ACAP


                         ANNUAL REPORT 2002

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CONTENTS
------

President's Report . . . . . . . . . . . . . . . .      1

Management's Financial Analysis. . . . . . . . . .      3

Consolidated Balance Sheets. . . . . . . . . . . .     12

Consolidated Statements of Operations and
 Comprehensive Income  . . . . . . . . . . . . . .     13

Consolidated Statements of Stockholders' Equity  .     14

Consolidated Statements of Cash Flows. . . . . . .     15

Notes to Consolidated Financial Statements . . . .     16

Independent Auditors' Report. . . . . . . . . . .      34

Stockholder Information. . . . . . . . . . . . . .     35

Directors and Officers. . . . . . . . . . . . . .      36


CORPORATE PROFILE
--------------

Acap Corporation is a life insurance holding company that primarily
focuses on the acquisition of existing life insurance policies, either
through direct purchase or the acquisition of life insurance companies.
Adjuncts to the acquisition-oriented growth strategy include using
financial leverage and reinsurance to make more acquisitions and to
maximize the return to stockholders, consolidating and streamlining the
operations of acquired businesses, concentrating on a limited number of
lines of business, and providing superior customer service to improve
policy retention.

In addition to the acquisition program, Acap subsidiaries market
Medicare supplement health insurance policies, final expense life
insurance policies, and preneed funeral service contracts.

Acap was formed in 1985.  Acap's life insurance operations are conducted
through its wholly owned life insurance subsidiaries.  All operations
are conducted from the corporate headquarters in Houston, Texas.  Acap's
common stock is quoted on NASDAQ's OTC Bulletin Board under the symbol
AKAP.

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     ACAP CORPORATION ANNUAL REPORT 2002

     PRESIDENT'S REPORT


To Our Stockholders:

The year 2002 was marked by significant accomplishments and
significant challenges.

We are pleased to report that the Company had basic earnings per
share of $278.33 during 2002 in comparison to a loss per share of
$137.04 during 2001.  An analysis of the results of operations and
the differences in such results between 2002 and 2001 is included
in the Management's Financial Analysis section of this Annual
Report. It is not possible, of course, in this brief "President's
Report" to call attention to all significant information covered
in the Annual Report or to adequately cover the items chosen for
comment. Stockholders are urged to read the entire Annual Report
to gain a better understanding of the Company, its recent financial
performance, and its prospects.

While we are pleased with the results discussed above, we are
also mindful of the challenges before us.  As discussed in the
Management's Financial Analysis section of this Annual Report,
a portion of 2002's positive financial results was the result of
one-time benefits.  Revenues have decreased in each of the last
two years as policy terminations have exceeded new policies issued.
On the other hand, as discussed under "Reinsurance" in the
Management's Financial Analysis section of this Annual Report,
there is the prospect, drawing closer each year, that the Company
may eventually be able to "recapture" for its own benefit a portion
of the profits emerging from one or more of the blocks of policies
that were reinsured when acquired as part of acquisition
transactions.

The day-to-day agenda of the Company continues to be pursued, such
as the ongoing transition from three policy administration systems
to one system. During 2002, we completed the transition from three
policy administration systems to two systems. We continue toward our
goal of consolidating to a single system. It is inherent in the
Company's "acquisitions" strategy that new systems will be acquired,
resulting in the need to make system conversions. By this process we
are able to realize the efficiencies and cost savings to enhance the
benefits of an acquisition. The cost of the process is significant,
but gradually we are realizing the intended cost reductions. On
another "housekeeping" note, we also continue to devote
considerable resources to compliance with federally mandated
privacy laws regarding financial and health information, and the
costs of mailing notices of the Company's policies on the subject to
policyholders.

Marketing of insurance products (Medicare supplement, pre-need,
and burial policies) continues at a low volume. First-year Medicare
supplement premium for 2002 was about one-fourth the amount of such
premium for 2001. The Company's pre-need and burial life insurance
sales were up slightly in 2002 over the 2001 levels, but remain at
relatively low levels.  While we are exploring various ways of
increasing new business production, we believe the environment for
such production will remain challenging.

The Company continues its search for acquisition candidates. It is
the nature of the acquisitions strategy that future acquisition
episodes are impossible to predict or quantify. It seems to be
increasingly difficult to find suitable candidates, but
nevertheless, there is no reason to think that the Company will
not have some success in the process, as it has in the past. In
the meantime, the amount of the Company's inforce policies
continues to decline, except to the extent that marketing,
discussed above, can provide replenishment.

Regarding the Medicare supplement policies acquired by the Company
from various state guaranty associations in 1999, the acquisition
agreement provided for a refund to the associations based on the
"experience" (i.e., profitability) of the business during the
three years ending December 31, 2001. The experience was favorable,
resulting in the accumulation over the three-year period of a refund
liability (based on a formula agreed upon at inception), and the
accounting and settlement were completed in 2002. Beginning in 2002,
the results (which continue at this stage to be favorable) inure
solely to the benefit of the Company.

As discussed in the Notes to Consolidated Financial Statements
section of this Annual Report, a lawsuit seeking class action
status was filed against a subsidiary of the Company in 2001.
While we believe the subject claims are without merit, the Company
incurred significant legal fees in connection with the defense
against the lawsuit in 2002.  The Company has filed a motion for
summary judgment seeking to have the case dismissed.  If the case
is not dismissed, the Company will seek to have class certification
denied.  If class certification is not denied, the Company will
have to defend itself at a jury trial on the merits of the case.

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The Company will incur progressively higher legal fees at each of the
above steps in the process.  While we believe the claims are without
merit, there can be no guarantee of the ultimate outcome.  To date, the
damages sought by the plaintiffs have not been quantified. In another
lawsuit, in Mississippi, the Company was successful in 2002 in its
motion for summary judgment, and the suit was dismissed. Even a lawsuit
that has no merit can result in significant costs of defense and, while
it may appear to be without merit (and indeed may ultimately prove to be
without merit), the Company incurs costs of defense in the interim, as
well as the burden of management's involvement, and the continuing lack
of absolute certainty regarding its ultimate outcome.

As discussed in the Management's Financial Analysis section of this
Annual Report, on March 24, 2003, the Company's Board of Directors
adopted a plan to be implemented by an amendment to the Company's
Certificate of Incorporation to effect a 1-for-2 reverse stock
split to reduce the number of stockholders to less than 300,
thereby enabling the Company to terminate its registration with
the Securities and Exchange Commission ("SEC"), a transaction
often referred to as "going private." The Company expects to
realize significant cost savings as a result of going private.

The Company's Board of Directors has devoted considerable
attention to whether or not to go private, as well as addressing
the issues involved. The resulting termination of reporting to
the SEC will decrease the public availability of information
about the Company. This is an adverse consequence, but there
would be adverse consequences to failing to take the step of
going private in face of the obvious benefits. This is especially
true of any company that happens to be well positioned to take
the "going private" step, such as when (in Acap's case) there are
only approximately 600 stockholders, and more than half of the
stockholders own only one share each.

For more information concerning the going private plan you are
urged to review "Subsequent Event - Reverse Stock Split" in the
Management's Financial Analysis section of this Annual Report. In
addition, please note that the only complete information on the
subject will be contained in an Information Statement that will
be mailed to the Company's stockholders after the Company
completes the process of filing it with the SEC.

The Company faces a dynamic and challenging business environment.
We were able to make significant accomplishments in that
environment during 2002.  We believe the Company will continue
to be able to find opportunities and success in the future.






                                           William F. Guest
                                           President
                                           April 14, 2003



                                   2

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               ACAP CORPORATION ANNUAL REPORT 2002
               MANAGEMENT'S FINANCIAL ANALYSIS

RESULTS OF OPERATIONS
-----------------

As used herein, "American Capitol" is American Capitol Insurance
Company, a wholly-owned subsidiary of the Company.
"Texas Imperial" is Texas Imperial Life Insurance Company,
a wholly-owned subsidiary of American Capitol.

     Life Segment

Comparability of the life segment results of operations between
2002 and 2001 are affected by two reinsurance transactions in the
 first quarter of 2001 related to a single block of life insurance
policies (the "Reinsurance Transactions").  The Reinsurance
Transactions involved recapturing a block of policies from one
reinsurer effective January 1, 2001, and then, effective March 31,
2001, the same block of policies was reinsured with a different
reinsurer.  Thus, the subject policy transactions were recorded
as part of the Company's operations for the first quarter of 2001,
but they were not reflected as part of the Company's operations
subsequent to that period, including all of 2002, to which fact
reference will be made in the following discussion. But for the
Reinsurance Transactions, the policy transactions that occurred
during the first quarter of 2001 related to this block of policies
would not have been recorded by the Company but, instead, would have
been recorded by the reinsurers for the quarter in question.

Total life segment revenue (excluding net realized investment gains and
losses) was 5% lower during 2002 in comparison to 2001.
As a result of the Reinsurance Transactions and their affect on the
first quarter of 2001, premiums and net investment income were lower
while the amortization of deferred gain on reinsurance was higher during
2002 in comparison to 2001.  In addition to the effect of the
Reinsurance Transactions, net investment income for 2002 was also lower
than the net investment income for 2001 due to lower market interest
rates during 2002 for the investment of new cash and the reinvestment of
matured or sold securities.  The Company also held a larger percentage
of its assets in cash and short-term investments during 2002 than in
2001.  Cash and short-term investments have lower interest rates than
long-term fixed maturities.  Another component of life segment revenue
is the reinsurance expense allowance the Company receives for
administering certain blocks of reinsured life insurance policies.
While the Reinsurance Transactions reduced the reinsurance expense
allowance received during 2001, the reinsurance expense allowance for
2002 was lower yet than the reinsurance expense allowance for 2001 due
to normal attrition of the reinsured policies.  The smaller base of
reinsured policies resulted in a smaller reinsurance expense allowance.

Realized investment gains of $139,285 were recorded during 2002 in
comparison to realized investment losses of $306,566 recorded during
2001.  During 2002, the Company sold several fixed maturity securities,
primarily to reduce or eliminate the Company's exposure to the issuers
of those securities.  Due to the low interest environment at the time of
the sales, the Company realized net investment gains on the sales.
During 2001, the Company recognized an other-than-temporary impairment
on two securities: $184,920 on an $850,000 par value fixed maturity
security and $255,443 on a $500,000 par value asset-backed security.
Both securities had experienced a substantial decline in market value
for an extended period.  Partially offsetting these realized investment
losses during 2001 was a $134,671 realized investment gain on the sale
of 4,565 shares of the common stock of MetLife, Inc.  The Company had
received the MetLife common stock in 2000 upon the demutualization of
Metropolitan Life Insurance Company ("Metropolitan") by virtue of the
Company's ownership of a life insurance policy issued by Metropolitan.
Since holding common stock is not consistent with the Company's general
investment philosophy, management decided to sell the MetLife stock
during 2001.

Life segment policy benefits were 37% lower during 2002 in comparison to
2001.  The decrease in policy benefits is primarily attributable to four
factors.  The first factor is the Reinsurance Transactions, whereby the
policy benefits on the block of policies covered by the Reinsurance
Transactions were recorded as direct expenses during the three months
ended March 31, 2001 whereas the policy benefits on that block of
policies were fully ceded during all of 2002.  The second factor is that
life segment policy benefits during 2001 also include a charge of
approximately $196,000 resulting from the recapture of a reinsurance
agreement in connection with the Reinsurance Transactions.  The third
factor is a one-time gain on indemnity reinsurance related to a single
large policy during 2002.  The policy in question was reinsured for the
face amount of the policy in excess of the Company's retention without
regard to policy reserves the Company was holding on the policy.  Upon
the death of the insured during 2002, the reinsurer reimbursed the
Company for the face amount that was reinsured and the Company released
the reserves related to the policy.  This resulted in a net reduction of
life segment policy benefits of approximately $340,000.  The fourth
factor is that the Company had experienced a larger-than-usual increase
in the reserve for policy dividends during 2001.

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Total expenses (i.e., total benefits and expenses less policy benefits)
were relatively unchanged between 2002 and 2001.  Higher commissions and
general expenses during 2002 in comparison to 2001 were offset by the
absence of the amortization of goodwill.  In July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142, which became effective for the Company in January 2002,
requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at
least annually in accordance with the provisions of SFAS No. 142.
The Company concluded there was no impairment during 2002.  Therefore,
there was no amortization of goodwill recorded during 2002.  Goodwill
amortization recognized in 2001 was $224,608.

As a result of the factors discussed above, the life segment had income
before income taxes of $793,708 for 2002 in comparison to a loss of
$368,659 for 2001.

     Health Segment

Total health segment revenue was 15% lower for 2002 in comparison to
2001.  Premium increases from rate adjustments on the existing policies
in force and the premiums related to new issues were more than offset by
the loss of premium income due to policy terminations.  First-year
Medicare supplement premium for 2002 was about one-fourth the amount of
such premium for 2001.  The Medicare supplement marketplace in the
states in which the Company currently markets is highly competitive.
During 2002, several major competitors offered Medicare supplement
products with premium rate structures lower than the premium rate
structures on the Company's primary Medicare supplement products. This
resulted in the Company experiencing substantially lower sales of new
Medicare supplement policies during 2002.

Total health segment policy benefits were 62% of total segment revenues
in 2002 in comparison to 66% of total health segment revenues in 2001.
The improvement in the ratio of benefits to revenues during 2002
resulted from premium rate adjustments implemented in 2002 and a general
improvement in claims experience.

