INSPIRE INSURANCE SOLUTIONS INC, 424B4, 1998-03-27

INSPIRE INSURANCE SOLUTIONS INC
424B4, 1998-03-27
INSURANCE AGENTS, BROKERS & SERVICE

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<PAGE> 1

Filed pursuant to Rule 424(b)(4)
Registration Statement Nos. 333-47413 and 333-48747

PROSPECTUS

2,300,000 SHARES

[INSPIRE LOGO]

COMMON STOCK
------------------------
Of the 2,300,000 shares of Common Stock offered hereby, 1,500,000 shares
are being issued and sold by INSpire Insurance Solutions, Inc. (the "Company")
and 800,000 shares are being sold by certain selling shareholders (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of Common Stock being sold by the Selling
Shareholders.

The Common Stock is listed on the Nasdaq National Market under the trading
symbol "NSPR."

------------------------
SEE "RISK FACTORS" ON PAGES 7 THROUGH 14 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
====================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER(3)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $31.50 $1.89 $29.61 $29.61
- --------------------------------------------------------------------------------------------------------------------
Total(4)..................... $72,450,000 $4,347,000 $44,415,000 $23,688,000
====================================================================================================================
</TABLE>

(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses estimated at $359,000 payable by the Company.

(3) Before deducting expenses estimated at $141,000 payable by The Millers
Mutual Fire Insurance Company ("Millers Mutual").

(4) The Company and Millers Mutual have granted to the Underwriters a 30-day
option to purchase up to 345,000 additional shares of Common Stock on the
same terms and conditions as the securities offered hereby, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to Company
and Proceeds to Selling Shareholders will be $83,317,500, $4,999,050,
$53,298,000 and $25,020,450, respectively. See "Underwriting."

------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them, and subject to
certain other conditions including the right of the Underwriters to withdraw,
cancel, modify or reject any order in whole or in part. It is expected that
delivery of the shares will be made on or about April 1, 1998 at the offices of
Raymond James & Associates, Inc., St. Petersburg, Florida.

RAYMOND JAMES & ASSOCIATES, INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
SOUTHWEST SECURITIES
The date of this Prospectus is March 27, 1998.
<PAGE> 2
[INSPIRE INSURANCE SOLUTIONS LOGO] Untitled
THE ONE-SOURCE OUTSOURCING ANSWER

POLICY ADMINISTRATION

CLAIMS ADMINISTRATION

TECHNOLOGY AND SYSTEMS

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."

The following text overlays a stylized multi-color geometric design:

<TABLE>
<S> <C>
INSpire
Provides

o Increased Efficiency
o Greater Flexibility/Quicker Response
o Ability to Maximize Surplus
o Ease of Entry

Policy Administration
o Processing Policies, Renewals,
Cancellations, Reinstatements
o Document/Application Review
o Direct, Agency and Internet Marketing
Support
o Billing and Accounting
o Issuing, Canceling, Amending Policies
o Inquiries By Agents, Insureds and Others
o Bureau Reporting
o Commission Handling
o Data Access/Reporting to Customer

P & C Insurance Industry
o Approximately 2,500 Existing Companies
o Approximately $260 Billion in Claims Administration
Premium Revenues
o New Entrants o Coverage Verification
o Financial Institutions o Loss Reports to Insured
o Virtual Insurance Companies and Agents
o Other Start-ups o Administering Appraisal/
Assessment Process
o Administering Claim and
Loss Reports
o Preparing Checks and
Vouchers
o Compromises, Releases
and Agreements
o Service Standards and
Claims Documentation

Technology & Systems
Customer o Integrated Systems
o Policy and Claims
Administration System
Goals o Windows into Property and
Casualty System

o Software Productivity Tools
o Focus on Core Competencies o EmPower - Automated Workflow
Management
o Reduce Fixed Costs o Underwriting Expert System
o Leverage Economics of Technology o Policy Set Production
o Create New Distribution Channels o Visual Rater
o "Year 2000" Solution o Software Services
o Regulatory Reporting o Installation
o Improve Customer Service o Customization/Conversion/
Enhancements/Upgrades
o Maintenance

</TABLE>

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<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including notes thereto,
appearing elsewhere in this Prospectus. As used herein, the "Company" or
"INSpire" means INSpire Insurance Solutions, Inc., and "Millers Mutual" means
The Millers Mutual Fire Insurance Company, unless the context otherwise
requires. Unless otherwise indicated, all financial information and share data
in this Prospectus assume no exercise of the Underwriters' over-allotment
option.

THE COMPANY

The Company is a provider of policy and claims administration solutions to
the property and casualty ("P&C") insurance industry, offering a comprehensive
choice of outsourcing services and software and software services. The Company's
outsourcing services, which generally are provided on a percentage of premiums
or claims paid basis, include application of underwriting and rating criteria
defined by the insurer, policy issuance, policyholder mailings, customer
service, billing and collections, claims adjusting and processing, and
information technology ("IT") services. The Company's software products include
policy and claims administration systems, as well as systems that increase the
productivity of insurers by automating certain functions, such as workflow
management, underwriting rules and guidelines, document production and rating
algorithms. These systems, which run on a variety of platforms including IBM
AS/400, IBM RS/6000, Windows 3.1, Windows 95 and Windows NT, enable the
Company's customers to conduct their policy and claims administration more
efficiently. The Company's software services include installation,
customization, conversion and maintenance of these systems to meet customer
specifications.

The Company was established in April 1995 as a wholly-owned subsidiary of
Millers Mutual, an insurance company chartered in Texas in 1898. The Company was
created to provide outsourcing services to other P&C insurers by capitalizing on
Millers Mutual's success in developing, implementing and managing software
systems for its internal use. As a result of the acquisition of Strategic Data
Systems, Inc. ("SDS") in March 1997 (the "SDS Acquisition"), the Company also
develops and markets software and software services to the P&C insurance
industry. SDS offered software and software services to the P&C insurance
industry for 16 years prior to its acquisition by the Company. The Company
believes its services and products allow customers to focus on core
competencies, reduce costs by converting their fixed costs of in-house
information technology to variable costs and leverage the Company's investment
in software systems and productivity tools.

The Company's outsourcing revenues have continued to grow rapidly since
inception. These services typically generate recurring revenues due to the
ongoing nature of the services provided and the long-term nature of the service
contracts. Revenues from outsourcing services increased to $32.5 million in 1997
from $13.7 million in 1996. The Company recently formed a sales team, led by an
industry veteran, that is dedicated solely to outsourcing sales. The Company
believes the marketing efforts of this sales team will enhance the growth of its
outsourcing business.

According to A.M. Best Company ("A.M. Best"), there were approximately
2,400 P&C insurance companies in the United States as of December 31, 1996,
generating more than $260 billion of annual premium revenues. According to the
National Association of Independent Insurers, information systems expenses as a
percentage of written premiums increased from 2.5% in 1992 to 3.3% in 1996.
Recent trends in the P&C insurance industry include selling policies directly to
policyholders rather than through independent agents and the emergence of new
entrants such as banks, credit unions and other financial services companies as
a result of recent regulatory changes in the P&C insurance industry. The Company
believes the availability of outsourcing enables these new insurers, which often
lack the necessary infrastructure to process policies and administer claims, to
improve efficiency, manage costs and increase customer satisfaction. The
Company's outsourcing services also allow these new insurers to quickly enter
markets being exited by more established insurers seeking to reduce their
exposure to geographical risk due to the concentration of recent natural
catastrophes in certain areas.

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<PAGE> 4

The Company has experienced rapid growth since its inception as a result of
the development of its policy and claims administration facility in Fort Worth,
Texas, the expansion of its network of claims administration centers and the SDS
Acquisition. Historical revenues increased to $56.6 million for the year ended
December 31, 1997 from $13.7 million for the year ended December 31, 1996, an
increase of 313%. The Company's strategy is to become the leading provider of
policy and claims administration solutions to the P&C insurance industry by
offering a comprehensive choice of solutions, penetrating new markets, enhancing
product capabilities, generating recurring revenues and pursuing strategic
acquisitions. The Company's customers generally are small to mid-size insurance
companies with annual direct written premiums of $10 million to $300 million and
include Atlantic Mutual Insurance Co., Clarendon National Insurance Company,
Firemen's Fund Insurance Company, Grinnell Mutual Reinsurance Company, Interco,
Inc., Nationwide Mutual Insurance Co.-Western Direct Operations, Zurich
Insurance Company, and Millers Mutual and affiliated companies.

The Company's principal executive office is located at 300 Burnett Street,
Fort Worth, Texas 76102, and its telephone number is (817) 348-3999.

THE OFFERING

Common Stock offered by the Company....... 1,500,000 Shares

Common Stock offered by the Selling
Shareholders.............................. 800,000 Shares

Common Stock to be outstanding after this
offering.................................. 11,892,396 Shares(1)

Use of Proceeds........................... For general corporate purposes,
including working capital,
product development and possible
acquisitions. See "Use of
Proceeds."

Nasdaq National Market Symbol............. NSPR
- ---------------

(1) Excludes (a) 2,048,854 shares (2,798,854 shares if the shareholders of the
Company approve a proposed amendment to the Stock Option Plan (as defined
below)) reserved for issuance under the Company's Amended and Restated 1997
Stock Option Plan (the "Stock Option Plan"), pursuant to which options
covering 1,825,667 shares will be outstanding after this offering at a
weighted average exercise price of $9.24 per share, (b) 50,000 shares
reserved for issuance under a nonemployee directors stock option plan (the
"Director Plan"), pursuant to which options covering 7,500 shares will be
outstanding after this offering at an exercise price of $12.00 per share,
and (c) 418,760 shares reserved for issuance under an employee stock
purchase plan (the "Stock Purchase Plan"). The number of shares of Common
Stock to be outstanding after this offering would be 13,182,512 after
giving effect to the issuance of 1,290,116 shares of Common Stock issuable
under outstanding options granted pursuant to the Stock Option Plan and the
Director Plan applying the treasury stock method based on the public
offering price of $31.50 per share.

4
<PAGE> 5

SUMMARY HISTORICAL AND PRO FORMA CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)

The historical information as of December 31, 1997 and for the period April
28, 1995 through December 31, 1995 and the years ended December 31, 1996 and
1997 was derived from the audited financial statements of the Company. The
Company's pro forma condensed financial data are based on assumptions and
adjustments described in the notes to the Pro Forma Condensed Statement of
Operations (Unaudited) and are not necessarily indicative of the results of
operations that may be achieved in the future. The information set forth below
should be read in conjunction with "Selected Financial Data of INSpire,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of INSpire," the Company's Financial Statements and the Company's Pro
Forma Condensed Statement of Operations (Unaudited). The results of operations
presented below are not necessarily indicative of the results of operations that
may be achieved in the future.

<TABLE>
<CAPTION>
PERIOD
APRIL 28, 1995 YEAR ENDED DECEMBER 31,
THROUGH ---------------------------------------
DECEMBER 31, PRO FORMA
1995(1) 1996 1997(2) 1997(2)(3)
-------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 3,907 $ 13,653 $ 56,569 $ 61,981
Operating expenses...................... 5,518 14,430 56,036 60,868
Operating income (loss)................. (1,611) (777) 533 1,113
Net income (loss)....................... (1,262) (515) 1,716 2,032
Net income (loss) per share (basic)..... (0.18) (0.07) 0.21 0.25
Net income (loss) per share (diluted)... $ (0.16) $ (0.07) $ 0.20 $ 0.23
Weighted average shares (basic)......... 7,000,000 7,000,000 8,137,370 8,137,370
Weighted average shares (diluted)....... 7,749,221 7,749,221 8,782,497 8,782,497
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
AS
ACTUAL ADJUSTED(4)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 28,039 $ 72,095
Working capital............................................. 30,375 74,431
Total assets................................................ 65,471 109,527
Current portion of long-term debt........................... 610 610
Long-term debt, excluding current portion................... 373 373
Shareholders' equity........................................ 48,766 92,822
</TABLE>

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

(1) The Company was incorporated April 28, 1995 and commenced operations July
1, 1995.

(2) Includes $3.0 million of purchased research and development expenses
relating to the SDS Acquisition, $3.9 million of deferred compensation
expense relating to the grant of stock options to executive officers and
$1.6 million of other income attributable to the gain on sale of Applied
Quoting Systems, Inc. ("AQS"), a wholly-owned subsidiary of the Company.
Excluding the effect of such one-time items, historical operating expenses,
operating income and net income would have been $49.1 million, $7.5 million
and $5.1 million, respectively, and historical net income per share (basic)
would have been $0.63 and historical net income per share (diluted) would
have been $0.58; and pro forma operating expenses, operating income and net
income would have been $53.9 million, $8.1 million and $5.4 million,
respectively, and pro forma net income per share (basic) would have been
$0.67 and pro forma net income per share (diluted) would have been $0.62.

(3) Unaudited pro forma condensed statement of operations data for the year
ended December 31, 1997 reflects: (i) the acquisition of SDS using the
purchase method of accounting as if the SDS Acquisition, which occurred on
March 12, 1997, had occurred on January 1, 1997 and (ii) the results of
operations of the Company as if the Company had operated on an independent
basis separate from Millers Mutual since January 1, 1997. See the Company's
Pro Forma Condensed Statement of Operations (Unaudited).

5
<PAGE> 6

(4) Adjusted to reflect: (i) the sale by the Company of 1,500,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company, and
(ii) the application by the Company of its estimated net proceeds
therefrom. See "Use of Proceeds."

FORWARD-LOOKING STATEMENTS

All statements other than statements of historical fact included in this
Prospectus, including without limitation statements under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of INSpire" and "Business" regarding the Company's financial
position, business strategy and plans and objectives of management of the
Company for future operations, are forward-looking statements. When used in this
Prospectus, words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of the Company's management as well as assumptions made
by and information currently available to the Company's management. Actual
results could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, such as those disclosed under "Risk
Factors," including but not limited to difficulties associated with growth, the
Company's dependence on major customers and limited operating history,
technological change, competitive factors and pricing pressures, product
development risks, changes in legal and regulatory requirements and general
economic conditions. Such statements reflect the current views of the Company's
management with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the operations, results of
operations, growth strategy and liquidity of the Company. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by this
paragraph.

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RISK FACTORS

The following factors, which may affect the Company's current position and
future prospects, should be considered carefully in addition to the other
information contained in this Prospectus before purchasing the Common Stock
offered hereby.

ABILITY TO GROW AND EXPAND SERVICES

The Company has grown rapidly since its formation. The Company's growth
strategy depends on its ability to increase its share of the policy and claims
administration market and expand sales of its software and software services
through the enhancement of existing products, development of new services and
products and the marketing of its services and products. There can be no
assurance that the Company will have the financial, managerial, administrative,
marketing or other resources necessary to achieve these objectives.

The success of the Company depends in large part on its ability to attract
and retain highly-skilled managerial, sales and marketing personnel. In
addition, the Company believes it will need to hire additional technical
personnel to enhance and develop its services and products. Competition for such
personnel is intense, and should the Company be unable to hire the necessary
personnel, the development and sale of new or enhanced services and products
would likely be delayed or prevented. There can be no assurance that the Company
will be able to attract, integrate and retain skilled personnel, manage its
infrastructure or overcome other difficulties associated with growth. If the
Company were to encounter difficulties in implementing the expansion or
development of its services and products, or in attracting, integrating and
retaining its personnel, such difficulties could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- The INSpire Strategy" and "Management."

DEPENDENCE ON MAJOR CUSTOMERS

The Company derives a substantial portion of its revenues from outsourcing
services provided to a few large customers, including Millers Mutual and its
subsidiary, The Millers Casualty Insurance Company ("Millers Casualty," and
collectively with Millers Mutual, the "Millers Group"), Clarendon National
Insurance Company ("Clarendon"), and Interco, Inc. ("Interco"). The terms of the
contracts with the Millers Group expire in 2000 and automatically renew for
successive one-year periods if neither party terminates them. The Company
provides services to Clarendon through contracts with various subsidiaries of
E.W. Blanch Holdings Company, Inc. (collectively, "Blanch"), each of which is a
managing general agent of Clarendon. The Blanch contracts expire in 1999 and
automatically renew for an additional three years if neither party terminates
them. Blanch may terminate these contracts at any time without cause upon
payment of a specified termination fee. These contracts will also terminate if
the contracts between Blanch and Clarendon are terminated for any reason other
than a breach by Blanch. Pursuant to a contract with HOW Insurance Company, Home
Warranty Corporation and Home Owners Warranty Corporation (collectively, "HOW"),
the Company provides services to Interco, which administers such contract on
behalf of the State Corporation Commission of the Commonwealth of Virginia (the
"Virginia Commission"), which is a receiver of and acts on behalf of HOW. The
Virginia Commission may terminate this contract at any time without cause upon
the payment of a specified termination fee. The Millers Group, Clarendon, and
Interco accounted for approximately 32%, 16% and 7%, respectively, of the
Company's historical revenues in 1997 and 29%, 14% and 6%, respectively, of the
Company's pro forma revenues in 1997. The Millers Group, Clarendon and Interco
accounted for approximately 68%, 8% and 21%, respectively, of the Company's
historical revenues in 1996. Any loss of or material decrease in the business
from any of these customers could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Customers."

TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT RISKS

The markets in which the Company competes are increasingly characterized by
rapid technological change. The introduction of competing services or products
incorporating new technologies could render some or all of the Company's
services and products obsolete or unmarketable. The Company believes that its
future

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success depends on its ability to enhance its services and develop new products
that address the increasingly sophisticated needs of its customers. As a result,
the Company has expended substantial resources for the enhancement of its
services and for product development and intends to continue to do so. The
development of new or enhanced services or products results in expenditures and
capital costs that may not be recovered if the service or product is
unsuccessful. Development projects can be lengthy and subject to changing market
requirements and unforeseen costs and delays. The failure of the Company to
develop and introduce new or enhanced services or products in a timely and
cost-effective manner could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Product Development."

COMPETITION

The markets for policy and claims administration services and products are
highly competitive. The Company competes in the following markets serving the
P&C insurance industry: (i) outsourcing of policy administration, (ii)
outsourcing of claims administration, (iii) outsourcing of IT services and (iv)
software and software services.

The policy administration and IT services outsourcing markets are dominated
by a few large companies, including Policy Management Systems Corporation
("PMSC"). The Company competes for these outsourcing customers on the basis of
customer service, performance, product features and price. The claims
administration outsourcing market is highly fragmented, with competition from a
large number of claims administration companies of varying size as well as
independent contractors. Competition in the claims administration outsourcing
market is principally price driven. Two of the larger competitors in this market
are Lindsey Morden Claim Services Inc. and Crawford & Company, Inc. The Company
competes for software customers on the basis of customer service, performance,
product features, ability to tailor products and services to specific customer
requirements, timely delivery and price. Competitors include PMSC, Computer
Sciences Corporation, The Freedom Group, Inc. and The Wheatley Group, Ltd.

The Company believes, however, that its most significant competition for
outsourcing services and software sales comes from policy and claims
administration and information systems development performed in-house by
insurance companies. Insurers that fulfill some or all of their policy and
claims administration needs in-house typically have made a significant
investment in their information processing systems and may be less likely to
utilize the Company's services. In addition, insurance company personnel have a
vested interest in maintaining these responsibilities in-house.

Many of the Company's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company, including name recognition with current and potential customers. As
a result, these competitors may devote more resources to the development,
promotion and sale of their services or products than the Company and respond
more quickly to emerging technologies and changes in customer requirements. In
addition, current and potential competitors may establish cooperative
relationships among themselves or with third parties to increase the ability of
their services and products to address customer needs. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. There can be no assurance that the Company will be
able to compete successfully against current and future competitors, or that
competitive pressure faced by the Company will not have a material adverse
effect on its business, financial condition and results of operations. See
"Business -- Competition."

BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS

The Company expects to use the net proceeds from this offering for working
capital and other general corporate purposes, including possible acquisitions.
The Company's management will have broad discretion to allocate the net proceeds
of this offering, and the amounts actually expended for specific purposes may
vary significantly depending on a number of factors, including the amount of
future revenues, the amount of cash generated or used by the Company's
operations and the availability of suitable acquisitions. Shareholders of the
Company will not have the opportunity to review or vote upon any potential
acquisition. See "Use of Proceeds."
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ACQUISITION RISKS

The Company completed the SDS Acquisition on March 12, 1997 and intends to
pursue acquisitions of other complementary businesses. There can be no
assurance, however, that the Company will be able to completely integrate the
operations of SDS within its own operations. Similarly, there can be no
assurance that the Company will be able to consummate or successfully integrate
future acquisitions. Acquisitions involve significant risks, including: (i) the
diversion of management's time and attention to the negotiation of the
acquisition and to the assimilation of the businesses acquired, (ii) the need to
modify financial and other systems and add management resources, (iii) the
potential liabilities of the acquired business, (iv) unforeseen difficulties in
the acquired operations, (v) the possible adverse short-term effects on the
Company's results of operations and (vi) the financial reporting effects of the
amortization of goodwill and other intangible assets. Furthermore, there can be
no assurance that SDS, or any business acquired in the future, will achieve
acceptable levels of revenue and profitability or otherwise perform as expected.
Currently, the Company has no arrangements or understandings with any party with
respect to any future acquisition. The Company, however, continues to monitor
potential acquisition opportunities. See "SDS Acquisition" and "Business -- The
INSpire Strategy."

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; VOLATILITY OF TRADING PRICE

The Company may experience significant quarter-to-quarter fluctuations in
its results of operations. Quarterly results of operations may fluctuate as a
result of a number of factors, including the introduction of new or enhanced
services and products by the Company or its competitors, customer acceptance or
rejection of new services and products, product development expenses, the timing
of large scale catastrophes, the volume of usage of the Company's services and
products, competitive conditions in its industry, general economic conditions
and the level of selling, general and administrative expenses. Many of these
factors are beyond the Company's control.

The sales cycles for the Company's services and products are lengthy
(generally between three and twelve months for outsourcing services and six and
twelve months for software and software services) and subject to a number of
factors beyond the Company's control. Customer decisions to enter into new
license agreements may be significantly affected by their decisions to replace
current systems. In addition, demand for the Company's claims administration
services fluctuates greatly depending on the concentration of large scale
catastrophes, such as hurricanes. For these and other reasons, the revenues of
the Company are difficult to forecast, and the Company believes that
period-to-period comparisons of results of operations are not necessarily
meaningful or indicative of the results that the Company may achieve for any
subsequent quarter or fiscal year. Therefore, past operating results should not
be considered a reliable indicator of future performance.

The trading price of the Common Stock could fluctuate widely in response to
variations in the Company's quarterly operating results, changes in earnings
estimates by securities analysts, changes in the Company's business and changes
in general market or economic conditions. In addition, in recent years the stock
market has experienced extreme price and volume fluctuations. These fluctuations
have significantly affected the trading prices of the securities of many
emerging growth companies without regard to their specific operating
performance. Such market fluctuations could have a material adverse effect on
the trading price of the Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of INSpire."

LIMITED OPERATING HISTORY AND NET LOSSES

The Company has a limited operating history in the P&C insurance
outsourcing business and only three significant outsourcing customers, one of
which is Millers Mutual. In addition, the Company recently acquired SDS in March
1997. Although SDS had a significant operating history as a provider of software
and software services to the P&C insurance industry, the Company has very little
history conducting its operations on a consolidated basis. The Company continues
to integrate the SDS operations into the Company's financial, managerial,
administrative and marketing functions. In addition, certain of the Company's
senior management

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personnel recently joined the Company. There can be no assurance that the
Company will be successful in implementing its long-term operating strategy.
Prior to the SDS Acquisition, the Company's operations did not generate net
income for any year. The Company had net losses of $1.3 million for the period
from inception through December 31, 1995 and $515,000 for the year ended
December 31, 1996. The Company had net income of $1.7 million for the year ended
December 31, 1997. There can be no assurance that the Company will be able to
maintain revenue growth or that the Company will not sustain net losses in the
future. See "SDS Acquisition," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of INSpire" and "Management."

CONTROL BY EXISTING SHAREHOLDER; CONFLICTS OF INTEREST

Prior to this offering, Millers Mutual owned approximately 37.7% of the
outstanding shares of Common Stock. After this offering, Millers Mutual will
beneficially own 27.0% of the outstanding shares of Common Stock (26.0% if the
Underwriters' over-allotment option is exercised in full). As the Company's
largest shareholder, Millers Mutual is likely to be able to maintain effective
control of the Company, including the ability to elect a majority of the Board
of Directors, after this offering. The ownership by Millers Mutual of shares of
Common Stock after this offering may discourage or prevent unsolicited mergers,
acquisitions, tender offers, proxy contests or changes of incumbent management,
even when shareholders other than Millers Mutual consider such a transaction or
event to be in their best interest. Accordingly, holders of Common Stock may be
deprived of an opportunity to sell their shares at a premium over the trading
price of the shares.

Until recently, F. George Dunham, III, the Company's President, Chief
Executive Officer and Chairman of the Board, also served as President and Chief
Executive Officer of each of Millers Mutual and Millers Casualty. On June 18,
1997, Mr. Dunham resigned from those positions with Millers Mutual and Millers
Casualty. However, Mr. Dunham serves as Vice Chairman of the Board of Directors
of each of Millers Mutual and Millers Casualty, and his father, Frank G. Dunham,
Jr., serves as Chairman of the Board and Chief Executive Officer of each of
Millers Mutual and Millers Casualty. In addition, the Company will continue to
have a variety of contractual relationships with Millers Mutual and Millers
Casualty, including a benefits administration agreement pursuant to which the
Company provides certain benefits administration services to Millers Mutual and
certain contracts pursuant to which the Company provides policy and claims
administration services to Millers Mutual and Millers Casualty. As the interests
of the Company and the Millers Group will differ, Mr. Dunham will face certain
conflicts of interest. See "Principal and Selling Shareholders" and "Certain
Transactions."

DEPENDENCE ON KEY PERSONNEL

The Company's continued success will depend largely on the efforts and
abilities of its executive officers, including F. George Dunham, III, the
President and Chief Executive Officer of the Company, and certain key technical,
managerial and sales employees. The loss of Mr. Dunham's services, or the
services of any of the Company's other key employees, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has an employment agreement with Mr. Dunham that
terminates in 2000. There can be no assurance that the Company will be
successful in retaining its key personnel. See "Business -- Competition" and "--
Employees" and "Management."

RELIANCE ON INFORMATION PROCESSING SYSTEMS

The Company's outsourcing services depend on its ability to store,
retrieve, process and manage significant databases, and expand and upgrade
periodically its information processing capabilities. The Company's principal
computer equipment and software systems are maintained at the Company's
facilities in Fort Worth, Texas and Sheboygan, Wisconsin. Interruption or loss
of the Company's information processing capabilities through loss of stored
data, breakdown or malfunctioning of computer equipment and software systems,
telecommunications failure or damage caused by fire, tornadoes, lightning,
electrical power outage or other disruption could have a material adverse effect
on the Company's business, financial condition and results of operations.
Although the Company maintains business interruption insurance with an aggregate
limit of $5.0 million per occurrence, and has entered into an agreement with
International Business Machines,
10
<PAGE> 11

Inc. to provide disaster recovery services, if needed, there can be no assurance
that such insurance or services will continue to be available at reasonable
prices, cover all such losses or compensate the Company for the possible loss of
customers occurring during any period that the Company is unable to provide
services. See "Business -- Customer Support and Operations."

DEPENDENCE ON PROPRIETARY RIGHTS AND RISKS OF INFRINGEMENT

The Company regards the technology underlying its services and products as
proprietary. The Company has no registered copyrights or trademarks and relies
primarily on a combination of intellectual property laws, confidentiality
agreements and contractual provisions to protect its proprietary rights. Trade
secret and copyright laws afford the Company limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's software or obtain and use information
that the Company regards as proprietary. Policing unauthorized use of the
Company's software is difficult. There can be no assurance that the obligations
to maintain the confidentiality of the Company's proprietary information
(including software source code) will prevent disclosure of such information or
that the Company's proprietary information will not be independently developed
by the Company's competitors. Litigation may be necessary for the Company to
defend against claims of infringement or protect its intellectual property
rights, which could result in substantial costs to the Company and diversion of
management's efforts. There can be no assurance that the Company would prevail
in any such litigation. The absence of federal or state registrations for its
intellectual property could be detrimental to the Company in any infringement
litigation or other disputes regarding intellectual property. The inability of
the Company to protect its proprietary rights could have a material adverse
effect on the Company's business, financial condition and results of operations.

The Company is unaware of any claim that its software, trademarks or other
proprietary rights infringe the proprietary rights of third parties. There can
be no assurance, however, that third parties will not assert infringement claims
against the Company in the future. Any such claims, with or without merit, could
require the expenditure of significant time and money to defend, require the
Company to enter into royalty and/or license agreements or require the Company
to cease the alleged infringing activities. The failure to obtain such royalty
or license agreements, if required, and the Company's involvement in such
litigation could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, there can be no
assurance that, to the extent the Company relies on licenses of software or
other technology from third parties, the Company will be able to maintain or
renew such licenses. See "Business -- Intellectual Property."

RISKS OF SOFTWARE DEFECTS

The sale and support of software by the Company entails the risks of
product liability and warranty claims, which could be substantial. Software
products may contain errors or defects, especially when first introduced or when
new versions or enhancements are released. Any such defects in the Company's
software products could result in loss of revenues or delay market acceptance of
new products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to product liability or warranty claims. These limitation of
liability provisions, however, may be ineffective because of existing or future
federal, state or local laws or unfavorable judicial decisions.

In February 1997, a lawsuit was filed against SDS by a customer claiming
damages in excess of $1.3 million. The customer alleges that the software sold
to such customer does not meet required specifications. The Company and the
former shareholders of SDS placed $1.5 million of the SDS purchase price in an
escrow account pending resolution of such claim. No assurance can be given with
respect to the outcome of this lawsuit, including whether the amount of any
judgment or settlement will exceed the escrowed funds and require the Company to
pay the amount of the excess. A successful product liability or warranty claim
against the Company could have a material adverse effect on the Company's
business, financial condition and results of operations. See "SDS Acquisition"
and "Business -- Product Development," "-- Intellectual Property" and "-- Legal
Proceedings."

11
<PAGE> 12

YEAR 2000 ISSUES

There is significant uncertainty regarding the impact of Year 2000 issues,
which arise when computer systems do not properly recognize date sensitive
information beyond December 31, 1999, thereby generating erroneous data or
failing altogether. The Company believes that the computer equipment and
software used and sold by the Company will function properly with respect to
dates in the Year 2000 and thereafter. However, third parties that have
relationships with the Company, including suppliers, customers and creditors,
may experience significant Year 2000 issues. These issues may have a serious
adverse impact on the operations of such third parties, including a shut-down of
operations for a period of time, which may, in turn, have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, competitors, other software companies and other third parties may
experience significant Year 2000 issues and, as a result, seek to hire the
Company's programmers and other software-related personnel at higher salaries to
address these issues. Loss of certain employees or a significant number of
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of INSpire -- Year
2000 Issues."

