ACAP CORPORATION

                        ANNUAL REPORT 2001






                          ACAP CORPORATION

                             CONTENTS

President's Report                                                1

Management's Financial Analysis                                   3

Consolidated Balance Sheet                                       11

Consolidated Statements of Operations and Comprehensive Income   12

Consolidated Statements of Stockholders' Equity                  13

Consolidated Statements of Cash Flows                            14

Notes to Consolidated Financial Statements                       15

Independent Auditors' Report                                     31

Stockholder Information                                          32

Directors and Officers                                           33



                        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 the NASD Electronic Bulletin Board under the
symbol AKAP.
                              PRESIDENT'S REPORT

OVERVIEW

While all of America shared in the grief of the attacks on our country
that took place on September 11, 2001, and while many were affected by
the financial turmoil involving Enron Corporation, there was no direct
financial impact to Acap Corporation from these events.  The slowing
economy, with the resulting reduction in interest rates, has lowered the
yield available to the Company on new investments while increasing the
market value of investments made prior to the reduction in interest
rates.  The slowdown in the employment market has resulted in lower
employee turnover with the associated benefit of lower employment costs
for the Company.

During 2001, the Company continued to concentrate on improving the
results of its Medicare supplement line of business which was undertaken
in 1999.  On the Medicare supplement business acquired in 1999 from
certain state guaranty associations, the incurred-claim-to-earned-premium
ratio ("claims ratio") improved from 77% in 2000 to 73% in 2001.
However, the benefit of the improved claims ratio on this portion of the
Medicare supplement business was more than offset by an increase in the
experience refund payable to the associated guaranty associations (see
"Results of Operations" below).  With respect to the Medicare supplement
business marketed by American Capitol since 1999, the claims ratio went
from 73% in 2000 to 76% in 2001.  However, the ratio of commissions-to-
earned-premium decreased from the 2000 level of 23% to 18% in 2001,
resulting in a net improvement in the financial performance of this
portion of the Medicare supplement business.

During 2001, the Company continued to make significant progress towards
consolidating its policy administration onto a single policy
administration system.  The Company currently operates on three policy
administration systems.  During 2000, the Company began the process of
converting all of its policies to one of the three policy administration
systems.  The Company completed the conversion of its largest block of
policies, involving approximately 240,000 policies, on November 1, 2000.
The Company completed the conversion of another significant block of
policies, involving approximately 31,000 policies, on January 7, 2002.
Approximately 60,000 active policies remain to be converted.

RESULTS OF OPERATIONS

The Company had a net loss for 2001 of $806,113, or $137.04 per basic
common share, compared to a net loss for 2000 of $398,416, or $83.00 per
basic common share.

The principal element of the 2001 net loss was the Company's obligation
to make an "experience refund" relating to the blocks of Medicare
supplement policies acquired by the Company in 1999 from various state
guaranty associations. Pursuant to the acquisition agreement, the
affected guaranty associations funded (at the time of the acquisition)
the losses that were projected to result from the performance of these
blocks of policies, but as provided in the agreement, if the actual
financial performance of the blocks proved to be better than the original
projections, they would share in the results by a recalculation of amount
of the "funding" based on the actual experience for the period from
inception through December 31, 2001 (the "experience refund"). Although a
refund obligation resulted from the better-than-projected performance
that was achieved, this was the Company's objective and in the Company's
best interest (as well as the guaranty associations' best interest)
because this indicates an increased likelihood that the performance of
the block will be profitable. The refund formula resulted in the Company
recording a charge for an experience refund liability to the guaranty
associations of $1,924,137 for 2001 and $1,253,255 for 2000 (subject to a
"true-up" adjustment of the claims liability based on the claims
experience through the first two quarters of 2002). While the refund
obligation impacted the Company's earnings negatively through the period
ending December 31, 2001, going forward, the Company will not record any
additional experience refund amounts related to the acquisition of the
subject blocks (but for the above-noted "true-up" adjustment).


A more detailed explanation of the experience refund, as part of a more
complete analysis of the results of operations, is included in the
Management's Financial Analysis section of this Annual Report.
Stockholders are urged to read the entire Annual Report to gain a better
understanding of the Company, its recent financial performance, and its
prospects.

BOARD OF DIRECTORS CHANGE

Effective August 13, 2001, Mr. R. W. ("Spike") Daniels resigned his
position as a member of the Board of Directors of the Company due to
health reasons.  Mr. Daniels had been a director since 1987 and was a
member of the Audit Committee.  Spike was a valuable member of the Board,
with an excellent record of attendance and active participation at Board
meetings.  We will miss Spike's counsel and support and wish him the very
best.