Excluding the effect of an experience refund, discussed below, total
health segment expenses (i.e., total benefits and expenses less policy
benefits) were 20% of total health segment revenues in 2002 in
comparison to 26% of total health segment revenues in 2001.  The primary
source of the lower expense-to-premium ratio in total expenses was a
decrease in the ratio of commissions to total revenues in 2002 as
compared to 2001.  As the Company implements premium rate adjustments on
its Medicare supplement business, there is not a corresponding increase
in the commissions paid.  This was the primary factor in the improvement
in the ratio of commissions to total revenues during 2002.

During 2002, the Company made an "experience refund" to various state
guaranty associations in connection with the acquisition by the Company
of a block of Medicare supplement policies from the guaranty
associations effective June 1, 1999, pursuant to an acquisition
agreement.  Pursuant to said agreement, the guaranty associations
provided funds to the Company to cover the projected losses expected to
arise from the performance of the subject policies, the amount of which
was based on a projection of losses made at the time of the acquisition
of the policies ("original projection"). The agreement was that the
Company would refund to the guaranty associations, in 2002, a portion of
the amount by which the actual performance of the block (for the
designated period ending December 31, 2001) exceeded the original
projection, based on a refund formula set forth in the agreement
("experience refund"). The refund formula resulted in the Company
recording a charge for an experience refund to the guaranty associations
during 2001 of $1,924,137.  The payment to the guaranty associations was
made in the fourth quarter of 2002 following a "true-up" of the claims
liability based on the claims experience through the first two quarters
of 2002. In addition to the true-up of the claims liability noted above,
the Company also recorded during 2002 the settlement of certain issues
that had arisen with the guaranty associations in regard to the
interpretation of various provisions of the acquisition agreement.  Of
the total $5,150,000 experience refund paid to the guaranty associations
during 2002, $4,739,331 had been accrued prior to 2002 (including the
$1,924,137 accrued during 2001 noted above) and $410,669 was recorded as
a charge during 2002.

As a result of the factors discussed above, the health segment had
income before income taxes of $1,543,159 for 2002 in comparison to a
loss of $879,294 for 2001.

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LIQUIDITY AND CAPITAL RESOURCES
-------------------------

     Liquidity of Insurance Subsidiaries

Acap's insurance subsidiaries have a significant portion of their assets
invested in debt instruments, short-term investments, or other
marketable securities.  Although there is no present need or intent to
dispose of such investments, the insurance subsidiaries could liquidate
portions of the investments should the need arise.  These assets should
be sufficient to meet the insurance anticipated long-term and short-term
liquidity needs.

As of December 31, 2002, 98% of the insurance subsidiaries' portfolios
of publicly traded bonds are invested in securities that are rated
"investment grade" (i.e., rated BBB-/Baa3 or higher by Standard & Poor
or Moody).  The Company's investment policy prohibits making any new
investments in below investment grade securities without the advance
approval of the applicable insurance subsidiary's Board of Directors.
All of the Company's bonds are classified as available-for-sale and are,
accordingly, reflected in the financial statements at fair value.  The
insurance subsidiaries" liabilities are primarily long term in nature.
Therefore, long-term assets can be purchased with the general intent to
hold such assets to maturity.  It has not been the Company's investment
practice in the past to be an active trader with its bond portfolios.
It is not expected that the insurance subsidiaries" investment practices
will change in the future.

A significant portion (13%) of the Company's bond portfolio is invested
in mortgage-backed securities, with 77% of such mortgage-backed
securities classified as collateralized mortgage obligations and 23%
classified as pass-through securities.  Mortgage-backed securities are
purchased to diversify the portfolio from credit risk associated with
corporate bonds.  The majority of mortgage-backed securities in the
Company's investment portfolio have minimal credit risk because the
underlying collateral is guaranteed by specified government agencies
(e.g., GNMA, FNMA, FHLMC).

The principal risks inherent in holding mortgage-backed securities are
prepayment and extension risks that arise from changes in the general
level of interest rates.  As interest rates decline and homeowners
refinance their mortgages, mortgage-backed securities prepay more
rapidly than anticipated.  Conversely, as interest rates increase,
underlying mortgages prepay more slowly, causing principal repayment of
mortgage-backed securities to be extended.  In general, mortgage-backed
securities provide for higher yields than corporate debt securities of
similar credit quality and expected maturity to compensate for this
greater amount of cash flow risk.  Due to the underlying structure of
the individual securities, the majority of mortgage-backed securities in
the Company's investment portfolio have relatively low cash flow
variability.

The Company's investments in collateralized mortgage obligations are
primarily of the planned amortization class (84%), Z (12%) and
sequential (4%) types.  A planned amortization class tranche is
structured to provide more certain cash flows and is therefore subject
to less prepayment and extension risk than other forms of mortgage-
backed securities.  Risk of prepayment in the Z tranche exposes both
interest and principal. Planned amortization class securities derive
their stability at the expense of cash flow risk for other tranches as
early repayments are applied first to other tranches, and cash flows
originally applicable to other tranches are first applied to the planned
amortization class tranche if that tranche's originally scheduled cash
flows are received later than expected.  The Z tranche defers all
interest to other tranches until those tranches are paid down, at which
time accumulated interest and principal are paid to this class.  The
cash flows associated with sequential tranches can vary as interest
rates fluctuate, since these tranches are not supported by other
tranches. The Z and sequential tranches generally are subject to a
higher level of prepayment risk than the planned amortization class
tranche.

The Company records its fixed maturity and equity securities at fair
value with unrealized gains and losses, net of taxes, reported as a
separate component of stockholders" equity.  Primarily as a result of
decreasing interest rates during the year, the fair value of the
Company's fixed maturity and equity securities increased $755,739 net of
taxes during 2002,following a $785,612 net of taxes increase during
2001.

As of December 31, 2002, the Company held 10 mortgage loans as
investments.  The Company's investment policy generally prohibits making
new investments in mortgage loans (although mortgage loans may be
acquired as approved assets in connection with an acquisition).  In
addition to the real estate collateral, approximately $535,000 (83%) of
the mortgage loans are guaranteed by an individual who management has
reason to believe has a net worth well in excess of the balance of the
guaranteed loans.  The average yearly principal balance of the Company's
mortgage loans at December 31, 2002 was approximately $29,000 and the
weighted average maturity was 10 years.  Mortgage loans on Tennessee
properties represent

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 50% of the mortgage loan balances at December 31, 2002, Alabama
properties 19%, Texas properties 17%, with Florida and Kentucky
properties representing the remainder of the mortgage loan balances.
Residential mortgages represent 88% of the mortgage loan balances at
December 31, 2002 with one commercial mortgage constituting the balance.
In general, the performance of commercial mortgages is more subject to
changing U.S. and regional economic conditions than residential
mortgages.
Mortgage loans are far less liquid an investment than publicly traded
securities. No mortgage loans are in default at December 31, 2002.

     Liquidity of the Parent Company

Net cash provided by operating activities decreased in 2002 as compared
to 2001 primarily due to the reduction of other liabilities of
$5,150,000 resulting from the settlement in the fourth quarter of 2002
of the experience refund to the various state guaranty associations
(discussed in more detail above under "Results of Operations").

Net cash provided by investing activities increased in 2002 as compared
to 2001 primarily due to the reduction of notes receivable of $4,088,295
resulting from the settlement in the fourth quarter of 2002 of the
experience refund to the various state guaranty associations.  The
amounts due to the guaranty associations were netted against the notes
receivable at settlement as required by the acquisition agreement.

On March 31, 1999, Acap borrowed $1.5 million from Central National Bank
of Waco, Texas.  Acap used $500,000 of the loan proceeds to repay an
existing loan at Central National Bank,
with the balance of the loan proceeds used to purchase a surplus
debenture from American Capitol.  At December 31, 2002, the outstanding
principal balance of the loan was $562,500.  The loan is renewable each
April 30 until fully repaid.  The loan bears interest at a rate equal to
the base rate of a bank.  The interest rate at December 31, 2002 was
5.25%.  Principal payments on the loan are due quarterly.  The loan
agreement contains certain restrictions and financial covenants.
Without the written consent of the bank, Acap may not incur any debt,
pay common stock dividends, or sell any substantial amounts of assets.
Also, American Capitol is subject to minimum statutory earnings and
capital and surplus requirements during the loan term.  The Company is
in compliance with all of the terms of the loan at December 31, 2002.
The principal payments on the bank loan are matched by the principal
payments on surplus debentures issued by American Capitol to Acap.

The primary sources of funds for Acap are payments on the surplus
debentures from American Capitol and dividends from American Capitol.
American Capitol may pay dividends in any one year without the prior
approval of regulatory authorities as long as such dividends do not
exceed certain statutory limitations.  As of December 31, 2002, the
amount of dividends available to the parent company from American
Capitol not limited by such restrictions is approximately $485,000.
Payments on the surplus debentures may only be made to the extent
statutory capital and surplus exceeds $2 million.  At December 31, 2002,
American Capitol's statutory capital and surplus was $4,430,621.

The determination of statutory surplus is governed by accounting
practices prescribed or permitted by the State of Texas.  Statutory
surplus therefore bears no direct relationship to surplus as would be
determined under accounting principles generally accepted in the United
States of America.

REINSURANCE
---------

Reinsurance plays significant roles in the Company's operations. One
role of reinsurance is to limit the Company 's exposure to loss on any
single insured by reinsuring that portion of risks in excess of $50,000
on the life of any individual.

Another role of reinsurance has been to facilitate acquisitions made by
the Company.  The insurance subsidiaries of the Company are required to
report to state regulatory authorities financial statements prepared in
accordance with prescribed statutory accounting principles ("SAP").  As
discussed in Note 1 to the Company's consolidated financial statements,
there are significant differences between accounting principles
generally accepted in the United States of America ("GAAP") and SAP.
One such difference is that under GAAP an asset is recognized related to
acquired policies equal to the actuarially determined present value of
projected future profits from policies in force at the purchase date
("DAC"), while SAP does not recognize such an asset.  Therefore, upon
the acquisition of a block of policies under SAP, the Company's
insurance subsidiaries realize a reduction in SAP equity (that is not
realized under GAAP) in an amount equal to the excess of the acquired
liabilities over the acquired assets.  By using reinsurance as described
below, the Company's insurance subsidiaries can increase their SAP

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equity (although such increase in equity is not recognized under GAAP).
Under SAP, whenever an insurance subsidiary of the Company cedes a block
of policies to a reinsurer, the insurance subsidiary realizes an
increase in equity in an amount equal to the excess of the ceded
liabilities over the ceded assets (keeping in mind there is no DAC asset
under SAP).  As a result, the Company's insurance subsidiaries can
acquire blocks of business and cede such blocks to the reinsurer to
offset, or minimize, the effect on the insurance subsidiaries" SAP
equity.  The reinsurers under such treaties receive all the profits (or
losses) related to the reinsured blocks of business and pay the Company
a reinsurance expense allowance for administering the reinsured
policies.  Depending on the particular reinsurance treaty, once the
profits under each treaty (calculated pursuant to a formula contained in
each treaty) reach a specified level (generally, the amount of the
difference between the ceded liabilities and ceded assets at the
inception of the treaty, all on the basis of SAP accounting), either the
subject insurance subsidiary is entitled to receive a specified
percentage of any profits that develop related to the reinsured policies
from that point forward, or has the option (but not the obligation) to
recapture the treaty (thus receiving future profits or losses, as the
case may be, that develop related to the policies that are the subject
of the recaptured treaty).

In accounting for reinsurance, the Company reports (based on GAAP)
reserve and claim liabilities related to reinsured blocks of business as
liabilities on the Company's balance sheet with an offsetting
reinsurance receivable reported as an asset on the Company's balance
sheet.  At December 31, 2002 and 2001, respectively, reinsurance
receivables with a carrying value of $43.8 million and $44.8 million
were recoverable from a single reinsurer, Canada Life Assurance Company
("Canada Life").  At December 31, 2001, Canada Life had statutory assets
in excess of $32 billion and statutory stockholders" equity of
approximately $3.4 billion.  Canada Life is rated "Superior" by A.M.
Best Company, an insurance company rating organization.  At December 31,
2002 and 2001, respectively, reinsurance receivables with a carrying
value of $44.2 million and $45.4 million were recoverable from Republic-
Vanguard Life Insurance Company ("Republic").  Republic is rated
"Excellent" by A.M. Best Company.  At December 31, 2001, Republic had
statutory assets of approximately $655 million and statutory
stockholders" equity of approximately $37 million.  At December 31, 2002
and 2001, respectively, reinsurance receivables with a carrying value of
$1.6 million and $2 million were recoverable from Hannover Life
Reassurance (Ireland) Limited ("Hannover").  Hannover is rated
"Superior" by A.M. Best Company.  The Hannover reinsurance receivables
are secured by a trust account containing a $3.57 million letter of
credit granted in favor of an insurance subsidiary of the Company.

A treaty with Canada Life provides that the Company is entitled to 85%
of the profits (calculated pursuant to a formula contained in the
treaty) beginning when the accumulated profits under the treaty reach a
specified level.  As of December 31, 2002, there remains $5,104,186 in
profits to be generated before the Company is entitled to 85% of the
profits.  As of December 31, 2001, such number was $5,956,285.  Should
future experience under the treaty match the experience of recent years,
which cannot reliably be predicted to occur, the accumulated profits
would reach the specified level around 2008. (However, regarding the
uncertainty as to when the specified level may be reached, it should be
noted that the experience has been erratic from year to year and the
number of policies in force that are covered by the treaty diminishes
each year.)