GOVERNMENT REGULATION

The P&C insurance industry is subject to extensive regulation by state
governments. Certain aspects of the Company's business are affected by such
regulations, requiring the Company to periodically update its software to
reflect changes in regulations. In addition, changes in regulations that
adversely affect the Company's existing and potential customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company's services and products are not
directly subject to insurance regulations in the states where the Company
currently provides them, the Company's outsourcing services may be subject to
insurance regulations in states where the Company may do business in the future.
Such regulations could require the Company to obtain a license as a managing
general agent or third party administrator. No assurance can be given with
respect to the extent to which the Company may become subject to regulation in
the future, the ability of the Company to comply with any such regulation or the
cost of compliance. See "Business."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the open market
after this offering could adversely affect the trading price of the Common
Stock. Immediately after this offering Millers Mutual will hold 3,216,250
shares, representing 27.0% of the outstanding shares of Common Stock (26.0% if
the Underwriters' over-allotment option is exercised in full). A decision by
Millers Mutual to sell shares of Common Stock could adversely affect the trading
price of the Common Stock. Upon consummation of this offering, the Company will
have 11,892,396 shares of Common Stock outstanding (12,192,396 shares if the
Underwriters' over-allotment option is exercised in full). Of these shares, all
shares sold in this offering (other than those sold to affiliates of the
Company) will be freely tradeable. Of the remaining 9,592,396 shares, 6,376,146
shares are freely transferable and 3,216,250 shares may not be sold unless the
sale is registered under the Securities Act, or an exemption from registration
is available, including the exemption provided by Rule 144 under the Securities
Act. Also, the shares of Common Stock held by the Selling Shareholders and
certain directors and officers of the Company are subject to lock-up agreements
with the Underwriters. Such lock-up agreements restrict transfers of such shares
without the written consent of Raymond James & Associates, Inc. until 90 days
after the date of this Prospectus, except that the Company may issue shares of
Common Stock under the Stock Purchase Plan and upon exercise of options
outstanding under the Stock Option Plan and the Director Plan and may grant
additional options under the Stock Option Plan and the Director Plan, provided
that without the prior written consent of Raymond James & Associates, Inc., such
additional options shall not be exercisable during such period. After such
90-day period expires, all 3,216,250 unregistered shares held by Millers Mutual
will be eligible for sale pursuant to Rule 144 under the Securities Act. In
addition, upon consummation of this offering, 2,048,854 shares of Common Stock
will be reserved for issuance under the Stock Option Plan, 1,825,667 of which
will be issuable upon exercise of outstanding options, including options to
purchase 654,938 shares exercisable immediately after this offering or that will

12
<PAGE> 13

become exercisable within 90 days after this offering, and 50,000 shares of
Common Stock will be reserved for issuance under the Director Plan, 7,500 of
which will be issuable upon exercise of options that will be outstanding and
fully vested immediately after this offering. Such shares issuable upon the
exercise of options within 90 days after this offering are subject to the
lock-up agreements to the extent described above. Also upon consummation of this
offering, an additional 418,760 shares will be reserved for issuance to
employees of the Company upon their purchase pursuant to the Stock Purchase
Plan. The Company has registered on Form S-8 under the Securities Act the
offering and sale of Common Stock issuable under the Stock Option Plan, the
Director Plan and the Stock Purchase Plan. An amendment to the Stock Option Plan
to increase the maximum number of shares of Common Stock issuable upon exercise
of options from 2,250,000 to 3,000,000 shares has been approved by the Board of
Directors and will be submitted to the shareholders of the Company for approval
at the annual meeting of shareholders to be held April 21, 1998. See
"Management -- Stock Option Plan," "-- Director Stock Option Plan," and
"-- Employee Stock Purchase Plan."

ANTI-TAKEOVER CONSIDERATIONS

Certain provisions of the Company's Restated Articles of Incorporation (the
"Restated Articles"), the Company's Bylaws (the "Bylaws") and the Texas Business
Corporation Act ("TBCA") may have the effect of discouraging unsolicited
proposals for acquisition of the Company. The Restated Articles and the Bylaws
divide the Board of Directors into three classes serving staggered three-year
terms. Pursuant to the Restated Articles, shares of preferred stock may be
issued by the Company in the future without shareholder approval and upon such
terms and conditions, and having such rights, privileges and preferences, as the
Board of Directors may determine. The rights of the holders of Common Stock will
be subject to, and may be adversely affected by, any such preferred stock. The
issuance of preferred stock, while providing desirable flexibility in connection
with possible acquisitions, financings and other corporate transactions, could
have the effect of discouraging a third party's acquisition of a majority of the
Common Stock. The Company has no present plans to issue any shares of preferred
stock. In addition, the Company has adopted a shareholder rights plan that could
further discourage attempts to acquire control of the Company. Finally, the TBCA
restricts certain business combinations with any "affiliated shareholder," as
defined therein and provides that directors serving on staggered boards of
directors may be removed only for cause unless the articles of incorporation
otherwise provide. The Company's Restated Articles do not otherwise so provide.
See "Description of Capital Stock -- Anti-Takeover Considerations" and
"-- Preferred Stock."

POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES

After this offering, the Company will have an aggregate of approximately
35,589,990 shares of Common Stock authorized but unissued and not reserved for
specific purposes. All of such shares may be issued without any action or
approval by the Company's shareholders. Any shares issued would further dilute
the percentage ownership of the Company held by the investors in this offering.
After this offering, reserved shares of Common Stock will include (i) 2,048,854
shares of Common Stock under the Stock Option Plan, (ii) 50,000 shares of Common
Stock under the Director Plan, and (iii) 418,760 shares of Common Stock under
the Stock Purchase Plan. In addition, an amendment to the Stock Option Plan to
increase the maximum number of shares of Common Stock issuable upon exercise of
options from 2,250,000 to 3,000,000 shares has been approved by the Board of
Directors and will be submitted to the shareholders of the Company for approval
at the annual meeting of shareholders to be held April 21, 1998. The terms on
which the Company could obtain additional capital as a result of the Stock
Option Plan, Director Plan and Stock Purchase Plan may be adversely affected
because of such potential dilution and because the holders of the options issued
under the Stock Option Plan and the Director Plan might be expected to exercise
them if the trading price of the Common Stock exceeds their exercise prices. See
"Management -- Stock Option Plan," "-- Director Stock Option Plan," "-- Stock
Purchase Plan" and "Description of Capital Stock."

LIMITATIONS ON PERSONAL LIABILITY OF DIRECTORS

The Restated Articles and Bylaws contain provisions that reduce the
potential personal liability of directors for certain monetary damages and
provide for indemnity of directors and other persons. The

13
<PAGE> 14

Company is unaware of any pending or threatened litigation against the Company
or its directors that would result in any liability for which a director would
seek indemnification or similar protection. The Company also maintains officers
and directors liability insurance and has entered into indemnification
agreements with certain of its officers and directors. The indemnification
agreements provide for reimbursement for all direct and indirect costs of any
type or nature whatsoever (including attorneys' fees and related disbursements)
reasonably incurred in connection with either the investigation, defense or
appeal of a covered legal proceeding, including amounts paid in settlement by or
on behalf of an indemnitee thereunder. See "Management -- Employment and
Indemnification Agreements" and "Description of Capital Stock -- Special
Provisions of the Restated Articles, the Bylaws and Texas Law."

NO DIVIDENDS

The Company has never paid cash dividends on its stock and has no plans to
do so in the foreseeable future. The Company intends to retain earnings, if any,
to fund growth. See "Dividend Policy."

SDS ACQUISITION

On March 12, 1997, the Company acquired all of the capital stock of
Strategic Data Systems, Inc., a Wisconsin corporation, for $18.0 million in
cash. Of this amount, $2.5 million remains in escrow to secure certain
indemnification obligations of the former SDS shareholders. The SDS Acquisition
was financed with a $7.5 million loan from NationsBank of Texas, N.A.
("NationsBank") and a capital contribution of $10.5 million from Millers Mutual.
The Company repaid the loan from NationsBank in September 1997 with a portion of
its net proceeds from the Company's initial public offering. SDS was merged into
the Company in July 1997. See "Business -- Legal Proceedings."

SDS began operations in 1981 as a provider of software and software
services to the P&C insurance industry. SDS's revenues and net income were $23.7
million and $698,000, respectively, in 1996 and $5.4 million and $231,000,
respectively, for the period from January 1, 1997 through March 11, 1997. SDS's
founder and Chief Executive Officer, Stuart H. Warrington, and its President,
Robert K. Agazzi, became executive officers of the Company. See
"Management -- Executive Officers and Directors" and "-- Consulting Agreement."

The software acquired by the Company through the SDS Acquisition includes
policy and claims administration systems, as well as software that increases the
productivity of insurers by automating functions such as workflow management,
underwriting rules and guidelines, document production and rating algorithms.
Through the SDS Acquisition, the Company gained the ability to provide
additional software services, including installation, customization, conversion
and maintenance of the SDS systems to meet customer specifications.

Prior to the SDS Acquisition, the Company's operations were focused solely
on providing outsourcing services to the P&C insurance industry. Millers Mutual
has utilized SDS software since 1993. The SDS Acquisition allows the Company to
offer a comprehensive choice of solutions, including software systems and
services, to satisfy the needs of customers that choose to retain some or all of
their processing capabilities in-house. These software systems and services also
enhance the quality of the Company's outsourcing services. The Company believes
that utilization of the experienced sales and marketing personnel of SDS and
access to the SDS customer base will facilitate cross-selling opportunities and
expansion of the Company's outsourcing services.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered by the Company will be approximately $44.1 million
(approximately $52.9 million if the Underwriters' over-allotment option is
exercised in full) after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company. The Company intends to use
the net proceeds for general corporate purposes, including working capital,
product development and possible acquisitions. The Company

14
<PAGE> 15

has no present commitments or understandings with respect to the acquisition of
any business, although the Company continues to monitor potential acquisition
opportunities. Pending such uses, the Company intends to invest the net proceeds
in short-term, investment grade, interest bearing securities.

The Company will not receive any proceeds from the sale of the shares of
Common Stock offered by the Selling Shareholders. The net proceeds to be
received by the Selling Shareholders from the sale of the 800,000 shares offered
by the Selling Shareholders will be approximately $23.5 million after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Selling Shareholders. See "Principal and Selling Shareholders."

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on the Common
Stock. The Company intends to retain any future earnings to fund growth and does
not anticipate paying any cash dividends in the foreseeable future. Under the
terms of a bank credit facility with NationsBank (the "NationsBank Facility"),
the Company cannot declare or pay any dividends or return any capital to its
shareholders or authorize or make any other distribution, payment or delivery of
property or cash to its shareholders as such without the prior written consent
of NationsBank.

PRICE RANGE OF COMMON STOCK

The Common Stock is listed on the Nasdaq National Market under the trading
symbol NSPR. The following table sets forth the high and low closing sales price
as reported by the Nasdaq National Market for the Common Stock for the periods
indicated. On August 22, 1997, the Company completed an initial public offering
of the Common Stock at an initial price to public of $12.00 per share.

<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------- -------
<S> <C> <C>
September 30, 1997.......................................... $18.750 $16.625
December 31, 1997........................................... $20.875 $17.250
March 31, 1998 (through March 26, 1998)..................... $34.250 $19.750
</TABLE>

The closing sale price on March 26, 1998 was $32.25 per share. As of March
2, 1998, there were approximately 13 record holders and 2,800 beneficial holders
of the Common Stock.

15
<PAGE> 16

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of December 31, 1997, and as adjusted to reflect: (i) the sale by the
Company of 1,500,000 shares of Common Stock offered hereby, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company, and (ii) the application of the estimated net proceeds
therefrom.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 610 $ 610
Long-term debt, excluding current portion................... 373 373
Shareholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $0.01 par value; 50,000,000 shares
authorized, 10,191,250 shares issued and outstanding
and 11,691,250 shares issued and outstanding as
adjusted(1)(2)......................................... 102 117
Additional paid-in capital................................ 48,725 92,766
Accumulated deficit....................................... (61) (61)
------- -------
Total shareholders' equity............................. 48,766 92,822
------- -------
Total capitalization.............................. $49,749 $93,805
======= =======
</TABLE>

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

(1) Excludes as of December 31, 1997, (a) 2,250,000 shares reserved for
issuance under the Stock Option Plan, pursuant to which options covering
1,991,479 shares are outstanding at a weighted average exercise price of
$7.57 per share, (b) 50,000 shares reserved for issuance under the Director
Plan, pursuant to which options covering 7,500 shares are outstanding at an
exercise price of $12.00 per share, and (c) 418,760 shares reserved for
issuance under the Stock Purchase Plan.

(2) Excludes immediately following this offering, (a) 2,048,854 shares reserved
for issuance under the Stock Option Plan, pursuant to which options
covering 1,825,667 shares will be outstanding at a weighted average
exercise price of $9.24 per share, (b) 50,000 shares reserved for issuance
under the Director Plan, pursuant to which options covering 7,500 shares
will be outstanding at an exercise price of $12.00 per share, and (c)
418,760 shares reserved for issuance under the Stock Purchase Plan.

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<PAGE> 17

SELECTED FINANCIAL DATA OF INSPIRE
(IN THOUSANDS, EXCEPT SHARE DATA)

The selected financial data of the Company presented below as of December
31, 1995, 1996 and 1997, and for the period April 28, 1995 through December 31,
1995 and the years ended December 31, 1996 and 1997 have been derived from the
audited financial statements of the Company. The selected financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of INSpire," the Company's Financial
Statements and the Company's Pro Forma Condensed Statement of Operations
(Unaudited). The results of operations presented below are not necessarily
indicative of the results of operations that may be achieved in the future.

<TABLE>
<CAPTION>
PERIOD
APRIL 28,
1995 YEAR ENDED DECEMBER 31,
THROUGH --------------------------------------
DECEMBER 31, PRO FORMA
1995(1) 1996 1997(2) 1997(2)(3)
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Outsourcing services................. $ 3,907 $ 13,653 $ 32,458 $ 32,458
Software and software services....... -- -- 21,101 25,941
Other................................ -- -- 3,010 3,582
---------- ---------- ---------- ----------
Total revenues............... 3,907 13,653 56,569 61,981
---------- ---------- ---------- ----------
Expenses:
Cost of outsourcing services......... 4,885 10,543 20,798 20,798
Cost of software and software
services.......................... -- -- 10,681 15,041
Cost of other revenues............... -- -- 2,413 2,797
Selling, general and
administrative.................... -- -- 8,714 9,060
Research and development............. -- -- 1,190 1,455
Depreciation and amortization........ 33 787 4,001 4,588
Purchased research and development... -- -- 3,000 3,000
Deferred compensation................ -- -- 3,949 3,949
Management fees to shareholder....... 600 3,100 1,290 180
---------- ---------- ---------- ----------
Total expenses............... 5,518 14,430 56,036 60,868
---------- ---------- ---------- ----------
Operating income (loss)................ (1,611) (777) 533 1,113
Other income (expense)................. -- (2) 1,984 1,924
---------- ---------- ---------- ----------
Income (loss) before income tax........ (1,611) (779) 2,517 3,037
Income tax benefit (expense)........... 349 264 (801) (1,005)
---------- ---------- ---------- ----------
Net income (loss)...................... $ (1,262) $ (515) $ 1,716 $ 2,032
========== ========== ========== ==========
Net income (loss) per share (basic).... $ (0.18) $ (0.07) $ 0.21 $ 0.25
========== ========== ========== ==========
Net income (loss) per share
(diluted)............................ $ (0.16) $ (0.07) $ 0.20 $ 0.23
========== ========== ========== ==========
Weighted average shares (basic)........ 7,000,000 7,000,000 8,137,370 8,137,370
Weighted average shares (diluted)...... 7,749,221 7,749,221 8,782,497 8,782,497
</TABLE>

See notes on following page.

17
<PAGE> 18

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, 1997
----------------- ----------------------
AS
1995 1996 ACTUAL ADJUSTED(4)
------- ------- ------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 22 $ 363 $28,039 $ 72,095
Working capital.................................... (1,072) (2,550) 30,375 74,431
Total assets....................................... 2,817 5,232 65,471 109,527
Current portion of long-term debt.................. -- 2,500 610 610
Due to shareholder................................. 1,569 996 -- --
Long-term debt, excluding current portion.......... -- -- 373 373
Shareholders' equity............................... 1,121 606 48,766 92,822
</TABLE>

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

(1) The Company was incorporated April 28, 1995 and commenced operations July
1, 1995.

(2) Represents $3.0 million of purchased research and development expenses
relating to the SDS Acquisition, $3.9 million of deferred compensation
expense relating to the grant of stock options to executive officers and
$1.6 million of other income attributable to the gain on sale of AQS.
Excluding the effect of such one-time items, historical operating expenses,
operating income and net income would have been $49.1 million, $7.5 million
and $5.1 million, respectively, and historical net income per share (basic)
would have been $0.63 and historical net income per share (diluted) would
have been $0.58; and pro forma operating expenses, operating income and net
income would have been $53.9 million, $8.1 million and $5.4 million,
respectively, and pro forma net income per share (basic) would have been
$0.67 and pro forma net income per share (diluted) would have been $0.62.

18
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF INSPIRE

OVERVIEW

The Company's revenues are derived principally from (i) outsourcing
services and (ii) software and software services. Revenues from outsourcing
services are derived from policy administration services, claims administration
services and IT services. Revenues from software and software services are
derived from contracts that grant customers a license to use the Company's
software products and contracts that provide for installation, customization,
enhancement, conversion and maintenance services. Other revenues principally
represent hardware sold in connection with software installations.

Revenues from outsourcing services are recognized as services are rendered.
The Company is typically paid a percentage of premiums for policy administration
services, a percentage of premiums or claims paid for claims administration
services and a percentage of premiums subject to a minimum fee for IT services.
Outsourcing services contracts generally are for terms of two to five years. Due
to the ongoing nature of these services and the length of the terms of the
service contracts, outsourcing services generate recurring revenues. Initial
installations of software systems generally include a one-time license fee and a
contract for the installation and customization of the system to meet the
customer's specifications, which the Company bills at an hourly rate. Amounts
charged for the initial license and the installation and customization of
systems are recognized as revenue during the installation period in proportion
to the hours expended for installation compared to the total hours projected for
installation. In other instances, revenues are recognized based on performance
milestones specified in the contract. The Company recognizes the annual fee
charged for maintenance of the customer's system as revenue as hours are
expended over the maintenance contract period. Revenues from computer hardware
and equipment sales, included in other revenues, are recognized when the Company
receives notification that the equipment has been shipped by the manufacturer
and title has passed to the customer. Changes in estimates of percentage of
completion or losses, if any, associated with outsourcing or software services
are recognized in the period in which they are determined. Unearned revenues
consist of billings to customers in advance of revenues recognized on such
services. Unbilled receivables consist of revenues recognized in advance of
billings due to timing differences related to billing schedules specified in
contracts.

The Company incurs research and development costs that relate primarily to
the development of new products and major enhancements to existing services and
products. Research and development costs are comprised primarily of salaries.
The Company expenses or capitalizes, as appropriate, these research and
development costs in accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." All research and development costs incurred prior to the
time management believes a project has reached "technological feasibility" are
expensed. Software production costs incurred subsequent to reaching
technological feasibility are capitalized, if material, and reported at the
lower of unamortized cost or net realizable value. Capitalized costs are
amortized over the expected service life of the related software, generally five
to seven years, using the straight-line method. The cost and related accumulated
amortization of projects are written off as they become fully amortized.

Prior to the Company's initial public offering, Millers Mutual, the Company
and the other subsidiaries of Millers Mutual were parties to a Consolidated
Federal Income Tax Allocation Agreement, effective as of January 1, 1994 (as
amended, the "Tax Allocation Agreement"). Under the Tax Allocation Agreement,
Millers Mutual was required to pay the Company an amount equal to any decrease
in the income taxes otherwise payable by the Millers Mutual consolidated tax
group attributable to any net losses of the Company. Conversely, the Tax
Allocation Agreement required the Company to pay to Millers Mutual the amount of
any income taxes that the Company would have paid if it had not been included in
the Millers Mutual consolidated tax group. Effective August 23, 1997, the Tax
Allocation Agreement was terminated as it applied to the Company. The agreement
to terminate the Company's participation in the Tax Allocation Agreement
provides that the Company will indemnify the other members of the Millers Mutual
consolidated tax group for any of the group's income taxes and related expenses
attributable to the Company, and Millers Mutual will
19
<PAGE> 20

indemnify the Company for any income taxes and related expenses attributable to
any members of the consolidated tax group other than the Company.

RECENT DEVELOPMENTS

Purchase of SDS. On March 12, 1997 the Company acquired SDS for $18.0
million. The results of operations of SDS since March 12, 1997 are included in
the results of operations of the Company. See "SDS Acquisition."

Sale of Subsidiary. On September 15, 1997, the Company sold AQS for $2.5
million to Samuel J. Fleager, the former principal shareholder of AQS. The sale
resulted in a gain of $1.6 million, which is included in other income in the
Company's consolidated statements of operations for the year ended December 31,
1997. AQS sells the Applied Quoting Systems Module ("AQSM"), a DOS-based
commercial lines policy administration system. AQSM automates commercial policy
rating, issuance, renewals and mid-term policy changes. AQS's total revenues
were $3.4 million for the period January 1, 1997 through September 15, 1997 and
$4.1 million for the year ended December 31, 1996. On October 29, 1997, the
Company entered into a five-year agreement with Cover-All Systems, Inc.
("Cover-All") to license Cover-All's commercial lines rating, policy issue and
forms solutions for use in the Company's software products and services
offerings. The Company calls this new product "ValueRate" and is currently
integrating it with PCA and WPC (as hereinafter defined). See
"Business -- Services and Products."

RESULTS OF OPERATIONS

The following table sets forth, with respect to the Company and for the
periods indicated, the percentage of total revenues represented by certain
revenue, expense and income items:

<TABLE>
<CAPTION>
PERIOD
APRIL 28, 1995 YEAR ENDED DECEMBER 31,
THROUGH ---------------------------
DECEMBER 31, PRO FORMA
1995(1) 1996 1997 1997(2)
-------------- ----- ----- ---------
<S> <C> <C> <C> <C>
Revenues:
Outsourcing services............................. 100.0% 100.0% 57.4% 52.4%
Software and software services................... -- -- 37.3 41.8
Other............................................ -- -- 5.3 5.8
----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Expenses:
Cost of outsourcing services..................... 125.0 77.2 36.8 33.6
Cost of software and software services........... -- -- 18.9 24.3
Cost of other revenues........................... -- -- 4.3 4.5
Selling, general and administrative.............. -- -- 15.4 14.6
Research and development......................... -- -- 2.1 2.3
Depreciation and amortization.................... 0.8 5.8 7.0 7.4
Purchased research and development............... -- -- 5.3 4.8
Deferred compensation............................ -- -- 7.0 6.4
Management fees to shareholder................... 15.4 22.7 2.3 0.3
----- ----- ----- -----
Total expenses........................... 141.2 105.7 99.1 98.2
----- ----- ----- -----
Operating income (loss)............................ (41.2) (5.7) 0.9 1.8
Other income (expense)............................. -- -- 3.5 3.1
----- ----- ----- -----
Income (loss) before income tax.................... (41.2) (5.7) 4.4 4.9
Income tax benefit (expense)....................... 8.9 1.9 (1.4) (1.6)
----- ----- ----- -----
Net income (loss).................................. (32.3)% (3.8)% 3.0% 3.3%
===== ===== ===== =====
</TABLE>

See notes on following page.

20
<PAGE> 21

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

(1) The Company was incorporated April 28, 1995 and commenced operations July 1,
1995.

(2) Unaudited pro forma condensed statement of operations data for the year
ended December 31, 1997 reflects: (i) the acquisition of SDS using the
purchase method of accounting as if the SDS Acquisition, which occurred on
March 12, 1997, had occurred on January 1, 1997 and (ii) the results of
operations of the Company as if the Company had operated on an independent
basis separate from Millers Mutual since January 1, 1997. See the Company's
Pro Forma Condensed Statement of Operations (Unaudited).

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 ON A HISTORICAL BASIS

Revenues. The Company's total revenues were $56.6 million for the year
ended December 31, 1997 compared to $13.7 million for the year ended December
31, 1996, an increase of $42.9 million or 313%. This increase is attributable
primarily to (i) the SDS Acquisition and (ii) revenues from three significant
outsourcing contracts entered into in mid-1996 under which the Company performed
outsourcing services during all of 1997. These three contracts included a claims
administration agreement with HOW and a policy administration agreement and a
claims administration agreement with Blanch whereby services are provided to
Clarendon. See "Business -- Customers."

Cost of Revenues. Total cost of revenues was $33.9 million for the year
ended December 31, 1997 compared to $10.5 million for the year ended December
31, 1996, an increase of $23.4 million or 223%, primarily as a result of (i) the
SDS Acquisition and (ii) the costs associated with the performance of services
under the three significant outsourcing contracts described above. Cost of
revenues as a percentage of total revenues decreased to 60% for the year ended
December 31, 1997 from 77% for the year ended December 31, 1996. This decrease
was primarily a result of economies of scale associated with spreading certain
fixed costs over a larger revenue base and lower personnel and equipment costs
as a percentage of revenues.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including management fees paid to shareholder, were
$10.0 million for the year ended December 31, 1997 compared to $3.1 million for
the year ended December 31, 1996, an increase of $6.9 million or 223%. This
increase was primarily due to (i) the SDS Acquisition and (ii) additional
staffing, office space and computer equipment and software required to expand
the infrastructure to support the Company's growth. Selling, general and
administrative expenses as a percentage of total revenues decreased to 18% for
the year ended December 31, 1997 from 23% for the year ended December 31, 1996.
This decrease was primarily a result of economies of scale associated with
spreading certain fixed costs over a larger revenue base and lower personnel and
equipment costs as a percentage of revenues.

Research and Development. Research and development expense was $1.2 million
for the year ended December 31, 1997, net of capitalized research and
development costs of $819,000. This expense was comprised primarily of
personnel, equipment and occupancy costs related to software development. Prior
to the SDS Acquisition, the Company did not incur any significant research and
development expenses.

Depreciation and Amortization. Depreciation and amortization expense was
$4.0 million for the year ended December 31, 1997 compared to $787,000 for the
year ended December 31, 1996, an increase of $3.2 million or 408%. This increase
is primarily attributable to (i) Millers Mutual's capital contribution of
approximately $1.3 million in depreciable property and equipment to the Company
in January 1997 and (ii) amortization of goodwill recorded in connection with
the SDS Acquisition.

Nonrecurring Expenses. In the purchase price allocation of the SDS
Acquisition, $3.0 million was assigned to in-process research and development.
This amount was charged to operations in March 1997. In addition, $3.9 million
was charged to operations as deferred compensation associated with stock options
granted to executive officers during 1997.

Other Income. Other income for the year ended December 31, 1997 includes a
$1.6 million gain on the sale of AQS. Interest income, attributable primarily to
short-term investments purchased with unused proceeds from the Company's initial
public offering, was $681,000 for the year ended December 31, 1997. During 1996
the Company did not have investments that earned interest income. Interest
expense, attributable

21
<PAGE> 22

primarily to the NationsBank Facility, was approximately $348,000 for the year
ended December 31, 1997. The Company did not have any interest-bearing debt
during 1996.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM INCEPTION
THROUGH DECEMBER 31, 1995 ON A HISTORICAL BASIS

Revenues. The Company's total revenues were $13.7 million for the year
ended December 31, 1996 compared to $3.9 million for the period from inception
through December 31, 1995, an increase of $9.8 million or 251%. This increase is
attributable primarily to (i) the Company conducting twelve months of operations
in 1996 compared to approximately six months in 1995 and (ii) revenues from the
three significant outsourcing contracts entered into during 1996 under which the
Company performed significantly more outsourcing services. These three contracts
included a claims administration agreement with HOW and a policy administration
agreement and a claims administration agreement with Blanch whereby services are
provided to Clarendon.

Cost of Revenues. Cost of revenues was $10.5 million for the year ended
December 31, 1996 compared to $4.9 million for the period from inception through
December 31, 1995, an increase of $5.6 million or 114%. This increase is
attributable primarily to (i) the Company conducting twelve months of operations
in 1996 compared to approximately six months in 1995 and (ii) personnel and
other costs associated with the three significant outsourcing contracts
described above. Cost of revenues as a percentage of total revenues decreased
from 126% for the period from inception through December 31, 1995 to 77% for the
year ended December 31, 1996. This decrease was primarily a result of economies
of scale associated with spreading certain fixed costs over a larger revenue
base and lower personnel costs as a percentage of revenues.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.1 million for the year ended December 31, 1996
compared to $600,000 for the period from inception through December 31, 1995, an
increase of $2.5 million or 417%. This increase is attributable primarily to the
Company conducting twelve months of operations in 1996 compared to approximately
six months in 1995.

Depreciation and Amortization. Depreciation and amortization expense was
$787,000 for the year ended December 31, 1996 compared to $33,000 for the period
from inception through December 31, 1995, an increase of $754,000 or 2,285%.
This increase is primarily attributable to Miller Mutual's capital contribution
of approximately $2.4 million in depreciable property and equipment during the
last six months of 1995 and the Company's purchase of approximately $1.8 million
in depreciable property and equipment during 1996.

