses. The increase in
1995 other  expense was due in part to an  increase of $248,000 in the  expenses
related to claims of the Company's self-insured employee group medical plan.

The Company's net tax provision of $204,000 in 1996 was for alternative  minimum
taxes, while the tax benefit in 1995 consisted of $9,000 of alternative  minimum
taxes offset by a benefit of $43,000 from  overpayments of alternative  taxes in
the prior year.  The Company's tax benefit in 1994 was $1.6 million,  consisting
primarily  of  the  Company's  reduction  of its  deferred  tax  balance  in the

                                       27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


insurance  division  by  $350,000  upon  settlement  of a tax case  with the IRS
regarding  tax years 1983 and 1984 and by  $650,000  upon  expiration  of a time
limitation with respect to another potential tax liability.

LIQUIDITY AND CAPITAL RESOURCES

The major cash needs of the Company  are for the payment of claims and  expenses
as they come due and  maintaining  adequate  statutory  capital  and  surplus to
satisfy state regulatory requirements. The Company's primary sources of cash are
written premiums and investment  income.  Cash payments consist of current claim
payments to insureds and operating expenses such as salaries, employee benefits,
commissions,  taxes,  and  shareholder  dividends,  when  earnings  warrant such
payment.  By  statute,  the  state  regulatory   authorities  establish  minimum
liquidity standards primarily to protect policyholders.

The Company's  insurance  subsidiaries  reported a combined  statutory profit of
$8.9 million in 1996  compared to $4.5 million in 1995 and $7.7 million in 1994.
The 1996  statutory  results were due to a profit of $5.6 million from  American
Southern, $2.0 million from Georgia Casualty, and $1.3 million from the Life and
Health Division. The 1995 statutory results were due to a profit of $1.5 million
from  Georgia  Casualty  and a profit  of $3.0  million  in the Life and  Health
Division.  The 1994 statutory results were comprised of a profit of $5.1 million
in the Casualty Division (which includes the $4.9 million redundancy realized on
the settlement of the workers' compensation  liability previously discussed) and
a profit of $2.6 million in the Life and Health Division.

Statutory  results  differ from the  generally  accepted  accounting  principles
("GAAP") results of operations for the Casualty  Division due to the deferral of
acquisition costs and interest expense on surplus notes being a direct charge to
surplus  and not an  income  statement  item.  The  Life and  Health  Division's
statutory  results  differ from GAAP  primarily  due to deferral of  acquisition
costs and different  reserve  methods.  Management  attempts to keep the maximum
premium to surplus  ratio at three to one for Georgia  Casualty.  As of December
31, 1996, Georgia Casualty had annualized  premiums of $18.8 million and surplus
of $13.6 million.  Georgia  Casualty's  statutory surplus is no longer a concern
since  it  has  more  than  adequate   statutory  surplus  due  to  a  statutory
recapitalization  completed in the second quarter of 1994. In  conjunction  with
the  recapitalization,  Georgia  Casualty no longer pays the Company interest on
the  surplus  notes that were  subsequently  converted  to equity.  The  Company
received dividends of $1.0 million in 1996 and $2.0 million in 1995 from Georgia
Casualty.

On April 1, 1996, the Company completed a merger  transaction  pursuant to which
the Company  acquired the remaining  publicly-held  interest in Bankers Fidelity
that the Company did not own. As a result of the merger,  the Company  owns 100%
of the  equity of  Bankers  Fidelity,  and the  public  shareholders  of Bankers
Fidelity  received  $6.25  in  cash  per  share,  for  an  aggregate  payout  of
approximately  $1.3  million.  The source of funds for the payment of the merger
consideration,  together  with an estimated  $225,000 in related  expenses,  was
Bankers Fidelity's surplus account.

On November 26, 1996, the Company acquired the remaining  publicly-held interest
in Georgia Casualty. The transaction was completed through the merger of a newly
formed  wholly-owned  subsidiary  of the Company  into  Georgia  Casualty,  with
Georgia Casualty being the surviving  corporation in the merger.  As a result of
the transaction,  the Company owns 100% of the equity of Georgia  Casualty,  and
the remaining public shareholders of Georgia Casualty received $9.00 in cash per
share, for an aggregate payout of approximately $20,000.