A treaty with Republic provides that the Company is entitled to 85% of
the profits (calculated pursuant to a formula contained in the treaty)
beginning when the accumulated profits under the treaty reach a
specified level.  As of December 31, 2002, there remains $2,004,266 in
profits to be generated before the Company is entitled to 85% of the
profits.  As of December 31, 2001, such number was $3,980,591.  Should
future experience under the treaty match the experience of recent years,
which cannot reliably be predicted to occur, the accumulated profits
would reach the specified level towards the end of 2003 or early 2004.
(However, regarding the uncertainty as to when the specified level may
be reached, it should be noted that the experience has been erratic from
year to year and the number of policies in force that are covered by the
treaty diminishes each year.)  Whereas during 2001 Republic was
responsible for holding and managing the investments supporting the
treaty, during 2002 and going forward the Company is responsible for
holding and managing such investments.

The treaty with Hannover was effected as of March 31, 2001.  The treaty
provides that the Company may recapture the treaty without a charge to
the surplus of an insurance subsidiary of the Company under statutory
accounting beginning when the accumulated profits (calculated pursuant
to a formula contained in the treaty) reach a specified level.  As of
December 31, 2002, there remains $2,433,621 in profits to be generated
before the Company can recapture the treaty without a surplus charge.
As of December 31, 2001, such number was $2,914,477. Should future
experience under the treaty match the experience of recent years, which
cannot reliably be predicted to occur, the accumulated profits would
reach the specified level around 2007. (However, regarding the
uncertainty as to when the specified level may be reached, it should be
noted that the

                                  7

<PAGE>

experience has been erratic from year to year and the number of policies
in force that are covered by the treaty diminishes each year.)  While
the Company expects that all amounts ceded to reinsurers will ultimately
be collected, the Company remains primarily liable to its contract
holders with respect to any reinsurance ceded, and would bear any loss
if such reinsurers were to default on their obligations under the
applicable reinsurance treaties.  Acap evaluates the financial condition
of its reinsurers and monitors concentrations of credit risk to minimize
its exposure to significant losses from reinsurer insolvencies.

CRITICAL ACCOUNTING STANDARDS
------------------------

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amount of revenues and expenses during the reporting period.  Actual
results could differ from those estimates.  In making such estimates,
management follows accounting policies established by the Company.
Management believes the accounting policies that are most critical to
the Company's financial statements, and that are subject to the most
judgment, are those related to other-than-temporary impairments,
reinsurance, deferred acquisition costs, recognition of premium revenue
and related expenses, the liability for future policy benefits and
contract claims, and income taxes.

Management monitors the investment securities for declines in value that
may be considered other-than-temporary on a monthly basis.  Judgment is
required to determine the existence and extent of other-than-temporary
impairment, including assessment of economic outlook, industry factors,
analyst expectations and the underlying collateral, if any.  Identified
other-than-temporary impairments are accounted for in the consolidated
statements of operations in net realized investment gains/losses.

Deferred acquisition costs are the costs of policies acquired through
the purchase of insurance companies and represent the actuarially
determined present value of projected future profits from policies in
force at the purchase date.

For interest-sensitive whole life contracts, deferred costs are
amortized in relation to the present value of expected future gross
profits from the contracts.  For traditional contracts, deferred costs
are amortized in relation to future anticipated premiums.  The deferred
costs are reviewed to determine that the unamortized portion of such
costs does not exceed recoverable amounts.  Management believes such
amounts are recoverable.

For traditional insurance contracts, premiums are recognized as revenue
when earned.  Benefits and expenses are associated with earned premiums
so as to result in their recognition over the premium-paying period of
the contracts.  Such recognition is accomplished by means of the
provision for future policy benefits and the amortization of deferred
policy acquisition costs.

For contracts with mortality risk that permit the Company to make
changes in the contract terms (such as interest-sensitive whole life
policies), premium collections and benefit payments are accounted for as
increases or decreases to a liability account rather than as revenue and
expense.  In addition, decreases to the liability account for the costs
of insurance and policy administration and for surrender penalties are
recorded as revenues.  Interest credited to the liability account and
benefit payments made in excess of a contract liability account balance
are charged to expense.

For investment contracts without mortality risk (such as deferred
annuities), net premium collections and benefit payments are recorded as
increases or decreases to a liability account rather than as revenue and
expense.  Surrender penalties are recorded as revenues.  Interest
credited to the liability account is charged to expense.

Reserves for traditional contracts are calculated using the net level
premium method and assumptions as to investment yields, mortality,
withdrawals, and dividends.  The assumptions are based on past and
expected experience and include provisions for possible unfavorable
deviation.  These assumptions are made at the time the contract is
issued or, for contracts acquired by purchase, at the purchase date.
Interest assumptions used to compute reserves ranged from 4% to 9% at
December 31, 2002.

                                   8

<PAGE>

Reserves for interest-sensitive whole life policies and investment
contracts are based on the contract account balance if future benefit
payments in excess of the account balance are not guaranteed, or the
present value of future benefit payments when such payments are
guaranteed.

The liability for contract claims represents the liability for claims
reported in excess of the related policy benefit reserve plus an
estimate of claims incurred but not reported. Management believes that
the Company's reserves have been appropriately calculated based on
available information as of December 31, 2002; however, it is possible
that the ultimate liability may vary significantly from these estimated
amounts.

The Company accounts for income taxes in accordance with SFAS No. 109,
that requires that a deferred tax liability be recognized for all
taxable temporary differences and a deferred tax asset be recognized for
an enterprise's deductible temporary differences and operating loss and
tax credit carryforwards.  A deferred tax asset or liability is measured
using the marginal tax rate expected to apply to the last dollars of
taxable income in future years.  The effects of enacted changes in tax
laws or rates are recognized in the period that includes the enactment
date.  The Company's subsidiaries receive a small-life insurance company
deduction that reduces its income tax expense.  The income tax benefit
is dependent upon the amount of taxable income in any given year.

The Company accounts for reinsurance in accordance with Statement of
Financial Accounting Standards No. 113.  In accounting for reinsurance,
the Company has reported ceded reserve credits and reinsurance claim
credits as reinsurance receivables.  The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to
account for the underlying policies.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
----------------------------------

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 amends
existing guidance on reporting gains and losses on the extinguishment of
debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. The provisions of SFAS No. 145 related to the rescission
of SFAS No. 4 are applied in fiscal years beginning after May 15, 2002.
Earlier application of these provisions is encouraged. The provisions of
SFAS No. 145 related to SFAS No. 13 were effective for transactions
occurring after May 15, 2002, with early application encouraged. The
adoption of SFAS No. 145 is not expected to have a material effect on
the Company's financial statements.

In August 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets."  SFAS No. 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," and the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business (as previously defined in that Opinion).  This
statement also amends ARB No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary.  Because SFAS No. 121 did not address
the accounting for a segment of a business accounted for a discontinued
operation under Opinion 30, two accounting models existed for long-lived
assets to be disposed of.  A single accounting model was established
based on the framework established in SFAS No. 121 for long-lived assets
to be disposed of by sale.  Significant implementation issues related to
SFAS No. 121 were also resolved.  The adoption of  SFAS No. 144 is for
fiscal years beginning after December 15, 2001.  The adoption of SFAS
No. 144 is not expected to have a material effect on the Company's
financial statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor"s
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No.
34." This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under guarantees issued.  The Interpretation also clarifies
that a guarantor is required to recognize, at inception of a guarantee,
a liability for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after

                                 9

<PAGE>

December 31, 2002.   The disclosure requirements are effective for
financial statements of interim or annual periods ending after December
15, 2002.  The application of this interpretation is not expected to
have a material effect on the Company's financial statements.

 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-
based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements.  Certain of the
disclosure modifications are required for fiscal years ending after
December 15, 2002.  The adoption of SFAS No. 148 is not expected to have
a material effect on the Company's
financial statements.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003.
The Interpretation requires certain disclosures in financial statements
issued after January 31, 2003. The application of this interpretation is
not expected to have a material effect on the Company's financial
statements.

In July 2001, SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets" were issued.  SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001.  SFAS No.
141 also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an
assembled workforce may not be accounted for separately.  SFAS No. 142
will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142.  SFAS No.
142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of."  There was no effect from
the adoption of SFAS No. 141.
The impact of the adoption of SFAS No. 142 will result in no
amortization of goodwill for 2002.  Goodwill amortization recognized in
2001 was $224,608.

MARKET FOR THE COMPANY'S COMMON STOCK
-------------------------------------

By a letter dated March 22, 2002 from NASDAQ, the Company was informed
of a plan to replace NASDAQ's OTC Bulletin Board, on which the Company's
stock trades, with a new market, the Bulletin Board Exchange.
Information published by the Bulletin Board Exchange indicates that the
new market is scheduled to launch in the fourth quarter of 2003, pending
approval by the Securities and Exchange Commission, and that NASDAQ
plans to discontinue the OTC Bulletin Board six months following the
launch of the Bulletin Board Exchange.

On May 9, 2002, the Company became aware that proposed listing
qualifications published by the Bulletin Board Exchange include the
requirement that issuers have at least 100 round-lot stockholders (i.e.,
stockholders owning 100 or more shares) and have at least 200,000 shares
in the public float.  The Company does not meet either of these
qualifications.  If the changes noted above come to pass with the
qualifications noted above, the Company's stock would not qualify for
listing on the Bulletin Board Exchange and the OTC Bulletin Board would
cease to exist, and the only market for the Company's common stock would
be informal, over-the-counter methods.

While the changes noted above would result in the loss of the Company's
common stock listing on the OTC Bulletin Board in the second quarter of
2004, the reverse stock split approved by the Company's Board of
Directors on March 24, 2003 could result in de-listing of the Company's
common stock from the OTC Bulletin Board during 2003.  The reverse stock
split is discussed below in "Subsequent Event - Reverse Stock Split."


                                   10
 <PAGE>

SUBSEQUENT EVENT - REVERSE STOCK SPLIT
--------------------------------

On March 24, 2003, the Company's Board of Directors unanimously adopted
a "going private" plan (defined below) to be implemented by an amendment
to the Company's Certificate of Incorporation to effect a 1-for-2
reverse stock split (subject to the approval of the holders of a
majority of the outstanding shares of the Company's common stock, which
may be accomplished through the written consent of such majority).  When
(and if) effective, the reverse stock split will reduce the number of
holders of the Company's common stock to less than 300 by "cashing out"
stockholders owning only one share of the Company's common stock (but
see the "buy or sell" discussion below).  This reduction will enable the
Company to terminate its registration with the Securities and Exchange
Commission ("SEC").  This process is often referred to as "going
private."  The Company expects thereby to realize significant cost
savings.

The "going private" plan provides the opportunity to a holder of a
single share of the Company's "old" common stock to elect to remain a
stockholder (subject to the possibility of limitations as stated in the
pertinent information) as follows.  The reverse stock split will result
in so-called "fractional" shares of the Company's old common stock for
any stockholder who owns a single share or who holds a number of shares
not evenly divisible by 2, and the plan does not call for issuing
fractional shares.  The plan allows a stockholder who holds a fractional
share resulting from the reverse stock split to "buy or sell" a
fractional share at the stated price.  A stockholder who buys a
fractional share (instead of selling a fractional share) will thereby
own two shares of the old common stock to be exchanged for one share of
the Company's new common stock.  Thus, a holder of a single share of old
common stock can remain a stockholder, if that is his or her election.

Also, if a stockholder simply wishes to dispose of his or her fractional
share, the reverse stock split provides a means to sell such share of
stock at the stated price without having to pay brokerage commissions.

While a de-listing of the Company's common stock from the OTC Bulletin
Board (where the Company's common stock currently trades) will result
from the Company's termination of its registration with the SEC, as
discussed above in "Market for the Company's Common Stock," the
Company's common stock is likely to lose its market on the OTC Bulletin
Board during 2004 anyway, as a result of changes being pursued by
NASDAQ.  Upon de-listing from the OTC Bulletin Board, the only market
for the Company's common stock will be informal, over-the-counter
methods.  For example, the market makers in the Company's common stock
may choose to move their quotes in the Company's common stock to the
Pink Sheets, a centralized quotation service that collects and publishes
market maker quotes for over-the-counter securities.  The Company is
unable to predict with certainty the effect the foregoing will have on
either the market price of the Company's common stock, the volatility of
such price, or the trading volume of the Company's common stock.

An Information Statement providing details of the terms of the reverse
stock split will be mailed to stockholders at least twenty days prior to
the effective date of the reverse stock split.  The Information
Statement must first be filed with the SEC, which affects the timetable.

CAUTIONARY STATEMENT
----------------

The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking
statements.  Accordingly, any forward-looking statement contained herein
or in any other oral or written statement by the Company or any of its
officers, directors, or employees is qualified by the fact that actual
results of the Company may differ materially from such statement due to
the following important factors, among other risks and uncertainties
inherent in the Company's business: state insurance regulations, rate
competition, adverse changes in interest rates, unforeseen losses with
respect to loss and settlement expense reserves for unreported and
reported claims, and catastrophic events.