22
<PAGE> 23

QUARTERLY RESULTS OF OPERATIONS ON A HISTORICAL BASIS

The following table sets forth certain unaudited historical quarterly
financial data for each of the eight consecutive quarters in fiscal 1996 and
1997. This information is derived from unaudited financial statements that
include, in the opinion of the Company, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation when read in
conjunction with the financial statements of the Company and notes thereto
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1997(1)
--------- --------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Outsourcing services....... $ 2,308 $ 3,030 $ 3,837 $ 4,478 $ 6,737
Software and software
services................. -- -- -- -- 1,079
Other...................... -- -- -- -- 375
--------- --------- --------- --------- ---------
Total revenues....... 2,308 3,030 3,837 4,478 8,191
--------- --------- --------- --------- ---------
Expenses:
Cost of outsourcing
services................. 1,877 2,325 2,958 3,383 4,891
Cost of software and
software services........ -- -- -- -- 740
Cost of other revenues..... -- -- -- -- 182
Selling, general and
administrative........... -- -- -- -- 259
Research and development... -- -- -- -- 126
Depreciation and
amortization............. 173 177 210 227 535
Purchased research and
development.............. -- -- -- -- 3,000(2)
Deferred compensation...... -- -- -- -- 3,065(3)
Management fees to
shareholder.............. 600 600 600 1,300 626
--------- --------- --------- --------- ---------
Total expenses....... 2,650 3,102 3,768 4,910 13,424
--------- --------- --------- --------- ---------
Operating income (loss)...... (342) (72) 69 (432) (5,233)
Other income (expense)....... -- -- -- (2) (51)
--------- --------- --------- --------- ---------
Income (loss) before income
tax........................ (342) (72) 69 (434) (5,284)
Income tax benefit
(expense).................. 71 70 (14) 137 1,789
--------- --------- --------- --------- ---------
Net income (loss)............ $ (271) $ (2) $ 55 $ (297) $ (3,495)
========= ========= ========= ========= =========
Net income (loss) per share
(basic).................... $ (0.04) $ -- $ 0.01 $ (0.04) $ (0.50)
========= ========= ========= ========= =========
Net income (loss) per share
(diluted).................. $ (0.03) $ -- $ 0.01 $ (0.04) $ (0.45)
========= ========= ========= ========= =========
Weighted average shares
(basic).................... 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000
Weighted average shares
(diluted).................. 7,749,221 7,749,221 7,749,221 7,749,221 7,749,221

<CAPTION>
THREE MONTHS ENDED
----------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997
--------- ------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Revenues:
Outsourcing services....... $ 7,658 $ 8,178 $ 9,885
Software and software
services................. 6,482 6,710 6,830
Other...................... 928 294 1,413
--------- --------- ----------
Total revenues....... 15,068 15,182 18,128
--------- --------- ----------
Expenses:
Cost of outsourcing
services................. 5,207 5,066 5,634
Cost of software and
software services........ 2,182 4,288 3,471
Cost of other revenues..... 514 341 1,376
Selling, general and
administrative........... 3,169 2,180 3,106
Research and development... 554 211 299
Depreciation and
amortization............. 1,160 1,122 1,184
Purchased research and
development.............. -- -- --
Deferred compensation...... 884(3) -- --
Management fees to
shareholder.............. 574 45 45
--------- --------- ----------
Total expenses....... 14,244 13,253 15,115
--------- --------- ----------
Operating income (loss)...... 824 1,929 3,013
Other income (expense)....... (108) 1,731(4) 412
--------- --------- ----------
Income (loss) before income
tax........................ 716 3,660 3,425
Income tax benefit
(expense).................. (77) (1,204) (1,309)
--------- --------- ----------
Net income (loss)............ $ 639 $ 2,456 $ 2,116
========= ========= ==========
Net income (loss) per share
(basic).................... $ 0.09 $ 0.29 $ 0.21
========= ========= ==========
Net income (loss) per share
(diluted).................. $ 0.08 $ 0.27 $ 0.19
========= ========= ==========
Weighted average shares
(basic).................... 7,000,000 8,332,000 10,191,250
Weighted average shares
(diluted).................. 7,749,221 9,260,668 11,381,670
</TABLE>

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

(1) The Company acquired SDS on March 12, 1997. See "SDS Acquisition."

(2) Represents $3.0 million of purchased research and development expenses
relating to the SDS Acquisition.

(3) Represents $3.9 million of deferred compensation expense relating to the
grant of stock options to executive officers.

(4) Primarily attributable to the gain on sale of AQS of $1.6 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of INSpire -- Recent Developments."

23
<PAGE> 24

The following table sets forth, for the periods indicated, the percentage
of net sales represented by the indicated items:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1997(1) 1997 1997 1997
--------- -------- ------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Outsourcing
services............ 100.0% 100.0% 100.0% 100.0% 82.2% 50.8% 53.9% 54.5%
Software and software
services............ -- -- -- -- 13.2 43.0 44.2 37.7
Other................. -- -- -- -- 4.6 6.2 1.9 7.8
----- ----- ----- ----- ------ ----- ----- -----
Total
revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ------ ----- ----- -----
Expenses:
Cost of outsourcing
services............ 81.3 76.7 77.1 75.5 59.7 34.5 33.4 31.1
Cost of software and
software services... -- -- -- -- 9.0 14.5 28.2 19.2
Cost of other
services............ -- -- -- -- 2.2 3.4 2.2 7.6
Selling, general and
administrative...... -- -- -- -- 3.3 21.0 14.4 17.1
Research and
development......... -- -- -- -- 1.5 3.7 1.4 1.7
Depreciation and
amortization........ 7.5 5.9 5.5 5.1 6.5 7.7 7.4 6.5
Purchased research and
development......... -- -- -- -- 36.6(2) -- -- --
Deferred
compensation........ -- -- -- -- 37.4(3) 5.9(3) -- --
Management fees to
shareholder......... 26.0 19.8 15.6 29.0 7.7 3.8 0.3 0.2
----- ----- ----- ----- ------ ----- ----- -----
Total
expenses...... 114.8 102.4 98.2 109.6 163.9 94.5 87.3 83.4
----- ----- ----- ----- ------ ----- ----- -----
Operating income
(loss)................ (14.8) (2.4) 1.8 (9.6) (63.9) 5.5 12.7 16.6
Other income
(expense)............. -- -- -- -- (0.6) (0.7) 11.4(4) 2.3
----- ----- ----- ----- ------ ----- ----- -----
Income (loss) before
income tax............ (14.8) (2.4) 1.8 (9.6) (64.5) 4.8 24.1 18.9
Income tax benefit
(expense)............. 3.1 2.3 (0.4) 3.0 21.8 (0.5) (7.9) (7.2)
----- ----- ----- ----- ------ ----- ----- -----
Net income (loss)....... (11.7)% (0.1)% 1.4% (6.6)% (42.7)% 4.3% 16.2% 11.7%
===== ===== ===== ===== ====== ===== ===== =====
</TABLE>

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

(1) The Company acquired SDS on March 12, 1997. See "SDS Acquisition."

(2) Represents $3.0 million of purchased research and development expenses
relating to the SDS Acquisition.

(3) Represents $3.9 million of deferred compensation expense relating to the
grant of stock options to executive officers.

(4) Primarily attributable to the gain on sale of AQS of $1.6 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of INSpire -- Recent Developments."

The Company has experienced in the past and will experience in the future
quarterly variations in revenues and net income. Thus, operating results for any
particular quarter are not necessarily indicative of results for any future
period. Factors that have affected quarterly operating results include the
introduction of new or enhanced services and products by the Company or its
competitors, customer acceptance or rejection of new services and products,
product development expenses, the timing of large scale catastrophes, the volume
of usage of the Company's services and products, competitive conditions in its
industry, general economic conditions and the level of selling, general and
administrative expenses.

24
<PAGE> 25

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company funded its operations through cash generated from
operations, as well as borrowings and capital contributions from Millers Mutual.
In August 1997, the Company completed its initial public offering. Net cash
provided by (used in) operating activities was $4.5 million for the year ended
December 31, 1997 compared to ($459,000) for the year ended December 31, 1996.
In 1997, cash flow used in operating activities included an increase in accounts
receivable of approximately $5.7 million and a decrease in deferred income taxes
of approximately $2.4 million, which was offset by depreciation and amortization
expense of approximately $4.0 million, purchased research and development
expense of $3.0 million, deferred compensation expense of $4.0 million and an
increase in income taxes payable of $2.8 million. Net cash used in investing
activities was $19.1 million for the year ended December 31, 1997, primarily
attributable to the SDS Acquisition, compared to $1.7 million for the year ended
December 31, 1996. Net cash provided by financing activities was $42.3 million
for the year ended December 31, 1997, primarily due to the Company's initial
public offering, compared to $2.5 million for the year ended December 31, 1996.

The Company entered into the NationsBank Facility on March 12, 1997,
pursuant to which the Company borrowed $5.0 million under a term credit facility
and $2.5 million under a $4.0 million revolving credit facility, subject to a
borrowing base formula, to finance in part the SDS Acquisition. Although the
Company used a portion of the net proceeds of the Company's initial public
offering to repay these amounts, the Company intends to keep the revolving
credit facility in place for future borrowings. The Company must pay a
commitment fee of 0.25% per annum on the average daily unused portion of the
revolving credit facility. In addition, the NationsBank Facility contains
certain restrictive covenants that require the Company to meet certain
requirements, such as maintaining a minimum net worth, and that, without the
prior written consent of NationsBank, prohibit the Company from incurring
indebtedness other than pursuant to the NationsBank Facility or declaring or
paying dividends or other distributions. The revolving credit facility matures
on March 12, 1999. Borrowings under the NationsBank Facility are secured by all
accounts receivable, inventory, equipment, servicing contract rights, and other
personal property of the Company. As of the date of this Prospectus and at
December 31, 1997, there are no outstanding borrowings under the NationsBank
Facility, and the Company is in compliance with its covenants under the
NationsBank Facility.

The Company believes that cash generated from operations and its net
proceeds from this offering will satisfy the Company's anticipated working
capital requirements for at least one year. The Company, however, may require
substantial additional funds for potential acquisitions and expansion. In the
normal course of business, the Company evaluates acquisitions of businesses,
products and technologies that complement the Company's business. The Company
has no present commitments or understandings with respect to any such
transaction. The Company, however, may acquire businesses, products or
technologies in the future.

YEAR 2000 ISSUES

The Company believes that the computer equipment and software used and sold
by the Company will function properly with respect to dates in the Year 2000 and
thereafter. The Company is in the process of communicating with its significant
suppliers and customers to determine the extent to which interfaces with such
entities are vulnerable to Year 2000 issues and the extent to which any products
purchased by or from such entities are vulnerable to Year 2000 issues. The
Company presently believes that the Year 2000 issues will not require the
Company to incur any material costs or pose significant operational problems for
the Company directly or as a result of any Year 2000 issues of suppliers or
customers. The Company believes that Year 2000 issues of its customers or
potential customers provide opportunities to the Company to market its products
and services as a solution to such Year 2000 issues.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 97-2, Software Revenue Recognition ("SOP 97-2"). SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company believes the adoption of SOP 97-2 will not have a material effect on the
Company's financial position or results of operations.
25
<PAGE> 26

SELECTED CONSOLIDATED FINANCIAL DATA OF SDS
(IN THOUSANDS)

The selected consolidated financial data of SDS presented below as of
December 31, 1995 and 1996, and March 11, 1997, and for the years ended December
31, 1994, 1995 and 1996 and the period January 1, 1997 through March 11, 1997
have been derived from the SDS audited consolidated financial statements
appearing elsewhere in this Prospectus. The selected consolidated financial data
of SDS presented below as of December 31, 1992, 1993, and 1994 and for the years
ended December 31, 1992 and 1993 have been derived from audited consolidated
financial statements of SDS that are not included in this Prospectus. The
selected consolidated financial data of SDS presented below for the three months
ended March 31, 1996 are unaudited but have been prepared on the same basis as
the audited consolidated financial statements of SDS included herein and, in the
opinion of management, include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of SDS's consolidated
financial position and results of operations for such periods. The results of
operations presented below are not necessarily indicative of the contribution
that the former operations of SDS will make to the Company's results of
operations in the future. The selected consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of SDS" and SDS's Consolidated Financial
Statements.

<TABLE>
<CAPTION>
PERIOD
THREE JANUARY 1,
MONTHS 1997
YEAR ENDED DECEMBER 31, ENDED THROUGH
--------------------------------------------------- MARCH 31, MARCH 11,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software services.................. $ 7,184 $ 9,199 $ 9,041 $ 9,078 $10,037 $ 2,396 $ 2,385
Software........................... 6,207 5,682 4,313 9,068 8,987 2,132 2,455
Hardware........................... 616 924 2,245 2,400 3,680 361 463
Other.............................. 245 349 405 615 960 184 109
------- ------- ------- ------- ------- ------- -------
Total revenues............... 14,252 16,154 16,004 21,161 23,664 5,073 5,412
------- ------- ------- ------- ------- ------- -------
Expenses:
Salaries and compensation.......... 8,482 9,793 11,811 13,088 14,505 3,380 3,476
Depreciation and amortization...... 1,219 1,574 2,157 1,879 1,827 462 411
Cost of hardware sold.............. 459 738 1,862 1,979 2,699 291 384
Occupancy costs.................... 1,158 1,343 1,374 1,379 1,566 352 406
Other.............................. 1,536 1,536 1,831 1,667 2,032 379 372
------- ------- ------- ------- ------- ------- -------
Total expenses............... 12,854 14,984 19,035 19,992 22,629 4,864 5,049
------- ------- ------- ------- ------- ------- -------
Operating income (loss).............. 1,398 1,170 (3,031) 1,169 1,035 209 363
Interest income (expense), net....... (264) (2) (134) (80) 77 (8) 24
Other income (expense), net.......... (15) 97 2 (2) 35 -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before income tax...... 1,119 1,265 (3,163) 1,087 1,147 201 387
Income tax benefit (expense)......... (444) (503) 1,253 (429) (449) (81) (156)
------- ------- ------- ------- ------- ------- -------
Net income (loss).................... $ 675 $ 762 $(1,910) $ 658 $ 698 $ 120 $ 231
======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- MARCH 11,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 67 $ 492 $ 289 $ 529 $ 1,516 $ 940
Working capital.................................... 302 993 (1,167) 572 1,785 1,694
Total assets....................................... 11,243 12,705 13,692 12,054 13,465 13,391
Current portion of long-term debt.................. 299 361 557 689 525 439
Long-term debt, excluding current portion.......... 2,428 2,674 2,570 2,028 1,883 1,879
Shareholders' equity............................... 5,000 5,596 3,739 4,538 5,385 5,617
</TABLE>

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<PAGE> 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SDS

RESULTS OF OPERATIONS

The following table sets forth, with respect to SDS and for the periods
indicated, the percentage of total revenues represented by certain revenue,
expense and income items:

<TABLE>
<CAPTION>
PERIOD
THREE JANUARY 1,
MONTHS 1997
YEAR ENDED DECEMBER 31, ENDED THROUGH
------------------------- MARCH 31, MARCH 11,
1994 1995 1996 1996 1997
----- ----- ----- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Software services........................... 56.5% 42.9% 42.4% 47.3% 44.1%
Software.................................... 27.0 42.9 38.0 42.0 45.3
Hardware.................................... 14.0 11.3 15.5 7.1 8.6
Other....................................... 2.5 2.9 4.1 3.6 2.0
----- ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Expenses:
Salaries and compensation................... 73.8 61.8 61.3 66.6 64.2
Depreciation and amortization............... 13.5 8.9 7.7 9.1 7.6
Cost of hardware sold....................... 11.6 9.4 11.4 5.7 7.1
Occupancy costs............................. 8.6 6.5 6.6 6.9 7.5
Other....................................... 11.4 7.9 8.6 7.6 6.9
----- ----- ----- ----- -----
Total expenses...................... 118.9 94.5 95.6 95.9 93.3
----- ----- ----- ----- -----
Operating income (loss)....................... (18.9) 5.5 4.4 4.1 6.7
Other income (loss)........................... (0.8) (0.4) 0.5 (0.1) 0.4
----- ----- ----- ----- -----
Income (loss) before income tax............... (19.7) 5.1 4.9 4.0 7.1
Income tax benefit (expense).................. 7.8 (2.0) (1.9) (1.6) (2.9)
----- ----- ----- ----- -----
Net income (loss)............................. (11.9)% 3.1% 3.0% 2.4% 4.2%
===== ===== ===== ===== =====
</TABLE>

COMPARISON OF SDS'S RESULTS OF OPERATIONS FOR THE PERIOD JANUARY 1, 1997 THROUGH
MARCH 11, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1996

Revenues. SDS's revenues were $5.4 million for the period January 1, 1997
through March 11, 1997 and $5.1 million for the three months ended March 31,
1996, an increase of approximately $300,000 or 6%. This increase was due to
additional software installation revenues, primarily sales of WPC, as well as
increased hardware sales in connection with the increased software
installations.

Operating Expenses. Operating expenses were $5.0 million for the period
January 1, 1997 through March 11, 1997 and $4.9 million for the three months
ended March 31, 1996, an increase of approximately $100,000 or 2%. This increase
is attributable to: (i) the increased costs of computer hardware sold associated
with the corresponding increase in computer hardware sales revenues and (ii)
additional personnel and occupancy costs. Total operating expenses as a
percentage of revenues remained fairly constant.

COMPARISON OF SDS'S RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995

Revenues. SDS's revenues were $23.7 million for the year ended December 31,
1996 compared to $21.2 million for the year ended December 31, 1995, an increase
of $2.5 million or 12%. This increase is primarily attributable to increases in
services performed, including: (i) software service fees, (ii) software
installation revenues, primarily WPC installations, which contributed an
additional $1.2 million in revenues in 1996, and (iii) computer hardware sales
and commissions, which increased by $1.3 million from 1995 to 1996.

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<PAGE> 28

Operating Expenses. Operating expenses were $22.6 million for the year
ended December 31, 1996 compared to $20.0 million for the year ended December
31, 1995, an increase of $2.6 million or 13%. This increase is primarily
attributable to increased personnel costs of $1.4 million and the increase of
approximately $720,000 in the cost of computer hardware sold. Total operating
expenses as a percentage of revenues remained constant at approximately 95% for
the years ended December 31, 1995 and 1996.

COMPARISON OF SDS'S RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1994

Revenues. SDS's revenues were $21.2 million for the year ended December 31,
1995 compared to $16.0 million for the year ended December 31, 1994, an increase
of $5.2 million or 33%. This increase is attributable primarily to software
installations relating to: (i) several significant new customers in late 1994
and early 1995, as well as additional installations for existing clients, and
(ii) the introduction of new products, such as WPC and UES (as hereinafter
defined) that had been in development in the early 1990s and for which demand
increased in late 1994 and early 1995, resulting in increased software
installations. WPC alone contributed an additional $1.6 million in software
installation revenues in 1995 compared to 1994.

Operating Expenses. Operating expenses were $20.0 million for the year
ended December 31, 1995 compared to $19.0 million for the year ended December
31, 1994, an increase of $1.0 million or 5%. This increase was due primarily to
higher salaries and benefits expenses of approximately $1.3 million relating to
an increase in the number of SDS employees from approximately 230 at December
31, 1994 to approximately 250 at December 31, 1995. Total operating expenses as
a percentage of revenues decreased from 119% for the year ended December 31,
1994 to 95% for the year ended December 31, 1995 as a result of economies of
scale associated with spreading certain fixed costs over a larger revenue base
and lower personnel costs as a percentage of revenues.

LIQUIDITY AND CAPITAL RESOURCES

Historically, SDS funded its operations primarily through cash generated
from operations, supplemented by borrowings. Net cash provided by operating
activities was approximately $201,000 in the period from January 1, 1997 through
March 11, 1997 compared to approximately $317,000 in the three months ended
March 31, 1996. Cash flow provided by operating activities was $2.2 million,
$2.2 million and $1.2 million for the years ended December 31, 1996, 1995 and
1994, respectively. In 1996, cash flow provided by operating activities was
comprised primarily of $1.8 million of depreciation and amortization expense.

SDS entered into a letter agreement with Norwest Bank Wisconsin, National
Association ("Norwest") on September 21, 1994 (as amended, the "Norwest
Agreement"), pursuant to which SDS borrowed under a line of credit facility and
under certain promissory notes to help finance certain property acquisitions,
such as a building and business equipment, and the repurchase of SDS common
stock. In addition, SDS entered into a contract with the Redevelopment Authority
of Sheboygan, Wisconsin (the "Redevelopment Authority") on November 1, 1988 (the
"Authority Contract"), pursuant to which SDS borrowed $150,000 from the
Redevelopment Authority to finance the acquisition of certain land. In
connection with the SDS Acquisition, SDS transferred the building and land to
Riverview Building, LLC ("Riverview"), and Riverview assumed the debt associated
with the building under the Norwest Agreement and the debt associated with the
land under the Authority Contract. In addition, on June 23, 1997, SDS paid the
outstanding principal balance and accrued interest on the remaining outstanding
debt under the Norwest Agreement. As a result, there are no outstanding
borrowings under the Norwest Agreement or the Authority Contract. See "Certain
Transactions."

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<PAGE> 29

BUSINESS

INTRODUCTION

The Company is a provider of policy and claims administration solutions to
the P&C insurance industry, offering a comprehensive choice of outsourcing
services and software and software services. The Company's outsourcing services,
which generally are provided on a percentage of premiums or claims paid basis,
include application of underwriting and rating criteria defined by the insurer,
policy issuance, policyholder mailings, customer service, billing and
collections, claims adjusting and processing, and IT services. The Company's
software products include policy and claims administration systems, as well as
systems that increase the productivity of insurers by automating certain
functions, such as workflow management, underwriting rules and guidelines,
document production and rating algorithms. These systems, which run on a variety
of platforms including IBM AS/400, IBM RS/6000, Windows 3.1, Windows 95 and
Windows NT, enable the Company's customers to conduct their policy and claims
administration more efficiently. The Company's software services include
installation, customization, conversion and maintenance of these systems to meet
customer specifications.

The Company was established in April 1995 as a wholly-owned subsidiary of
Millers Mutual, an insurance company chartered in Texas in 1898. The Company was
created to provide outsourcing services to other P&C insurers by capitalizing on
Millers Mutual's success in developing, implementing and managing software
systems for its internal use. As a result of the SDS Acquisition, the Company
also develops and markets software and software services to the P&C insurance
industry. SDS offered software and software services to the P&C insurance
industry for 16 years prior to its acquisition by the Company. The Company
believes its services and products allow customers to focus on core
competencies, reduce costs by converting their fixed costs of inhouse
information technology to variable costs and leverage the Company's investment
in software systems and productivity tools.

OVERVIEW OF THE PROPERTY AND CASUALTY INSURANCE INDUSTRY

The P&C insurance industry provides financial protection for individuals,
businesses and others against losses of property or losses by third parties for
which the insured is liable. P&C insurers underwrite policies that cover various
types of risk, which can generally be divided into personal lines of insurance
covering individuals and commercial lines of insurance covering businesses.
Personal lines generally include automobile insurance (physical damage and
liability insurance) and homeowners' insurance. Commercial lines generally
include workers' compensation, business, directors and officers liability, theft
and medical malpractice insurance as well as insurance covering other commercial
risks.

The P&C insurance industry is highly competitive. Insurance companies
compete primarily on the basis of price, consumer satisfaction and claims paying
ability. According to A.M. Best, as of December 31, 1996, there were
approximately 2,400 P&C insurance companies in the United States generating
approximately $260 billion in annual premium revenues, of which approximately
55% were written by the top 20 insurers. Based on statistics released by the
Insurance Services Office, an industry advisory organization, premium revenues
for the P&C insurance industry over the past several years have been increasing
approximately 3% annually.

According to a study published by A.M. Best, the 10 largest insured
catastrophes have occurred since 1989, including Hurricane Andrew in 1992, the
Northridge, California earthquake in 1994 and Hurricane Hugo in 1989. The
Company believes that these catastrophes have caused insurers to decrease their
exposure in areas prone to natural disasters. Much of the excess demand created
by insurers leaving markets is being met by reinsurers and new market entrants
that have not made significant infrastructure investments and do
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<PAGE> 30

not desire to do so. The Company believes that its ability to deliver services
priced as a percentage of premiums or claims paid should be attractive to these
new entrants, as it will enable them to enter new markets without incurring
substantial fixed infrastructure costs.

According to the National Association of Independent Insurers, information
systems expenses as a percentage of written premiums increased from 2.5% in 1992
to 3.3% in 1996. The Company believes that this increasing investment in
information systems is indicative of the demand for automation in the P&C
insurance industry. This demand promotes the sale of software and software
services and represents an opportunity to provide outsourcing services for those
insurers that do not wish to make increasing levels of capital expenditures.

NEED FOR INFORMATION MANAGEMENT AND WORK PROCESS AUTOMATION

Technology is a critical element in an insurance company's ability to
compete. Insurance companies use technology and information systems as
management tools to compete more effectively by improving efficiency, managing
costs and increasing customer satisfaction. A highly technical industry has
evolved to meet the unique needs of P&C insurers to manage and process large
amounts of policyholder data. The focus of insurers has recently shifted away
from finding more efficient means of storing information toward more efficient
ways of processing information.

The Company provides a wide variety of services and products to manage and
process policy and claims information more efficiently and allow its customers
to focus on their core competencies, including (i) software and software
services, (ii) policy administration services, (iii) claims administration
services and (iv) IT services. The Company also provides both policy and claims
administration outsourcing services to enable customers to operate as "virtual
insurance companies" by allowing such customers to eliminate infrastructures
necessary for such purposes. The Company believes there are significant
opportunities to market its services and products for the following reasons:

- Economies of Technology. The investment in information systems necessary
for P&C insurers to remain competitive is often cost prohibitive,
particularly for smaller companies, because of the specialized technical
knowledge required to develop, install, operate and maintain
sophisticated systems. The Company's services and products allow
insurance companies to take advantage of economies of technology by
leveraging the Company's investment in software systems and productivity
tools.

- Trend Toward Direct Sales. Many personal lines insurers are reducing
costs by selling policies directly to policyholders rather than through
independent agents. By selling directly to policyholders, insurance
companies can reduce costs, which allows them to reduce premiums. This
trend has created opportunities for the Company to market its services
and products to insurers that sell directly to policyholders and those
that continue to sell through independent agents. Automation of the
policy and claims administration functions allows insurers selling
directly to customers to provide services efficiently that were
traditionally performed by agents. Automation also enables insurers that
sell through agents to reduce administration costs to compete more
effectively with insurers that sell directly to policyholders.

- Year 2000 Issue. The Year 2000 issue manifests itself in a number of ways
in the policy and claims administration area. The Year 2000 issue arose
because, until recently, most software systems were not programmed to
recognize correctly dates beyond December 31, 1999. The Company believes
that many insurance companies may resolve the Year 2000 issue by either
(i) purchasing new software systems or (ii) entirely outsourcing their
policy and claims needs rather than incurring the cost of updating their
old systems.

- State Regulation. P&C insurers are subject to supervision and regulation
on a state-by-state basis with respect to numerous aspects of their
business. State insurance regulators closely regulate the product
offerings, claims processes and premium structure of insurance companies.
State regulators also require insurance companies to file annual and
other reports relating to their financial condition. Policy and

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<PAGE> 31

claims administration systems can facilitate compliance with numerous
regulatory requirements by automating statutory reporting and other
compliance tasks.

- Customer Service. As policyholders demand faster, broader and better
service, P&C insurers that provide superior customer service enjoy a
competitive advantage. Dissatisfaction with policy or claims handling
processes is frequently cited as a cause of policy nonrenewal. In
addition, retaining an existing policyholder with good customer service
is more cost effective for an insurance company than attracting a new
policyholder away from a competitor. Automation and outsourcing can allow
insurance companies to improve customer service while lowering fixed
costs.

TREND TOWARD OUTSOURCING

Since the late 1980s, many P&C insurers have sought to use third parties to
provide certain functions or services that the insurers historically performed
in-house. These companies seek to focus on their core competencies, reduce costs
and avoid the significant investment associated with developing, installing,
operating and maintaining information management and automation systems. The
Company believes that insurance companies increasingly will conclude that policy
and claims administration and regulatory compliance are too complicated, costly
and administratively burdensome to be performed in-house. Other factors
contributing to the outsourcing trend include the following:

- Need for Flexibility. Many P&C insurers lack the ability to respond
rapidly to changing market conditions. Outsourcing enables insurance
companies to enter new markets quickly and cost-effectively to take
advantage of favorable market conditions without incurring substantial
fixed infrastructure costs.

- Need to Diversify Risk. Many P&C insurers are overexposed to risks from
natural catastrophes in certain markets. Because many states restrict the
ability of insurers to cancel policies or exit particular lines of
business, these insurers often cease writing new policies and outsource
the administration of their remaining policies and claims ("stranded
policies"). Alternatively, insurers may reduce their risk by reinsuring
policies with other insurers that do not have a similar geographic
concentration or by allowing other insurers to renew the stranded
policies. As insurers leave markets, they create demand for outsourcing
the policy and claims administration of the stranded policies.

- Desire to Maximize Statutory Surplus. As most state regulations require
insurance companies to maintain certain ratios of surplus to premiums,
insurance companies that maximize surplus are able to write greater total
premiums. Insurance companies cannot capitalize, for statutory-basis
financial statement reporting purposes, most of the hardware and software
they purchase or develop for policy and claims administration. As a
result, an insurance company with a large investment in its policy and
claims administration infrastructure generally will experience a lower
statutory surplus than it would if it were to outsource its policy and
claims administration.

- Virtual Insurance Companies. Regulatory changes have permitted new
companies that are not traditional insurance companies to enter the P&C
insurance industry. Banks, credit unions and other financial services
companies are beginning to underwrite P&C insurance. These new entrants
often do not have policy and claims administration infrastructure or
expertise in place and are natural candidates for outsourcing. The
Company facilitates the creation of these "virtual insurance companies"
by providing policy and claims administration and related back office
administration to new entrants that desire to focus their resources on
the core marketing, underwriting and financial aspects of the P&C
insurance business.

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<PAGE> 32

THE INSPIRE STRATEGY

The Company's objective is to become the leading provider of policy and
claims administration solutions to the P&C insurance industry. The Company's
strategy to achieve this objective involves the following elements:

- Offer a Comprehensive Choice of Solutions. The Company offers an "a la
carte" menu of services and products that is attractive to a wide variety
of potential customers. This comprehensive and flexible approach enhances
customer stability and increases opportunities for new sales by allowing
the Company to sell multiple services and products to both existing and
new customers.

- Focus Sales Efforts. The Company believes that specialized sales teams
dedicated to the Company's principal markets of outsourcing services and
software and systems sales can most effectively relate to each type of
customer. The Company's outsourcing marketing group concentrates on
marketing the Company's claims administration, policy administration and
IT services to established P&C insurance companies as well as new
entrants in the P&C industry, such as banks, credit unions and other
financial services companies. The Company's software and systems
marketing group uses dedicated sales teams to focus on larger accounts
(generally defined as insurance companies with annual premiums in excess
of $250 million) as well as certain of the Company's outsourcing
customers. The Company believes that this sales strategy allows the
Company to capitalize on its ability to offer a comprehensive choice of
solutions to a wide variety of customers.

- Generate Recurring Revenues. The Company's services and products are
structured to generate revenues based on events that occur in the normal
course of a customer's business. Policy administration and IT services
generate recurring revenues because the Company earns a percentage of
each premium received by the insurance company. Claims administration
services generate recurring revenues because the Company earns a
percentage of either each claim paid or each premium received by the
insurance company. Software licensing generates recurring revenues
because most of the Company's customers enter into systems support,
maintenance or enhancement agreements to purchase additional services and
software enhancements throughout the life of their systems.

- Penetrate New Markets. Prior to the SDS Acquisition, SDS traditionally
marketed its software products and services to small to mid-size domestic
insurance companies. Utilizing the combined resources of the merged
companies, the Company intends to pursue sales opportunities with larger
insurance companies both domestically and internationally. For example,
the Company recently executed an agreement with Sul America Cia Nacional
de Seguros ("Sul America"), the largest P&C insurance company in Brazil,
pursuant to which the Company will install and implement WPC (as
hereinafter defined) and certain software productivity tools and
customize WPC to Sul America's specifications.

- Enhance Product Capabilities. Maintaining technological leadership is
critical to remaining competitive in the Company's industry. The Company
plans to enhance continuously its existing services and products and
develop entirely new services and products to respond to constantly
changing customer requirements.

- Pursue Strategic Acquisitions. The Company intends to consider potential
acquisition candidates that offer opportunities to increase market share
and expand the Company's line of outsourcing services and software and
software services.