We are pleased to welcome Mr. Jarred W. Sloan as a new member of the
Board of Directors (as of November 12, 2001) to fill the vacancy created
by the resignation of Mr. Daniels.  Mr. Sloan is a Certified Public
Accountant and for over five years has been the Vice President and
Treasurer of the Clayton Foundation for Research located in Houston,
Texas.  Mr. Sloan serves as a member of the Audit Committee.

OUTLOOK

Barring unfavorable developments, we believe the Company is positioned to
return to profitability during 2002.  The Company will continue its
efforts to improve the results of its Medicare supplement business.
Additional progress is expected during 2002 in the process of converting
policies to the Company's primary policy administration system.  Finally,
we plan on intensifying our search for suitable acquisition prospects.

While significant challenges continue to face the Company, we expect to
find solutions to, and opportunities in, those challenges.




                                            William F. Guest
                                            President
                                            April 8, 2002

<PAGE>


                                 ACAP CORPORATION
                            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

Two reinsurance transactions affecting the same block of life insurance
policies in 2001 (the "Reinsurance Transactions") affected the Company's
life segment operations presented herein.  But for these two 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.  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, prior to
January 1, 2001, and subsequent to March 31, 2001, the subject policy
transactions were not reflected as part of the Company's operations, but
they were recorded by the Company for the first quarter of 2001, to which
fact reference will be made in the following discussion.

Premiums and other considerations were 6% higher in 2001 in comparison to
2000.  The effect of the Reinsurance Transactions noted above was the
primary factor in the higher level of premiums during 2001.  Excluding
the first quarters of 2001 and 2000 (in order to minimize the effect of
the Reinsurance Transactions when comparing the results of operations for
2001 and 2000), premiums and other considerations were only 2% higher in
2001 in comparison to 2000.

Net investment income on the invested assets associated with the life
segment was 18% higher during 2001 in comparison to 2000.  The higher
level of investment income in 2001 was primarily due to the effect of the
Reinsurance Transactions noted above.  Excluding the first quarters of
2001 and 2000, net investment income was 5% higher in 2001 in comparison
to 2000.  This increase in net investment income was primarily
attributable to an increase in the yield on the invested assets
associated with the life segment.  A higher percentage of relatively
longer term, and thereby higher yield, assets were associated with the
life segment in 2001 as compared to 2000.

Realized investment losses of $306,566 were recorded during 2001 in
comparison to $5,274 recorded during 2000.  During 2001, the Company
wrote down the book value of 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.  While the Company's external
investment manager's opinion is that the Company should continue to hold
both of the securities, management concluded that based upon the
magnitude of the market decline and the length of time of such market
decline that the book value of the securities should be written down to
the market value of each security at the time the decision was made.
Partially offsetting these realized investment losses was a $134,671
realized investment gain on the sale of 4,565 shares of the common stock
of MetLife, Inc. owned by the Company.  The Company had received the
MetLife common stock upon the demutualization of Metropolitan Life
Insurance Company 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.

A major source of revenue for the Company is the expense allowance the
Company receives for administering certain blocks of reinsured policies.
The expense allowance for 2001 was 13% lower than the expense allowance
received during 2000.  The effect of the Reinsurance Transactions noted
above was the primary reason for the decrease in the expense allowance as
no expense allowance was earned during the time the policies were not
reinsured.  Excluding the first quarters of 2001 and 2000, the expense
allowance was 9% lower in 2001 in comparison to 2000.  This decrease in
the expense allowance is attributable to normal attrition of the
reinsured policies.

Other income for 2001 was $197,841 lower than other income for 2000.  The
decrease in other income is primarily attributable to certain non-
recurring income items recorded in 2000.

As a result of the factors noted above, total revenue, including net
realized investment losses, was 6% lower in 2001 as compared to 2000.
Excluding net realized investment losses, total revenue was 2% lower in
2001 as compared to 2000.

Policy benefits were 24% higher in 2001 in comparison to 2000.  The
higher level of policy benefits in 2001 was primarily due to the effect
of the Reinsurance Transactions noted above. Also, included in policy
benefits for the first quarter of 2001 was a charge of approximately
$196,000 resulting from the recapture of a reinsurance agreement in
connection with the Reinsurance Transactions.  Excluding the first
quarters of 2001 and 2000, policy benefits were 3% higher in 2001 in
comparison to 2000.  This increase in policy benefits was primarily
attributable to an increase in the Company's mortality experience.