                                  11


               ACAP CORPORATION ANNUAL REPORT 2002
               CONSOLIDATED BALANCE SHEETS






                                      December 31,   December 31,
                                         2002           2001
------------------------------------------------------------------
Assets
Investments:
 Fixed maturities available for sale
 (amortized cost of $39,548,976;
  $40,866,976) . . . . . . . . .. .. $  42,005,831    41,923,365
 Mortgage loans . . . . . . . . . .        647,700       763,128
 Policy loans . . . . . . . . . . .      4,964,721     5,795,047
 Short-term investments . . . . . .      2,954,390     1,107,220
                                     ----------------------------
    Total investments  . . . . . . .     50,572,642    49,588,760
Cash   . . . . . . . . . . . . . . .        209,067       414,378
Accrued investment income  . . . . .        562,265       666,791
Reinsurance receivables  . . . . . .     91,744,493    94,362,428
Notes receivable . . . . . . . . . .             --     4,088,295
Accounts receivable
 (less allowance for uncollectible
 accounts of $187,444) . . . . . . .        593,954       611,929
Deferred acquisition costs . . . . .      1,084,120     1,292,203
Property and equipment (less
 accumulated depreciation of
 $1,155,972; $969,138)  . . . . . . .       437,350       566,349
Costs in excess of net assets
 of acquired business (less
 accumulated  amortization
 of $1,895,727) . . . . . . . . . . .       778,044       778,044
Net deferred tax asset  . . . . . . .       419,290       643,827
Other assets  . . . . . . . . . . . .       398,644       891,851
                                     ----------------------------
    Total assets  . . . . . . . . . . $ 146,799,869   153,904,855
                                     ============================
------------------------------------------------------------------
Liabilities
Policy liabilities:
  Future policy benefits . . . . . .  $ 127,923,721   131,859,810
  Contract claims  . . . . . . . . .      2,443,109     2,844,066
                                     ----------------------------
     Total policy liabilities. . . .    130,366,830   134,703,876
Other policyholders' funds. . .. . .      1,884,620     2,024,987
Other liabilities  . . . . . . . . .      1,810,351     6,670,838
Note payable . . . . . . . . . . . .        562,500       812,500
Deferred gain on reinsurance  . . .       2,766,620     2,985,443
Deferred gain on sale of real estate             --       101,090
                                     ----------------------------
     Total liabilities  . . . . . .   $ 137,390,921   147,298,734
                                     ============================
-----------------------------------------------------------------

Stockholders' Equity
Series A preferred stock, par value
 $.10 per share, authorized, issued,
 and outstanding 74,000 shares
 (involuntary liquidation
 value $2,035,000) .. . . . . . . . . $   1,850,000     1,850,000
Common stock, par value $.10 per
 share, authorized 10,000 shares,
 issued 8,759, and
 outstanding 7,324; 7,224 shares . . .          876           876
Additional paid-in capital . . . . . .    6,241,963     6,259,589
Retained earnings (deficit). . . . . .      158,376    (1,862,312)
Treasury stock, at cost, 1,435;
 1,535 common shares . . . . . . . . .     (463,816)     (507,842)
Accumulated other comprehensive
 income-net unrealized investment
 gains, net of taxes of $835,339;
 $446,022  . . . . . . . . . . . . . .    1,621,549       865,810
                                     ----------------------------
     Total stockholders' equity  . . .    9,408,948     6,606,121
                                     ----------------------------
     Total liabilities and
      stockholders' equity . . . . . .$ 146,799,869   153,904,855
                                     ============================
------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

                                  12

<PAGE>

                ACAP CORPORATION ANNUAL REPORT 2002
                CONSOLIDATED STATEMENTS OF OPERATIONS
                AND COMPREHENSIVE INCOME


                                         Year Ended December 31,
                                           2002         2001
-------------------------------------------------------------------
Revenues
Premiums and other considerations . . . $ 12,410,089  14,226,626
Net investment income . . . . . . . . . .  2,181,711   2,478,443
Net realized investment
 gains (losses) . . . . . . . . . . . . .    139,285    (306,566)
Reinsurance expense allowance . . . . . .  3,131,267   3,245,838
Amortization of deferred gain . . . . . .    319,913     287,717
Other income. . . . . . . . . . . . . . .    242,879     316,593
                                     ----------------------------
   Total revenues . . . . . . . . . . . . 18,425,144  20,248,651
                                     ----------------------------
------------------------------------------------------------------
Benefits and Expenses
Net policy benefits . . . . . . . . . . .  8,512,238  11,322,513
Commissions and general expenses  . . . .  7,331,302   9,665,920
Interest expense  . . . . . . . . . . . .     36,654      68,852
Amortization of deferred
 acquisition costs  . . . . . . . . . . .    208,083     214,711
Amortization of costs in
 excess of net assets of
 acquired business  . . . . . . . . . . .         --     224,608
                                     ----------------------------
   Total benefits and expenses. . . . . . 16,088,277  21,496,604
                                     ----------------------------
------------------------------------------------------------------
Earnings
Income (loss) before federal
 income tax expense (benefit) . . . . . .  2,336,867  (1,247,953)
Federal income tax expense (benefit):
  Current . . . . . . . . . . . . . . . .    352,615     351,123
  Deferred  . . . . . . . . . . . . . . .   (164,780)   (792,963)
                                     ----------------------------
Net income (loss) . . . . . . . . . . . .  2,149,032    (806,113)
                                     ============================
------------------------------------------------------------------
Other Comprehensive Income (Loss)
Net unrealized investments holding
 gains arising during period, net
 of taxes of $436,676 in 2002
 and $300,476 in 2001 . . . . . . . . . .    847,667     583,278
Less: reclassification adjustment for
 net investment gains and losses
 included in net income, net of taxes
 of $(47,357) in 2002 and
 $104,232 in 2001 . . . . . . . . . . . .    (91,928)    202,334
                                     ----------------------------
Comprehensive income (loss) . . . . . $    2,904,771     (20,501)
                                     ============================
------------------------------------------------------------------
Earnings (Loss) Per Share
Basic earnings (loss)
 per common share . . . . . . . . . . $      278.33      (137.04)
                                     ============================
Diluted earnings (loss)
 per common share . . . . . . . . . . $      274.18      (137.04)
                                     ============================
------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

                                   13

<PAGE>

              ACAP CORPORATION ANNUAL REPORT 2002
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                          Year Ended December 31,
                                                2002     2001
------------------------------------------------------------------
Series A Preferred Stock
 (Including Additional
 Paid-in Capital) . . . . . . . . . .   $  1,850,000   1,850,000
                                     ----------------------------
------------------------------------------------------------------
Common Stock  . . . . . . . . . . . .            876         876
                                     ----------------------------
------------------------------------------------------------------
Additional Paid-in Capital
Balance, beginning of year  . . . . .      6,259,589   6,259,589
Stock options exercised . . . . . . .        (17,626)         --
                                     ----------------------------
Balance, end of year  . . . . . . . .      6,241,963   6,259,589
                                     ----------------------------
------------------------------------------------------------------
Retained Earnings (Deficit)
Balance, beginning of year . . . . . .    (1,862,312)   (872,355)
Net income (loss)  . . . . . . . . . .     2,149,032    (806,113)
Preferred stock cash dividends . . . .      (128,344)   (183,844)
                                     ----------------------------
Balance, end of year . . . . . . . . .       158,376  (1,862,312)
                                     ----------------------------
------------------------------------------------------------------
Treasury Stock
Balance, beginning of year  . . . . .       (507,842)   (507,842)
Stock options exercised . . . . . . .         44,026          --
                                     ----------------------------
Balance, end of year  . . . . . . . .       (463,816)   (507,842)
                                     ----------------------------
------------------------------------------------------------------
Accumulated Other Comprehensive Income
Balance, beginning of year . . . . . .      865,810       80,198
Change during year . . . . . . . . . .      755,739      785,612
                                     ----------------------------
Balance, end of year . . . . . . . . .    1,621,549      865,810
                                     ----------------------------
------------------------------------------------------------------
Total Stockholders' Equity . . . . . . $  9,408,948    6,606,121
                                     ============================
------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

                                 14

<PAGE>

                ACAP CORPORATION ANNUAL REPORT 2002
                CONSOLIDATED STATEMENTS OF CASH FLOWS


                                         Year Ended December 31,
                                           2002         2001
-----------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) . . . . . . . . . .  $   2,149,032    (806,113)
Adjustments to reconcile net income
 (loss) to net cash provided by
 (used in) operating activities:
Depreciation and amortization . . . . .      188,847     414,539
Allowance for uncollectible accounts  .           --      99,153
Amortization of deferred acquisition
 costs . . . . . . . . . . . . . . . .       208,083     214,711
Amortization of deferred gain
 on reinsurance . . . . . . . . . . . .     (319,913)   (287,717)
Premium and discount amortization . . .        5,543     (43,030)
Net realized investment
 losses (gains) . . . . . . . . . . . .     (139,285)    306,566
Deferred federal income tax benefit . .     (164,780)   (792,963)
Decrease in reinsurance receivables . .    2,617,935   1,253,218
Decrease in accrued investment income .      104,526       1,285
Decrease (increase) in accounts
 receivable . . . . . . . . . . . . . .       17,975    (125,225)
Decrease (increase) in other
 assets . . . . . . . . . . . . . . . .      493,207    (272,817)
Decrease in policy liabilities  . . . .   (3,405,760) (1,767,892)
Increase (decrease) in other
 liabilities . . . . . . . . . . . . .    (4,860,487)  2,160,159
                                     ----------------------------
     Net cash provided by
     (used in) operating activities . .   (3,105,077)    353,874
                                     ----------------------------
-----------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from sales and maturities
 of investments available for sale and
 principal repayments on mortgage loans   14,705,019   5,300,205
Purchases of investments available
 for sale  . . . . . . . . . . . . . .   (13,393,259) (4,649,026)
Principal payments received
 on notes receivable . . . . . . . . .     4,088,295          --
Net decrease in policy loans . . . . .       830,326     345,411
Net increase in short-term investments    (1,847,170)    (16,554)
Purchases of property and equipment..        (59,848)     (7,775)
                                      ---------------------------
     Net cash provided by
     investing activities . . . . . .      4,323,363     972,261
                                     ----------------------------
------------------------------------------------------------------
Cash Flows from Financing Activities
Principal payments on note payable . .      (250,000)   (250,000)
Deposits on policy contracts . . . . .       979,364     967,608
Withdrawals from policy contracts  . .    (2,051,017) (1,576,553)
Proceeds from issuance of stock
 options exercised . . . . . . . . . .        26,400          --
Preferred stock dividends paid . . . .      (128,344)   (183,844)
                                     ----------------------------
     Net cash used in
     financing activities  . . . . . .    (1,423,597) (1,042,789)
                                     ----------------------------
------------------------------------------------------------------
Net increase (decrease) in cash  . . .      (205,311)    283,346
Cash at beginning of year  . . . . . .       414,378     131,032
                                     ----------------------------
Cash at end of year . . . . . . . . . $      209,067     414,378
                                     ============================
------------------------------------------------------------------
See accompanying notes to consolidated financial statements

                                 15

<page>


                 ACAP CORPORATION ANNUAL REPORT 2002
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------

     A. Principles of Consolidation and Nature of Operations

The consolidated financial statements of Acap Corporation ("Acap" or
"the Company") include its wholly-owned subsidiaries: American Capitol
Insurance Company ("American Capitol"); Imperial Plan, Inc. ("Imperial
Plan"); and Texas Imperial Life Insurance Company ("Texas Imperial").
All significant intercompany transactions and accounts have been
eliminated in consolidation.  Controlling interest in the Company of
approximately 45% and 46% at December 31, 2002 and 2001, respectively,
was owned by InsCap Corporation ("InsCap").

Acap is a life insurance holding company that focuses on the acquisition
of existing life insurance policies, either through direct purchase or
the acquisition of insurance companies.  In May 1999, Acap began
marketing Medicare supplement health insurance.  Acap's insurance
operations are conducted through its wholly-owned insurance
subsidiaries.  Operations are conducted from the corporate headquarters
in Houston, Texas.  Approximately half of the Company's direct collected
premium comes from residents of the State of Texas, with no other state
generating as much as 14% of the Company's direct collected premium.

     B. Basis of Presentation

The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America ("GAAP").  Such accounting principles differ from prescribed
statutory reporting practices used by the insurance subsidiaries in
reporting to state regulatory authorities.  The more significant
differences from statutory accounting principles are:  (a) acquisition
costs related to acquiring new business are deferred and amortized over
the expected lives of the policies rather than being charged to
operations as incurred;  (b) future policy benefits are based on
estimates of mortality, interest, and withdrawals generally representing
the Company's experience, which may differ from those based on statutory
mortality and interest requirements without consideration of
withdrawals;  (c) certain assets (principally software, agents' debit
balances and certain other receivables) are reported as assets rather
than being charged to retained earnings/accumulated deficit; (d)
investments in fixed maturity securities that are classified as
available for sale are recorded at fair value rather than at amortized
cost;  (e) for acquisitions accounted for as a purchase, the identified
net assets of the acquired company are valued at their fair values and
reviewed for impairment at least annually, whereas, for statutory
purposes, this excess is not allowed and acquisitions are accounted for
as equity investments; (f) there are no investment related reserves,
while the statutory basis of accounting requires the Asset Valuation
Reserve and the Interest Maintenance Reserve;  (g) assets and
liabilities are reported gross of reinsurance, while the statutory basis
of accounting requires assets and liabilities to be reported net of
reinsurance; and (h) at the time of the initial ceding of a block of
business, a deferred gain is set up and amortized over the life of the
policies ceded; whereas, under the statutory basis of accounting, the
decrease in surplus relief from reinsurance ceded agreements is
amortized through net income with an offset in surplus netting to a zero
effect on surplus.