SERVICES AND PRODUCTS

The Company offers a range of services and products to address the policy
and claims administration needs of the P&C insurance industry, with the
capability to provide a complete turnkey solution to all of a customer's policy
and claims administration needs. The Company installs, enhances and maintains a
variety of policy and claims administration software systems and offers
outsourcing of policy and claims administration.

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<PAGE> 33

Outsourcing Services. The Company's outsourcing services include
application of underwriting and rating criteria defined by the insurer, policy
issuance, policyholder mailings, customer service, billing and collections,
claims adjusting and processing, and IT services. The customer determines the
extent to which it uses the Company's services. A team of Company and customer
personnel work closely together to ensure the seamless integration of the
customer's outsourced and in-house activities. The Company's outsourcing
services include the following:

- Policy Administration. Policy administration describes the suite of
services the Company offers customers that are considering outsourcing
their policy administration. The customer retains all of the financial
risk and works with the Company to provide underwriting and rating
guidelines. The Company typically is paid a percentage of premiums for
policy administration services, which include the following:

- Direct, agency and internet marketing support

- Policy issuance and acceptance

- Application of underwriting and rating criteria defined by the insurer

- Customer service phone center for policyholders and agents

- Accounting, billing and collections

- Commission calculation and disbursement

- Statutory reporting and regulatory compliance

- Comprehensive management and service bureau reporting

- Claims Administration. Claims administration describes the management of
appraising, qualifying and settling P&C insurance claims. The Company maintains
a staff of claims adjusters and examiners. The Company also uses independent
claims adjusters. The Company reviews insurance coverage, performs a claim
analysis and prepares a check for payment of the claim, if warranted. The
Company typically is compensated on either a percentage of premiums or claims
paid basis.

- IT Outsourcing. IT outsourcing describes the services offered by the
Company to assist customers in operating, maintaining and enhancing information
systems. The Company migrates the customer's current system platform to the
Company's processing platform, including the installation of all necessary
hardware components, depending on the customer's needs. After such migration,
the customer administers its policies and claims internally by utilizing the
Company's systems and other software productivity tools. The Company typically
is compensated on a percentage of premiums basis, subject to a minimum fee.

Software Products. The Company sells information processing systems and
software productivity tools that automate policy and claims administration. The
information processing systems are designed to run on a variety of platforms,
including IBM AS/400, IBM RS/6000, Windows 3.1, Windows 95 and Windows NT. The
Company's software productivity tools add functionality and flexibility to base
systems. These productivity modules can be sold in conjunction with the
Company's base systems or as add-ons to other vendors' base systems.

- Information Processing Systems

- Policy and Claims Administration System. The Policy and Claims
Administration System ("PCA") is an integrated system that offers
policy and claims administration, billing and collections, financial
administration, and management and statistical bureau reporting. PCA
runs on the AS/400 and RS/6000 platforms. PCA was originally introduced
in 1988 and the current version was introduced in 1995. The Company has
completed 39 AS/400 installations and 8 RS/6000 installations of PCA.

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<PAGE> 34

- Windows into Property and Casualty System. Functionally comparable to
PCA, Windows into Property and Casualty System ("WPC") is an
integrated system that performs functions from submission tracking to
policy and claims administration to management and bureau reporting.
WPC runs on a PC platform in a client/server environment and on most
major PC network operating systems, including Novell Netware and
Microsoft Windows NT. Since its introduction in 1992, the Company has
installed 23 WPC systems.

- ValueRate Policy Administration System. In October 1997, the Company
entered into a five-year agreement with Cover-All to license
Cover-All's commercial lines rating, policy issue and forms solutions
for use in the Company's products and services. This system, called
ValueRate, is a commercial lines policy administration system designed
to automate policy processing and improve customer service.
ValueRate's functionality includes rating new applications, policy
issuance, mid-term changes, cancellations, reinstatements and
renewals. ValueRate also prints multiple recipient copies of all
relevant documentation for each of these transactions, including quote
summaries, declarations pages and mandatory and optional manuscript
forms. ValueRate may be customized to interface with any policy
administration system, and the Company is currently working to
interface it with PCA and WPC.

- Software Productivity Tools

- EmPower. EmPower is an automated workflow management system designed
for the personal lines policy administration needs of P&C insurers.
EmPower interfaces with PCA, other vendors' systems or insurers'
proprietary systems to provide imaging and workflow management
technology. EmPower automatically processes the flow of information in
a paperless environment, substantially reducing manual activities
through the integration of voice, data, image and text into one
system. EmPower was introduced in 1996 and operates in a client/server
environment using Microsoft Windows. The Company plans to enhance
EmPower to support claims administration and commercial lines policy
administration software.

- Underwriting Expert System. The Underwriting Expert System ("UES")
automates underwriting rules and guidelines to mirror a client's
underwriting process. UES enhances consistency of review and
streamlines customer service and operations departments by reducing
the need for manual underwriting review. UES uses a relational
database to store and report statistics concerning underwriting
efficiency and results of the review process. UES operates in a
client/ server environment and interfaces with PCA and WPC, as well as
most systems sold by other vendors or insurers' proprietary systems.
UES was introduced in 1993.

- Policy Set Production. Policy Set Production ("PSP") allows for laser
quality printing of policy declarations, booklets, forms,
endorsements, billing notices and letters. PSP manages the logistics
of producing the appropriate documents necessary for each
policyholder. Introduced in 1995, PSP operates in a client/server
environment and interfaces with PCA and WPC, as well as most systems
sold by other vendors or insurers' proprietary systems.

- Visual Rater. Visual Rater is a productivity tool using object
oriented programming technology that allows nontechnical users to
create, build, test and maintain the rating components of insurance
processing. Visual Rater's "point and click" rating construction and
maintenance interface can be operated by persons who are not technical
programmers. Instead, reusable rating components become simple icons
used as building blocks to create rating algorithms. Visual Rater was
introduced in 1995 and generally is sold with WPC.

Software Services. The Company customizes all of its software products to
meet customer specifications. The initial license fee paid to the Company gives
the customer the right to use the software, but does not cover customization,
conversion, enhancements or upgrades. The Company provides systems installation,
customization, conversion and maintenance on a time-and-materials basis.
Disaster recovery planning services and bureau reporting services are provided
on either a fixed fee or time-and-materials basis. Future

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<PAGE> 35

enhancements and upgrades to a system are provided for an annual fee equal to a
percentage of the initial license fee. Installations of upgrades and
enhancements are performed on a time-and-materials basis.

PRODUCT DEVELOPMENT

The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent introductions of new
products and enhancements. The Company's future success depends in part on its
ability to enhance its existing services and products and develop new services
and products to meet changing customer requirements. The Company's development
efforts are focused on enhancement of existing services and products, expansion
of operating system compatibility and development of new applications for
emerging insurance markets. In addition, the Company has in the past acquired
new services and products through the acquisition of complementary businesses
and may do so in the future. Currently, major areas of development emphasis are
(i) the expansion of EmPower to include claims administration and commercial
lines policy administration, (ii) integrating ValueRate into PCA and WPC, and
(iii) the expansion of software applications to address additional P&C insurance
markets.

Since inception, the Company has made substantial investments in the
enhancement and development of its services and products. Prior to being
acquired by the Company, SDS incurred costs of approximately $2.9 million, $2.8
million and $3.7 million in 1996, 1995 and 1994, respectively, for research and
development. The Company incurred costs of approximately $2.3 million in 1997
(which includes approximately $250,000 incurred by SDS from January 1, 1997
through March 11, 1997) for research and development, and the Company intends to
devote substantial resources to research and development in the future. As of
December 31, 1997, the Company had approximately 41 employees that performed
product development and quality assurance, as well as participated in the
initial installations of new products. There can be no assurance that the
Company will be successful in developing and marketing new or enhanced services
or products.

CUSTOMER SUPPORT AND OPERATIONS

The Company's policy administration and IT outsourcing services are
provided at the Company's service center in Fort Worth, Texas. The Company
maintains a customer service phone center for policyholders and agents five days
a week. The Company employs approximately 86 people in the service center.

The Company provides claims administration outsourcing services at its
service centers in Fort Worth, Texas; Laguna Hills, California; Troy, Michigan;
and St. Petersburg, Florida. The Company employs approximately 126 people in its
claims administration service centers.

The Company provides software development, installation, maintenance and
enhancement services at its facilities in Sheboygan, Wisconsin, and Columbia,
South Carolina. The Company employs approximately 277 people who provide
software support and maintains a customer help line five days a week.

SALES AND MARKETING

The Company recently formed a sales team, led by an industry veteran, that
is dedicated solely to outsourcing sales. This sales team is conducting
strategic marketing to a target base of customers identified on the basis of
detailed customer criteria developed by the Company's marketing personnel. The
Company believes that this targeted marketing approach should increase its
customer success rate and generate additional outsourcing services revenues.

The Company also markets its outsourcing services through insurance
brokers, industry consultants, managing general agents and reinsurers. Once an
opportunity is identified by one of these sources and a request for proposal is
received, the Company prepares and submits a comprehensive proposal directly to
the prospective customer. The prospective customer is then invited to Fort Worth
to tour the Company's service center and discuss the customer's requirements in
detail. If the Company is selected to be the outsourcing service provider, a
multi-year contract is negotiated and executed. While the outsourcing sales
cycle varies from customer to customer, it typically ranges from three to twelve
months.

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The Company's software and software services have traditionally been
marketed through a direct sales force located in Sheboygan, Wisconsin and
Columbia, South Carolina. To support its sales force of 12 people, the Company
conducts marketing programs that include direct mail, trade shows, public
relations, advertising and ongoing customer communication programs. The Company
also maintains strategic relationships with industry consultants who frequently
assist insurance companies in identifying vendors. While the software systems
sales cycle varies from customer to customer, it typically ranges from six to
twelve months.

The Company believes that specialized sales teams dedicated to either
outsourcing services or software and systems sales can most effectively relate
to each type of customer. The Company concentrates on marketing the Company's
claims administration, policy administration and IT services to established P&C
insurance companies as well as new entrants in the P&C industry, such as banks,
credit unions and other financial services companies. The Company's software and
systems sales teams focus on larger accounts (generally defined as insurance
companies with annual premiums in excess of $250 million) as well as certain of
the Company's outsourcing customers.

COMPETITION

The policy administration and IT services outsourcing markets are dominated
by a few large companies, including PMSC. The Company competes for these
outsourcing customers on the basis of customer service, performance, product
features and price. The claims administration outsourcing market is highly
fragmented, with competition from a large number of claims administration
companies of varying size as well as independent contractors. Competition in the
claims administration market is principally price driven. Two of the larger
competitors in this market are Lindsey Morden Claim Services Inc. and Crawford &
Company, Inc. The Company competes for software customers on the basis of
customer service, performance, product features, ability to tailor products and
services to specific customer requirements, timely delivery and price.
Competitors include PMSC, Computer Sciences Corporation, The Freedom Group, Inc.
and The Wheatley Group, Ltd.

CUSTOMERS

The Company currently provides claims administration outsourcing services
to insurance companies, reinsurers and managing general agents. The Company has
three claims administration customers, the Millers Group, Clarendon and Interco.
The Company provides services to Clarendon through contracts with Blanch.
36
<PAGE> 37

Pursuant to a contract with HOW, the Company provides services to Interco, which
administers such contract on behalf of the Virginia Commission, which is a
receiver of and acts on behalf of HOW. The Company has two significant policy
administration outsourcing customers, Clarendon (through Blanch) and Millers
Casualty. The Company has entered into two new contracts to provide both policy
administration services and claims administration services to two new customers,
and the Company believes that it will begin performing such services in the
second quarter of 1998. The Company currently provides IT services to two
customers, including the Millers Group.

Prior to its acquisition by the Company, SDS historically provided its
software and software services to P&C insurance companies with premium revenues
of less than $250 million. The Company intends to pursue sales opportunities
with larger insurance companies in the future. The Company currently has
approximately 100 software and software services customers, including Employers
Reinsurance Corporation, Zurich National Insurance Company, Providence
Washington Insurance Company, Firemen's Fund Insurance Company, Old Guard Group,
Inc., Colorado Farm Insurance Company, Society Insurance Company, Rockford
Mutual Insurance Company, Nationwide Mutual Insurance Co. -- Western Direct
Operations, Country Companies, Atlantic Mutual Insurance Co. and Arbella Mutual
Insurance Co.

The Millers Group, Clarendon and Interco accounted for approximately 68%,
8% and 21%, respectively, of the Company's historical revenues in 1996. The
Millers Group, Clarendon and Interco accounted for approximately 32%, 16% and
7%, respectively, of the Company's historical revenues in 1997 and 29%, 14% and
6%, respectively, of the Company's pro forma revenues in 1997. Any loss of or
material decrease in the business from any of these customers could have a
material adverse effect on the Company's business, financial condition and
results of operations.

EMPLOYEES

As of March 1, 1998, the Company had 603 full-time employees, of whom 20
were employed in sales and marketing functions, 50 in finance and
administration, 41 in research and development, 215 in outsourcing operations
and 277 in software and software services functions. The Company's employees are
not represented by any collective bargaining organization and none of its
employees are covered by a collective bargaining agreement. The Company believes
that its relationship with its employees is good. The Company regularly seeks to
identify skilled software engineers and other potential employee candidates and
experiences intense competition for personnel in the software industry. The
Company believes that its ability to recruit and retain highly skilled
technical, sales and marketing and management personnel will be critical to the
Company's future success. There can be no assurance that the Company will be
able to hire a sufficient number of employees with the skills necessary to
enable the Company to attain its objective of becoming the leading provider of
policy and claims administration solutions to the P&C insurance industry.

INTELLECTUAL PROPERTY

The Company licenses its software systems to customers under nonexclusive
and nontransferable license agreements, which generally provide for a paid-up
license fee or a license fee payable in installments. The initial license fee
grants the customer the right to use the version of the software system existing
at the time the license is granted and does not cover upgrades or enhancements.

The Company relies on contract rights and copyright and other intellectual
property laws to protect its products, including software source code, as trade
secrets and confidential proprietary information. The Company's agreements with
its customers and prospective customers prohibit disclosure of the Company's
trade secrets and proprietary information to third parties without the consent
of the Company and generally restrict the use of the Company's products to the
customers' operations. The Company also informs its employees of the proprietary
nature of its products and typically obtains from them agreements not to
disclose trade secrets and proprietary information. Notwithstanding these
restrictions, there can be no assurance that competitors of the Company could
not obtain unauthorized access to the Company's software source code and other
trade secrets and proprietary information. The Company owns common law
trademarks, copyrights and service marks that it uses in connection with its
business, none of which are registered.

37
<PAGE> 38

The Company is not engaged in any material disputes with other parties with
respect to the ownership or use of the Company's proprietary technology. There
can be no assurance, however, that third parties will not assert technology
infringement claims against the Company in the future. The litigation of such
claims may involve significant expense and management time. In addition, if any
such claim were successful, the Company could be required to pay monetary
damages, refrain from distributing or using the alleged infringing product, or
obtain a license from the party asserting the claim, which could be unavailable
on commercially reasonable terms. The absence of federal or state registrations
for its intellectual property could be detrimental to the Company in any
infringement litigation or other disputes regarding intellectual property.

LEGAL PROCEEDINGS

In February 1997, the Philadelphia Contributionship for the Insurance of
Houses from Loss by Fire ("PCIHLF") filed a lawsuit (Civil Action No.
97-CV-1262) against SDS in the United States District Court for the Eastern
District of Pennsylvania. The suit alleges that the PCA, PSP and UES systems
that SDS sold to PCIHLF in 1995 did not meet PCIHLF's specifications. PCIHLF
claims damages in excess of $1.3 million. The Company and the former SDS
shareholders placed $1.5 million of the SDS purchase price in an escrow account
in respect of this claim. The Company has no recourse against the former SDS
shareholders to the extent that the aggregate of any judgment, settlement and
expenses exceeds the amount of the escrowed funds. SDS filed a counterclaim
against PCIHLF for $550,000 for amounts due under its agreements with PCIHLF.
There can be no assurance with respect to the outcome of this lawsuit.

The Company is not a party to any other legal proceedings that the Company
believes could have a material adverse effect on the Company's business,
financial condition or results of operations.

PROPERTIES

The following table sets forth certain information with respect to the
principal facilities used in the Company's operations, all of which are leased:

<TABLE>
<CAPTION>
CURRENT
MONTHLY APPROXIMATE LEASE
LOCATION FUNCTION LEASE RATE SQ. FT. EXPIRATION DATE
-------- -------- ---------- ----------- ---------------
<S> <C> <C> <C> <C>
Fort Worth, Texas(1)................. Headquarters and policy $25,400 57,000 Monthly
and claims administration
Sheboygan, Wisconsin................. Software and software 20,700 28,100 February 2007
services
Columbia, South Carolina............. Software and software 25,600 29,400 August 2002
services
Sheboygan, Wisconsin................. Software and software 5,400 6,500 February 2002
services
Laguna Hills, California............. Claims administration 4,600 3,200 October 1998
St. Petersburg, Florida(2)........... Claims administration 3,200 2,500 December 1999
Troy, Michigan....................... Claims administration 1,900 1,600 May 2000
</TABLE>

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

(1) The Company anticipates entering into a new ten-year lease for
approximately 96,000 square feet at this location effective on or about May
1, 1998. See "Certain Transactions -- Miscellaneous."

(2) The Company anticipates subletting this location and relocating to an 8,000
square foot facility on or about May 1, 1998.

The aggregate monthly lease rate for the properties listed above is
$86,800. The Company also leases approximately 5,600 square feet in Westborough,
Massachusetts at $6,000 per month under a lease expiring in December 1998, which
the Company subleases to a subtenant at substantially the same monthly lease
rate under a sublease expiring in December 1998.

The Company believes that, subject to the contemplated expansions of
facilities noted above, its existing facilities are adequate to meet the
Company's requirements for the foreseeable future.

38
<PAGE> 39

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
F. George Dunham, III................ 39 President, Chief Executive Officer, Chairman and
Director
Ronald O. Lynn....................... 60 Executive Vice President and Chief Information
Officer
Terry G. Gaines...................... 38 Executive Vice President, Chief Financial
Officer and Treasurer
Robert K. Agazzi..................... 54 Executive Vice President -- Software and Systems
Jeffrey W. Robinson.................. 40 Executive Vice President -- Outsourcing
W. Scott Lewis....................... 42 Senior Vice President -- Software and Systems
Sales and Marketing
James P. Strickland.................. 31 Senior Vice President -- Outsourcing Sales and
Marketing
Harry E. Bartel...................... 55 Director
R. Earl Cox, III..................... 64 Director
Mitch S. Wynne....................... 39 Director
</TABLE>

F. George Dunham, III has served as President, Chief Executive Officer and
a director of the Company since its inception in 1995. His current term as
director expires in 2000. Mr. Dunham served from inception to March 1996 as
Chairman of the Board of the Company and was again elected to that position in
June 1997. From 1994 to June 1997, Mr. Dunham served as President and Chief
Executive Officer of Millers Mutual and Millers Casualty. From 1992 to 1994, Mr.
Dunham served as Executive Vice President and Chief Financial Officer of Millers
Mutual and Millers Casualty. Mr. Dunham has served as a director of Millers
Mutual and Millers Casualty since 1992, and in June 1997 he was elected Vice
Chairman of the Board of both companies. From 1991 to 1992, Mr. Dunham served as
Vice President -- Finance of Lindsey Morden Claim Services Inc., an insurance
claim services and administration company.

Ronald O. Lynn has served as Executive Vice President and Chief Information
Officer of the Company since March 1997 and, from March 1996 to March 1997, as
Vice President of the Company. Mr. Lynn also served as Executive Vice President
and Chief Information Officer from March 1997 to June 1997 and as Vice President
from 1993 to March 1997 of Millers Mutual and Millers Casualty. From 1992 to
1993, Mr. Lynn served as Vice President of Harco National Insurance Company,
where he was responsible for computer related functions. From 1988 to 1992, Mr.
Lynn served as Assistant Vice President of Property and Casualty Processing
Services for PMSC.

Terry G. Gaines has served as Executive Vice President and Chief Financial
Officer of the Company since June 1997 and Treasurer of the Company since July
1997. From March 1997 to June 1997 Mr. Gaines served as Vice
President -- Finance and Administration of Federal Liaison Services, Inc., a
software development company, and from March 1996 to March 1997 as a Product
Manager for that company. From 1992 to February 1996, Mr. Gaines was Controller
of the fixed income department of Rauscher Pierce Refsnes, Inc., a regional
investment banking firm, where he also served as Vice President from August 1995
to February 1996. From 1989 to 1992 he served as Vice President -- Finance of
Richmond Petroleum Inc., an oil and gas company. Mr. Gaines is a Certified
Public Accountant and was employed by Deloitte & Touche LLP from 1982 to 1989.

Robert K. Agazzi has served as Executive Vice President -- Software and
Systems of the Company since July 1997. Mr. Agazzi served as President of SDS
from 1989 until July 1997 and as Vice President -- Marketing of SDS from 1983 to
1989. Prior to 1983, Mr. Agazzi served in various management positions with PMSC
and several insurance and software development companies.

39
<PAGE> 40

Jeffrey W. Robinson has served as Executive Vice President -- Outsourcing
of the Company since June 1997. From November 1996 to June 1997, Mr. Robinson
served as Vice President -- Policy Life Cycle of the Company, Millers Mutual and
Millers Casualty. From 1985 to March 1997, Mr. Robinson served in various
management positions with PMSC, including Vice President of the Risk Services
Division. Prior to 1985, Mr. Robinson served in various management and analyst
positions for Home Insurance Company and Business Computer Systems, an insurance
processing and administration company.

W. Scott Lewis has served as Senior Vice President -- Software and Systems
Sales and Marketing since January 1998, and from May 1997 to January 1998, as
Executive Vice President -- Marketing. From 1988 to May 1997, Mr. Lewis served
as Regional Sales Manager of The Wheatley Group, Ltd., a software development
and policy and claims administration company. Prior to 1988, Mr. Lewis served in
various sales and sales management positions with PMSC and other companies that
develop software and sell administration services.

James P. Strickland joined the Company in January 1998 as Senior Vice
President -- Outsourcing Sales and Marketing. From 1996 to January 1998, Mr.
Strickland served as Vice President Integrated Business Services of Computer
Sciences Corporation (formerly The Continuum Company, Inc.), a software
development and policy and claims administration company for P&C and life
insurance companies. From 1992 to 1996, Mr. Strickland served as Vice President
Outsourcing Services for The Continuum Company, Inc. From 1988 to 1992, Mr.
Strickland served as Director of Outsourcing Sales Support for Electronic Data
Systems.

Harry E. Bartel has served as a director of the Company since 1996 and his
current term as director expires in 2000. Mr. Bartel also served as a director
of Millers Mutual and Millers Casualty from March 1995 to June 1997. Since 1968,
Mr. Bartel has been a partner with the law firm of Cantey & Hanger, L.L.P.,
which from time to time provides legal services to the Company.

R. Earl Cox, III has served as a director of the Company since 1996 and his
current term as director expires in 1998. Mr. Cox is a nominee for reelection as
a director at the annual meeting of shareholders to be held on April 21, 1998.
Mr. Cox also served as a director of Millers Mutual and Millers Casualty from
March 1987 to June 1997. Since 1977, Mr. Cox has served as president of R.E. Cox
Realty Co. and has been a co-owner of OFCO Office Furniture, Inc. since 1985.
Mr. Cox has served as a director of KBK Capital Corp., a factoring company,
since 1995 and a director and Chairman of the Board of Tandycraft, Inc., a
manufacturer and retailer of craft products, since 1985.

Mitch S. Wynne was elected as a director of the Company in March 1997 and
his current term as director expires in 1999. Mr. Wynne also served as a
director of Millers Mutual and Millers Casualty from March 1997 to June 1997.
Mr. Wynne has owned and operated Wynne Petroleum Company, an oil and gas
production company, for more than five years.

Directors who are executive officers or employees of the Company receive no
compensation as such for service as members of either the Board of Directors or
committees thereof. Directors who are not executive officers or employees of the
Company receive an annual fee of $15,000, plus $1,000 per Board meeting
attended, $300 per committee meeting attended and reimbursement for travel
expenses to attend such meetings. Directors who serve as chairman of a committee
receive an additional annual fee of $3,000. The nonemployee directors are also
eligible to receive options to purchase Common Stock under the Director Plan.
See "Management -- Director Stock Option Plan."

The Company has an Audit Committee and a Compensation Committee. The Audit
Committee is comprised of Messrs. Bartel, Cox and Wynne and is responsible for
reviewing the independence, qualifications and activities of the Company's
independent certified accountants and the Company's financial policies, control
procedures and accounting staff. The Audit Committee recommends to the Board the
appointment of the independent certified public accountants and reviews and
approves the Company's financial statements. The Compensation Committee is
comprised of Messrs. Bartel, Cox and Wynne and is responsible for establishing
the compensation of the Company's directors, officers and other managerial
personnel, including salaries, bonuses, termination agreements and other
executive officer benefits as well as grants of stock options.

40
<PAGE> 41

EXECUTIVE COMPENSATION

The following table sets forth the annual and long-term compensation with
respect to the Chief Executive Officer of the Company and the Company's four
most highly compensated executive officers other than the Chief Executive
Officer (the "named executive officers") for services rendered during 1997.
During 1995, 1996 and the six months ended June 30, 1997, Mr. Dunham was the
President and Chief Executive Officer of both the Company and Millers Mutual,
and Millers Mutual paid all compensation of Mr. Dunham and certain other
officers of the Company who were also officers of Millers Mutual. In turn, the
Company paid Millers Mutual a management fee. Accordingly, the Company did not
pay any compensation during 1995 or 1996 to any named executive officer. See
"Certain Transactions."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY($) BONUS($)(2) OPTIONS(#) COMPENSATION($)
----------------- ---- --------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
F. George Dunham, III................. 1997 175,000(3) 175,000 931,539 --
President, Chief Executive Officer
and Chairman of the Board
Stuart H. Warrington.................. 1997 153,444(4) 37,718 158,362 75,413(5)
Executive Vice President -- Customer
Relations
Robert K. Agazzi...................... 1997 136,126(6) 33,448 158,362 --
Executive Vice President -- Software
and Systems
Ronald O. Lynn........................ 1997 115,000 57,500 158,362 --
Executive Vice President and Chief
Information Officer
Jeffrey W. Robinson................... 1997 115,000 57,500 158,362 --
Executive Vice
President -- Outsourcing
</TABLE>

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

(1) Does not include "Other Annual Compensation" because amounts of certain
perquisites and other noncash benefits provided by the Company did not
exceed the lesser of $50,000 or 10% of the total annual base salary and
bonus disclosed in this table for the respective officer.

(2) Represents for the named executive officers incentive compensation under
employment agreements. Amounts were paid in 1998 but are attributable to and
were earned in 1997. See "Management -- Employment and Indemnification
Agreements."

(3) Represents salary paid to Mr. Dunham since July 1, 1997. Mr. Dunham was
compensated by Millers Mutual for the six months ended June 30, 1997.

(4) Represents salary paid to Mr. Warrington since his employment with the
Company began on March 12, 1997. Effective March 15, 1998, Mr. Warrington
will resign as Executive Vice President -- Customer Relations of the Company
but will continue to provide consulting services to the Company. See
"-- Consulting Agreement."

(5) Represents the amount of deferred compensation accrued in 1997 under Mr.
Warrington's employment agreement. Such deferred compensation is payable to
Mr. Warrington in the amount of $40,000 per year during the 20-year period
commencing on January 1, 1999 and ending on December 31, 2018.

(6) Represents salary paid to Mr. Agazzi since his employment with the Company
began on March 12, 1997.

41
<PAGE> 42

The following table sets forth certain information concerning options
granted to the named executive officers during 1997. Since December 31, 1997,
the Company has not granted any options to any of the named executive officers.
For additional information on and certain terms of options, see
"Management -- Stock Option Plan."

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION FOR OPTION
SECURITIES GRANTED TO MARKET PRICE TERM($)(2)
UNDERLYING EMPLOYEES EXERCISE ON DATE ----------------------------------
OPTIONS IN FISCAL PRICE OF GRANT EXPIRATION
NAME GRANTED(#) YEAR(1) ($/SH) ($/SH) DATE 0% 5% 10%
---- ---------- ---------- -------- ------------ ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F. George Dunham, III....... 279,462(3) 14 1.30 6.00 3/12/03 1,313,471 1,883,734 2,607,203
652,077(3) 32 12.00 12.00 8/22/03 -- 2,661,223 6,037,406
Stuart H. Warrington........ 93,154(3) 5 1.30 6.00 3/12/03 437,824 627,911 869,068
65,208(4) 3 12.00 12.00 8/22/03 -- 266,123 603,743
Robert K. Agazzi............ 93,154(3) 5 1.30 6.00 3/12/03 437,824 627,911 869,068
65,208(4) 3 12.00 12.00 8/22/03 -- 266,123 603,743
Ronald O. Lynn.............. 93,154(3) 5 1.30 6.00 3/12/03 437,824 627,911 869,068
65,208(4) 3 12.00 12.00 8/22/03 -- 266,123 603,743
Jeffrey W. Robinson......... 93,154(3) 5 1.30 6.00 3/12/03 437,824 627,911 869,068
65,208(4) 3 12.00 12.00 8/22/03 -- 266,123 603,743
</TABLE>

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

(1) Options to purchase a total of 2,018,376 shares of Common Stock were granted
to employees in 1997.

(2) The amounts under the columns labeled "0%," "5%" and "10%" are included by
the Company pursuant to certain rules promulgated by the Commission and are
not intended to forecast future appreciation, if any, in the price of the
Common Stock. Such amounts are based on the assumption that the named
persons hold the options for the full term of the options. The actual value
of the options will vary in accordance with the market price of the Common
Stock. With respect to the options with an exercise price per share of
$1.30, which are nonqualified stock options, the market price per share of
Common Stock on the date of grant was determined on the basis of a valuation
report prepared by the Company. The options with an exercise price per share
of $12.00, which are incentive stock options (to the extent permitted by
law), were granted on the effective date of the Company's initial public
offering at the initial public offering price.

(3) Options are subject to a two-year vesting schedule, with one-third becoming
exercisable on the date of grant and an additional one-third becoming
exercisable on each of the first two anniversaries of the date of grant.

(4) Options are subject to a four-year vesting schedule, with one-fifth becoming
exercisable on the date of grant and an additional one-fifth becoming
exercisable on each of the first four anniversaries of the date of grant.

42
<PAGE> 43

The following table sets forth certain information concerning all
unexercised options held by the named executive officers as of December 31,
1997. For additional information on and certain terms of options, see
"Management -- Stock Option Plan." No options were exercised during 1997.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
F. George Dunham, III........................... 310,513 621,026 $3,752,551 $7,505,101
Stuart H. Warrington............................ 44,092 114,270 723,562 1,678,648
Robert K. Agazzi................................ 44,092 114,270 723,562 1,678,648
Ronald O. Lynn.................................. 44,092 114,270 723,562 1,678,648
Jeffrey W. Robinson............................. 44,092 114,270 723,562 1,678,648
</TABLE>

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

(1) Based upon the closing price of the Common Stock of $20.875 on December 31,
1997.