In connection  with the  acquisition of American  Southern on December 31, 1995,
the Company entered into a Credit Agreement with Wachovia Bank of Georgia,  N.A.
The Credit Agreement  provides for aggregate  borrowings of approximately  $34.0
million,  of which $22.6 million was immediately  drawn on December 31, 1995, to
finance  the cash  portion  of the  purchase  price.  The  remaining  amount was


                                       28
<PAGE>
borrowed  on  October  11,  1996 to  finance  the $11.4  million  balance of the
purchase  price  due on that  date.  At  December  31,  1996,  the  Company  had
outstanding  borrowings  under the Credit  Agreement of $30.0 million,  of which
approximately  $4.0 million will become due and payable during 1997. The Company
intends to repay its  obligations  under the  Credit  Agreement  using  dividend
payments   received  from  its   subsidiaries  and  through  receipts  from  its
tax-sharing agreement.

In connection with entering into the Credit  Agreement,  the Company  converted,
effective December 31, 1995,  approximately $13.4 million in outstanding debt to
affiliates into a new series of preferred stock,  which accrues  dividends at 9%
per year.  The Company did not pay the  cumulative  dividends on this  preferred
stock during 1996, nor does it intend to pay such dividends in 1997. At December
31,  1996,  the  Company  had  accrued  but not paid  dividends  on its Series B
preferred stock totaling $1.2 million.

The Company  provides certain  administrative  and other services to each of its
insurance  subsidiaries.  The  amounts  charged to and paid by the  subsidiaries
remained constant at $5.6 million in 1996 and 1995, but increased  approximately
$140,000 from 1994. In addition,  the Company has a formal tax-sharing agreement
between the Company and its insurance  subsidiaries,  to which American Southern
was added in 1996. A net total of $3.4 million and $1.4 million were paid to the
Company under the tax-sharing  agreement in 1996 and 1995,  respectively.  It is
anticipated  that this agreement will provide the Company with additional  funds
from profitable  subsidiaries due to the  subsidiaries' use of the Company's tax
loss carryforwards which totaled approximately $51 million at December 31, 1996.
Approximately  93% of the  investment  assets  of  the  insurance  subsidiaries,
including American Southern,  are in marketable securities that can be converted
into cash, if required; however, use of such assets by the Company is limited by
state insurance  regulations.  Dividend payments to the Company by its insurance
subsidiaries are limited to the accumulated statutory earnings of the individual
insurance subsidiaries.  At December 31, 1996, Georgia Casualty had $8.5 million
of accumulated  statutory  earnings,  Bankers  Fidelity Life had $7.0 million of
accumulated  statutory  earnings,  Atlantic  American  Life had $1.4  million of
accumulated  statutory  deficit,  and  American  Southern  had $18.4  million of
accumulated  statutory earnings.  The Company believes that the fees and charges
it receives  from its  subsidiaries  and, if needed,  borrowings  from banks and
affiliates  of the  Company  will  enable  the  Company  to meet  its  liquidity
requirements for the foreseeable  future. The Company anticipates that the funds
to be used to retire the $5.6  million in  outstanding  principal  amount of the
Company's 8%  convertible  subordinated  notes due May 15, 1997,  will come from
internal  funds  and bank  financing.  Management  is not  aware of any  current
recommendations by regulatory  authorities  which, if implemented,  would have a
material  adverse  effect  on the  Company's  liquidity,  capital  resources  or
operations.

Net cash provided by operating activities totaled $8.4 million in 1996, compared
to $3.2 million in 1995 and net cash used of $9.8  million in 1994.  The Company
incurred a total of $1.6 million in 1996 and $1.1 million in 1995 for  additions
to property and equipment,  which mainly  represent  leasehold  improvements and
additions  to  the  new  computer  system.   Cash  and  short-term   investments
attributable  to continuing  operations  increased from $4.0 million at December
31, 1994, to $15.1 million at December 31, 1995, due to the $3.2 million of cash
provided  by  operations,  net  investment  proceeds  of $5.1  million,  and the
acquisition of American  Southern's cash balance of $5.5 million at December 31,
1995.  Cash and  short-term  investments  increased to $45.5 million in 1996, an
increase of $30.4 million due primarily to the sale of American  Southern's  tax
free  investments and  reinvestment  of the proceeds in short-term  investments.
This shift of American Southern's  investments from long-term to short-term also
accounts  for  the   decrease  in  total   investments   (excluding   short-term
investments)  to  $142.5  million  at  December  31,  1996.  Total   investments
(excluding short-term  investments)  increased to $168.1 million at December 31,
1995,  from $96.4 million at December 31, 1994, due primarily to the purchase of
American Southern.