Generally, the net assets of the Company's insurance subsidiaries
available for transfer to the parent company are limited to the amounts
that the insurance subsidiaries' statutory net assets exceed minimum
statutory capital requirements; however, payment of the amounts as
dividends may be subject to approval by regulatory authorities.  As of
December 31, 2002 and 2001 the amount of dividends available to the
parent company from subsidiaries not limited by such restrictions is
approximately $485,000 and $239,000, respectively.

The combined net income of the Company's insurance subsidiaries as
determined using statutory accounting practices, was $4,550,513 and
$3,178,741 for the years ended December 31, 2002 and 2001, respectively.
The consolidated statutory stockholders' equity of the Company's
insurance subsidiaries amounted to $4,430,621 and $3,433,200 at December
31, 2002 and 2001, respectively.  The total adjusted statutory
stockholders' equity of the Company's insurance subsidiaries exceeds the
Risk-Based Capital requirements.

In March 1998, the National Association of Insurance Commissioners
("NAIC") adopted the Codification of Statutory Accounting Principles
Project as the NAIC-supported basis of accounting.  However, the
codification project was approved with the provision for state insurance
commissioner discretion in the determination of appropriate statutory
accounting for insurers domiciled in their state.  The adoption of this
codification project changed, to some extent, prescribed statutory

                                   16

<PAGE>

accounting practices and resulted in changes to the accounting practice
that insurance companies previously used to prepare their statutory
financial statements.  The effective date for the new codified statutory
accounting principles was January 1, 2001.  The combined effect of
codification implementation at January 1, 2001 for the insurance
subsidiaries was an increase in surplus of $208,336 in total, relating
to the establishment of deferred tax assets.

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period.  Actual
results could differ from those estimates.

Certain prior year amounts have been reclassified to conform to the
current year presentation.  Such reclassifications had no impact on net
income or stockholders' equity as previously reported.

     C. Investments

Investments are reported on the following bases:

All of the Company's debt securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115 and
are classified as available-for-sale securities. Accordingly, such
securities are reported at fair value, with unrealized gains and losses,
net of taxes, excluded from earnings and reported as a separate
component of stockholders' equity as accumulated other comprehensive
income (loss).

The retrospective method is used to calculate the amortization of
premium and accretion of discount on the mortgage-backed securities.

Mortgage loans on real estate are carried at their unpaid principal
balances.

Policy loans are carried at their unpaid principal balances.  Policy
loans consist primarily of automatic borrowings against a policy's cash
surrender value to pay policy premiums.  Interest accrues at rates
ranging from 5% to 10%.

Short-term investments, consisting primarily of commercial paper, are
carried at cost.

Declines in value considered other-than-temporary and other realized
gains and losses, determined on the specific identification method, are
accounted for in the consolidated statements of operations in net
realized investment gains/losses.

     D. Deferred Acquisition Costs

Deferred acquisition costs are the costs of policies acquired through
the purchase of insurance companies and represent the actuarially
determined present value of projected future profits from policies in
force at the purchase date.

For interest-sensitive whole life contracts, deferred costs are
amortized in relation to the present value of expected future gross
profits from the contracts.  For traditional contracts, deferred costs
are amortized in relation to future anticipated premiums.  The deferred
costs are reviewed to determine that the unamortized portion of such
costs does not exceed recoverable amounts.  Management believes such
amounts are recoverable.

The deferred acquisition costs for the years ended December 31, are
summarized as follows:

                                           2002           2001
-----------------------------------------------------------------
Balance, beginning of year . . . . . $    1,292,203    1,506,914
Amortized during the year . . . . .        (208,083)    (214,711)
                                     ---------------------------
Balance, end of year . . . . . . . . $    1,084,120    1,292,203
                                     ===========================
-----------------------------------------------------------------

                                   17

<PAGE>

The amortization of deferred acquisition costs is expected to be between
$100,000 and $200,000 over each of the next five years.

     E. Property and Equipment

Property and equipment are carried at cost.  Depreciation is computed
using the straight-line method over the estimated useful lives, which
range from three to ten years.  Depreciation expense was $188,847 and
$189,931 for the years ended December 31, 2002 and 2001, respectively.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any
resulting gains or losses are recognized in income for the period.  The
cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized.

     F. Costs in Excess of Net Assets of Acquired Business

Beginning January 1, 2002, the costs in excess of net assets of
acquired business were no longer amortized, but instead are tested for
impairment at least annually in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142.  In 2001, the costs in excess of
net assets of acquired business were amortized on a straight-line basis
over the estimated lives of seven and seventeen years.  The Company's
evaluation for the year ended December 31, 2002 determined there was no
impairment.

                                           2002           2001
-----------------------------------------------------------------
Net earnings
------------
 As reported . . . . . . . . . . .   $   2,149,032      (806,113)
                                     =============================
 Adjusted for goodwill
  amortization  . . . . . . . . . .  $          --      (581,505)
                                     =============================
Basic earnings per share:
------------------------
 As reported  . . . . . . . . . . .  $     278.33        (137.04)
                                     =============================

 Adjusted for goodwill
  amortization  . . . . . . . . . .  $         --        (105.95)
                                     =============================

Diluted earnings per share:
--------------------------
 As reported  . . . . . . . . . . .  $     274.18        (137.04)
                                     =============================

 Adjusted for goodwill
  amortization  . . . . . . . . . .  $         --        (105.95)
                                     =============================
-----------------------------------------------------------------


     G. Recognition of Premium Revenue and Related Expenses, Liability
for Future Policy Benefits and Contract Claims

For traditional insurance contracts, premiums are recognized as revenue
when earned.  Benefits and expenses are associated with earned premiums
so as to result in their recognition over the premium-paying period of
the contracts.  Such recognition is accomplished by means of the
provision for future policy benefits and the amortization of deferred
policy acquisition costs.

For contracts with mortality risk that permit the Company to make
changes in the contract terms (such as interest-sensitive whole life
policies), premium collections and benefit payments are accounted for as
increases or decreases to a liability account rather than as revenue and
expense.  In addition, decreases to the liability account for the costs
of insurance and policy administration and for surrender penalties are
recorded as revenues.  Interest credited to the liability account and
benefit payments made in excess of a contract liability account balance
are charged to expense.

For investment contracts without mortality risk (such as deferred
annuities), net premium collections and benefit payments are recorded as
increases or decreases to a liability account rather than as revenue and
expense.  Surrender penalties are recorded as revenues.  Interest
credited to the liability account is charged to expense.

Reserves for traditional contracts are calculated using the net level
premium method and assumptions as to investment yields, mortality,
withdrawals, and dividends.  The assumptions are based on past and
expected experience and include provisions for possible unfavorable
deviation.  These assumptions are made at the time the contract is
issued or, for contracts acquired by purchase, at the purchase date.
Interest assumptions used to compute reserves ranged from 4% to 9% at
December 31, 2002.

                                   18

<PAGE>

Reserves for interest-sensitive whole life policies and investment
contracts are based on the contract account balance if future benefit
payments in excess of the account balance are not guaranteed, or the
present value of future benefit payments when such payments are
guaranteed.

The liability for contract claims represents the liability for claims
reported in excess of the related policy benefit reserve plus an
estimate of claims incurred but not reported. Management believes that
the Company's reserves have been appropriately calculated based on
available information as of December 31, 2002, however it is possible
that the ultimate liability may vary significantly from these estimated
amounts.

     H. Earnings (Loss) per Share

Earnings (loss) per common share for 2002 and 2001 were computed as
follows:

                                             2002         2001
-----------------------------------------------------------------
Net income (loss) . . . . . . . . .   $    2,149,032    (806,113)
Preferred dividends . . . . . . . .         (128,344)   (183,844)
                                      ---------------------------
Earnings (loss) available
 to common stockholders . . . . . .   $    2,020,688    (989,957)
                                      ===========================
Weighted Average Shares:
   Basic ..........................            7,260       7,224
                                      ===========================
   Diluted ........................            7,370       7,224
                                      ===========================
Net earnings (loss) per share:
   Basic ..........................   $       278.33     (137.04)
                                      ===========================
   Diluted ........................   $       274.18     (137.04)
                                      ===========================
-----------------------------------------------------------------
     I. Participating Policies

Acap maintains both participating and nonparticipating life insurance
policies. Participating business represented approximately 27% and 32%
of the life insurance in force at December 31, 2002 and 2001, and 46%
and 42% of life insurance premium income at December 31, 2002 and 2001,
respectively.  Dividends to participating policyholders are determined
annually and are payable only upon declaration of the Boards of
Directors of the insurance subsidiaries.

     J. Federal Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
that requires that a deferred tax liability be recognized for all
taxable temporary differences and a deferred tax asset be recognized for
an enterprise's deductible temporary differences and operating loss and
tax credit carryforwards.  A deferred tax asset or liability is measured
using the marginal tax rate expected to apply to the last dollars of
taxable income in future years.  The effects of enacted changes in tax
laws or rates are recognized in the period that includes the enactment
date.  The Company's subsidiaries receive a small-life insurance company
deduction that reduces its income tax expense.  The income tax benefit
is dependent upon the amount of taxable income in any given year.

     K. Statements of Cash Flows

For purposes of reporting cash flows, cash includes cash on hand, in
demand accounts, in money market accounts, and in savings accounts.

     L. Stock-Based Compensation

The Company grants stock options to employees for a fixed number of
shares with an exercise price equal to the fair market value of the
shares at the date of grant.  The Company accounts for stock options in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and accordingly recognizes no compensation expense for the
stock option grants.

                                  19

<PAGE>

The pro forma disclosure required by SFAS No. 123 has not been included
in the financial statements since the effects of SFAS No. 123 are not
material to the financial statements.

     M. Recently Issued Accounting Standards

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 amends
existing guidance on reporting gains and losses on the extinguishment of
debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. The provisions of SFAS No. 145 related to the rescission
of SFAS No. 4 are applied in fiscal years beginning after May 15, 2002.
Earlier application of these provisions is encouraged. The provisions of
SFAS No. 145 related to SFAS No. 13 were effective for transactions
occurring after May 15, 2002, with early application encouraged. The
adoption of SFAS No. 145 is not expected to have a material effect on
the Company's financial statements.

In August 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets."  SFAS No. 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," and the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business (as previously defined in that Opinion).  This
statement also amends ARB No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary.  Because SFAS No. 121 did not address
the accounting for a segment of a business accounted for a discontinued
operation under Opinion 30, two accounting models existed for long-lived
assets to be disposed of.  A single accounting model was established
based on the framework established in SFAS No. 121 for long-lived assets
to be disposed of by sale.  Significant implementation issues related to
SFAS No. 121 were also resolved. The adoption of  SFAS No. 144 is for
fiscal years beginning after December 15, 2001.  The adoption of SFAS
No. 144 is not expected to have a material effect on the Company's
financial statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor"s
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No.
34." This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under guarantees issued.  The Interpretation also clarifies
that a guarantor is required to recognize, at inception of a guarantee,
a liability for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002.  The
application of this interpretation is not expected to have a material
effect on the Company's financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-
based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements.  Certain of the
disclosure modifications are required for fiscal years ending after
December 15, 2002.  The adoption of SFAS No. 148 is not expected to have
a material effect on the Company's financial statements.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003.
The Interpretation requires certain disclosures in financial statements
issued after January 31, 2003. The application of this interpretation is
not expected to have a material effect on the Company's financial
statements.

                                  20

<PAGE>

In July 2001, SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets" were issued.  SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001.  SFAS No.
141 also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an
assembled workforce may not be accounted for separately.  SFAS No. 142
will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142.  SFAS No.
142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of."  There was no effect from
the adoption of SFAS No. 141.  The impact of the adoption of SFAS No.
142 will result in no amortization of goodwill for 2002.  Goodwill
amortization recognized in 2001 was $224,608.

     N. Comprehensive Income

Other comprehensive loss for the year ended December 31, 2001 has been
restated to correct the unrealized holding gains, decreasing
comprehensive loss by $82,998 resulting in a $20,501 comprehensive loss.
There was no change to the net loss or stockholders' equity as
previously reported.