EMPLOYMENT AND INDEMNIFICATION AGREEMENTS

In July 1997, the Company entered into employment agreements with Messrs.
Dunham, Lynn, Robinson and Gaines, each of which terminates in June 2000, and
which provide for an annual salary for Mr. Dunham of $350,000 and annual
salaries for Messrs. Lynn, Robinson and Gaines of $115,000 each. Messrs. Dunham,
Lynn, Robinson and Gaines have been granted options to purchase 931,539;
158,362; 158,362; and 93,154 shares of Common Stock, respectively, under the
Stock Option Plan. Each of Messrs. Dunham, Lynn, Robinson and Gaines was paid an
annual bonus for 1997 equal to 50% of his base salary and is subject to
noncompetition and confidentiality provisions. Mr. Dunham's employment agreement
also permits him to serve as Vice Chairman of the Board of Millers Mutual and
Millers Casualty. See "-- Stock Option Plan."

Each employment agreement with Messrs. Dunham, Lynn, Robinson and Gaines
also provides that if there is a "change of control" of the Company, the
employee shall be paid, for the term of his employment agreement plus a period
of two years thereafter, his annual "cash compensation" (which is based upon
such employee's average cash compensation for the two years prior to such change
of control), along with an annual amount equal to 50% of such average annual
cash compensation (the "Bonus"). The total amount, however, cannot exceed the
amount that would cause such payment to be deemed a "parachute payment" under
Section 280G of the Internal Revenue Code. Each agreement also provides that the
payments to such employee will cease if he is terminated for cause or in the
event of reasonable proof of any violation of the noncompetition or
confidentiality provisions of his employment agreement. Also, if following a
change of control an employee voluntarily terminates employment for other than
good reason (as defined in the employment agreement), his annual cash
compensation and Bonus will be payable for only one year following such
termination.

Each employment agreement with Messrs. Dunham, Lynn, Robinson and Gaines
was amended by a first amendment to employment agreement, dated and effective as
of January 1, 1998. Such amendments revised the bonus provisions to specify that
each of Messrs. Dunham, Lynn, Robinson and Gaines shall be entitled to
participate in the Company's 1998 Annual Bonus Plan during the remainder of the
terms of their employment agreements. See "-- 1998 Annual Bonus Plan."

The Company also entered into employment agreements with Messrs. Warrington
and Agazzi that terminated in March 1998. Mr. Warrington's agreement provided
for an annual salary of $190,500, options to purchase 93,154 shares of Common
Stock and deferred annual compensation of $40,000 to be paid each year for the
20-year period commencing January 1, 1999 and ending December 31, 2018. Mr.
Warrington retired as an executive officer effective March 15, 1998. Mr.
Agazzi's agreement provided for an annual salary of $169,000 and options to
purchase 93,154 shares of Common Stock. Messrs. Warrington and Agazzi are
subject to noncompetition and confidentiality provisions. See "-- Consulting
Agreement."

43
<PAGE> 44

The Company has entered into indemnification agreements with each of its
directors. Each indemnification agreement provides that the Company shall
indemnify the director against certain liabilities and expenses actually and
reasonably incurred by the director in connection with any threatened, pending
or completed action, suit or proceeding, including an action by or on behalf of
shareholders of the Company or by or in the right of the Company, to which the
director is, or is threatened to be made, a party by reason of his status as a
director, provided that such individual did not derive an improper benefit, such
individual did not commit acts or omissions that were not in good faith or that
involved intentional misconduct or a knowing violation of the law, or such
indemnification is not otherwise disallowed under Texas law.

CONSULTING AGREEMENT

Effective March 15, 1998, the Company entered into a consulting agreement
with Stuart H. Warrington pursuant to which Mr. Warrington, age 63, retired as
an executive officer of the Company. The consulting agreement provides that Mr.
Warrington will serve as a consultant to the Company until May 30, 1999 for a
consulting fee of $2,000 per month and will be fully vested with respect to
options to purchase 93,154 shares of Common Stock granted to Mr. Warrington on
March 12, 1997, which were scheduled to vest in three equal annual installments
commencing on the date of grant. Mr. Warrington will also retain the vested
portion of options granted effective August 22, 1997, covering 13,042 shares of
Common Stock. The consulting agreement contains noncompetition and
confidentiality provisions. Mr. Warrington founded SDS and served in one or more
capacities as its President, Chief Executive Officer and Chairman of the Board
from inception in 1981 until July 1997 and served from July 1997 until March 15,
1998 as an executive officer of the Company.

EMPLOYEE BENEFIT PLANS

Millers Mutual has a defined benefit pension plan that covered the
employees of the Company. The Company and Millers Mutual have reached an
agreement that provides for the assets of this plan attributable to the
Company's employees to be handled in the same manner as those assets
attributable to terminated employees who were 100% vested under such plan. Under
the defined benefit pension plan, participating employees of the Company receive
benefits as follows. With respect to normal and late retirement benefits, a
participating employee who retires after age 65 will receive an annuity for
life, payable monthly in an amount determined actuarially on the basis of the
participating employee's account balance at age 65. A participant's account
balance is equal to the present value of his accrued benefit on July 1, 1996,
calculated using an 8% interest rate plus quarterly additions to the account
equal to 5% of quarterly considered compensation plus an interest credit equal
to the rate on one-year U.S. Treasury securities (but not greater than 30-year
Treasury securities). With respect to early retirement benefits, a participating
employee who retires on or after age 55 and before his normal retirement age is
eligible to receive an annuity for life, commencing at age 65 and payable
monthly in an amount equal to the amount calculated above for normal retirement
benefits, provided, however, that if such employee so elects, such employee may
receive a reduced pension benefit beginning on his elected retirement date. As
of the date of this Prospectus, the estimated annual benefits payable upon
retirement at normal retirement age under the defined benefit pension plan for
Messrs. Dunham, Warrington, Agazzi and Lynn are expected to be $10,789, $474,
$794 and $5,637, respectively. Mr. Robinson was not a participant in the defined
benefit pension plan, and therefore will not receive any payments upon
retirement under such plan.

In addition, the Company maintains a defined contribution plan for its
employees that is qualified under Section 401(k) of the Internal Revenue Code of
1986, as amended.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Frank G. Dunham, Jr., Frank A. Bailey, III, R. Earl Cox, III, F. George
Dunham, III and Frank C. Wilson served as members of the Compensation Committee
of the Company until June 18, 1997. Each such member of the Compensation
Committee also served as a member of the compensation committees for Millers
Mutual and Millers Casualty during such period. Frank G. Dunham, Jr. is the
father of F. George Dunham, III and both men served as executive officers of the
Company, Millers Mutual and Millers Casualty
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<PAGE> 45

during such period. The Company has entered into certain transactions with
Millers Mutual and Millers Casualty. See "Certain Transactions."

Since June 18, 1997, R. Earl Cox, III, Harry E. Bartel and Mitch Wynne have
served as members of the Compensation Committee of the Company.

STOCK OPTION PLAN

A total of 2,250,000 shares of Common Stock has been reserved for issuance
pursuant to the Stock Option Plan. The Stock Option Plan was initially adopted
by the Board of Directors in March 1997, amended and restated by the Board of
Directors in July 1997 and amended by the Board of Directors effective as of
July 30, 1997. An additional amendment to the Stock Option Plan that would
increase the maximum number of shares of Common Stock issuable upon exercise of
options granted under the Stock Option Plan from 2,250,000 to 3,000,000 shares
has been approved by the Board of Directors of the Company and recommended to
the shareholders of the Company for approval at the annual meeting of
shareholders to be held on April 21, 1998. The Stock Option Plan was
administered by the Board of Directors through January 27, 1998 and thereafter
is administered by the Compensation Committee. Both nonqualified stock options
and incentive stock options (as defined in the Internal Revenue Code) may be
granted under the Stock Option Plan. Incentive stock options granted under the
Stock Option Plan may be exercised solely by the grantee, or in the case of a
grantee's death or incapacity, by the grantee's executors, administrators,
guardians or other legal representatives and are not assignable or transferable
by such grantee. Nonqualified stock options may be transferred to certain
permitted transferees under the Stock Option Plan.

DIRECTOR STOCK OPTION PLAN

In July 1997 the Board of Directors adopted the Director Plan, which is
administered by the Board of Directors. Each current nonemployee director has
been granted options under the Director Plan to purchase 2,500 shares of Common
Stock at an exercise price of $12.00 per share. Such options vested and became
exercisable in full as of August 22, 1997.

Each new nonemployee director who is elected (or appointed to fill any
vacancy) as a director of the Company will be granted options under the Director
Plan to purchase 2,500 shares of Common Stock at the fair market value of the
Common Stock on the date of grant. Also, each nonemployee director who has
previously been granted options under the Director Plan will be granted
additional options under the Director Plan to purchase 250 shares of Common
Stock on the day immediately after each annual meeting of shareholders of the
Company subsequent to the time at which such nonemployee director is first
elected or appointed as a director of the Company if such nonemployee director
continues to serve as a director on such date of grant. The options under the
Director Plan will vest and be exercisable as of the date of grant.

An amendment to the Director Plan that would increase from 250 to 2,500 the
number of shares of Common Stock covered by the annual option grants described
in the preceding paragraph has been approved by the Board of Directors and
recommended to the shareholders of the Company for approval at the annual
meeting of shareholders to be held on April 21, 1998.

A total of 50,000 shares of Common Stock has been reserved for issuance
pursuant to the Director Plan. Options granted under the Director Plan may be
exercised solely by the grantee, or in the case of a grantee's death or
incapacity, by the grantee's executors, administrators, guardians or other legal
representatives, and are not assignable or transferable by such grantee, except
for certain permitted transfers subject to the prior consent of the Board of
Directors.

EMPLOYEE STOCK PURCHASE PLAN

In July 1997 the Board of Directors adopted the Stock Purchase Plan, under
which a total of 425,000 shares of Common Stock has been reserved for issuance.
The Board of Directors has appointed a committee to administer the Stock
Purchase Plan. Any employee who has been employed by the Company for 90 days is
eligible to participate in offerings under the Stock Purchase Plan.

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<PAGE> 46

The Stock Purchase Plan was initially implemented by an offering of 25,000
shares of Common Stock from October 1, 1997 to December 31, 1997. Pursuant to
such offering, 6,240 shares of Common Stock were purchased by participants under
the Stock Purchase Plan. The Company anticipates that the Stock Purchase Plan
will be further implemented by eight additional semiannual offerings of Common
Stock beginning on January 1 and July 1 for each of the years 1998, 1999, 2000
and 2001. The maximum number of shares issued in each semi-annual offering will
be 50,000 shares plus the number of unissued shares from prior offerings under
the Stock Purchase Plan.

On the commencement date of each offering under the Stock Purchase Plan, a
participating employee will be deemed to have been granted an option to purchase
a maximum number of shares of Common Stock equal to (i) the percentage of the
employee's base pay that such employee has elected to be withheld (not to exceed
10%), (ii) multiplied by such employee's base pay during the period of such
offering and (iii) divided by the lower of 85% of the closing market price of
the Common Stock on the applicable offering commencement date or 85% of the
closing market price of the Common Stock on the offering termination date.
Options held by a participant shall be exercisable only by that participant.

No employee may be granted options to participate in the Stock Purchase
Plan if, as a result of such grant, such employee would (i) own stock or hold
options to purchase stock possessing 5% or more of the total combined voting
power or value of all classes of stock of the Company or (ii) have rights to
purchase stock under all employee stock purchase plans of the Company that
accrue at a rate in excess of $25,000 in fair market value for any calendar
year.

Unless a participant gives written notice to the Company, such
participant's option for the purchase of Common Stock with payroll deductions
made during an offering shall be deemed to have been exercised automatically on
the offering termination date applicable to such offering, for the purchase of
the number of full shares of Common Stock that the accumulated payroll
deductions at that time will purchase at the applicable option price. A
participant may withdraw payroll deductions credited to his account under the
Stock Purchase Plan at any time.

1998 ANNUAL BONUS PLAN

In January 1998, the Board of Directors adopted the 1998 Annual Bonus Plan,
which is administered by the Compensation Committee of the Board of Directors.
The Compensation Committee may designate earnout periods and, for each such
earnout period, the performance goal, participants, performance award for each
such participant and the award percentage of the performance award for each such
participant for various degrees of achievement of such performance goal. At the
end of each earnout period, based on a comparison of the actual performance of
the Company over such earnout period to the applicable performance goal, each
participant shall receive a lump-sum cash award within 75 days after the
issuance of the Company's audited financial statements corresponding to such
earnout period in an amount equal to the performance award designated for such
participant for such earnout period multiplied by the award percentage
corresponding to the extent to which such performance goal was achieved.

The Compensation Committee has established (i) the year ended December 31,
1998 as the initial earnout period, (ii) performance goals for such earnout
period based on earnings per share, (iii) a performance award for each
participant of 100% of the base salary of such participant if the performance
goal is fully met, and (iv) award percentages for a portion of the full
performance award if certain percentages of the full performance goal are met.
Pursuant to their employment agreements (as amended), Messrs. Dunham, Lynn,
Robinson and Gaines participate in the 1998 Annual Bonus Plan.

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<PAGE> 47

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth the number and percentage of the outstanding
shares of Common Stock owned beneficially as of the date of this Prospectus by:
(i) each director of the Company, (ii) each named executive officer of the
Company, (iii) all directors and executive officers as a group and (iv) Millers
Mutual, which is the only shareholder that beneficially owned more than 5% of
the Common Stock as of the date of this Prospectus.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF COMMON STOCK OF COMMON STOCK
PRIOR TO THIS OFFERING SHARES TO AFTER THIS OFFERING
---------------------- BE SOLD IN --------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT THIS OFFERING SHARES PERCENT
------------------------ ---------- -------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
Millers Mutual......................... 3,866,250 37.7% 650,000(1) 3,216,250(1) 27.0%(1)
300 Burnett Street
Fort Worth, Texas 76102-2799
F. George Dunham, III.................. 397,667(2) 3.8 105,000 292,667(2) 2.4
Ronald O. Lynn......................... 75,144(3) * 20,000 55,144(3) *
Stuart H. Warrington................... 101,498(4) 1.0 -- 101,498(4) *
Robert K. Agazzi....................... 80,405(3) * -- 80,405(3) *
Jeffrey W. Robinson.................... 75,144(3) * 25,000 50,144(3) *
Harry E. Bartel........................ 5,500(5) * -- 5,500(5) *
R. Earl Cox, III....................... 5,500(5) * -- 5,500(5) *
Mitch S. Wynne......................... 24,500(6) * -- 24,500(6) *
All directors and executive officers as
a group (11 individuals)............. 801,069(7) 7.3% 651,069(7) 5.2%
</TABLE>

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

* Less than 1%

(1) Assuming exercise in full of the Underwriters' over-allotment option,
Millers Mutual will sell 695,000 shares of Common Stock in this offering
and will own 3,171,250 shares of Common Stock, constituting 26.0% of the
outstanding shares of Common Stock, after this offering.

(2) Includes 378,667 shares of Common Stock (prior to this offering) and
273,667 shares of Common Stock (after this offering) issuable upon exercise
of options exercisable within 60 days after the date of this Prospectus.

(3) Includes 75,144 shares of Common Stock (prior to this offering) issuable
upon exercise of options exercisable within 60 days after the date of this
Prospectus. Includes 55,144, 75,144 and 50,144 shares of Common Stock
(after this offering) with respect to Messrs. Lynn, Agazzi and Robinson,
respectively, issuable upon exercise of options exercisable within 60 days
after the date of this Prospectus.

(4) Includes 96,196 shares of Common Stock issuable upon exercise of options
exercisable within 60 days after the date of this Prospectus.

(5) Includes 2,500 shares of Common Stock issuable upon exercise of options
exercisable within 60 days after the date of this Prospectus. Does not
include options covering additional shares expected to be granted following
the annual meeting of shareholders pursuant to the Director Plan. See
"Management -- Director Stock Option Plan."

(6) Includes 10,000 shares of Common Stock held in trust, of which Mr. Wynne is
trustee for the benefit of certain family members of Mr. Wynne, and 2,500
shares of Common Stock issuable upon exercise of options exercisable within
60 days of the date of this Prospectus. Does not include options covering
additional shares expected to be granted following the annual meeting of
shareholders pursuant to the Director Plan. See "Management -- Director
Stock Option Plan."

(7) Includes 735,741 shares of Common Stock (prior to this offering) and
585,741 shares of Common Stock (after this offering) issuable upon exercise
of options exercisable within 60 days after the date of this Prospectus.

47
<PAGE> 48

CERTAIN TRANSACTIONS

BENEFITS ADMINISTRATION CONTRACT

Effective July 1, 1997, the Company and Millers Mutual entered into a
benefits administration contract (the "Benefits Administration Contract")
pursuant to which Millers Mutual provides the Company with certain benefits
administration services, including payroll, and the Company pays Millers Mutual
a service fee of $15,000 per month. The term of the Benefits Administration
Contract is three years. Effective January 1, 1998, the Company and Millers
Mutual have agreed, subject to approval by the Texas Department of Insurance, to
amend the Benefits Administration Contract to provide that the Company shall
provide Millers Mutual, rather than Millers Mutual providing to the Company, the
benefits administration services specified in the Benefits Administration
Contract, and Millers Mutual shall pay the Company a service fee of $15,000 per
month.

The Company and Millers Mutual were parties to a management agreement
effective as of January 1, 1996 (the "Management Agreement"), which covered the
period July 1, 1995 to June 30, 1997, under which Millers Mutual provided
certain management, administrative and support services to and on behalf of the
Company, including personnel, legal, banking, investment, financial, payroll,
accounting and recordkeeping, marketing and sales, management information and
electronic data processing. The Company paid Millers Mutual a monthly fee of
$200,000 plus an annual fee equal to a fixed percentage, to be determined
annually by mutual agreement of the parties, of the Company's pre-tax income.
The Management Agreement has been replaced by the Benefits Administration
Contract.

For 1995 and 1996, the Company paid Millers Mutual management fees of
$600,000 and $3.1 million, respectively, under the Management Agreement. For
1997, the Company paid Millers Mutual aggregate service fees of $1.3 million
under the Benefits Administration Contract and the Management Agreement.

CLAIMS SERVICE CONTRACTS

Effective October 1, 1997, the Company, Millers Mutual and Millers Casualty
entered into a claims administration services agreement (the "Claims Services
Agreement"), which amends and restates the Service Contract (as defined below)
in its entirety and provides for the Company to perform claims administration
services for and on behalf of Millers Mutual and Millers Casualty. Under the
Claims Services Agreement, each of Millers Mutual and Millers Casualty pays a
fee per claim administered and a monthly fee for claims open greater than 31
days, both of which are in an amount that depends on the insurance policy line
under which a claim is administered, and a fee per hour for the services of
consultants and programmers. The term of the Claims Service Agreement is five
years, which automatically shall be renewed and extended for successive terms of
three years, unless earlier terminated.

Effective July 1, 1997, the Company, Millers Mutual and Millers Casualty
entered into an amended and restated service contract (the "Service Contract"),
which provided for the Company to perform claims administration services for and
on behalf of Millers Mutual and Millers Casualty. Under the Service Contract,
each of Millers Mutual and Millers Casualty paid a monthly service fee to the
Company. The Service Contract has been replaced by the Claims Services
Agreement.

The Company, Millers Mutual and Millers Casualty were parties to a service
contract, as amended (the "Prior Service Contract") effective as of January 1,
1996, which covered the period July 1, 1995 through November 30, 1996, under
which the Company provided claims administration services to Millers Mutual and
Millers Casualty for service fees. Effective December 1, 1996, the Prior Service
Contract was amended to modify the service fees paid to the Company by each of
Millers Mutual and Millers Casualty. The Prior Service Contract was replaced by
the Service Contract.

Millers Mutual and Millers Casualty paid the Company aggregate service fees
under the Prior Service Contract of $3.4 million in 1995 and $7.6 million in
1996. In 1997, Millers Mutual and Millers Casualty paid the Company aggregate
service fees of $7.2 million under the Claims Service Agreement, the Service
Contract and the Prior Service Contract.

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<PAGE> 49

The Company and the Speciality Personal Lines Division of Millers Mutual
are parties to a service contract effective as of April 1, 1997 under which the
Company provides claims administration services to Millers Mutual with respect
to nonstandard auto policies issued by Sun Coast General Insurance Agency ("Sun
Coast"). Millers Mutual paid the Company fees for services related to policies
issued by Sun Coast of $530,000 in 1995, $1.7 million in 1996 and $3.7 million
in 1997.

POLICY SERVICES CONTRACT

Effective October 1, 1997, the Company, Millers Mutual and Millers Casualty
entered into a policy administration services agreement (the "Policy Services
Agreement"), which provides for the Company to perform policy administration
services for and on behalf of Millers Mutual and Millers Casualty. The term of
the Policy Services Agreement is two years, which automatically shall be renewed
and extended for successive terms of one year unless earlier terminated. In
1997, Millers Mutual and Millers Casualty paid the Company aggregate service
fees of approximately $714,000 under the Policy Services Agreement.

INFORMATION SERVICES CONTRACTS

Effective October 1, 1997, the Company, Millers Mutual and Millers Casualty
entered into a second amended information services contract (the "Second Amended
Information Services Contract"), which amends and restates the Information
Services Contract (as defined below) in its entirety and provides for the
Company to provide certain IT services to Millers Mutual and Millers Casualty,
including telecommunications services, hardware services, application software
services, system software services, network services and system integration
services. Under the Second Amended Information Services Contract, each of
Millers Mutual and Millers Casualty pays monthly service fees based on the
amount and type of services provided. This monthly service fee is subject to a
minimum of $375,000 per month in 1997, $300,000 per month in 1998, and $275,000
per month in 1999 to 2001. In addition, each of Millers Mutual and Millers
Casualty pays a fee per hour for modifications by the Company to
Company-supplied application software. The term of the Second Amended
Information Services Contract is five years, which automatically shall be
renewed and extended for successive terms of three years unless earlier
terminated. Effective January 1, 1998, the Company, Millers Mutual and Millers
Casualty agreed to amend the Second Amended Information Services Contract to
provide that the Company shall not charge Millers Mutual or Millers Casualty
service fees with respect to policies issued by Millers General Agency, Inc., a
third-party managing general agent that is owned and managed by a former officer
of Millers Mutual and Millers Casualty.

Effective July 1, 1997, the Company, Millers Mutual and Millers Casualty
entered into an amended and restated information services contract (the
"Information Services Contract"), which required the Company to provide certain
IT services to Millers Mutual and Millers Casualty, including telecommunications
services, hardware services, application software services, system software
services, network services and system integration services. The Information
Services Contract has been replaced by the Second Amended Information Services
Contract.

The Company, Millers Mutual and Millers Casualty were parties to an
information services contract, effective as of October 1, 1996 (the "Services
Contract"), under which the Company provided certain IT services. This contract
was replaced by the Information Services Contract.

No fees were paid in 1996. In 1997, Millers Mutual and Millers Casualty
paid the Company aggregate service fees of $5.5 million under the Second Amended
Information Services Contract, the Information Services Contract and the
Services Contract.

OUTSOURCING SERVICES CONTRACTS WITH MILLERS CASUALTY

Effective May 1, 1997, the Company and Millers Casualty entered into a
policy administration services agreement, which was amended by Amendment No. 1,
effective October 1, 1997 (the "Policy Administration Services Agreement"),
pursuant to which the Company provides policy administration services for
Millers Casualty's homeowners line of business in Florida. The term of the
Policy Administration Services Agreement is three years, which will
automatically renew for successive three-year terms unless terminated by either
49
<PAGE> 50

party. In 1997, Millers Casualty paid the Company aggregate fees of
approximately $924,000 under the Policy Administration Services Agreement.

Effective June 1, 1997, the Company and Millers Casualty entered into a
claims administration services agreement (the "Claims Administration Services
Agreement") pursuant to which the Company provides claims administration
services for Millers Casualty's homeowners line of business in Florida. The term
of the Claims Administration Services Agreement is three years, which will
automatically renew for successive three-year terms unless terminated by either
party. In 1997, Millers Casualty paid the Company aggregate fees of
approximately $252,000 under the Claims Administration Services Agreement.

MISCELLANEOUS

Mr. Bartel, a director of the Company, is a partner with the law firm of
Cantey & Hanger, L.L.P., which from time to time provides legal services to the
Company.

As of December 31, 1997, the Company had no outstanding borrowings from
Millers Mutual. The largest amount of borrowings from Millers Mutual outstanding
since the inception of the Company was $4.3 million.

In 1993, Millers Mutual licensed SDS software pursuant to a license
agreement with SDS. For 1997, 1996 and 1995, Millers Mutual paid SDS (or the
Company after the SDS Acquisition) $733,000, $32,000, and $31,000, respectively,
for software and software services.

The Company leases its principal Sheboygan, Wisconsin facility pursuant to
a lease dated March 12, 1997 (the "Building Lease"). The building is owned by
Riverview, which is controlled by Stuart H. Warrington, a former executive
officer of the Company and, effective March 15, 1998, a consultant to the
Company. The term of the Building Lease ends February 28, 2007. Pursuant to the
Building Lease, Riverview leases to the Company approximately 28,000 square feet
of office space at a monthly rate of approximately $21,000 for the first four
years, $23,000 for the next five years, and $25,000 for the last year. For the
year ended December 31, 1997, the Company paid Riverview approximately $198,000
under the Building Lease.

The Company leases its approximately 57,000 square foot headquarters in
Fort Worth, Texas from Millers Mutual pursuant to a month-to-month rental
agreement, effective as of May 1, 1996 (the "Lease"), which provides for monthly
rental payments of approximately $25,400. For 1997 and 1996, the Company
incurred rental expense of $317,000 and $297,000, respectively, under the Lease.
Prior to May 1, 1996, the Company incurred no rental expense for office space
provided by Millers Mutual.

The Board of Directors of Millers Mutual has approved the sale of the
building in which the Company headquarters are located to a limited partnership
to be formed (the "Partnership"). A 50% interest in the Partnership will be
owned by F. George Dunham, III and the remaining 50% interest in the Partnership
will be owned in equal parts by Messrs. Bartel, Cox and Wynne. The Company
proposes to lease approximately 96,000 square feet of the building from the
Partnership for a term of ten years, with one renewal option of five years, at a
monthly rental rate of approximately $64,000 for the first five years, $72,000
for the next five years and $81,000 for the five-year renewal period, plus
taxes, insurance and maintenance costs. In addition, the Company would have an
option, on terms substantially similar to those with respect to the space
initially leased by the Company, to expand its leased space in such building in
the event Millers Mutual vacates the space that Millers Mutual proposes to lease
from the Partnership. The sale of the building to the Partnership and lease back
of a portion of the building by Millers Mutual is subject to the approval of the
Texas Department of Insurance. The lease of space by the Company has been
approved by the Board of Directors and recommended to the shareholders of the
Company for approval at the annual meeting of shareholders to be held April 21,
1998. The Company contemplates that, subject to obtaining requisite approvals,
the sale of the building to the Partnership and lease of space by the Company
from the Partnership will occur on or about May 1, 1998.

The Company and Millers Mutual are parties to a sublease agreement, dated
as of January 1, 1997, pursuant to which Millers Mutual subleases to the Company
certain furniture, equipment and other personal property that Millers Mutual has
leased from third parties under various equipment leases for the benefit of

50
<PAGE> 51

the Company. The sublease payments by the Company to Millers Mutual under the
sublease equal the lease payments by Millers Mutual to the lessors under the
respective leases.

Prior to the Company's initial public offering, Millers Mutual, the Company
and the other subsidiaries of Millers Mutual were parties to the Tax Allocation
Agreement. Under the Tax Allocation Agreement, Millers Mutual was required to
pay the Company an amount equal to any decrease in the income taxes otherwise
payable by the Millers Mutual consolidated tax group attributable to any net
losses of the Company. Conversely, the Tax Allocation Agreement required the
Company to pay to Millers Mutual the amount of any income taxes that the Company
would have paid if it had not been included in the Millers Mutual consolidated
tax group. For the period from April 28, 1995 through December 31, 1996, the
Company received from Millers Mutual approximately $190,000 under the Tax
Allocation Agreement. Effective August 23, 1997, the Tax Allocation Agreement
was terminated as it related to the Company due to the Company leaving the
Millers Mutual consolidated tax group at the time of the Company's initial
public offering. The agreement to terminate the Tax Allocation Agreement
provides that the Company will indemnify the other members of the Millers Mutual
consolidated tax group for any of the group's income taxes and related expenses
attributable to the Company and Millers Mutual will indemnify the Company for
any income taxes and related expenses attributable to any members of the
consolidated tax group other than the Company.

DESCRIPTION OF CAPITAL STOCK

As of the date of this Prospectus, the authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock, par value $0.01 per
share, of which 11,892,396 shares will be outstanding immediately following this
offering (12,192,396 shares if the Underwriters' over-allotment option is
exercised in full), and 1,000,000 shares of Preferred Stock, par value $1.00 per
share (the "Preferred Stock"), of which no shares will be outstanding
immediately following this offering. The following summary of the Company's
capital stock is qualified in its entirety by reference to the Company's
Restated Articles and its Bylaws.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by shareholders, including the election of directors, and do
not have cumulative voting rights. Subject to the rights of holders of any then
outstanding shares of Preferred Stock, the holders of the Common Stock are
entitled to such dividends as may be declared in the discretion of the Board of
Directors out of funds legally available therefor. Holders of Common Stock are
entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of the Preferred Stock then outstanding. The holders of Common Stock have
no preemptive rights to purchase shares of stock in the Company. Shares of
Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of the Company. All outstanding shares of
Common Stock are, and the shares of Common Stock to be issued by the Company
pursuant to this offering will be, upon payment therefor, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
will be subject to those of the holders of any shares of Preferred Stock the
Company may issue in the future. See "Dividend Policy."

PREFERRED STOCK

The Board of Directors may from time to time authorize the issuance of one
or more classes or series of Preferred Stock without shareholder approval.
Subject to the provisions of the Restated Articles and limitations prescribed by
law, the Board of Directors is authorized to adopt resolutions to issue the
shares, establish the number of shares, change the number of shares constituting
any series, and provide or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions on shares of Preferred Stock, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemp-

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<PAGE> 52

tion prices, conversion rights and liquidation preferences, in each case without
any action or vote by the shareholders. The Company has no current plans to
issue any shares of Preferred Stock of any class or series, except as described
below and under "Anti-Takeover Considerations -- Rights Agreement" below.

One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to discourage an attempt to obtain control of the Company by
means of a tender offer, proxy contest, merger or otherwise, and thereby protect
the Company's management. The issuance of Preferred Stock pursuant to the Board
of Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
trading price of the Common Stock.