                                       29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


DEFERRED TAXES

At December 31,  1996,  the Company had a net  cumulative  deferred tax asset of
zero.  The net  cumulative  deferred  tax asset  consists  of $26.0  million  of
deferred tax assets,  offset by $9.8 million of deferred tax liabilities,  and a
$16.2  million  valuation  allowance.  SFAS No. 109  requires  that a  valuation
allowance  be recorded  against tax assets  which are not likely to be realized.
The Company's  carryforwards  expire at specific future dates and utilization of
certain  carryforwards is limited to specific amounts each year. However, due to
the uncertain nature of their ultimate  realization  based upon past performance
and expiration  dates,  the Company has  established a full valuation  allowance
against  these  carryforward  benefits  and  recognizes  the  benefits  only  as
reassessment demonstrates they are realizable. The Company's ability to generate
taxable income from operations is dependent upon various factors,  many of which
are beyond management's control. Accordingly, there can be no assurance that the
Company will generate  future  taxable  income based on historical  performance.
Therefore,  the  realization  of  the  deferred  tax  assets  will  be  assessed
periodically  based  on  the  Company's  current  and  anticipated   results  of
operations.

IMPACT OF INFLATION

Insurance  premiums  are  established  before  the  amount  of  losses  and loss
adjustment expenses, or the extent to which inflation may affect such losses and
expenses,   are  known.   Consequently,   the  insurance  segment  attempts,  in
establishing its premiums, to anticipate the potential impact of inflation.  For
competitive  reasons,  however,  premiums  cannot  be  increased  to  anticipate
inflation,  in which event the  Company's  inflation  costs  would be  absorbed.
Inflation also affects the rate of investment return on the Company's investment
portfolio with a corresponding effect on investment income.

                                       30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of
Atlantic American Corporation:

We have  audited  the  accompanying  consolidated  balance  sheets  of  Atlantic
American Corporation (a Georgia corporation) and subsidiaries as of December 31,
1996  and  1995,  and  the  related   consolidated   statements  of  operations,
shareholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1996. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1995 consolidated
balance sheet of American  Southern  Insurance  Company,  which  reflects  total
assets of 38% of the consolidated 1995 assets. That balance sheet was audited by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to the 1995 amounts included for that entity,  is based solely on the
report of the other auditors.

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

In our  opinion,  based on the  audits  and the  report of other  auditors,  the
financial  statements  (pages 8 through 32) referred to above present fairly, in
all material respects,  the financial position of Atlantic American  Corporation
and  subsidiaries  as of December  31,  1996 and 1995,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