2.  INVESTMENTS
-------------

     A. Fixed Maturity Securities

The amortized cost and fair values of investments in fixed
maturity securities as of December 31, 2002 are as follows:

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

                                   Gross       Gross
                       Amortized Unrealized  Unrealized     Fair
                          Cost     Gains       Losses      Value
                          ----     -----       ------      -----
Government securities $  3,312,890   366,852      --    3,679,742
Corporate securities .  26,360,832 2,188,966 (278,080) 28,271,718
Asset-backed securities  4,627,100    83,200 (322,195)  4,388,105
Mortgage-backed
 securities . . . . . .  5,248,154   418,112       --   5,666,266
                      -------------------------------------------
                      $ 39,548,976 3,057,130 (600,275) 42,005,831
                      ===========================================
-----------------------------------------------------------------

The amortized cost and fair values of investments in fixed maturity
securities as of December 31, 2001 are as follows:

-----------------------------------------------------------------
                                   Gross       Gross
                       Amortized Unrealized  Unrealized     Fair
                          Cost     Gains       Losses      Value
                          ----     -----       ------      -----
Government securities $  3,443,430   190,108       --   3,633,538
Corporate securities .  28,122,877   941,468 (216,291) 28,848,054
Asset-backed securities  3,642,705    77,856 (273,368)  3,447,193
Mortgage-backed
 Securities . . . . . .  5,657,964   336,616       --   5,994,580
                       ------------------------------------------
                      $ 40,866,976 1,546,048 (489,659) 41,923,365
                      ===========================================
-----------------------------------------------------------------

                                  21

<PAGE>

A summary of proceeds from the sales of investments in fixed maturity
securities, exclusive of proceeds from maturities, and the gross gains
and losses realized on those sales follows:

                                             2002         2001
-------------------------------------------------------------------
Proceeds on sales . . . . . . . . . .  $   6,793,144    2,477,661
                                       ============================
Gross realized gains on sales  . . .         236,601       11,930
Gross realized losses on sales . . .        (98,299)      (14,745)
                                       ----------------------------
Net realized gains (losses)
 on sales . . . . . . . . . . . . . .       138,302        (2,815)
Realized gains (losses) on
 transactions other than sales  . . .           983      (438,422)
                                       ----------------------------
Net realized gains (losses) . . . . .  $    139,285      (441,237)
                                       ============================
-------------------------------------------------------------------

The amortized cost and estimated fair value of fixed maturity securities
by contractual maturity are shown below.  Expected maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.

                                            December 31, 2002
----------------------------------------------------------------------
                                          Amortized        Fair
                                             Cost          Value
                                             ----          -----

Maturing in one year or less . . . . . $    625,598       634,494
Maturing after one year through
 five years . . . . . . . . . . . . .    10,894,108    11,557,034
Maturing after five years through
 ten years . . . . . . . . . . . . . .   13,406,369    14,340,431
Maturing after ten years . . . . . . .    9,374,747     9,807,606
                                       ----------------------------
                                         34,300,822    36,339,565
Mortgage-backed securities . . . . . .    5,248,154     5,666,266
                                        ---------------------------
                                      $  39,548,976    42,005,831
                                      ===============================

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

A summary of the fair value of mortgage-backed securities by type as of
December 31 follows:

                                               2002         2001
-------------------------------------------------------------------
Collateralized mortgage obligations:
 Planned amortization class . . . . . . $   3,660,033    3,897,708
 Z  . . . . . . . . . . . . . . . . . .       524,389      783,974
 Sequential . . . . . . . . . . . . . .       171,373      809,549
                                         --------------------------
                                            4,355,795    5,491,231
Pass-through securities . . . . . . . .     1,310,471      503,349
                                         --------------------------
                                        $   5,666,266    5,994,580
                                         ==========================
-------------------------------------------------------------------

With a planned amortization class security, early repayments are applied
first to other tranches, and cash flows originally applicable to other
tranches are first applied to the planned amortization class tranche if
that tranche's originally scheduled cash flows are received later than
expected.  The Z tranche defers all interest to other tranches until
those tranches are paid down, at which time accumulated interest and
principal are paid to this class.  Sequential tranches are not supported
by other tranches.

As of December 31, 2002 and 2001, 98% of the Company's fixed maturity
securities were rated "investment grade" (i.e., rated BBB-/Baa3 or
higher by Standard & Poor or Moody).

                                  22

<PAGE>

     B. Mortgage Loans

The weighted average interest rate of mortgage loans held as of
December 31, 2002 and 2001 was 8.2%.

The distribution of principal balances on mortgage loans held as of
December 31 by contractual maturity follows.  Actual maturities may
differ from contractual maturities because borrowers may have the right
to prepay obligations with or without penalties.

                                             2002         2001
-----------------------------------------------------------------------
Maturing in one year or less . . . . . .$      34,316       33,431
Maturing after one year through
 five years  . . . . . . . . . . . . . .      166,132      187,943
Maturing after five years
 through ten years . . . . . . . . . . .      130,720      134,713
Maturing after ten years . . . . . . . .      316,532      407,041
                                       ----------------------------
                                        $     647,700      763,128
                                       =============================
----------------------------------------------------------------------

The distribution of mortgage loans by class of loan and geographic
distribution at December 31 follows:

                                             2002         2001
----------------------------------------------------------------------

Commercial loans:
  Texas . . . . . . . . . . . . . . . . $      80,865       84,346
                                       =============================
Residential loans:
  Tennessee . . . . . . . . . . . . . . $     326,662      335,466
  Alabama . . . . . . . . . . . . . . .       120,366      206,035
  Florida . . . . . . . . . . . . . . .        55,220       57,547
  Texas . . . . . . . . . . . . . . . .        32,031       46,299
  Kentucky . . . . . . . . . .  . . . .        32,556       33,435
                                       ----------------------------
                                        $     566,835      678,782
                                       =============================
------------------------------------------------------------------------

     C. Investment Income

A summary of net investment income follows:

                                             2002         2001
------------------------------------------------------------------------

Interest on fixed maturities . . . . .  $   2,048,264    2,312,713
Interest on mortgage loans . . . . . .         55,658       68,332
Interest on policy loans   . . . . . .         10,551       53,698
Interest on cash and
 short-term investments  . . . . . . ..        19,354       44,163
Miscellaneous investment income . . . .        87,245       73,014
                                       ----------------------------
                                            2,221,072    2,551,920
Investment expense  . . . . . . . . . .       (39,361)     (73,477)
                                       ----------------------------
                                        $   2,181,711    2,478,443
                                       =============================
----------------------------------------------------------------------

                                   23

<PAGE>

     D. Unrealized Investment Gains (Losses)

The change between cost and fair value for fixed maturity securities,
net of taxes, follows:

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

                                    Equity        Fixed
                                  Securities    Maturities     Total
                                  ----------    ----------     -----
Balance, January 1, 2001 . . . . $   105,451     (25,253)     80,198
Change during the year . . . . .    (105,451)    891,063     785,612
                                  -----------------------------------
Balance, December 31, 2001 . . .          --     865,810     865,810
Change during the year . . . . .          --     755,739     755,739
                                  -----------------------------------
Balance, December 31, 2002 . . . $        --   1,621,549   1,621,549
                                  ===================================
------------------------------------------------------------------------

     E. Net Realized Investment Gains (Losses)

A summary of net realized investment gains (losses) follows:

                                             2002         2001
------------------------------------------------------------------------

Fixed maturities . . . . . . . . . . .   $    139,285     (441,237)
Equity securities  . . . . . . . . . .             --      134,671
                                          -------------------------
                                         $    139,285     (306,566)
                                          =========================
------------------------------------------------------------------------


In 2001, a pretax realized investment loss of approximately $440,000 was
recognized as a result of the other-than-temporary impairment of two
different issues of fixed maturity investments.

     F. Other Investment Disclosures

Bonds with a fair value of $5,873,045 and $5,702,977 were on deposit
with various regulatory authorities at December 31, 2002 and 2001,
respectively.

Investments, other than investments issued or guaranteed by the United
States Government or a United States Government agency or authority, in
excess of 10% of stockholders' equity were as follows:

                                              December 31, 2002
------------------------------------------------------------------------
                                         Balance Sheet
                                             Amount       Category

AT&T Corporation  . . . . . . . . . . .  $  1,435,121   Fixed Maturity
National Rural Utility . . . . . . . .      1,375,916   Fixed Maturity
Keyspan Gas . . . . . . . . . . . . . .     1,125,427   Fixed Maturity
General Electric Capital Corporation  .     1,103,457   Fixed Maturity
Ingersoll-Rand . . . . . . . . . . . . .    1,102,964   Fixed Maturity
American General Finance . . . . . . . .    1,029,540   Fixed Maturity
SLM Corporation . . . . . . . . . . . .     1,008,866   Fixed Maturity

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

                                  24

<PAGE>

                                               December 31, 2001
------------------------------------------------------------------------

                                            Balance Sheet
                                               Amount       Category
                                               ------       --------
National Rural Utility . . . . . . . . . $  1,260,211   Fixed Maturity
AT&T Corporation . . . . . . . . . . . .    1,254,852   Fixed Maturity
Hydro Quebec . . . . . . . . . . . . . .    1,184,204   Fixed Maturity
Merrill Lynch  . . . . . . . . . . . . .    1,093,298   Fixed Maturity
Ford Motor Credit  . . . . . . . . . . .    1,051,325   Fixed Maturity
General Electric Capital Corporation . .    1,041,717   Fixed Maturity
Keyspan Gas . . . . . . . . . . . . .. .    1,040,820   Fixed Maturity
Ingersoll-Rand . . . . . . . . . . . . .    1,018,308   Fixed Maturity
Green Tree Home Equity Loan . . . . .. .    1,003,967   Fixed Maturity
La Farge Corp . . . . . . . . . . . . ..      954,016   Fixed Maturity
General Motors . . . . . . . . . . . . .      910,664   Fixed Maturity
Alcoa Inc . . . . . . . . . . . . . . .       774,215   Fixed Maturity
Sprint Capital Corp . . . . . . . . . .       766,646   Fixed Maturity
Simon Property Group . . . . . . . . . .      741,011   Fixed Maturity
PNC Mortgage . . . . . . . . . . . . . .      722,394   Fixed Maturity
General Electric Capital Mortgage Services    674,205   Fixed Maturity
 -----------------------------------------------------------------------

3.  FAIR VALUES
--------------

The carrying values and estimated fair values of the Company's financial
instruments were as follows:

                                               December 31, 2002
-----------------------------------------------------------------------

                                            Carrying         Fair
                                             Amount         Value
                                             ------         -----
Assets:
 Fixed maturities . . . . . . . . . .    $ 42,005,831    42,005,831
 Mortgage loans . . . . . . . . . . .         647,700       746,082
 Policy loans . . . . . . . . . . . .       4,964,721     4,964,721
 Short-term investments . . . . . . .       2,954,390     2,954,390
Liabilities:
 Note payable  . . . . . . . . . . .          562,500       562,500

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


                                               December 31, 2001
-----------------------------------------------------------------------

                                            Carrying         Fair
                                             Amount         Value
                                               ----         -----

Assets:
 Fixed maturities . . . . . . . . . .    $ 41,923,365    41,923,365
 Mortgage loans . . . . . . . . . . .         763,128       795,967
 Policy loans . . . . . . . . . . . .       5,795,047     5,795,047
 Short-term investments . . . . . . .       1,107,220     1,107,220
 Notes receivable  . . . . . .  . . .       4,088,295     4,088,295
Liabilities:
 Note payable . . . . . . . . . . . .         812,500       812,500
-----------------------------------------------------------------------

                                  25

<PAGE>

Estimated market values of publicly traded fixed maturity securities and
equity securities are as reported by an independent pricing service.
Estimated market values of fixed maturity securities not actively traded
in a liquid market are estimated using a third party pricing system,
which uses a matrix calculation assuming a spread over U.S. Treasury
bonds.

Fair values of mortgage loans are estimated by discounting expected cash
flows, using market interest rates currently being offered for similar
loans.

Policy loans have no stated maturity dates and are a part of the related
insurance contracts.  Accordingly, it is not practicable for the Company
to estimate a fair value for them.

For short-term investments and notes receivable the carrying amount is a
reasonable estimate of fair value.

In that the note payable is a floating rate instrument, the principal
balance is a reasonable estimate of the note's fair value.

4.  NOTE PAYABLE
--------------

On March 31, 1999, Acap borrowed $1.5 million from Central National Bank
of Waco, Texas.  Acap used $500,000 of the loan proceeds to repay an
existing loan at Central National Bank, with the balance of the loan
proceeds used to purchase a surplus debenture from American Capitol,
which debenture is security on the loan.  At December 31, 2002 the
outstanding principal balance of the loan was $562,500.  The loan is
renewable each April 30 until fully repaid.  The loan bears interest at
a rate equal to the base rate of a bank. The interest rate was 5.25% at
December 31, 2002.  Principal payments on the loan are due quarterly.
The loan agreement contains certain restrictions and financial
covenants.  Without the written consent of the bank, Acap may not incur
any debt, pay common stock dividends, or sell any substantial amounts of
assets.  Also, American Capitol is subject to minimum statutory earnings
and capital and surplus requirements during the loan term.  The Company
is in compliance with all of the terms of the loan.

During 1997, American Capitol and Texas Imperial obtained revolving
lines of credit from a bank by signing unsecured promissory notes in the
amount of $200,000 and $150,000, respectively.  Interest on both notes
is at the base interest rate of the bank.  Both notes were not renewed
in 2002.  As of December 31, 2002 and 2001, no funds were outstanding on
these notes.

5.  COMMITMENT AND CONTINGENCIES
---------------------------

     A. Lease

In 1997, in conjunction with the sale of American Capitol's home office
building, American Capitol entered into a lease agreement with the new
owner of the building to lease 13,087 square feet, approximately one
quarter of the net rentable area of the building (the area it then
occupied), for five years.  The Company deferred the gain related to the
sale of the building and is amortizing the gain over the term of the
lease agreement.  In 1998, an amendment was made to the original lease
agreement to lease an additional 8,424 square feet.  The effective date
of the amendment was June 1, 1998, and runs coterminously with the
original lease agreement.  In 1999, an amendment was made to the
original lease agreement to lease an additional 8,683 square feet.  The
effective date of the amendment was September 1, 1999, and runs
coterminously with the original lease agreement.