The Board of Directors has authorized 300,000 shares of Series A Junior
Preferred Stock, par value $1.00 per share ("Series A Preferred Stock"), in
connection with the authorization and declaration of the Rights (as defined
below). Each holder of Series A Preferred Stock will be entitled to 100 votes
for each share on all matters voted upon by the shareholders, except as provided
in the Restated Articles. Each share of Series A Preferred Stock will be
entitled to a minimum preferential quarterly dividend payment, out of funds
legally available therefor, of the greater of: (i) $1.00 per share or (ii) 100
times the dividend declared per share of Common Stock. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, no
distribution may be made to holders of Common Stock (or other shares of capital
stock ranking junior to Series A Preferred Stock) unless the holders of Series A
Preferred Stock shall have received an amount per share equal to the greater of:
(i) $100 per share, plus accrued and unpaid dividends, or (ii) an aggregate
amount per share equal to 100 times the aggregate amount to be distributed per
share to holders of Common Stock. Shares of Series A Preferred Stock are not
subject to any redemption provisions.

CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK

Under the Restated Articles, upon completion of this offering there will be
35,589,990 shares of Common Stock (assuming the Underwriters' over-allotment
option is not exercised and excluding an aggregate of 2,517,614 shares reserved
for issuance under the Stock Option Plan, the Director Plan and the Stock
Purchase Plan) and 1,000,000 shares of Preferred Stock available for future
issuance without shareholder approval. These additional shares may be utilized
for a variety of corporate purposes, including future public offerings to raise
additional capital or facilitate acquisitions. The Company does not currently
have any plans to issue additional shares of Common Stock or Preferred Stock
(other than shares of Common Stock issuable under the Stock Option Plan, the
Director Plan and the Stock Purchase Plan and as described under "Anti-Takeover
Considerations -- Rights Agreement" below).

SPECIAL PROVISIONS OF THE RESTATED ARTICLES, THE BYLAWS AND TEXAS LAW

The Texas Miscellaneous Corporation Laws Act (the "Texas Miscellaneous
Laws") authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their shareholders for monetary damages for breach
of their fiduciary duty as directors except for liability of a director
resulting from: (i) a breach of such director's duty of loyalty to the
corporation or its shareholders, (ii) an act or omission that is not in good
faith or that involves intentional misconduct or a knowing violation of laws,
(iii) a transaction from which the director received an improper personal
benefit or (iv) an act or omission for which the liability of the director is
expressly provided by an applicable statute. The Restated Articles limit the
liability of directors of the Company (in their capacity as directors but not in
their capacity as officers) to the Company or its shareholders to the fullest
extent permitted by the Texas Miscellaneous Laws. The inclusion of this
provision in the Restated Articles may reduce the likelihood of derivative
litigation against directors and may discourage or deter shareholders from suing
directors for breach of their duty of care, even though such an action, if
successful, might otherwise benefit the Company and its shareholders. The
inclusion of such provisions in the Restated Articles together with a provision
requiring the Company to indemnify its directors, officers and certain other
individuals against certain liabilities, is intended to enable the Company to
attract qualified persons to serve as directors who might otherwise be reluctant
to do so. The Commission has taken the
52
<PAGE> 53

position that personal liability of directors for violations of the federal
securities laws cannot be limited and that indemnification by the issuer for
such violations is unenforceable.

The Company has entered into separate indemnification agreements with each
of its directors that may require the Company, among other things, to indemnify
them against certain liabilities that may arise by reason of their status or
service as directors to the maximum extent permitted under the TBCA and advance
their expenses incurred as a result of any proceeding against them for which
they could be indemnified, obtain directors' and officers' insurance or maintain
self-insurance in lieu thereof.

Under the TBCA, the board of directors of a corporation has the power to
amend and repeal the corporation's bylaws unless the corporation's articles of
incorporation reserve the power exclusively to the shareholders or a particular
bylaw expressly provides that the board of directors may not amend or repeal the
bylaw. The Restated Articles give the Board of Directors the power to amend and
repeal the Company's Bylaws. The Company's Restated Articles and Bylaws also
provide that the number of directors shall be fixed from time to time by
resolution of the Board of Directors. These provisions, in addition to the
existence of authorized but unissued capital stock, may have the effect, either
alone or in combination with each other, of discouraging an acquisition of the
Company deemed undesirable by the Board of Directors.

ANTI-TAKEOVER CONSIDERATIONS

Anti-Takeover Statute. On September 1, 1997, the Company became subject to
newly-enacted Part 13 of the TBCA ("Part 13"), which subject to certain
exceptions, prohibits a Texas public corporation (as defined) from engaging in
any "business combination" with an "affiliated shareholder" for three years
following the date that such shareholder became an affiliated shareholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
shareholder becoming an affiliated shareholder or (ii) the business combination
is authorized at a meeting of shareholders called not less than six months after
such date by the affirmative vote of at least two-thirds of the outstanding
voting shares not owned by the affiliated shareholder.

Part 13 generally defines a "business combination" to include: (i) any
merger, share exchange or conversion involving the corporation and the
affiliated shareholder, (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 10% or more of the assets of the corporation to
the affiliated shareholder, (iii) subject to certain exceptions, any transaction
that results in the issuance or transfer by the corporation of any stock of the
corporation to the affiliated shareholder, (iv) any transaction involving the
corporation that has the effect of increasing the proportionate ownership
percentage of the stock of any class or series of the corporation beneficially
owned by the affiliated shareholder, (v) any receipt by the affiliated
shareholder of the benefit of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation or (vi) any adoption
of a plan or proposal for the liquidation or dissolution of the corporation
proposed by, or pursuant to any agreement or understanding with, an affiliated
shareholder. In general, Part 13 defines an "affiliated shareholder" as any
entity or person beneficially owning 20% or more of the outstanding voting stock
of the corporation and any entity or person affiliated with or controlling or
controlled by such entity or person. Because Millers Mutual has continuously
owned since prior to December 31, 1996 more than 20% of the outstanding Common
Stock, business combination transactions between Millers Mutual and the Company
would not be subject to these restrictions. The provisions of Part 13 could have
the effect of delaying, deferring or preventing a change of control of the
Company even if a change of control were in the shareholders' interests.

Classified Board of Directors. The Restated Articles provide for the Board
of Directors to be divided into three classes serving staggered three-year
terms. The term of office of the first class of directors will expire at the
1998 annual meeting of shareholders, the term of office of the second class will
expire at the 1999 annual meeting of shareholders and the term of office of the
third class will expire at the 2000 annual meeting of shareholders. The terms of
office of the current directors of the Company are set forth herein under
"Management -- Directors and Executive Officers."

At each annual meeting of shareholders, the class of directors to be
elected at such meeting will be elected for a three-year term, and the directors
in the other two classes will continue in office. As holders of
53
<PAGE> 54

Common Stock will have no right to cumulative voting for the election of
directors, at each annual meeting of shareholders Millers Mutual, as the
controlling shareholder of the Company, will likely be able to elect a majority
of the successors of the class of directors whose term expires at that meeting.
In addition, the staggered terms for directors may affect the shareholders'
ability to change control of the Company even if a change of control were in the
shareholders' interests.

Shareholder Action. If provided for in the articles of incorporation, the
TBCA permits shareholder action without a meeting, without prior notice, and
without a vote, upon the written consent of less than all of the holders of
outstanding stock. The Restated Articles prohibit shareholder action without a
meeting, except by unanimous written consent. The Company's Bylaws provide that
special meetings of the shareholders may be called only by the President,
Chairman of the Board, a majority of the Board of Directors or the holders of at
least 10% of all shares entitled to vote at the proposed meeting. These
provisions could have the effect of delaying, deferring or preventing a change
of control of the Company even if a change of control were in the shareholders'
interests.

Rights Agreement. The Board of Directors has authorized and declared a
dividend distribution of one right (a "Right") for each outstanding share of
Common Stock of the Company to the sole shareholder as of the date of the
adoption of the Rights Agreement (as defined below). One Right will thereafter
be issued for each share of Common Stock that becomes outstanding between the
date of adoption of the Rights Agreement and the earliest of the Distribution
Date (as defined below), the Final Expiration Date (as defined below), and the
date the Rights are redeemed. Except as described below, each Right represents
the right to purchase from the Company one one-hundredth ( 1/100) of a share of
Series A Junior Preferred Stock, par value $1.00 per share (the "Preferred
Shares"), at a price of $40.00 (the "Exercise Price"), subject to adjustment.
The mechanics of such adjustment, the timing of the exercise of the Rights, and
the description, terms and preferences of the Rights are set forth in the Rights
Agreement (the "Rights Agreement") between the Company and U.S. Trust Company of
Texas, N.A., as Rights Agent. A copy of a form of the Rights Agreement has been
filed with the Securities and Exchange Commission as an exhibit to the
registration statement of which this Prospectus is a part. This summary of the
Rights Agreement and the Rights does not purport to be complete and is qualified
in its entirety by reference to the Rights Agreement.

The Rights will be evidenced by the Common Stock certificates and not by
separate certificates until the earlier of: (i) ten days following a public
announcement that a person or group of affiliated or associated persons, with
certain limited exceptions (an "Acquiring Person"), has acquired, or obtained
the right to acquire, beneficial ownership of capital stock of the Company
representing 15% or more of the voting power of the Company (the "Stock
Acquisition Date") or (ii) ten business days (or such later date as may be
determined by action of the Board of Directors upon approval by a majority of
the Continuing Directors (as defined below), prior to the time that any person
becomes an Acquiring Person) following the commencement of (or a public
announcement of an intention to make) a tender or exchange offer if, upon
consummation thereof, such person or group would be the beneficial owner of
capital stock of the Company representing 15% or more of the voting power of the
Company (such date being called the "Distribution Date").

Until the Distribution Date: (i) the Rights shall be transferred with, and
only with, the Common Stock and (ii) the transfer of any Common Stock
certificates shall also constitute the transfer of the Rights associated
therewith. Following the Distribution Date, separate certificates evidencing the
Rights (the "Right Certificates") will be mailed to the record holders of Common
Stock as of the close of business on the Distribution Date, and thereafter such
separate Right Certificates alone will evidence the Rights.

The Rights are not exercisable until the Distribution Date, and will expire
upon the earliest of: (i) the close of business on the tenth anniversary of the
adoption of the Rights Agreement (the "Final Expiration Date"), (ii) the
redemption of the Rights by the Company as described below, (iii) the date on
which such Rights expire pursuant to the Rights Agreement or (iv) the exchange
of the Rights by the Company as described below.

A person generally will not become an Acquiring Person under the Rights
Agreement if such person is: (i) the Company, (ii) a subsidiary of the Company,
(iii) an employee benefit plan or employee stock plan of the Company or of a
subsidiary of the Company, (iv) Millers Mutual or an affiliate or associate of
Millers
54
<PAGE> 55

Mutual, (v) F. George Dunham, III, or any of the members of his family or
certain trusts, estates or other entities created for their benefit or
controlled by them, (vi) an "Exempt Person" (as defined in the Rights Agreement)
as designated by the Board of Directors or (vii) an Acquiring Person solely by
reason of (A) obtaining 15% or more of the voting power of the Company through
transactions approved by a majority of the Board of Directors and Continuing
Directors before such person or group became an Acquiring Person or (B) a
reduction in the number of shares of voting stock of the Company pursuant to a
transaction approved by a majority of the Board of Directors and Continuing
Directors.

Unless the Rights are earlier redeemed, in the event that a person or group
becomes the beneficial owner of capital stock of the Company representing 15% or
more of the voting power of the Company (other than pursuant to a tender or
exchange offer for all outstanding shares of Common Stock of the Company
approved by a majority of the Board of Directors and Continuing Directors), each
holder of Rights will thereafter have the right to exercise its Rights and to
receive, upon payment of the Exercise Price (as adjusted), for each of its
Rights, such number of shares of Common Stock of the Company (or in certain
circumstances, cash, property or other securities of the Company) as shall have
a value equal to twice the Exercise Price. Until a Right is exercised, the
holder thereof, as such, will have no rights as a shareholder of the Company,
including without limitation the right to vote or to receive dividends.
Notwithstanding anything to the contrary, however, following the time that a
person becomes an Acquiring Person, any Rights that are beneficially owned by
such Acquiring Person or by a transferee of such Acquiring Person shall
automatically become null and void.

The Exercise Price payable and the number of Preferred Shares, shares of
Common Stock or other securities or property issuable upon exercise of a Right,
and the number of Rights outstanding, are subject to adjustment from time to
time to prevent dilution. In addition, if at any time on or after the
Distribution Date the Company is merged into or consolidates with another person
and the Company does not survive such merger or consolidation or all or part of
the shares of Common Stock are in connection with such merger or consolidation
exchanged for securities of another person, or the Company or one or more of the
subsidiaries of the Company transfers to any other person 50% or more of the
assets or earning power of the Company and the subsidiaries, proper provision
will be made so that each holder of a Right will thereafter have the right to
receive, upon exercise at the then current Exercise Price of the Right, common
stock of the applicable issuer or the surviving company having a value equal to
twice the Exercise Price of the Right.

Upon the exercise of a Right, the Company will not be required to issue
fractional Preferred Shares (other than fractions in multiples of one
one-hundredth of a Preferred Share), and in lieu thereof may issue depositary
receipts evidencing fractions of such shares or cash based on the Fair Market
Value (as defined in the Rights Agreements) of Preferred Shares.

At any time after the date of the Rights Agreement until the earlier of ten
days after the Stock Acquisition Date or the Final Expiration Date, the Company
may, upon approval by a majority of the Board of Directors and Continuing
Directors, redeem the Rights in whole, but not in part, at a price of $0.01 per
Right (the "Redemption Price"), subject to adjustment. The Redemption Price may,
at the option of the Company, be paid in cash, shares of Preferred Stock or
shares of Common Stock. The Rights will thereupon terminate and the only right
of the holders of Rights will be to receive the Redemption Price.

At any time after a person or group of affiliated or associated persons
becomes an Acquiring Person and prior to the acquisition by any such person or
group of 50% or more of the voting power of the Company, the Board of Directors
(with the approval of a majority of the Continuing Directors) may exchange the
Rights (other than Rights owned by such person or group which have become void),
in whole or in part, at an exchange ratio of one share of Common Stock (or a
fraction of a share of Preferred Stock or other consideration having equivalent
value) per Right, subject to adjustment.

As long as the Rights are redeemable, the provisions of the Rights
Agreement may be amended by the Company without the approval of any holders of
the Rights. Any amendment adopted thereafter may not materially adversely affect
the interests of holders of the Rights.

For purposes of the Rights Agreement, a "Continuing Director" means any
member of the Board of Directors who is not an Acquiring Person or an affiliate
or associate of an Acquiring Person, or a representative

55
<PAGE> 56

or nominee of an Acquiring Person or any such affiliate or associate and who
either (i) was a member of the Board of Directors on the date the Rights
Agreement was adopted or (ii) subsequently became a member of the Board of
Directors and whose nomination for election or election to the Board was
recommended or approved by a majority of the Continuing Directors then on the
Board of Directors.

The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
other than pursuant to a tender offer or other transaction approved by the Board
of Directors. The Rights, however, provide the Board of Directors and the
Acquiring Person a ten-day period to negotiate such a merger or consolidation
before the Rights become exercisable. If an acceptable arrangement is reached
within this period, the Board of Directors may redeem all of the Rights.

Preferred Stock. The Restated Articles permit the Company's Board of
Directors to issue Preferred Stock at any time without shareholder approval. See
"-- Preferred Stock" and "-- Certain Effects of Authorized but Unissued Stock."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.

UNDERWRITING

Subject to the terms and conditions of an Underwriting Agreement, the
Underwriters named below have severally agreed to purchase from the Company and
the Selling Shareholders the following respective numbers of shares of Common
Stock at the price to public less the underwriting discounts and commissions set
forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Raymond James & Associates, Inc. ........................... 1,265,000
NationsBanc Montgomery Securities LLC....................... 805,000
Southwest Securities, Inc. ................................. 230,000
---------
Total............................................. 2,300,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to certain conditions. The Underwriters are obligated
to take and pay for all shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are to
be purchased.

The Underwriters propose to offer part of the shares of Common Stock
directly to the public at the offering price set forth on the cover page of this
Prospectus and part of the shares to certain dealers at a price that represents
a concession not in excess of $1.09 per share under the price to public. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $0.10 per share to certain other dealers. After the offering of the
shares to the public, the offering price and other selling terms may be changed
by the Underwriters. The Underwriters have advised the Company that they do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.

The Company and Millers Mutual have granted the Underwriters an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to an aggregate of 345,000 additional shares of Common Stock, at the
price to public, less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. To the extent that the Underwriters exercise
such option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total shown,
and the Company and Millers Mutual will be obligated, pursuant to the option, to
sell such shares to the Underwriters. The Underwriters may exercise their option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby. If purchased, the Underwriters will sell such
additional shares on

56
<PAGE> 57

the same terms as those on which the shares that the Underwriters have agreed to
purchase from the Company and the Selling Shareholders are being offered.

This offering of Common Stock is made for delivery when, as and if accepted
by the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

Raymond James & Associates, Inc. and Southwest Securities, Inc. currently
make a market in the Common Stock. Although it has no obligation to do so,
NationsBanc Montgomery Securities LLC currently intends to make a market in the
Common Stock and may otherwise effect transactions in the Common Stock. Such
market-making activity may be discontinued at any time. During the period
beginning at the close of the market on March 25, 1998 and ending upon the
completion of each Underwriter's distribution of the shares of Common Stock in
this offering (including the distribution of any shares of Common Stock received
upon the exercise of the Underwriters' over-allotment option), rules of the
Commission will limit the ability of each such Underwriter to bid for and
purchase shares of Common Stock. During this period, any market making by any
such Underwriter will be limited to passive market making on the Nasdaq National
Market. Passive market making consists of displaying bids and effecting
transactions in a security at a price that is not in excess of the highest bid
price for the security that is displayed by a market maker who is not an
Underwriter or affiliated purchaser. New purchases on each day by a passive
market maker are limited to 30% of the average daily trading volume in the
security during a certain period.

Until the distribution of Common Stock in this offering is completed, rules
of the Commission may limit the ability of the Underwriters and certain selling
group members to bid for and purchase the Common Stock. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriters create a short position in the Common Stock in
connection with this offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriters may
reduce the short position by purchasing Common Stock in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. The Underwriters may also
impose a penalty bid on certain selling group members. This means that if the
Underwriters purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the selling group members
who sold those shares as part of this offering. In general, purchases of a
security for the purpose of stabilization or to reduce a short position could
cause the price of the security to be higher than it might be in the absence of
such purchases. The imposition of a penalty bid might also have an effect on the
price of a security to the extent that it discouraged resales of any security.
Neither the Company, any Selling Shareholder nor any of the Underwriters makes
any representation or predictions as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Common Stock.
In addition, neither the Company, any Selling Shareholder nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.

The Selling Shareholders and certain officers and directors of the Company,
which upon consummation of this offering will own or have the right to acquire
in the aggregate 3,934,163 shares of Common Stock, have agreed that they will
not, without the prior written consent of Raymond James & Associates, Inc.,
sell, offer to sell, contract to sell or otherwise transfer or dispose of any
shares of Common Stock (other than the shares offered by the Selling
Shareholders in this offering), options, rights or warrants to acquire shares of
Common Stock, or securities exchangeable for or convertible into shares of
Common Stock, during the 90-day period commencing on the date of this
Prospectus, except that the Company may issue shares of Common Stock under the
Stock Purchase Plan and upon exercise of options outstanding under the Stock
Option Plan and the Director Plan and may grant additional options under the
Stock Option Plan and the Director Plan, provided that without the prior written
consent of Raymond James & Associates, Inc., such additional options shall not
be exercisable during such period.

57
<PAGE> 58

The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain civil
liabilities, including liabilities under the Securities Act.

In the ordinary course of their respective businesses, Raymond James &
Associates, Inc., NationsBanc Montgomery Securities LLC and Southwest
Securities, Inc. have provided, and in the future may provide, investment
banking services for the Company. NationsBanc Montgomery Securities LLC is an
affiliate of NationsBank. The Company and NationsBank are parties to the
NationsBank Facility. See "SDS Acquisition" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of
INSpire -- Liquidity and Capital Resources." In the ordinary course of business,
NationsBank or its affiliates have provided, and in the future may provide,
securities brokerage and commercial banking services to the Company from time to
time.

The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the form of
Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus is a part.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Dallas,
Texas. Certain matters will be passed upon for the Underwriters by Thompson &
Knight, A Professional Corporation, Dallas, Texas.

EXPERTS

The consolidated financial statements of the Company as of and for the
years ended December 31, 1997, and 1996 and for the period April 28, 1995 (date
of inception) through December 31, 1995 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, and have been so
included in reliance upon the opinion of such firm given upon their authority as
experts in accounting and auditing.

The consolidated financial statements of SDS and subsidiary as of March 11,
1997 and for the period January 1, 1997 through March 11, 1997 and as of and for
the three years in the period ended December 31, 1996 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, and
have been so included in reliance upon the opinion of such firm given upon their
authority as experts in accounting and auditing.

58
<PAGE> 59

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") two Registration Statements on Form S-1 (Nos. 333-47413 and
333-48747) (the "Registration Statements") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the offering and sale of Common
Stock. This Prospectus does not contain all the information set forth in the
Registration Statements and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statements and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statements, each such statement being
qualified in all respects by such reference. The Company is also subject to the
informational and reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and in accordance therewith files reports,
proxy and information statements, and other information with the Commission. The
Company has been subject to such requirements of the Exchange Act for less than
12 months. A copy of the Registration Statements and such reports, proxy and
information statements, and other information, to the extent the Company has
filed such reports, proxy and information statements, and other information
under the Exchange Act, may be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its following regional offices: Suite 788,
1375 Peachtree St. N.E., Atlanta, Georgia 30367; Northwestern Atrium Center, 500
W. Madison Street, Suite 1400, Chicago, Illinois 60621-2511; and 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the
Commission's Internet world wide web site at http://www.sec.gov.

59
<PAGE> 60

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)

Pro Forma Condensed Financial Information................... F-2
Pro Forma Condensed Statement of Operations................. F-3
Notes to Pro Forma Condensed Statement of Operations........ F-4

INSPIRE INSURANCE SOLUTIONS, INC. FINANCIAL STATEMENTS

Independent Auditors' Report................................ F-5
Financial Statements:
Balance Sheets............................................ F-6
Statements of Operations.................................. F-7
Statements of Shareholders' Equity........................ F-8
Statements of Cash Flows.................................. F-9
Notes to Financial Statements............................. F-10

STRATEGIC DATA SYSTEMS, INC. CONSOLIDATED FINANCIAL
STATEMENTS

Independent Auditors' Report................................ F-23
Consolidated Financial Statements:
Consolidated Balance Sheets............................... F-24
Consolidated Statements of Operations..................... F-25
Consolidated Statements of Shareholders' Equity........... F-26
Consolidated Statements of Cash Flows..................... F-27
Notes to Consolidated Financial Statements................ F-28
</TABLE>

F-1
<PAGE> 61

PRO FORMA CONDENSED FINANCIAL INFORMATION

INTRODUCTION

The accompanying unaudited pro forma condensed statement of operations for
the year ended December 31, 1997 reflects: (i) the acquisition of Strategic Data
Systems, Inc. ("SDS") using the purchase method of accounting as if the
acquisition of SDS, which occurred on March 12, 1997, had occurred on January 1,
1997 and (ii) the results of operations of INSpire Insurance Solutions, Inc.
(the "Company") as if the Company had operated on an independent basis separate
from The Millers Mutual Fire Insurance Company ("Millers Mutual") since January
1, 1997.

The unaudited pro forma condensed statement of operations is based on
currently available information and does not purport to represent what the
Company's results of operations would have been if the events referred to above
had occurred on January 1, 1997, or to project the Company's results of
operations for any future periods.

The unaudited pro forma condensed statement of operations should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of INSpire," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of SDS," the Company's Financial
Statements and SDS's Consolidated Financial Statements.

F-2
<PAGE> 62

PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
INSPIRE STRATEGIC
INSURANCE DATA PRO FORMA
SOLUTIONS, INC. SYSTEMS, INC. COMBINED ADJUSTMENTS PRO FORMA(a)
--------------- ------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Outsourcing services.................... $ 32,458 $ -- $ 32,458 $ -- $ 32,458
Software and software services.......... 21,101 4,840 25,941 -- 25,941
Other................................... 3,010 572 3,582 -- 3,582
--------- ------ --------- ------- ---------
Total revenues.................. 56,569 5,412 61,981 61,981
Operating expenses........................ 56,036 5,049 61,085 700(b) 60,868
(1,110)(c)
233(d)
184(e)
(20)(f)
(204)(g)
Operating income.......................... 533 363 896 1,113
Interest income........................... 332 24 356 (84)(h) 272
Other income.............................. 1,652 1,652 1,652
--------- ------ --------- ---------
Income from operations before income
taxes................................... 2,517 387 2,904 3,037
Income tax benefit (expense).............. (801) (156) (957) (48)(i) (1,005)
--------- ------ --------- ---------
Net income................................ $ 1,716 $ 231 $ 1,947 $ 2,032
========= ====== ========= =========
Net income per share (basic).............. $ 0.21 $ 0.25
========= =========
Net income per share (diluted)............ $ 0.20 $ 0.23
========= =========
Weighted average shares (basic)........... 8,137,370 8,137,370
Weighted average shares (diluted)......... 8,782,497 8,782,497
</TABLE>

See accompanying notes.

F-3
<PAGE> 63

NOTES TO PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)

(a) See the Introduction to Pro Forma Condensed Financial Information.

(b) Represents compensation for finance, administrative, executive and marketing
employees to perform services performed by Millers Mutual pursuant to a
management agreement.

(c) Reflects the net reduction in the management fee charged to the Company by
Millers Mutual resulting from the recognition of additional compensation for
employees to perform services provided by Millers Mutual pursuant to a
management agreement.

(d) Reflects the amortization of $6,000,000 of purchased software associated
with the acquisition of SDS.

(e) Represents the amortization of goodwill associated with the acquisition of
SDS.

(f) Represents previously recorded amortization of goodwill by SDS resulting
from the acquisition of Applied Quoting Systems, Inc.

(g) Reflects the elimination of amortization of software production expenses
capitalized by SDS as a result of conforming its software production expense
capitalization policy to that of the Company.

(h) Represents the effect of interest expense associated with the debt incurred
in conjunction with the acquisition of SDS, offset by the elimination of
certain interest expense associated with mortgage debt not assumed in the
acquisition of SDS.

(i) Income tax is calculated at an incremental tax rate of 36%.

F-4
<PAGE> 64

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
INSpire Insurance Solutions, Inc.
Fort Worth, Texas

We have audited the accompanying balance sheets of INSpire Insurance
Solutions, Inc. (formerly Millers Integrated Claims Resources, Inc. and
MiliRisk, Inc.) as of December 31, 1996 and 1997, and the related statements of
operations, shareholders' equity, and cash flows for the period April 28, 1995
(date of inception) through December 31, 1995, and the years ended December 31,
1996 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of INSpire Insurance Solutions, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the period April 28, 1995 (date of inception) through December 31, 1995, and
the years ended December 31, 1996 and 1997, in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP

Fort Worth, Texas
January 19, 1998

F-5
<PAGE> 65

INSPIRE INSURANCE SOLUTIONS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 363,398 $28,039,323
Accounts receivable, net.................................. 1,168,148 10,976,672
Income taxes receivable................................... 339,571 149,041
Deferred income taxes..................................... -- 1,434,000
Prepaid expenses and other current assets................. 140,950 1,727,876
----------- -----------
Total current assets.............................. 2,012,067 42,326,912
Accounts receivable, excluding current portion.............. -- 74,258
Property and equipment, net................................. 3,219,892 6,029,973
Intangibles and other assets................................ -- 17,039,634
----------- -----------
TOTAL....................................................... $ 5,231,959 $65,470,777
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable.............................................. $ 2,500,000 $ --
Accounts payable.......................................... 1,066,013 834,418
Accrued payroll and compensation.......................... -- 633,252
Other accrued expenses.................................... -- 1,485,543
Unearned revenue.......................................... -- 2,626,624
Deferred compensation..................................... -- 2,699,000
Income taxes payable...................................... -- 3,063,000
Current portion of long-term debt......................... -- 609,658
Due to shareholder........................................ 995,706 --
----------- -----------
Total current liabilities......................... 4,561,719 11,951,495
----------- -----------
Deferred compensation....................................... -- 1,657,017
Long-term debt.............................................. -- 373,151
Deferred income taxes....................................... 64,000 2,723,000
Commitments and contingencies (Note 15)..................... -- --
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.01 par value; 1,000 shares authorized, 100
shares issued and outstanding in 1996; 50,000,000
shares authorized and 10,191,250 shares issued and
outstanding in 1997.................................... 1 101,913
Additional paid-in capital................................ 2,383,417 48,725,299
Accumulated deficit....................................... (1,777,178) (61,098)
----------- -----------
Total shareholders' equity.................................. 606,240 48,766,114
----------- -----------
TOTAL....................................................... $ 5,231,959 $65,470,777
=========== ===========
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE> 66

INSPIRE INSURANCE SOLUTIONS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD APRIL 28,
1995 THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1995 1996 1997
---------------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Outsourcing services............................. $ 3,907,108 $13,653,003 $32,458,600
Software and software services................... -- -- 21,100,899
Other............................................ -- -- 3,009,960
----------- ----------- -----------
Total revenues........................... 3,907,108 13,653,003 56,569,459
----------- ----------- -----------
EXPENSES:
Cost of outsourcing services..................... 4,884,641 10,543,077 20,797,969
Cost of software and software services........... -- -- 10,680,787
Cost of other revenues........................... -- -- 2,413,170
Selling, general and administrative.............. -- -- 8,714,192
Research and development......................... -- -- 1,190,114
Depreciation and amortization.................... 33,070 786,768 4,001,260
Purchased research and development............... -- -- 3,000,000
Deferred compensation............................ -- -- 3,949,000
Management fees to shareholder................... 600,000 3,100,000 1,290,000
----------- ----------- -----------
Total expenses........................... 5,517,711 14,429,845 56,036,492
----------- ----------- -----------
OPERATING INCOME (LOSS)............................ (1,610,603) (776,842) 532,967
OTHER INCOME (EXPENSE):
Interest income.................................. -- -- 680,508
Interest expense................................. -- (2,245) (348,007)
Other............................................ -- -- 1,651,830
----------- ----------- -----------
Total other income (expense)............. -- (2,245) 1,984,331
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX.................... (1,610,603) (779,087) 2,517,298
INCOME TAX BENEFIT (EXPENSE)....................... 348,624 263,888 (801,218)
----------- ----------- -----------
NET INCOME (LOSS).................................. $(1,261,979) $ (515,199) $ 1,716,080
=========== =========== ===========
NET INCOME (LOSS) PER SHARE (BASIC)................ $ (0.18) $ (0.07) $ 0.21
=========== =========== ===========
NET INCOME (LOSS) PER SHARE (DILUTED).............. $ (0.16) $ (0.07) $ 0.20
=========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-7
<PAGE> 67

INSPIRE INSURANCE SOLUTIONS, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD APRIL 28, 1995 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Issuance of 100 shares of common stock
at inception.......................... $ 1 $ 999 $ -- $ 1,000
Shareholder's contribution of fixed
assets................................ -- 2,382,418 -- 2,382,418
Net loss................................ -- -- (1,261,979) (1,261,979)
-------- ----------- ----------- -----------
Balance, December 31, 1995.............. 1 2,383,417 (1,261,979) 1,121,439
Net loss................................ -- -- (515,199) (515,199)
-------- ----------- ----------- -----------
Balance, December 31, 1996.............. 1 2,383,417 (1,777,178) 606,240
Shareholder's contribution of fixed
assets................................ -- 1,308,191 -- 1,308,191
Shareholder's contribution of additional
paid-in capital....................... -- 10,500,000 -- 10,500,000
Stock dividends to shareholder of
6,999,900 shares...................... 69,999 (69,999) -- --
Initial public offering of 3,191,250
shares................................ 31,913 34,603,690 -- 34,635,603
Net income.............................. -- -- 1,716,080 1,716,080
-------- ----------- ----------- -----------
Balance, December 31, 1997.............. $101,913 $48,725,299 $ (61,098) $48,766,114
======== =========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-8
<PAGE> 68

INSPIRE INSURANCE SOLUTIONS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD APRIL 28,
1995 THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------
1995 1996 1997
---------------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................ $(1,261,979) $ (515,199) $ 1,716,080
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 33,070 786,768 4,001,260
Deferred income taxes.................................. 126,500 (62,500) (2,429,531)
Purchased research and development..................... -- -- 3,000,000
Gain on sale of subsidiary............................. -- -- (1,634,291)
Loss on sales of property and equipment................ 8,348 12,639 --
Change in operating assets and liabilities (net of
effects of the acquisition):
Accounts receivable.................................. -- (1,168,148) (5,744,286)
Income taxes receivable.............................. (475,124) 135,553 190,530
Prepaid expenses and other current assets............ -- (140,950) (1,334,926)
Other assets......................................... -- -- (468,530)
Accounts payable..................................... -- 1,066,013 (1,766,791)
Accrued payroll and compensation..................... -- -- (324,320)
Other accrued expenses............................... -- -- 1,222,702
Unearned revenue..................................... -- -- 1,310,315
Income taxes payable................................. -- -- 2,821,062
Deferred compensation................................ 1,569,108 (573,402) 3,949,000
----------- ----------- ------------
Net cash provided by (used in) operating activities........ (77) (459,226) 4,508,274
----------- ----------- ------------
INVESTING ACTIVITIES:
Proceeds from sales of property and equipment............ 23,039 67,494 --
Proceeds from sale of subsidiary, net of cash
relinquished........................................... -- -- 2,499,262
Purchase of software license agreement................... -- -- (1,623,750)
Purchases of property and equipment...................... (2,094) (1,766,738) (2,060,125)
Capitalized research and development costs............... -- -- (819,105)
Acquisition of subsidiary, net of cash acquired.......... -- -- (17,118,849)
----------- ----------- ------------
Net cash provided by (used in) investing activities........ 20,945 (1,699,244) (19,122,567)
----------- ----------- ------------
FINANCING ACTIVITIES:
Proceeds from borrowings................................. -- 2,500,000 8,677,503
Repayment of borrowings.................................. -- -- (10,792,589)
Repayment of borrowings to shareholder................... -- -- (995,706)
Contribution from shareholder............................ -- -- 10,500,000
Issuance of common stock, net of issuance costs paid..... 1,000 -- 34,635,603
Bank overdrafts.......................................... -- -- 265,407
----------- ----------- ------------
Net cash provided by financing activities.................. 1,000 2,500,000 42,290,218
----------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 21,868 341,530 27,675,925
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... -- 21,868 363,398
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 21,868 $ 363,398 $ 28,039,323
=========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.......................................... $ -- $ 2,245 $ 360,083
=========== =========== ============
Income taxes refunded.................................. $ -- $ 336,939 $ 48,686
=========== =========== ============
Noncash investing activities -- contribution of fixed
assets from shareholder.............................. $ 2,382,418 $ -- $ 1,308,191
=========== =========== ============
</TABLE>

See accompanying notes to financial statements.