                                 ARTHUR ANDERSEN LLP

Atlanta, Georgia
March 14, 1997

                                       31
<PAGE>
                                    SUBSIDIARIES

                       Bankers Fidelity Life Insurance Company
                                  J. MACK ROBINSON
                                      Chairman
                                    EUGENE CHOATE
                                      President
                                HILTON H. HOWELL, JR.
                              Executive Vice President
                                   JOHN W. HANCOCK
                         Senior Vice President and Treasurer
                                 ANTHONY D. CHAPMAN
             Vice President and Chief Marketing Officer, Agency Division
                                   ROBERT E. OREAN
                             Vice President and Actuary
                                   SHARON A. BUSCH
                              Assistant Vice President
                                  PATRICIA F. MAYNE
                                 Assistant Treasurer
                                    JANIE L. RYAN
                                 Assistant Secretary
                                   GAIL T. ARNOLD
                                 Assistant Secretary
                          Georgia Casualty & Surety Company
                                  J. MACK ROBINSON
                               Chairman and President
                                HILTON H. HOWELL, JR.
                              Executive Vice President
                                    LINDA S. COOK
                       Vice President, Secretary and Treasurer
                                 GEORGE G. CLEMENTS
                               Vice President, Claims
                                   SANDRA W. DOAR
                            Vice President, Underwriting
                                    JACK R. BAKER
                              Assistant Vice President
                                    JANIE L. RYAN
                                 Assistant Secretary
                         American Southern Insurance Company
                          American Safety Insurance Company
                                ROY S. THOMPSON, JR.
                                      Chairman
                                   CALVIN L. WALL
                      Vice Chairman and Chief Executive Officer
                                  SCOTT G. THOMPSON
                        President and Chief Financial Officer
                                  THOMAS J. WHITTY
                            Senior Vice President, Claims
                                   DAVID I. WEEKS
                               General Vice President
                                   WANDA J. HULSEY
                            Vice President, Underwriting
                                  BRIAN G. HAURYLAK
                                   Vice President
                                    JOHN R. HUOT
                                   Vice President
                                   GLENDA N. BATES
                                      Treasurer
                                   GAIL A. PARSONS
                            Secretary and Vice President
                                  FRANK J. CICCONE
                                   Vice President
                                ERNEST E. GRANT, JR.
                                   Vice President
                                  WILLIAM E. LYNCH
                                   Vice President
                                    BRIAN C. MOSS
                                   Vice President
                                 MICHAEL D. WINSTON
                                   Vice President
                                   TERESA P. GANN
                                 Assistant Secretary

 
MARKET INFORMATION (UNAUDITED)

The common stock of the Company is traded in the over-the-counter  market and is
quoted on the NASDAQ National Market under the symbol "AAME". As of December 31,
1996, the Company had approximately  6,536  stockholders,  including  beneficial
owners holding shares in nominee or "street" name. The following tables show for
the  periods  indicated  the range of the  reported  high and low  prices of the
common stock on the NASDAQ  National  Market and the closing  price of the stock
and percent of change at December 31. No common stock  dividends  have been paid
since 1988.

                                     1996                      1995
--------------------------------------------------------------------------------
                                High        Low           High       Low
--------------------------------------------------------------------------------
First quarter................  $3 1/4     $2 1/8        $2 3/4     $2
Second quarter...............   4          2 3/4         2 1/2      2
Third quarter................   3 5/8      3             2 7/8      1 7/8
Fourth quarter...............   3 5/8      3             3          2 1/8


                                1996      1995      1994     1993     1992
--------------------------------------------------------------------------------
December 31, stock price
  close per share............  $3 1/16   $2 5/16   $2 1/4   $1 3/4   $1 5/8
Stock price percentage of
  change from prior year.....   +32.4%    +2.8%     +28.6%   +8%      +116%


                                       32

<PAGE>

Shareholder Information


Annual Meeting

Atlantic American's annual meeting of shareholders will be held on Tuesday,  May
6, 1997, at 9:00 a.m. in the Peachtree  Insurance  Center,  4370 Peachtree Road,
N.E.,  Atlanta,  Georgia.  Holders  of  common  stock of  record at the close of
business  on March 7, 1997,  are  entitled to vote at the  meeting.  A notice of
meeting,  proxy statement and proxy were mailed to shareholders with this annual
report.

Independent Accountants
Arthur Andersen LLP
Atlanta, Georgia

Legal Counsel
Jones, Day, Reavis & Pogue
Atlanta, Georgia

Stock Exchange Listing
Symbol: AAME
Traded over-the-counter market
Quoted on the NASDAQ National
Market System

Transfer Agent and Registrar
Atlantic American Corporation
Attn:  Janie L. Ryan, Corporate Secretary
P. O. Box 190720
Atlanta, Georgia 31119-0720
(800) 241-1439 or (404) 266-5532

Form 10-K and Other Information For investors and others seeking additional data
regarding  Atlantic American  Corporation or copies of the Corporation's  annual
report to the Securities  and Exchange  Commission  (Form 10-K),  please contact
Janie L. Ryan Corporate Secretary, (800) 241-1439 or (404) 266-5532.

                                       
Atlantic
American
Corporation

4370 Peachtree Road, N.E.
Atlanta, Georgia 30319-3000
Telephone:  404-266-5500
Telecopier: 404-266-5596
            404-266-5699
                                
<PAGE>