In 2002, an amendment was made to the original lease agreement to: (a)
delete the first and second amendments to the original lease agreement,
(b) reduce the amount leased from 30,194 square feet to 22,852 square
feet, (c) change the term of the lease agreement to begin November 1,
2001 and to expire 120 months thereafter, (d) change the option to renew
the term for a period of 60 months immediately following the term of the
lease agreement, (e) settle all disputed items regarding prior years'
contingent rent billings, and (f) add tenant's rights of cancellation
upon the specified passing of time or the occurrence of certain
specified events.

                                   26

<PAGE>
Total remaining lease obligations are:

------------------------------------------------------------------
 Year Ending December 31                                   Amount

 2003 . . . . . . . . . . . . . . . . . . . . . . . .  $    341,010
 2004 . . . . . . . . . . . . . . . . . . . . . . . .       343,580
 2005 . . . . . . . . . . . . . . . . . . . . . . . .       360,719
 2006 . . . . . . . . . . . . . . . . . . . . . . . .       370,621
 2007 . . . . . . . . . . . . . . . . . . . . . . . .       350,055
 2008-2011 . . . . . . . . . . . . . . . .. . . . . .     1,415,416
                                                     ---------------
 Total . . . . . . . . . . . . . . . . . . . . . . .   $  3,181,401
                                                     ===============

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

American Capitol paid $315,015 in 2002 and $400,767 in 2001 in
connection with this lease agreement, and $16,693 and $41,000 in 2002
and 2001, respectively for contingent rental payments.

     B. Reinsurance

The Company accounts for reinsurance in accordance with SFAS No. 113.
In accounting for reinsurance, the Company has reported ceded reserve
credits and reinsurance claim credits as reinsurance receivables.  The
cost of reinsurance related to long-duration contracts is accounted for
over the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies.

On January 1, 2001, Texas Imperial recaptured the Alabama Re reinsurance
agreement and then entered into a new reinsurance agreement with
Hannover Life Reassurance (Ireland) Limited ("Hannover") covering the
same block of policies effective March 31, 2001.  Texas Imperial
continues to administer the reinsured policies, for which it receives an
expense allowance from Hannover.

Reinsurance plays a significant role in the Company's operations.  In
accounting for reinsurance, the Company has reported ceded reserve
credits and reinsurance claim credits as reinsurance receivables.  The
cost of reinsurance related to long-duration contracts is accounted for
over the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies.  At
December 31, 2002 and 2001, respectively, reinsurance receivables with a
carrying value of $43.8 million and $44.8 million were recoverable from
a single reinsurer, Canada Life Assurance Company ("Canada Life").  At
December 31, 2001, Canada Life had statutory assets in excess of $32
billion and statutory stockholders' equity of approximately $3.4
billion.  Canada Life is rated "Superior" by A.M. Best Company, an
insurance company rating organization.  At December 31, 2002 and 2001,
respectively, reinsurance receivables with a carrying value of $44.2
million and $45.4 million were recoverable from Republic-Vanguard Life
Insurance Company ("Republic").  Republic is rated "Excellent" by A.M.
Best Company.  At December 31, 2001, Republic had statutory assets of
approximately $655 million and statutory stockholders' equity of
approximately $37 million.  At December 31, 2002 and 2001, respectively,
reinsurance receivables with a carrying value of $1.6 million and $2
million were recoverable from Hannover Life Reassurance (Ireland)
Limited ("Hannover").  Hannover is rated "Superior" by A.M. Best
Company.  The Hannover reinsurance receivables are secured by a trust
account containing a $3.57 million letter of credit granted in favor of
an insurance subsidiary of the Company.

A treaty with Canada Life provides that the Company is entitled to 85%
of the profits (calculated pursuant to a formula contained in the
treaty) beginning when the accumulated profits under the treaty reach a
specified level.  As of December 31, 2002, there

                                   27

<PAGE>

remains $5,104,186 in profits to be generated before the Company is
entitled to 85% of the profits.  As of December 31, 2001, such number
was $5,956,285.  Should future experience under the treaty match the
experience of recent years, which cannot reliably be predicted to occur,
the accumulated profits would reach the specified level around 2008.
(However, regarding the uncertainty as to when the specified level may
be reached, it should be noted that the experience has been erratic from
year to year and the number of policies in force that are covered by the
treaty diminishes each year.)

A treaty with Republic provides that the Company is entitled to 85% of
the profits (calculated pursuant to a formula contained in the treaty)
beginning when the accumulated profits under the treaty reach a
specified level.  As of December 31, 2002, there remains $2,004,266 in
profits to be generated before the Company is entitled to 85% of the
profits.  As of December 31, 2001, such number was $3,980,591.  Should
future experience under the treaty match the experience of recent years,
which cannot reliably be predicted to occur, the accumulated profits
would reach the specified level towards the end of 2003 or early 2004.
Whereas during 2001 Republic was responsible for holding and managing
the investments supporting the treaty, during 2002 and going forward the
Company is responsible for holding and managing such investments.  While
the Company holds and manages the investments, there is no direct risk
to the Company from the performance or non-performance of the
investments.

The treaty with Hannover was effected as of March 31, 2001.  The treaty
provides that the Company may recapture the treaty without a charge to
the surplus of an insurance subsidiary of the Company under statutory
accounting beginning when the accumulated profits (calculated pursuant
to a formula contained in the treaty) reach a specified level.  As of
December 31, 2002, there remains $2,433,621 in profits to be generated
before the Company can recapture the treaty without a surplus charge.
As of December 31, 2001, such number was $2,914,477. Should future
experience under the treaty match the experience of recent years, which
cannot reliably be predicted to occur, the accumulated profits would
reach the specified level around 2007. (However, regarding the
uncertainty as to when the specified level may be reached, it should be
noted that the experience has been erratic from year to year and the
number of policies in force that are covered by the treaty diminishes
each year.)

The Canada Life, Republic, and Hannover reinsurance treaties are
representative of a key use of reinsurance by the Company.  Immediately
following the purchase of a block of life insurance policies through the
Company's acquisition program, the Company may reinsure all or a portion
of the acquired policies.  By doing so, the Company seeks to recover all
or a portion of the purchase price of the acquired policies and transfer
the risks associated with the policies to the reinsurer. The Company
retains the administration of the reinsured policies and seeks to profit
from the compensation the Company receives from the reinsurer for such
policy administration.  The Company is entitled, but not obligated, to
recapture the policies at a price determined by a formula in the
reinsurance treaty.

With regard to the policies not 100% reinsured with Canada Life,
Republic, or Hannover, the purpose of reinsurance is to limit the
Company's exposure to loss on any single insured.  The Company reinsures
the portion of risks in excess of a maximum of $50,000 on the life of
any individual through various reinsurance contracts, primarily of the
coinsurance and yearly renewable term type.

While the Company expects that all amounts ceded to reinsurers will
ultimately be collected, the Company remains primarily liable to its
contract holders with respect to any reinsurance ceded, and would bear
any loss if such reinsurers were to default on their obligations under
the applicable reinsurance treaties.  The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk to minimize its exposure to significant losses from
reinsurer insolvencies.  Other than its exposure to Canada Life,
Hannover and Republic as discussed above, management does not believe
the Company has significant concentrations of credit risk related to
reinsurance, or otherwise.

During 2002, the Company made an "experience refund" to various state
guaranty associations in connection with the acquisition by the Company
of a block of Medicare supplement policies from the guaranty
associations effective June 1, 1999, pursuant to an acquisition
agreement.  Pursuant to said agreement, the guaranty associations
provided funds to the Company to cover the projected losses expected to
arise from the performance of the subject policies, the amount of which
was based on a projection of losses made at the time of the acquisition
of the policies ("original projection"). The agreement was that the
Company would refund to the guaranty associations, in 2002, a portion of
the amount by which the actual performance of the block (for the
designated period ending December 31, 2001) exceeded the original
projection, based on a refund formula set forth in the agreement
("experience refund"). The refund formula resulted in the Company
recording a charge for an experience refund to the guaranty associations
during 2001 of $1,924,137.  The payment to the guaranty associations was
made in the fourth quarter of 2002 following a "true-up" of the December
31, 2001 claims liability based on the claims experience through the
first two quarters of 2002. In addition to the true-up of the claims
liability noted above, the Company also recorded during 2002 the
settlement of certain issues that had arisen with the guaranty
associations in regard to the interpretation of various provisions of
the acquisition agreement.  Of the total $5,150,000 experience refund
paid to the guaranty associations during 2002, $4,739,331 had been
accrued prior to 2002 (including the $1,924,137 accrued during 2001
noted above) and $410,669 was recorded as a charge during 2002.

                                   28

<PAGE>

The effect of reinsurance on premiums and benefits follows:

                                             2002         2001
-------------------------------------------------------------------

 Direct premiums . . . .  . . . . . . . $  18,961,571   21,565,676
 Reinsurance assumed . . . . . . . . . .      356,154      280,066
 Reinsurance ceded . . . . . . . . . . .   (6,907,636)  (7,619,116)
                                        ---------------------------
 Net premiums . . . . . . . . . . . . . $  12,410,089   14,226,626
                                        ===========================

 Direct policy benefits.  . . . . . . . $  16,254,892   18,068,621
 Reinsurance assumed  . . . . . . . . .       281,117      317,343
 Reinsurance ceded . . . . . . . . . . .   (8,023,771)  (7,063,451)
                                        ---------------------------
 Net policy benefits . . . . . . . . . .$   8,512,238  11,322,513
                                        ===========================

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

     C. Litigation

In a lawsuit entitled "Susie S. Brown versus American Capitol Insurance
Company" ("suit"), certain individual policyholders of American Capitol
filed a suit against American Capitol on May 16, 2001, in Civil District
Court for the Parish of Orleans, Louisiana, alleging that American
Capitol, in violation of state law cited therein, engaged in racial
discrimination in the pricing and/or marketing of certain life insurance
policies.  American Capitol removed the suit to the U. S. District Court
for the Eastern District of Louisiana and filed its answer generally
denying plaintiffs' allegations. Plaintiffs then amended the suit and
made their race-based discrimination claims under U. S. law instead of
state law.  Alleging that there are other American Capitol policyholders
similarly situated, Plaintiffs are seeking to certify a class of
policyholders in order to proceed as a class action.  Based on
investigations conducted by American Capitol and pre-trial discovery
that has taken place, the Company believes that none of the subject
policies reflect any race-based discrimination.  The Company further
believes that no "dual" pricing or other race-based discriminatory
pricing, marketing or administrative acts have occurred in respect to
any policies issued or assumed by American Capitol.  American Capitol
has further made it clear that the policies that fall within plaintiffs'
class definition were assumed by American Capitol in 1999 from another
company, and that American Capitol did not establish the pricing of, and
did not market, the subject policies.  On or about October 15, 2002,
American Capitol filed a motion for summary judgment.  At the present
time, the Company is unable to quantify the damages or remediation costs
sought by plaintiffs.  The Company believes that the plaintiffs' claims
are without merit and intends to defend the suit vigorously.  While
litigation is never completely free of liability exposure and results
can only be predicted based on information on hand or reasonably
anticipated information and developments, the Company does not expect to
incur any material liability as a result of the suit.

Acap and its subsidiaries are involved in various other lawsuits and
legal actions arising in the ordinary course of operations.  Management
is of the opinion that the ultimate disposition of the matters will not
have a material adverse effect on Acap's results of operations or
financial position.

6.  SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
-----------------------------------------

Cash payments for interest expense for the years ended December 31, 2002
and 2001 were $36,560 and $76,499, respectively.  Net cash payments of
$346,500 and $375,000 for federal income taxes were made during the
years ended December 31, 2002 and 2001, respectively.

7.  FEDERAL INCOME TAXES
---------------------

Acap and its subsidiaries file a consolidated federal income tax return.
At December 31, 2002, Acap had a remaining tax net operating loss
carryforward of approximately $600,000 that will expire during the years
2003 through 2019 if not previously utilized.  At December 31, 2002, the
Company had alternative minimum tax carryforwards of approximately
$878,000 that are available for an indefinite period to reduce future
regular federal income taxes.

                                  29

<PAGE>

A portion of life insurance taxable income generated prior to 1984 is
not taxable unless it exceeds certain statutory limitations or is
distributed to stockholders, in which case it becomes taxable at
ordinary corporate rates.  Such income is accumulated in a
Policyholders' Surplus Account that, at December 31, 2002, had a balance
of approximately $4,800,000.  No provision has been made for income
taxes related to this accumulation.