F-9
<PAGE> 69

INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General -- INSpire Insurance Solutions, Inc. ("INSpire" or the "Company")
(formerly Millers Integrated Claims Resources, Inc. and MiliRisk, Inc.) is a
provider of policy and claims administration and information technology
outsourcing services to the property and casualty ("P&C") insurance industry.
The Company also develops, markets, licenses and supports computer software and
related services to the P&C insurance industry. The Company sells its products
directly to the customer. The majority of sales are in North America. Prior to
the initial public offering of common stock on August 22, 1997, the Company was
a wholly-owned subsidiary of The Millers Mutual Fire Insurance Company ("Millers
Mutual").

SDS Acquisition -- On March 12, 1997, the Company acquired all of the
outstanding shares of common stock of Strategic Data Systems, Inc. and
subsidiary ("SDS") for an aggregate cash purchase price of $18.0 million,
subject to adjustment as provided in the purchase agreement and costs and
expenses of approximately $325,000. The acquisition was funded by a $10.5
million capital contribution from Millers Mutual along with borrowings under a
revolving line of credit and term loan from a bank.

The acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based on their relative fair market values. As of the
acquisition date, assets acquired and liabilities assumed were as follows (in
thousands):

<TABLE>
<S> <C>
Purchase price.............................................. $ 18,325
Fair values of net assets acquired:
Software.................................................. 6,000
Purchased research and development........................ 3,000
Fair value of tangible assets acquired.................... 10,832
Liabilities............................................... (10,786)
--------
9,046
--------
Goodwill.................................................... $ 9,279
========
</TABLE>

The amount assigned to purchased research and development was charged
against operating results at the time of acquisition.

SDS was merged into the Company on July 1, 1997. The operating results of
the acquired business are included from March 12, 1997, the date of acquisition.
Unaudited pro forma data reflecting results of the Company as if the acquisition
was effective at the beginning of 1996 follows (in thousands, except per share
data):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Total revenues.............................................. $ 37,317 $ 61,981
Operating income............................................ 397 1,113
Net income.................................................. 148 2,049
Net income per share (basic)................................ 0.02 0.25
Net income per share (diluted).............................. 0.02 0.23
Weighted average shares (basic)............................. 7,000,000 8,137,370
Weighted average shares (diluted)........................... 7,749,221 8,782,497
</TABLE>

Pro forma results are unaudited and are based on historical results,
adjusted for the impact of certain acquisition related adjustments, such as:
increased depreciation of property and equipment, the amortization of goodwill,
acquired software and other intangible assets and the related income tax
effects. Pro forma results

F-10
<PAGE> 70
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

do not reflect any synergies that might be achieved from combined operations
and, therefore, in management's opinion, are not indicative of what actual
results would have been if the acquisitions had occurred at the beginning of
1996. In addition, they are not intended to be a projection of future results.

The management fee historically paid by the Company was determined by
management to be reasonable based on an allocation of total projected common
costs of Millers Mutual and its subsidiaries allocated based on projected
revenues. As a result of the acquisition of SDS, including its existing finance,
administrative, executive and marketing infrastructure, and the addition of
other personnel, the Company is able to provide internally most of the services
previously provided by Millers Mutual.

The net effect of the pro forma adjustments to reflect: (i) differences
between the fees paid under the management agreement in place between the
Company and Millers Mutual through June 30, 1997 and the benefits administration
contract effective July 1, 1997, (ii) the additional costs that would have been
incurred by the Company for compensation of finance, administrative, executive
and marketing personnel to perform services provided by Millers Mutual on behalf
of the Company if the management agreement had not been in place and (iii) the
related income tax effects for the years ended December 31, 1996 and 1997 was to
increase net income as reported in the Statements of Operations by approximately
$1,223,000 and $250,000, respectively. The effect of these pro forma adjustments
was to increase pro forma net income per share (basic) for the years ended
December 31, 1996 and 1997 by $0.09 and $0.04, respectively and to increase pro
forma net income per share (diluted) for the years ended December 31, 1996 and
1997 by $0.09 and $0.03, respectively.

Property and Equipment -- The Company records property and equipment at
cost, less accumulated depreciation. Depreciation is calculated using the
straight-line method based on the related assets estimated useful lives which
range from three to seven years. Leasehold expenses are amortized over the lease
term or the estimated useful life, whichever is less. Repairs and maintenance
are charged to operating expenses as incurred.

Revenue Recognition -- Revenues from outsourcing services are recognized as
services are rendered. The Company is typically paid a percentage of premiums
for policy administration services, a percentage of premiums or claims paid for
claims administration services and a percentage of premiums subject to a minimum
fee for information technology services. Outsourcing services contracts
generally are for terms of two to five years. Due to the ongoing nature of these
services and the length of the terms of service contracts, outsourcing services
generate recurring revenues. Initial installations of software systems generally
include a one-time license fee and a contract for the installation and
customization of the system to meet the customer's specifications, which the
Company bills at an hourly rate. Amounts charged for the initial license and the
installation and customization of systems are recognized as revenue during the
installation period in proportion to the hours expended for installation
compared to the total hours projected for installation. In other instances,
revenues are recognized based on performance milestones specified in the
contract. The Company recognizes the annual fee charged for maintenance of the
customer's system as revenue as hours are expended over the maintenance contract
period. Revenues from computer hardware and equipment sales, included in other
revenues, are recognized when the Company receives notification that the
equipment has been shipped by the manufacturer and title has passed to the
customer. Changes in estimates of percentage of completion or losses, if any,
associated with outsourcing or software services are recognized in the period in
which they are determined. Unearned revenues consist of billings to customers in
advance of revenues recognized on services contracts. Unbilled receivables
consist of revenues recognized in advance of billings due to timing differences
related to billing schedules specified in contracts.

Income Taxes -- Prior to the initial public offering on August 22, 1997,
Millers Mutual and its subsidiaries, including the Company, filed a consolidated
federal income tax return. In accordance with federal income tax regulations,
all corporations included in a consolidated tax return were jointly and
severally liable for all tax liabilities. A tax sharing agreement among Millers
Mutual, the Company and the other subsidiaries
F-11
<PAGE> 71
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

of Millers Mutual (the "Tax Allocation Agreement") provided that taxes on income
were charged to profitable subsidiaries as if they were filing their own
separate returns. Subsidiaries with losses were given credit for tax benefits of
their losses to the extent utilized to reduce the consolidated tax liability or
to the extent the benefits are funded currently. Subsidiaries received the
benefit of all tax credits. Intercompany tax balances were settled annually.
Effective August 23, 1997, the Tax Allocation Agreement was terminated as it
related to the Company. The agreement to terminate the Tax Allocation Agreement
provides that the Company will indemnify the other members of the Millers Mutual
consolidated tax group for any of the group's income taxes and related expenses
attributable to the Company and Millers Mutual will indemnify the Company for
any income taxes and related expenses attributable to any members of the tax
group other than the Company's.

Federal income taxes were computed on a separate return basis in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," which requires income taxes to be accounted for under the
liability method. Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred income taxes related primarily to differences between the basis of
property and equipment due to depreciation differences and to the application of
the purchase method of accounting for financial statement purposes but not for
tax purposes, and nondeductible asset and liability reserves for tax purposes.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. Deferred tax assets
are evaluated based on the guidelines for realization and may be reduced by a
valuation allowance.

Industry Concentration -- The Company's revenues and accounts receivable
are derived primarily from the United States P&C insurance industry.

Research and Development -- All research and development costs incurred
prior to the point at which management believes a project has reached
"technological feasibility" are expensed. Software production costs incurred
subsequent to reaching technological feasibility are capitalized, if material,
and reported at the lower of unamortized cost or net realizable value.
Capitalized costs are amortized over the expected service life of the related
software, generally five to seven years, using the straight-line method. The
cost and related accumulated amortization of projects are written off as they
become fully amortized.

The Company assesses the recoverability of these costs by determining
whether the amortization of the capitalized costs over the remaining life of the
projects can be recovered through undiscounted future operating cash flows.

Cash and Cash Equivalents -- For the purposes of reporting cash flows, cash
and cash equivalents includes investments readily convertible to cash with
remaining maturities at date of purchase of three months or less.

Intangibles and Other Assets -- Goodwill is amortized over a period of 10
years using the straight-line method. The realizability of goodwill is evaluated
periodically to assess recoverability and, if warranted, impairment would be
recognized. Acquired software is amortized over a period of five years using the
straight-line method.

Financial Instruments -- Under SFAS No. 107, "Disclosure About Fair Value
of Financial Instruments," the Company's financial instruments include cash and
cash equivalents, accounts receivable, accounts payable, amount due to
shareholder and long-term debt. The Company believes that the carrying amounts
of cash and cash equivalents, accounts receivable, accounts payable, amount due
to shareholder and long-term debt are a reasonable estimate of their fair value
because of the short-term maturities of such instruments or, in the case of
long-term debt, because of interest rates available to the Company for similar
obligations.

F-12
<PAGE> 72
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Stock-Based Compensation -- SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," ("APB No. 25") and related
interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair market value of the Company's stock at the date
of the grant over the amount an employee must pay to acquire the stock. See Note
10.

Net Income (Loss) Per Share -- Net income (loss) per share (basic) of the
Company is computed by dividing net income or loss by the weighted average
number of shares outstanding. The weighted average number of shares (basic) was
7,000,000 in 1995 and 1996 and 8,137,370 in 1997 after giving effect to the
stock dividends paid in May and June 1997. The weighted average number of shares
(diluted) was 7,749,221 in 1995 and 1996 and 8,782,497 in 1997. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin Topic 4D, stock
options granted during the twelve months prior to the date of the initial filing
of the Company's Form S-1 Registration Statement have been included in the
calculation of net income or loss per share (diluted) using the treasury stock
method, as if they were outstanding for all periods presented.

Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities 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 amounts.

Recently Issued Accounting Pronouncements -- In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components, as defined.
SFAS No. 130 requires that all items that must be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement displayed with the same prominence as other financial statements. In
addition, SFAS No. 130 requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a balance
sheet. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Management believes that comprehensive income, as defined by SFAS No. 130,
will not differ materially from net income (loss) as reported in the Statements
of Operations.

In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which requires public
enterprises to report certain financial and descriptive information about
operating segments, as defined, in annual financial statements and selected
information in condensed financial statements for interim periods issued to
shareholders, if practical. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. Management is currently
evaluating the effect of the adoption of SFAS No. 131 on the Company's
disclosures.

In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company believes the adoption of SOP 97-2 will not have a material effect on the
Company's financial position or results of operations.

F-13
<PAGE> 73
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. ACCOUNTS RECEIVABLE

Accounts receivable is comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
Accounts receivable -- trade................................ $1,137,512 $ 9,957,538
Accounts receivable -- unbilled............................. -- 1,161,634
Other....................................................... 30,636 160,063
---------- -----------
1,168,148 11,279,235
Allowance for doubtful accounts............................. -- 302,563
---------- -----------
1,168,148 10,976,672
Noncurrent -- accounts receivable........................... -- 74,258
---------- -----------
$1,168,148 $11,050,930
========== ===========
</TABLE>

No allowance for doubtful accounts was considered necessary by management
as of December 31, 1996.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Computer equipment........................................ $ 4,084,887 $11,948,671
Office equipment.......................................... 335,685 1,938,491
Automobiles............................................... 68,867 242,710
Leasehold improvements.................................... 2,464 114,615
----------- -----------
4,491,903 14,244,487
Accumulated depreciation and amortization................. (1,272,011) (8,214,514)
----------- -----------
$ 3,219,892 $ 6,029,973
=========== ===========
</TABLE>

Depreciation and amortization expense was $33,070 for the period April 28,
1995 (date of inception) through December 31, 1995 and $786,768 and $2,263,087
for 1996 and 1997, respectively.

4. RESEARCH AND DEVELOPMENT

Research and development costs were approximately $2,975,000 for the year
ended December 31, 1997, including capitalized software costs of $819,000 and
amortization expense of approximately $966,000 relating to acquired software
costs. The Company had no significant research and development activities for
the period from April 28, 1995 (date of inception) through December 31, 1995 and
the year ended December 31, 1996.

F-14
<PAGE> 74
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. INTANGIBLES AND OTHER ASSETS

Intangibles and other assets consist of the following at December 31, 1997:

<TABLE>
<S> <C>
Goodwill, net of accumulated amortization of $748,567....... $ 8,530,173
Acquired software, net of accumulated amortization of
$966,000.................................................. 5,034,000
Capitalized research and development costs, net of
accumulated amortization of $26,513....................... 792,592
Software license agreement.................................. 1,623,750
Cash surrender value of life insurance...................... 409,898
Other....................................................... 649,221
-----------
$17,039,634
===========
</TABLE>

6. NOTE PAYABLE AND LONG-TERM DEBT

Note Payable -- On December 11, 1996, the Company entered into a note
agreement with a bank which was repaid on February 1, 1997.

Long-Term Debt -- The Company has a bank line of credit of $4 million which
expires on March 12, 1999. The line bears interest at prime (8.5% at December
31, 1997) or the London Interbank Offering Rate ("LIBOR") and is collateralized
by substantially all of the assets of the Company. Borrowings are limited based
on a borrowing base calculation. Interest is due and payable quarterly along
with commitment fees of 0.25% of the unused balance. The bank line of credit
agreement contains certain restrictive covenants. These covenants require that
the Company meet certain requirements such as maintenance of a minimum net
worth, and does not allow additional borrowings, dividends or other
distributions without prior consent of the bank. As of December 31, 1997, the
Company had no borrowings outstanding under the bank line of credit.

On August 22, 1997, the Company entered into a note agreement with a
financial institution to pay the cost of three-year professional liability and
directors and officers insurance policies. The note is payable in monthly
principal and interest installments of $54,424 through July 1999 and had a
balance of $982,809 at December 31, 1997. The note bears interest at an annual
rate of 6.25%.

The following represents the approximate future annual maturities of the
Company's long-term debt obligation at December 31, 1997:

F-15
<PAGE> 75
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

Federal income tax benefit (expense) consists of the following components:

<TABLE>
<CAPTION>
PERIOD
APRIL 28, 1995
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------
1995 1996 1997
-------------- -------- -----------
<S> <C> <C> <C>
Current:
Federal..................................... $ 475,124 $201,388 $(3,048,994)
State and local............................. -- -- (634,881)
Deferred:
Federal..................................... (126,500) 62,500 2,554,340
State and local............................. -- -- 328,317
--------- -------- -----------
$ 348,624 $263,888 $ (801,218)
========= ======== ===========
</TABLE>

A reconciliation of current income tax benefit (expense) computed by
applying the federal corporate tax rate of 34% to income (loss) before income
taxes to the actual income taxes is as follows:

<TABLE>
<CAPTION>
PERIOD
APRIL 28, 1995
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------
1995 1996 1997
-------------- --------- ----------
<S> <C> <C> <C>
Current federal income tax benefit (expense).... $ 547,605 $264,889 $(855,881)
State income taxes, net of federal income tax
benefit....................................... -- -- (91,000)
Difference in book and tax basis of assets
contributed by shareholder.................... (219,356) -- --
Valuation of temporary differences.............. -- -- 277,000
Goodwill........................................ -- -- (254,512)
Research and development credits................ -- -- 100,000
Other........................................... 20,375 (1,001) 23,175
--------- -------- ---------
$ 348,624 $263,888 $(801,218)
========= ======== =========
</TABLE>

F-16
<PAGE> 76
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
-------- -----------
<S> <C> <C>
Deferred income tax assets:
Current:
Accounts receivable.................................... $ -- $ 118,000
Accrued expenses....................................... -- 1,316,000
-------- -----------
-- 1,434,000
Noncurrent:
Net operating loss carryforwards....................... 210,000 --
Accrued expenses....................................... -- 203,000
-------- -----------
Total deferred income tax assets.................. 210,000 1,637,000
-------- -----------
Deferred income tax liabilities -- noncurrent:
Property and equipment.................................... 274,000 650,000
Capitalized research and development...................... -- 393,000
Acquired software......................................... -- 1,883,000
-------- -----------
Total deferred income tax liabilities............. 274,000 2,926,000
-------- -----------
Net deferred income tax liabilities......................... $(64,000) $(1,289,000)
======== ===========
Represented on the balance sheets as:
Current deferred income tax assets........................ $ -- $ 1,434,000
Noncurrent deferred income tax liabilities................ (64,000) (2,723,000)
-------- -----------
$(64,000) $(1,289,000)
======== ===========
</TABLE>

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods with respect to which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences.

8. RELATED PARTY TRANSACTIONS

The Company provided policy and claims administration services, data
processing services and software services to Millers Mutual and The Millers
Casualty Insurance Company ("Millers Casualty"), under the terms of various
agreements. Total fees earned were approximately $3,376,000, $7,557,000 and
$18,864,000 in 1995, 1996 and 1997, respectively.

Since July 1, 1995, the Company has had various agreements with Millers
Mutual for provision by Millers Mutual of management and administrative
services. Total fees paid by the Company in 1995, 1996 and 1997 were
approximately $600,000, $3,100,000 and $1,290,000, respectively. Effective
January 1, 1998, a new agreement was entered into, whereby the Company will
provide benefits administration services to Millers Mutual and Millers Casualty
for a monthly fee of $15,000.

Beginning May 1, 1996, the Company incurred rental expenses to Millers
Mutual, totaling approximately $297,000 for 1996 and $316,500 for 1997.

F-17
<PAGE> 77
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

There was a payable to Millers Mutual of approximately $996,000 at December
31, 1996, and a net receivable due from Millers Mutual of $1,301,000 at December
31, 1997.

9. EMPLOYEE BENEFIT PLANS

Prior to the initial public offering of common stock, substantially all of
the Company's employees were covered by a defined benefit pension plan (the
"Pension Plan") sponsored by Millers Mutual that provides retirement, death and
disability benefits for full-time employees completing at least 1,000 hours of
service. The Company made annual contributions to the Pension Plan equal to the
amounts accrued for pension expense, including amortization of past service cost
over 30 years. Contributions to the Pension Plan were determined by consulting
actuaries based upon future periodic payments, including lump-sum distributions
that were attributable under the Pension Plan's provisions to the service
employees had rendered. Benefits were based upon the average of the employee's
highest five consecutive years of compensation during the ten years of credited
service immediately preceding the valuation date. The actuarial present value of
accumulated plan benefits is that amount that results from applying actuarial
assumptions to adjust the accumulated plan benefits to reflect the time value of
money (through discounts for interest) and the probability of payment (by means
of decrements such as for death, disability, withdrawal, or retirement) between
the valuation date and the expected date of payment. Total expense associated
with the Pension Plan was $100,000 during 1995. No expense was incurred relative
to the Pension Plan during 1996 or 1997, as the pension plan was over-funded.

In addition, the Company participated in a defined contribution profit
sharing plan sponsored by Millers Mutual that covered substantially all of its
employees (the "Profit Sharing Plan"). Employees were not required to satisfy
any age or service requirements to become eligible to participate in the Profit
Sharing Plan. The Company also participated in an executive incentive
compensation plan covering officers sponsored by Millers Mutual. Contributions
to these plans were discretionary and were authorized annually by the Board of
Directors. Participants in the Profit Sharing Plan were permitted to contribute
1% to 12% (not to exceed $9,500 in 1997 and $9,240 in 1996 and 1995) of their
annual compensation on a tax deferred basis. Vesting of participants' interest
in the Profit Sharing Plan's contributions was based upon length of service.
Participants with five or more years of service were fully vested. Total expense
associated with the Profit Sharing Plan was approximately $30,000 in 1995. There
were no contributions made by the Company to the Profit Sharing Plan in 1996 or
1997.

In July 1997, the Board of Directors approved the termination of the
Company's participation in the Pension Plan and the Profit Sharing Plan. The
effects of termination of the Company's participation in the Pension Plan and
the Profit Sharing Plan were immaterial to the Company's financial position,
results of operations and cash flows.

In July 1997, the Company adopted a 401(k) plan (the "Plan") covering all
employees who meet certain minimum age and length of service requirements. The
Plan provides for payment of the employee's vested portion of the Plan upon
retirement, termination, disability or death. Discretionary contributions may be
made to the Plan under the direction of the Company's Board of Directors. The
Company made contributions of $434,000 and incurred expenses of $8,100 related
to the Plan for the year ended December 31, 1997.

10. STOCK OPTION PLANS

The Company adopted the Amended and Restated 1997 Stock Option Plan (the
"Stock Option Plan") in March 1997, which provides for the grant of incentive
and nonqualified options to purchase up to 2,250,000 shares of Common Stock
subject to certain adjustments as described in the Stock Option Plan. Stock
options are issuable only to eligible directors, officers and employees of the
Company.

The per share exercise price of an incentive option may not be less than
the greater of par value or 100% of the fair market value of the Common Stock,
as determined by the Board of Directors, on the date the

F-18
<PAGE> 78
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

option is granted. Incentive options granted to an employee who owns in excess
of 10% of the voting stock of the Company must have an exercise price of at
least 110% of the fair market value of the Common Stock at the date of grant. Of
the options granted in March 1997, 33% were immediately exercisable at the date
of grant, 33% will become exercisable one year from the date of grant and the
remainder will become exercisable two years from the date of grant. The Board of
Directors approved the grant of certain additional options effective as of the
date of the prospectus for the Company's initial public offering. Of such
options, except for one officer of the Company, 20% were immediately exercisable
at the date of grant and an additional 20% will become exercisable on each of
the first four anniversaries of such date. Of the options of the officer
referred to above, 33% were immediately exercisable at the date of grant, 33%
will become exercisable one year from the date of grant and the remainder will
become exercisable two years from the date of grant. Options may be exercised
only if the optionholder remains continuously associated with the Company from
the date of grant to the date of exercise, subject to certain conditions as
specified in the Stock Option Plan. An option granted under the Stock Option
Plan cannot be exercised later than ten years from the date of the grant. Any
options that expire unexercised or that terminate upon an optionee's ceasing his
or her association with the Company become available once again for issuance.

On July 30, 1997, the Board of Directors adopted the Director Stock Option
Plan ("Director Plan"). The Director Plan provided that each current nonemployee
director be granted options to purchase 2,500 shares of common stock as of the
effective date of the initial public offering at an exercise price equal to the
initial public offering price. Such options became immediately exercisable as of
the date of the initial public offering. A total of 50,000 shares has been
reserved for issuance pursuant to the Director Plan. Each new nonemployee
director who is elected (or appointed to fill any vacancy) as a director of the
Company will be granted options under the Director Plan to purchase 2,500 shares
of Common Stock at the fair market value of the Common Stock on the date of
grant. Also, each nonemployee director who has previously been granted options
under the Director Plan will be granted additional options under the Director
Plan to purchase 250 shares of Common Stock on the day immediately after each
annual meeting of shareholders of the Company subsequent to the time at which
such nonemployee director is first elected or appointed as a director of the
Company if such nonemployee director continues to serve as a director on such
date of grant. The options under the Director Plan will vest and be exercisable
as of the date of grant.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using a risk-free interest rate of 6.3%,
an expected life of five years and a volatility factor of 17.2%.

The following table summarizes the stock option activity under the Stock
Option Plan and Director Plan for the year ended December 31, 1997:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Options granted during the year ended December 31, 1997
Options granted prior to the initial public offering...... 840,248 $ 1.30
========= ===========
Options granted contemporaneously with the initial public
offering............................................... 1,185,628 $ 12.00
========= ===========
Options cancelled........................................... (26,897) $1.30-12.00
========= ===========
Options outstanding as of December 31, 1997................. 1,998,979 $1.30-12.00
========= ===========
Exercisable as of December 31, 1997......................... 591,576 $1.30-12.00
========= ===========
Options available for grant................................. 301,021
=========
</TABLE>

F-19
<PAGE> 79
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The weighted average fair value of options granted during the year ended
December 31, 1997 was $4.56 per share. The weighted average fair value of
options exercisable at December 31, 1997 was $2.64 per share. The weighted
average fair value of options outstanding at December 31, 1997 was $4.56 per
share. All options granted expire six years from date of grant.

Under APB No. 25, the Company recognized compensation expense of
approximately $3,949,000 for the year ended December 31, 1997 since the stock
options granted under the terms of the Stock Option Plan were at an exercise
price that was less than the estimated fair market value of the Company's common
stock at the date of grant. Had the Company implemented SFAS No. 123, the
Company's compensation expense would have increased by approximately $126,000
and the Company's pro forma net income, net income per share (basic) and net
income per share (diluted), considering the effects of implementing SFAS No.
123, net of tax effects, would have been approximately $1,633,000, $0.20 and
$0.19, respectively.

11. EMPLOYEE STOCK PURCHASE PLAN

On the commencement date of each offering under the Stock Purchase Plan, a
participating employee will be deemed to have been granted an option to purchase
a maximum number of shares of Common Stock equal to: (i) the percentage of the
employee's base pay that such employee has elected to be withheld (not to exceed
10%), (ii) multiplied by such employee's base pay during the period of such
offering and (iii) divided by the lower of 85% of the closing market price of
the Common Stock on the applicable offering commencement date or 85% of the
closing market price of the Common Stock on the offering termination date.
Options held by a participant shall be exercisable only by that participant.

12. SHAREHOLDERS' EQUITY

On June 12, 1997, the Board of Directors and the shareholder of the Company
approved an amendment to the Articles of Incorporation of the Company providing
for an increase in the number of authorized shares
F-20
<PAGE> 80
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

of common stock from 1,000 shares to 14,000,000 shares. On July 30, 1997, the
Board of Directors and the shareholder of the Company approved an amendment to
the Articles of Incorporation of the Company providing for an increase in the
number of authorized shares of common stock from 14,000,000 shares to 50,000,000
shares.

On July 30, 1997, the Board of Directors authorized 300,000 shares of
Series A Junior Preferred Stock, par value $1.00 per share, adopted the Rights
Agreement ("Rights Agreement") and authorized and declared a dividend
distribution of one right (a "Right") for each outstanding share of common stock
of the Company to Millers Mutual under the terms of the Rights Agreement. One
Right will thereafter be issued for each share of common stock that was
outstanding between the date of adoption of the Rights Agreement and the earlier
of the date the Rights become exercisable or are redeemed and the termination of
the Rights Agreement. Accordingly, one right has been issued for each share of
common stock outstanding. Each Right represents the right to purchase one
one-hundredth of a share of Series A Junior Preferred Stock at a price of
$40.00, subject to adjustment. The Rights are exercisable only in the event that
a person or group (with certain exceptions) becomes the beneficial owner of
shares representing 15% or more of the voting power of the Company, or announces
or commences a tender or exchange offer that would result in the acquisition of
such number of shares. The Rights Agreement expires ten years from the date of
adoption.

13. TRANSACTIONS WITH MAJOR CUSTOMERS

For the period April 28, 1995 (date of inception) through December 31,
1995, 100% of the Company's business was with Millers Mutual and Millers
Casualty. In addition to the outsourcing revenues derived from Millers Mutual
and Millers Casualty, for the years ended December 31, 1996 and 1997 (see Note
8), one customer accounted for approximately 21% and 16% of revenues,
respectively.