A reconciliation of income tax expense (benefit) for 2002 and 2001
computed at the applicable federal tax rate of 34% to the amount
recorded in the consolidated financial statements is as follows:

                                             2002         2001
-------------------------------------------------------------------

Federal income tax expense
 (benefit) at statutory rate . . . . . .$     794,535    (424,304)
Small life insurance
 company deduction . . . . . . . . . . .     (448,509)   (400,804)
Change in valuation allowance  . . . . .     (177,290)    320,769
Goodwill  . . . . . . . . . .  . . . . .           --      76,367
Other, net  . . . . . . . . . . . . .  .       19,099     (13,868)
                                        ---------------------------
Total federal income tax
 expense (benefit)  . . . . . . . . . . $     187,835    (441,840)
                                        ===========================
-------------------------------------------------------------------

The small life insurance company special deduction noted above is
available to life insurance companies with assets under $500 million.
The deduction is 60% of life insurance taxable income under $3 million.
The deduction is phased out for life insurance taxable income between $3
million and $15 million, with the deduction reduced by 15% of the life
insurance taxable income in excess of $3 million.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2002 and December 31, 2001 are as follows:

                                                2002         2001
-------------------------------------------------------------------

Deferred Tax Assets:
Deferred gain on reinsurance . . . . .  $     940,651   1,015,051
Deferred gain on sale of real estate .             --      34,371
Net operating loss carryforwards . . .        192,695     253,589
Alternative minimum tax credit
 Carryforwards . . . . . . . . . . . .        877,980     724,994
Deferred policy acquisition costs  . .      1,251,925   1,103,707
Fixed maturity write downs . . . . . .        122,301     188,439
Other  . . . . . . . . . . . . . . . .        111,139     126,684
                                        ---------------------------
Total gross deferred tax assets . . .       3,496,691   3,446,835
Less:  valuation allowance  . . . . .      (1,393,618) (1,570,907)
                                        ---------------------------
Deferred tax assets . . . . . . . . .       2,103,073   1,875,928
                                        ---------------------------
Deferred Tax Liabilities:
Policy reserves and policy funds . . .        777,726     701,303
Net unrealized gains on available
 for sale securities . . . . . . . . .        835,339     446,022
Other  . . . . . . . . . . . . . . . .         70,718      84,776
                                        ---------------------------
Deferred tax liabilities . . . . . . .      1,683,783   1,232,101
                                        ---------------------------
Net deferred tax asset . . . . . . . .  $     419,290     643,827
                                        ===========================

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

A valuation allowance for the net operating loss carryforward,
alternative minimum tax credit carryforward, and a portion of other
deferred tax assets of $1,393,618 was established at December 31, 2002
against the deferred tax asset.  The net change in the total valuation
allowance for the years ended December 31, 2002 and 2001 was a decrease
of $177,289 and an increase of  $320,769, respectively.  Management
believes that it is more likely than not that the deferred tax assets
that are not provided for in the valuation allowance are recoverable.

                                  30

<PAGE>

8.  SEGMENT INFORMATION
--------------------

The Company operates in two reportable segments: Life and Health.

Financial information by industry segment for the year ending December
31, 2002 is summarized as follows:

--------------------------------------------------------------------
                                    Life        Health         Total
                                    ----        ------         -----
Revenues:
Premiums and other
 considerations . . . . . . .  .$  2,201,029   10,209,060  12,410,089
Net investment income  . . . . .   2,047,155      134,556   2,181,711
Net realized investment gains. .     139,285           --     139,285
Reinsurance expense
 allowance . . . . . . . . . . .   3,131,267           --   3,131,267
Amortization of
 deferred  gain  . . . . . . . .     319,913           --     319,913
Other income . . . . . . . . . .      22,910      219,969     242,879
                                 -------------------------------------
    Total revenues . . . . . . .   7,861,559   10,563,585  18,425,144
                                 -------------------------------------

Benefits and Expenses:
Net policy benefits  . . . . . .   1,991,611    6,520,627   8,512,238
Commissions and general
 expenses  . . . . . . . . . . .   4,919,575    2,411,727   7,331,302
Interest expense . . . . . . . .      36,654           --      36,654
Amortization of deferred
 acquisition costs . . . . . . .     120,011       88,072     208,083
                                 -------------------------------------
    Total benefits and expenses.   7,067,851    9,020,426  16,088,277
                                 -------------------------------------
Pretax Income from
Continuing Operations . . . . . $    793,708    1,543,159   2,336,867
                                 =====================================
Identifiable Assets
 (as of December 31, 2002) . .  $144,389,070    2,410,799 146,799,869
                                 =====================================

-----------------------------------------------------------------------
Financial information by industry segment for the year ending December
31, 2001 is summarized as follows:

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

                                    Life        Health         Total
                                    ----        ------         -----
Revenues:
Premiums and other
 considerations . . . . . . .   $  2,264,765   11,961,861  14,226,626
Net investment income . . . . .    2,275,531      202,912   2,478,443
Net realized investment losses .    (306,566)          --    (306,566)
Reinsurance expense
 Allowance . . . . . . . . . . .   3,245,838           --   3,245,838
Amortization of
 deferred gain . . . . . . . . .     287,717           --     287,717
Other income   . . . . . . . . .      60,911      255,682     316,593
                                 -------------------------------------
    Total revenues . . . . . . .   7,828,196   12,420,455   20,248,651
                                 -------------------------------------
Benefits and Expenses:
Net policy benefits  . . . . . .   3,151,640    8,170,873   11,322,513
Commissions and
 general expenses . . . . . . .    4,658,538    5,007,382    9,665,920
Interest expense . . . . . . . .      68,852           --       68,852
Amortization of
 deferred acquisition costs . .       93,217      121,494      214,711
Amortization of costs in excess of
 net assets of acquired business     224,608           --      224,608
                                 -------------------------------------
    Total benefits and expenses .  8,196,855   13,299,749   21,496,604
                                 -------------------------------------

Pretax Income from
 Continuing Operations . . . . .$  (368,659)     (879,294)  (1,247,953)
                                 ======================================
Identifiable Assets
 (as of December 31, 2001) . .  $145,534,000    8,370,855  153,904,855
                                 ======================================
------------------------------------------------------------------------

                                          31

<PAGE>

9.  AMERICAN CAPITOL KEY EMPLOYEE STOCK OPTION PLAN
---------------------------------------------------

Effective May 13, 2002, the Board of Directors of American Capitol
adopted an incentive stock option plan (the "2002 Plan").  The 2002 Plan
adopted by the Board of Directors grants stock options to the senior
officers of Acap and the non-management members of the Board of
Directors.  The options enable the grantee to purchase the common stock
to which the options relate at the fair market value of the common stock
on the date of granting the options.  The options for 45 shares vest
four years from the date of grant and must be exercised within five
years from the date of grant.  The options for 315 shares vest five
years from the date of grant and must be exercised within ten years from
the date of grant.  The stock options have only been granted with
respect to shares of common stock of Acap owned by American Capitol.

Effective September 2, 1997, the Board of Directors of American Capitol
adopted an incentive stock option plan (the "1997 Plan").  The 1997 Plan
provides that the Board of Directors of American Capitol or the
Compensation Committee of the Board of Directors may grant stock options
to any employee determined to be a key employee.  The stock options may
only be granted on shares of common stock of Acap owned by American
Capitol.  The options enable the grantee to purchase the common stock to
which the options relate at the fair market value of the common stock on
the date of granting the options.  The options for 100 shares vest four
years from the date of grant and were exercised within five years from
the date of grant.  The options for 300 shares vest five years from the
date of grant and must be exercised within ten years from the date of
grant.

As of December 31, 2002, options to purchase 660 of the 661 shares of
Acap common stock owned by American Capitol had been granted and are
outstanding, with a weighted average option price of $330.00 per share.
During 2002, options to purchase 100 shares were exercised from the 1997
Plan.

Stock options granted for Acap Corporation common stock are summarized
as follows:

                                         2002   2001       2002   2001
----------------------------------------------------------------------
                                             Average         Number
                                          Option Price      of Shares
                                             -------        -------
Outstanding at January 1 . . .         $246.00   $246.00      400  400
Options granted . . . . . .  .          405.00        --      360   --
Options exercised  . . . . . .          264.00        --     (100)  --
                                                         -------------
Outstanding at December 31 . .          330.00    246.00      660  400
                                                         =============
Available for future grant . .                                  1  361
                                                         =============
----------------------------------------------------------------------

10.  CAPITAL STOCK
------------------

Acap has two classes of capital stock:  preferred stock ($.10 par value,
authorized 80,000 shares), which may be issued in series with such
dividend, liquidation, redemption, conversion, voting, and other rights
as the Board of Directors may determine, and common stock ($.10 par
value, authorized 10,000 shares), the "Common Stock."  The only series
of preferred stock outstanding is the Cumulative Exchangeable Preferred
Stock, Series A, $2.50 (Adjustable), the "Series A Preferred Stock."

     A. Series A Preferred Stock

There are 74,000 shares of Series A Preferred Stock authorized, issued,
and outstanding.  Acap pays dividends quarterly on the Series A
Preferred Stock (when and as declared by the Board of Directors).  The
amount of the dividend is based on the prime rate of a Pittsburgh bank
plus 2%.  Acap has the right, if elected by the Board of Directors, to
redeem the Series A Preferred Stock at the fixed redemption price of
$27.50 per share.  The holders of Series A Preferred Stock are entitled
to liquidating distributions of $27.50 per share.  The cumulative
dividends and liquidating distributions of the Series A Preferred Stock
are payable in preference to the Common Stock.  The Series A Preferred
Stock is nonvoting, except as required by law and except that, if six
quarterly dividends are unpaid and past due, the holders of the Series A
Preferred Stock may elect two directors to Acap's Board of Directors.
There was no activity related to the Series A Preferred Stock for 2002
or 2001 other than the payment of dividends.

                                  32

<PAGE>

     B. Common Stock

A reconciliation of the number of shares of Common Stock issued and
outstanding follows:

                                             2002         2001
-------------------------------------------------------------------

Number of shares issued at January 1 . . . .    8,759        8,759
Number of treasury shares
 held at January 1 . . . . . . . . . . . . .   (1,535)      (1,535)
Treasury shares transferred in
 connection with the exercise of
 stock options . . . . . . . . . . . . . . .      100           --
                                            ------------------------
Number of shares outstanding
 at December 31 . . . . . . .  . . . . . . .    7,324        7,224

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

                                 33

<PAGE>

               ACAP CORPORATION ANNUAL REPORT 2002
               INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Acap Corporation


We have audited the accompanying consolidated balance sheets of Acap
Corporation and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity, and cash flows for the years ended December 31,
2002 and 2001.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Acap
Corporation and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for the years ended
December 31, 2002 and 2001, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill in 2002.



                                  KPMG LLP


Houston, Texas
March 14, 2003
                                   34

<PAGE>

               ACAP CORPORATION ANNUAL REPORT 2002
               STOCKHOLDER INFORMATION


MARKET INFORMATION
---------------
The common stock of Acap is traded over-the-counter with activity in the
stock reflected nationally on the OTC Bulletin Board electronic
quotation system of the National Association of Securities Dealers.  The
Company's stock symbol is AKAP.

The table below presents the range of closing bid quotations for Acap's
common stock during the two most recent fiscal years.


                                             2002             2001
----------------------------------------------------------------------

                                        High    Low      High    Low
                                        ----    ---      ----    ---
First quarter  . . . . . . . . . .   $ 380.00  355.00   512.00  460.00
Second quarter . . . . . . . . . .     455.00  360.00   450.00  400.00
Third quarter .. . . . . . . . . .     406.00  370.00   357.00  350.00
Fourth quarter . . . . . . . . . .     372.00  361.00   380.00  355.00

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

The prices presented are bid prices, which reflect inter-dealer
transactions and do not include retail markups and markdowns or any
commission to the parties involved.  As such, the prices may not reflect
prices in actual transactions.

HOLDERS
------
The approximate number of holders of record of Acap's common stock as of
March 24, 2003 was 580.

DIVIDENDS
-------
Acap declared no common stock dividends in 2002 or 2001.  At present,
management anticipates that no dividends will be declared or paid with
respect to Acap's common stock during 2003.  The covenants of a bank
loan require the advance approval of the bank in order to pay common
stock dividends.

FORM 10-KSB
----------
Stockholders may receive without charge a copy of the Company's Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission
by writing to Stockholder Services, Acap Corporation, 10555 Richmond
Avenue, 2nd Floor, Houston, TX 77042.

TRANSFER AGENT
------------
The registrar and transfer agent for the Company's common stock is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, NY
10004.  For a change of name or address, or to replace lost stock
certificates, write to Continental at the address above or call (212)
509-4000.

INVESTOR RELATIONS
---------------
Requests for information should be directed by mail to Stockholder
Services, Acap Corporation, 10555 Richmond Avenue, 2nd Floor, Houston,
TX 77042 or by calling (713) 974-2242.

INDEPENDENT AUDITORS
----------------
The Company's consolidated financial statements for 2002 were audited by
the independent accounting firm of KPMG LLP, 700 Louisiana, Houston, TX
77002.

ANNUAL MEETING
------------
Stockholders are invited to attend the Annual Meeting of Stockholders,
which will be held on Monday, May 12, 2003 at 8:00 a.m. at the Company's
office at 10555 Richmond Avenue, Houston, Texas, on the second floor.
                                   35



<PAGE>
               ACAP CORPORATION ANNUAL REPORT 2002
               DIRECTORS AND OFFICERS


BOARD OF DIRECTORS OF ACAP
---------------------

Roy L. Butler
Self-employed Certified Public Accountant

William F. Guest
Chairman of the Board and President, Acap Corporation

C. Stratton Hill, Jr., M.D.
Physician

Jarred W. Sloan
Vice President and Treasurer, Clayton Foundation for Research

OFFICERS OF ACAP
-------------

William F. Guest
Chairman of the Board and President

John D. Cornett
Executive Vice President and Treasurer

H. Kathleen Musselwhite
Secretary and Assistant Treasurer

SENIOR OFFICERS OF AMERICAN CAPITOL AND TEXAS IMPERIAL
--------------------------------------------

William F. Guest
Chairman of the Board

John D. Cornett
President

H. Kathleen Musselwhite
Secretary, Treasurer, and Controller

Nelda I. Mays
Vice President

G. Michael Rambo
Vice President





                               36




                         ACAP CORPORATION

10555 Richmond Avenue, 2nd Floor   Houston, Texas 77042