14. SALE OF SUBSIDIARY

On September 15, 1997, the Company sold Applied Quoting Systems, Inc.
("AQS"), a wholly-owned subsidiary of SDS, for $2,500,000. The sale resulted in
a gain of $1,634,291, which is included in other income. For the period from
March 12, 1997 (the date of acquisition) through September 15, 1997 (date of
sale), AQS had revenues of approximately $2,535,000 and net income of
approximately $376,000. Net income per common share from the separate operations
of AQS for the period of March 12, 1997 through September 15, 1997 was $.05.
Total assets and total liabilities of AQS on the date of sale were approximately
$1,228,000 and $412,000, respectively.

15. COMMITMENTS AND CONTINGENCIES

Operating Leases -- The Company leases certain office space and equipment
under operating leases and a sublease for periods ranging from one to five
years. Rentals on operating leases (exclusive of real estate taxes, insurance
and other expenses payable under the leases) amounted to approximately
$3,818,000 for the year ended December 31, 1997. The Company incurred no
significant rental expense in 1995 and 1996. These leases generally contain
optional renewal provisions for one or more periods. Future annual minimum lease
payments for each of the next five years and in the aggregate are:

<TABLE>
<S> <C>
1998........................................................ $ 5,123,637
1999........................................................ 4,605,965
2000........................................................ 2,616,352
2001........................................................ 1,335,089
2002........................................................ 860,691
Thereafter.................................................. 1,217,410
-----------
$15,759,144
===========
</TABLE>

F-21
<PAGE> 81
INSPIRE INSURANCE SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Employment Agreements -- The Company has employment agreements with certain
key officers that provide for minimum annual salaries and benefits aggregating
approximately $1,737,500 and an annual bonus based on the Company's operating
performance.

Other -- In February 1997, the Philadelphia Contributionship for the
Insurance of Houses from Loss by Fire ("PCIHLF") filed a lawsuit (Civil Action
No. 97-CV-1262) against SDS in the United States District Court for the Eastern
District of Pennsylvania. The suit alleges that certain software systems that
SDS sold to PCIHLF in 1995 did not meet PCIHLF's specifications. PCIHLF claims
damages in excess of $1.3 million. In connection with the SDS Acquisition by the
Company, the former SDS shareholders placed $1.5 million of the SDS purchase
price in an escrow account in respect of this claim. The Company has no recourse
against the former SDS shareholders to the extent that the aggregate amount of
any judgment, settlement and expenses exceeds the amount of the escrowed funds.
SDS filed a counterclaim against PCIHLF for $550,000 for amounts due under its
agreements with PCIHLF. In addition, the Company is involved in various other
legal proceedings arising in the normal course of business. Management believes
the outcome of these matters will not materially affect the financial position,
results of operations or cash flows of the Company.

The Company participates in a self-insurance program for certain of its
employees that provides for the payment of employee health claims. The program
provides for specific excess loss reinsurance for aggregate claims greater than
a specified amount for any one claimant. The Company accrues the estimated
liabilities for the ultimate costs of both reported claims and incurred by not
reported claims.

F-22
<PAGE> 82

INDEPENDENT AUDITORS' REPORT

Board of Directors
Strategic Data Systems, Inc.

We have audited the accompanying consolidated balance sheets of Strategic
Data Systems, Inc. and subsidiary (the "Company") as of December 31, 1995, 1996
and March 11, 1997 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 and the period January 1, 1997 through March 11, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Strategic Data Systems, Inc.
and subsidiary as of December 31, 1995, 1996 and March 11, 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 and the period January 1, 1997 through March 11,
1997 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Fort Worth, Texas
July 18, 1997

F-23
<PAGE> 83

STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 11,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 528,468 $ 1,515,495 $ 939,762
Accounts receivable, net.......................... 3,608,403 4,750,708 4,755,376
Deferred income taxes............................. 273,000 180,000 343,000
Prepaid expenses and other current assets......... 181,712 166,739 262,217
----------- ----------- -----------
Total current assets...................... 4,591,583 6,612,942 6,300,355
----------- ----------- -----------
Property and equipment, net......................... 3,155,318 2,897,819 3,403,477
Accounts receivable, excluding current portion...... 397,671 367,091 313,355
Software -- net..................................... 2,935,140 2,606,888 2,398,017
Goodwill -- net..................................... 612,106 505,702 484,536
Other assets........................................ 362,012 474,927 491,316
----------- ----------- -----------
TOTAL............................................... $12,053,830 $13,465,369 $13,391,056
=========== =========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 432,686 $ 883,648 $ 914,318
Accrued payroll and compensation.................. 1,069,600 1,002,342 1,033,025
Other accrued expenses............................ 204,257 245,102 187,916
Warranty reserve.................................. 100,292 100,592 197,269
Customer deposits................................. 1,263,419 1,993,242 1,342,100
Income taxes payable.............................. 260,754 78,293 493,096
Current portion of long-term debt................. 688,793 524,699 438,713
----------- ----------- -----------
Total current liabilities................. 4,019,801 4,827,918 4,606,437
----------- ----------- -----------
Long-term debt, excluding current portion........... 2,028,074 1,883,381 1,879,393
Deferred compensation............................... 216,498 311,758 327,635
Deferred income taxes............................... 1,252,000 1,057,000 961,000
Commitments and contingencies (Note 9).............. -- -- --
SHAREHOLDERS' EQUITY:
Common stock, $5.00 stated value; 150,000 shares
authorized; 142,450, 143,950 and 143,950 shares
issued and outstanding in 1995, 1996 and 1997,
respectively................................... 712,250 719,750 719,750
Additional paid-in-capital........................ 1,705,094 1,847,594 1,847,594
Retained earnings................................. 3,057,357 3,755,212 3,986,491
----------- ----------- -----------
5,474,701 6,322,556 6,553,835
Less treasury stock (26,936 shares, at cost)...... 937,244 937,244 937,244
----------- ----------- -----------
4,537,457 5,385,312 5,616,591
----------- ----------- -----------
TOTAL............................................... $12,053,830 $13,465,369 $13,391,056
=========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-24
<PAGE> 84

STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD
YEAR ENDED DECEMBER 31, JANUARY 1, 1997
--------------------------------------- THROUGH
1994 1995 1996 MARCH 11, 1997
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Software services............................. $ 9,041,115 $ 9,078,073 $10,036,191 $2,384,658
Software...................................... 4,312,881 9,068,431 8,987,395 2,455,628
Hardware sales and commissions................ 2,245,134 2,399,537 3,680,048 463,108
Other......................................... 405,396 615,234 960,027 108,912
----------- ----------- ----------- ----------
Total revenues........................ 16,004,526 21,161,275 23,663,661 5,412,306
----------- ----------- ----------- ----------
EXPENSES:
Salaries and compensation..................... 11,810,524 13,088,072 14,505,432 3,476,165
Depreciation and amortization................. 2,157,093 1,878,973 1,826,826 411,266
Cost of hardware sold......................... 1,862,169 1,978,836 2,698,673 383,450
Occupancy costs............................... 1,374,230 1,379,332 1,565,833 405,663
Other......................................... 1,830,598 1,666,854 2,032,098 372,223
----------- ----------- ----------- ----------
Total expenses........................ 19,034,614 19,992,067 22,628,862 5,048,767
----------- ----------- ----------- ----------
OPERATING INCOME (LOSS)......................... (3,030,088) 1,169,208 1,034,799 363,539
OTHER INCOME (EXPENSE):
Interest income............................... 158,297 160,959 284,387 56,987
Interest expense.............................. (292,491) (240,481) (207,029) (33,272)
Gain (loss) on sale of property and
equipment.................................. 1,520 (2,403) 34,698 25
----------- ----------- ----------- ----------
Total other income (expense).......... (132,674) (81,925) 112,056 23,740
----------- ----------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAX................. (3,162,762) 1,087,283 1,146,855 387,279
INCOME TAX BENEFIT (EXPENSE).................... 1,253,000 (429,000) (449,000) (156,000)
----------- ----------- ----------- ----------
NET INCOME (LOSS)............................... $(1,909,762) $ 658,283 $ 697,855 $ 231,279
=========== =========== =========== ==========
</TABLE>

See notes to consolidated financial statements.

F-25
<PAGE> 85

STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
PERIOD JANUARY 1, 1997 THROUGH MARCH 11, 1997

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------------ PAID-IN RETAINED ------------------ SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------- -------- ---------- ----------- ------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994............. 139,594 $697,970 $1,526,110 $ 4,308,836 26,936 $(937,244) $ 5,595,672
Net loss........................... (1,909,762) (1,909,762)
Issuance of common stock........... 2,856 14,280 178,984 -- -- -- 193,264
------- -------- ---------- ----------- ------ --------- -----------
Balance, December 31, 1994........... 142,450 712,250 1,705,094 2,399,074 26,936 (937,244) 3,879,174
Net income......................... -- -- -- 658,283 -- -- 658,283
------- -------- ---------- ----------- ------ --------- -----------
Balance, December 31, 1995........... 142,450 712,250 1,705,094 3,057,357 26,936 (937,244) 4,537,457
Net income......................... 697,855 -- -- 697,855
Issuance of common stock........... 1,500 7,500 142,500 -- -- -- 150,000
------- -------- ---------- ----------- ------ --------- -----------
Balance, December 31, 1996........... 143,950 719,750 1,847,594 3,755,212 26,936 (937,244) 5,385,312
Net income......................... 231,279 231,279
------- -------- ---------- ----------- ------ --------- -----------
Balance, March 11, 1997.............. 143,950 $719,750 $1,847,594 $ 3,986,491 26,936 $(937,244) $ 5,616,591
======= ======== ========== =========== ====== ========= ===========
</TABLE>

See notes to consolidated financial statements.

F-26
<PAGE> 86

STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD
YEAR ENDED DECEMBER 31, JANUARY 1, 1997
--------------------------------------- THROUGH MARCH 11,
1994 1995 1996 1997
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,909,762) $ 658,283 $ 697,855 $ 231,279
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 2,157,093 1,878,973 1,826,826 411,266
Gain (loss) on sales of property and
equipment............................................. (1,520) 2,403 (34,701) (25)
Deferred income taxes................................... (563,957) 437,768 (102,000) (259,000)
Provision for uncollectible accounts receivable......... 277,250 235,900 2,000 21,484
Change in operating assets and liabilities:
Accounts receivable................................... (950,268) 632,474 (1,113,726) (344,416)
Income taxes recoverable.............................. (357,709) 357,709 -- --
Prepaid expenses and other current assets............. (31,517) (2,818) 14,973 (95,478)
Other assets.......................................... (82,333) (107,624) (112,916) (16,389)
Accounts payable...................................... (912,410) 16,811 450,962 30,670
Accrued payroll and compensation...................... 952,909 116,691 (67,258) 30,683
Other accrued expenses................................ 204,283 (26) 40,845 (57,186)
Warranty reserve...................................... 103,270 (2,978) 300 468,677
Customer deposits..................................... 2,441,214 (2,329,121) 729,823 (651,142)
Income taxes payable.................................. (237,120) 260,754 (182,461) 414,803
Deferred compensation................................. 71,771 82,855 95,260 15,877
----------- ----------- ----------- ----------
Net cash provided by operating activities........... 1,161,194 2,238,054 2,245,782 201,103
----------- ----------- ----------- ----------
INVESTING ACTIVITIES:
Proceeds from sales of property and equipment............. 1,520 -- 41,750 --
Purchases of property and equipment....................... (853,089) (362,546) (582,868) (686,862)
Development of software................................... (1,353,750) (671,000) (558,850)
----------- ----------- ----------- ----------
Net cash used in investing activities............... (2,205,319) (1,033,546) (1,099,968) (686,862)
----------- ----------- ----------- ----------
FINANCING ACTIVITIES:
Net borrowings (repayment) from line of credit............ 480,000 (480,000) -- --
Proceeds from issuance of long-term debt.................. 500,000 -- 409,817 --
Repayments of long-term debt.............................. (407,004) (410,409) (718,604) (89,974)
Proceeds (repayments) from policy loan against cash
surrender value of life insurance policy................ 75,000 (75,000) -- --
Issuance of common stock.................................. 193,264 -- 150,000 --
----------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities........................................ 841,260 (965,409) (158,787) (89,974)
----------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (202,865) 239,099 987,027 (575,733)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 492,234 289,369 528,468 1,515,495
----------- ----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 289,369 $ 528,468 $ 1,515,495 $ 939,762
=========== =========== =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 293,000 $ 240,000 $ 208,000 $ 33,300
=========== =========== =========== ==========
Income taxes paid (refunded).............................. $ (94,000) $ (627,000) $ 734,000 $ --
=========== =========== =========== ==========
</TABLE>

See notes to consolidated financial statements.

F-27
<PAGE> 87

STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations -- Strategic Data Systems, Inc. ("SDS") and its
wholly-owned subsidiary, Applied Quoting Systems, Inc., develop and market
software and software services to the property and casualty ("P&C") insurance
industry. SDS's software includes policy and claims administration systems, as
well as systems that increase the productivity of insurers by automating certain
functions, such as workflow management, underwriting rules and guidelines,
document production and rating algorithms. SDS's software services include
installation, customization, conversion and maintenance of these systems to meet
customer specifications. SDS also sells computer hardware and related equipment
and manages data centers. SDS sells its products directly to the customer. The
majority of sales are in North America.

Principles of Consolidation -- The consolidated financial statements
include the financial statements of SDS and its wholly-owned subsidiary. All
significant intercompany balances and transactions have been eliminated in
consolidation.

Revenue Recognition -- Initial installations of software systems generally
include a one-time licensing fee and a contract for the installation and
customization of the system to meet the customer's specifications, which SDS
bills at an hourly rate. Amounts charged for the initial license and the
installation and customization of systems are recognized as revenue during the
installation period in proportion to the hours expended for installation
compared to the total hours projected for installation. In other instances,
revenues are recognized based on performance milestones specified in the
contract. SDS recognizes the annual fee charged for maintenance of the
customer's system as revenue as hours are expended over the maintenance contract
period. Revenues from computer hardware and equipment sales are recognized when
SDS receives notification that the equipment has been shipped by the
manufacturer and title has passed to the customer. Changes in estimates of
percentage of completion or losses, if any, associated with software related
revenue activities are recognized in the period in which they are determined.

An annual fee is charged for maintenance of the customer's system and is
recognized as revenue as hours are expended over the maintenance contract
period. Losses, if any, are recognized in the period in which they are
determined.

Computer hardware and equipment sales are recognized when SDS receives
notification that the equipment has been shipped by the manufacturer to the
customer.

Depreciation -- Depreciation of property and equipment is computed using
the straight-line method over their estimated useful lives. The range of the
useful lives of the various classes of assets is 3 to 31.5 years. Leasehold
improvements are amortized over the lease term or the estimated useful life,
whichever is less.

Income Taxes -- Federal income taxes have been computed in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires income taxes to be accounted for under the liability
method. Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus deferred
income taxes related primarily to differences between the basis of property and
equipment due to depreciation differences and to the application of the purchase
method of accounting for financial statement purposes but not for tax purposes,
and nondeductible asset and liability reserves for tax purposes. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets are evaluated based on
the guidelines for realization and may be reduced by a valuation allowance.

Research and Development -- All research and development costs incurred
prior to the time management believes a project has reached "technological
feasibility" are expensed. Software production costs incurred subsequent to
reaching technological feasibility are capitalized and reported at the lower of
unamortized cost or net realizable value. Capitalized costs are amortized over
the expected service life of the

F-28
<PAGE> 88
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

related software, generally five to seven years using the straight-line method.
The cost and related accumulated amortization of projects are written off as
they become fully amortized.

SDS assesses the recoverability of these costs by determining whether the
amortization of the capitalized costs over the remaining life of the projects
can be recovered through undiscounted future operating cash flows.

Financial Instruments -- SDS's financial instruments under Statement of
Financial Accounting Standards No. 107, "Disclosure About Fair Value of
Financial Instruments," include cash and cash equivalents, accounts receivable,
accounts payable and long-term debt. SDS believes that the carrying amounts of
cash and cash equivalents, accounts receivable, accounts payable and long-term
debt are a reasonable estimate of their fair value because of the short-term
maturities of such instruments or, in the case of long-term debt, because of
interest rates available to SDS for similar obligations on such long-term debt.

Goodwill -- Goodwill represents the excess of the cost over the estimated
fair value of the net assets acquired and is amortized using the straight-line
method over a period of ten years.

Recently Issued Accounting Pronouncements -- Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairment is
evaluated by comparing future cash flows (undiscounted and without interest
charges) expected to result from the use of the asset and its eventual
disposition to the carrying amount of the asset.

2. ACCOUNTS RECEIVABLE

Accounts receivable is comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 11,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Accounts receivable -- trade................... $3,991,355 $4,961,126 $4,987,278
Allowance for doubtful accounts................ (382,952) (210,418) (231,902)
---------- ---------- ----------
3,608,403 4,750,708 4,755,376
Noncurrent -- accounts receivable.............. 397,671 367,091 313,355
---------- ---------- ----------
$4,006,074 $5,117,799 $5,068,731
========== ========== ==========
</TABLE>

F-29
<PAGE> 89
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 11,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Land........................................ $ 150,000 $ 150,000 $ 150,000
Land improvements........................... 217,276 217,276 217,276
Building.................................... 1,502,574 1,502,574 1,502,576
Computer equipment.......................... 4,794,462 5,251,033 5,412,021
Office equipment............................ 1,361,324 1,426,933 1,922,545
Automobiles................................. 303,326 126,784 126,784
Leasehold improvements...................... 80,154 80,154 105,322
----------- ----------- -----------
8,409,116 8,754,754 9,436,524
Accumulated depreciation and amortization... (5,253,798) (5,856,935) (6,033,047)
----------- ----------- -----------
$ 3,155,318 $ 2,897,819 $ 3,403,477
=========== =========== ===========
</TABLE>

Depreciation and amortization expense was approximately $1,146,000,
$1,030,000 and $833,000 in 1994, 1995 and 1996, respectively, and $152,000 for
the period from January 1, 1997 through March 11, 1997.

4. RESEARCH AND DEVELOPMENT

The total amount amortized for the capitalized computer software was
approximately $905,000, $742,000 and $887,000 in 1994, 1995 and 1996,
respectively. In addition, the total amortization of capitalized software was
$209,000 for the period January 1, 1997 through March 11, 1997.

Research and development costs, including amortization expense, were
approximately $4,587,000, $3,581,000 and $3,783,000 in 1994, 1995 and 1996,
respectively.

In addition, total research and development costs were approximately
$474,000, for the period January 1, 1997 through March 11, 1997.

Software -- net consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 11,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Software costs.............................. $ 4,435,161 $ 4,994,011 $ 4,994,011
Accumulated amortization.................... (1,500,021) (2,387,123) (2,595,994)
----------- ----------- -----------
$ 2,935,140 $ 2,606,888 $ 2,398,017
=========== =========== ===========
</TABLE>

5. GOODWILL

Goodwill -- net consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 11,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Goodwill....................................... $1,078,508 $1,078,507 $1,078,507
Accumulated amortization....................... (466,402) (572,805) (593,971)
---------- ---------- ----------
$ 612,106 $ 505,702 $ 484,536
========== ========== ==========
</TABLE>

F-30
<PAGE> 90
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. DEBT

A summary of long-term debt is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 11,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage note payable, interest at 7.37%, due
in equal monthly installments of principal
and interest of $17,000, with the final
payment due on January 20, 2001.............. $1,748,223 $1,672,670 $1,658,563
Computer note payable, interest at 6.75%, due
in equal monthly installments of principal
and interest of $23,931, with the final
payment due on December 27, 1996............. 278,054 -- --
Computer note payable, interest at 8.35%, due
in equal monthly installments of principal
and interest of $18,700, with the final
payment due on September 21, 1997............ 291,665 124,997 97,219
Treasury stock purchase note payable, interest
at 7.25%, due in equal monthly installments
of principal and interest of $4,978, with the
final payment due on December 27, 1998....... 166,156 111,639 103,049
Computer note payable with total availability
of $600,000, interest payable at prime plus
1.0%, due in monthly installments of
principal sufficient to amortize the
outstanding balance over a 36-month period,
and interest with the final payment due on
January 31, 1999............................. 143,289 437,127 397,628
Second mortgage note payable, interest at 7.0%,
due in equal annual installments of principal
and interest of $34,097 with the final
payment due on November 1, 1998.............. 89,480 61,647 61,647
---------- ---------- ----------
2,716,867 2,408,080 2,318,106
Less current maturities........................ 688,793 524,699 438,713
---------- ---------- ----------
$2,028,074 $1,883,381 $1,879,393
========== ========== ==========
</TABLE>

The mortgage note payable is collateralized by real estate and
substantially all other assets of SDS. In 1995, the final payment for the
mortgage note payable was extended from January 20, 1996 to January 20, 2001.
The computer notes payable are collateralized by the computer equipment of SDS.
The treasury stock purchase note payable is collateralized by the accounts
receivable of SDS. The second mortgage note is collateralized by a purchase
money mortgage lien pursuant to the terms of the note.

F-31
<PAGE> 91
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following represents the approximate future annual maturities for SDS's
long-term debt obligations:

<TABLE>
<CAPTION>
MARCH 11,
1997
----------
<S> <C>
Year Ended March 11:
1997...................................................... $ 438,713
1998...................................................... 380,107
1999...................................................... 96,726
2000...................................................... 104,101
2001...................................................... 1,298,459
----------
$2,318,106
==========
</TABLE>

7. INCOME TAXES

Income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
PERIOD
YEAR ENDED DECEMBER 31, JANUARY 1, 1997
---------------------------------- THROUGH MARCH 11,
1994 1995 1996 1997
----------- -------- --------- -----------------
<S> <C> <C> <C> <C>
Current:
Federal.................................... $ (689,000) $ (9,000) $ 504,000 $ 330,000
State...................................... -- -- 47,000 85,000
----------- -------- --------- ---------
Total current...................... (689,000) (9,000) 551,000 415,000
----------- -------- --------- ---------
Deferred:
Federal.................................... (407,000) 372,000 (132,000) $(221,000)
State...................................... (157,000) 66,000 30,000 (38,000)
----------- -------- --------- ---------
Total deferred..................... (564,000) 438,000 (102,000) (259,000)
----------- -------- --------- ---------
$(1,253,000) $429,000 $ 449,000 $ 156,000
=========== ======== ========= =========
</TABLE>

A reconciliation of expected income taxes computed by applying the federal
corporate tax rate of 34% to income (loss) before income taxes to actual income
taxes is as follows:

<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1997
YEAR ENDED DECEMBER 31, THROUGH
--------------------------------------- MARCH 11,
1994 1995 1996 1997
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Expected federal income taxes
(benefit)............................ $(1,075,000) $ 370,000 $ 390,000 $132,000
State income taxes, net of federal
income tax (benefit)................. (156,000) 45,000 53,000 18,000
Goodwill............................... 36,000 36,000 36,000 7,000
Research and development
credit............................... (80,000) (47,000) (63,000) --
Other, net............................. 22,000 25,000 33,000 (1,000)
----------- ----------- ----------- --------
$(1,253,000) $ 429,000 $ 449,000 $156,000
=========== =========== =========== ========
</TABLE>

F-32
<PAGE> 92
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 11,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred income tax assets:
Current:
Accounts receivable..................... $ 150,000 $ 81,000 $ 90,000
Nondeductible accrued expenses.......... 123,000 99,000 253,000
----------- ----------- ----------
273,000 180,000 343,000
----------- ----------- ----------
Noncurrent:
Deferred compensation................... 85,000 122,000 128,000
Research and development credit
carryforward.......................... 32,000 -- --
Net operating loss carryforwards........ 61,000 -- --
----------- ----------- ----------
178,000 122,000 128,000
----------- ----------- ----------
Total deferred income tax assets... 451,000 302,000 471,000
----------- ----------- ----------
Deferred income tax liabilities --noncurrent:
Property and equipment..................... 185,000 162,000 154,000
Software costs............................. 1,245,000 1,017,000 935,000
----------- ----------- ----------
Total deferred income tax
liabilities...................... 1,430,000 1,179,000 1,089,000
----------- ----------- ----------
Net deferred income tax liabilities.......... $ (979,000) $ (877,000) $ (618,000)
=========== =========== ==========
Represented on the consolidated balance sheet
as:
Current deferred income tax assets......... $ 273,000 $ 180,000 $ 343,000
Noncurrent deferred income tax
liabilities............................. (1,252,000) (1,057,000) (961,000)
----------- ----------- ----------
$ (979,000) $ (877,000) $ (618,000)
=========== =========== ==========
</TABLE>

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not SDS will realize the benefits of these deductible
differences.

8. EMPLOYEE BENEFIT PLANS

SDS sponsors a Profit-Sharing Plan qualified under Section 401(k) of the
Internal Revenue Code of 1986 covering employees who meet minimum service
requirements and who elect to participate. Participants' contributions are
voluntary. SDS made contributions of $103,750, $135,000 and $200,000 to the Plan
in 1994, 1995 and 1996, respectively. In addition, contributions of $70,000 were
recognized for the period from January 1, 1997 through March 11, 1997.

SDS has a supplemental retirement agreement with a key employee providing
for payments over twenty years commencing upon the earlier of retirement,
termination or death. The agreement has a vesting arrangement 20% per year
pursuant to which the employee will become fully vested in 1997 or the earlier
of permanent disability, death or change in control of SDS, as defined. SDS is
the owner and beneficiary of

F-33
<PAGE> 93
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

insurance policies to provide a portion of the funding of this agreement. The
total expense related to the agreement was approximately $72,000, $83,000, and
$95,000 for 1994, 1995 and 1996, respectively. Total expense related to the
agreement for the period January 1, 1997 through March 11, 1997 was $16,000.

SDS has an incentive compensation plan for certain key employees.
Participants in the plan may receive cash payments or stock contingent upon SDS
exceeding certain pretax earnings levels over a rolling four-year earnout period
as determined by the Board of Directors. If a participant terminates employment
during an earnout period, the participant will not be entitled to any
compensation under the plan. If a change in control, as defined, occurs during
an earnout period, the earnout period is deemed to be completed and all payments
earned become due. No provision was required for the years ended December 31,
1994, 1995 and 1996 and the period January 1, 1997 through March 11, 1997.

In 1996, SDS paid a bonus to a senior executive in an amount sufficient to
fund his purchase from SDS of 1,500 shares of SDS common stock at a price per
share of $100, plus an amount equal to the federal income taxes incurred by such
executive as a result of such bonus. The purchase was made by the executive
pursuant to a purchase right granted to him by SDS in 1989, entitling him to
purchase at fair market value, as determined by the Board of Directors, up to
4,200 shares of SDS common stock upon the attainment of certain performance
goals or discretionary approval by the Board of Directors. As of December 31,
1996, no shares remained available for purchase pursuant to this arrangement.

9. COMMITMENTS AND CONTINGENCIES

Operating Leases -- SDS maintains noncancellable operating leases on
various office facilities, vehicles and computers. These leases generally
contain optional renewal provisions for one or more periods. Rental expense was
approximately $429,000, $451,000 and $530,000 in 1994, 1995 and 1996,
respectively, and $142,000 for the period January 1, 1997 through March 11,
1997.

The future annual minimum lease payments are as follows:

<TABLE>
<CAPTION>
MARCH 11,
1997
-----------
<S> <C>
Year Ending December 31:
1997...................................................... $ 456,000
1998...................................................... 564,000
1999...................................................... 364,000
2000...................................................... 280,000
2001...................................................... 285,000
Thereafter................................................ 153,000
----------
$2,102,000
==========
</TABLE>

The future annual minimum rental revenues to be received under
noncancellable subleases (with initial or remaining lease terms in excess of one
year) as of December 31, 1996 were $67,000 for 1997 and $81,000 for 1998.

Other -- In February 1997, the Philadelphia Contributionship for the
Insurance of Houses from Loss by Fire ("PCIHLF") filed a lawsuit (Civil Action
No. 97-CV-1262) against SDS in the United States District Court for the Eastern
District of Pennsylvania. The suit alleges that certain software systems that
SDS sold to PCIHLF in 1995 did not meet PCIHLF's specifications. PCIHLF claims
damages in excess of $1.3 million. In connection with the acquisition of SDS by
INSpire Insurance Solutions, Inc. ("INSpire"), INSpire and the former SDS
shareholders placed $1.5 million of the SDS purchase price in an escrow account
in respect of this claim. INSpire has no recourse against the former SDS
shareholders to the extent that the aggregate amount of any judgment, settlement
and expenses exceeds the amount of the escrowed funds. SDS filed a

F-34
<PAGE> 94
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

counterclaim against PCIHLF for $550,000 for amounts due under its agreements
with PCIHLF. There can be no assurance with respect to the outcome of this
lawsuit.

SDS participates in a self-insurance program that provides for the payment
of employee health claims. The program provides for specific excess loss
reinsurance for aggregate claims greater than a specified amount for any one
claimant. SDS accrues the estimated liabilities for the ultimate costs of both
reported claims and incurred but not reported claims.

10. SUBSEQUENT EVENTS

On February 18, 1997, SDS's shareholders executed a definitive agreement
with INSpire whereby INSpire agreed to acquire SDS for an aggregate purchase
price of approximately $18.0 million plus assumed indebtedness of approximately
$650,000, subject to satisfactory resolution of certain matters. In addition,
INSpire and the former shareholders of SDS placed into escrow $1.0 million of
the purchase price in respect of certain contingent liabilities and $1.5 million
of the purchase price in escrow in respect of the PCIHLF lawsuit described in
Note 9. The transaction was consummated March 12, 1997.

On March 12, 1997, an affiliate of certain officers of SDS purchased the
land and improvements comprising SDS's administrative home office for the
assumption of debt in the amount of $1.8 million. Total gain from the sale was
approximately $225,000.

In March 1997, SDS terminated its supplemental retirement agreement with a
key employee, described in Note 8. SDS entered into an employment agreement with
such employee pursuant to which SDS agreed to pay to such employee $40,000 per
year during the twenty-year period commencing January 1, 1999 and ending
December 31, 2018.

In March 1997, SDS terminated its incentive compensation plan for certain
key employees, described in Note 8.

F-35
<PAGE> 95

=========================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
SDS Acquisition......................... 14
Use of Proceeds......................... 14
Dividend Policy......................... 15
Price Range of Common Stock............. 15
Capitalization.......................... 16
Selected Financial Data of INSpire...... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of INSpire................. 19
Selected Consolidated Financial Data
of SDS................................ 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of SDS..................... 27
Business................................ 29
Management.............................. 39
Principal and Selling Shareholders...... 47
Certain Transactions.................... 48
Description of Capital Stock............ 51
Underwriting............................ 56
Legal Matters........................... 58
Experts................................. 58
Available Information................... 59
Financial Statements.................... F-1
</TABLE>

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2,300,000 SHARES

[INSPIRE LOGO]
COMMON STOCK
------------------------

PROSPECTUS
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RAYMOND JAMES
& ASSOCIATES, INC.
NATIONSBANC MONTGOMERY
SECURITIES LLC
SOUTHWEST SECURITIES

March 27, 1998
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