Total expenses (i.e., total benefits and expenses less policy benefits)
were 13% lower in 2001 in comparison to 2000.  The Company currently
operates on three policy administration systems.  During 2000, the
Company began the process of converting all of its policies to one of the
three policy administration systems.  To accomplish the conversions, the
Company added programming and conversion resources.  The Company
completed the conversion of its largest block of policies, involving
approximately 240,000 policies, on November 1, 2000.  In November and
December 2000, the Company made expense reductions that on an annualized
basis exceed $500,000.  During 2001, the Company made additional expense
reductions associated with efficiencies related to the converted policies
and through normal attrition as the number of policies in force
diminishes.  The Company completed the conversion of another significant
block of policies, involving approximately 31,000 policies, on January 7,
2002.

Primarily as a result of the $196,000 charge discussed above related to
the Reinsurance Transactions, the life segment had a pre-tax operating
loss (which excludes realized investment gains and losses) of $62,093 for
2001 compared to a pre-tax operating loss of $42,448 for 2000.

Health Segment

Premiums and other considerations were 5% lower in 2001 in comparison to
2000.  The decrease in premium volume resulted from the Company writing a
smaller volume of new business during 2001 in comparison to 2000, which
was insufficient to offset the normal attrition of policies.  The Company
acquired a block of Medicare supplement and hospital indemnity policies
effective June 1, 1999 and began marketing Medicare supplement policies
in May 1999.  First-year Medicare supplement premiums for 2000 were
approximately $3.2 million.  However, due to higher-than-expected claims
experience on the Medicare supplement business marketed during 2000, the
Company implemented a 30% rate increase on such business effective
December 1, 2000.  The independent broker distribution system used to
market the Company's Medicare supplement policies is premium-rate
sensitive.  The increased premium rates resulted in a lower volume of
first-year premium in 2001, approximately $2.1 million as compared to
$3.2 million during 2000.

Net investment income on the invested assets associated with the health
segment was approximately $70,000 lower in 2001 as compared to 2000. The
decrease in net investment income was primarily attributable to a
decrease in the yield on the invested assets associated with the health
segment.  A higher percentage of relatively shorter term, and thereby
lower yield, assets were associated with the health segment in 2001 as
compared to 2000.

As a result of the factors noted above, total revenue was 5% lower in
2001 as compared to 2000.

Policy benefits were 68% of premiums in 2001 in comparison to 69% of
premiums in 2000.  Policy benefits in 2000 benefited from the release of
a $1.3 million adequacy reserve.  Excluding the benefit from the release
of the adequacy reserve, policy benefits during 2000 were 79%.  The
improvement in the ratio of benefits to premiums during 2001 resulted
from premium rate adjustments implemented in 2001 and a general
improvement in claims experience.

Excluding the effect of an experience refund, discussed below, total
expenses were 27% of premiums in 2001 in comparison to 31% of premiums in
2000.  The primary source of the lower expense-to-premium ratio in total
expenses was a decrease in the ratio of commissions to premiums in 2001
as compared to 2000.  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 premiums during 2001.

The Company is obligated to make 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 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 of $1,924,137 for 2001 and $1,253,255 for 2000
(however, note the release of the adequacy reserve in 2000 as discussed
above).  The payment to the guaranty associations will be due 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.
Subject to adjusting the amount of the experience refund liability
recorded as of December 31, 2001 as a result of the "true-up," the
Company will not record, subsequent to December 31, 2001, any additional
experience refund amounts related to the acquisition of the block of
Medicare supplement policies from the guaranty associations. The
objective of the Company was that the performance of this block of
policies would improve from inception (which did occur), resulting in an
experience refund, such that the greater the improvement in performance,
the higher the experience refund, and the greater the likelihood that the
performance of this block of policies would become profitable in due
course.

Primarily as a result of the experience refund discussed above, the
health segment had a pre-tax operating loss of $879,294 for 2001.  For
2000, the health segment had a pre-tax operating loss of $722,136.

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 subsidiaries' anticipated long-term and short-term
liquidity needs.

As of December 31, 2001, 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 (14%) of the Company's bond portfolio is invested
in mortgage-backed securities, with 92% of such mortgage-backed
securities classified as collateralized mortgage obligations and 8%
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 (71%), Z (14%) and sequential
(15%) 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 $785,612 during
2001, following a $670,068 increase during 2000.

As of December 31, 2001, the Company held 11 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 $632,000 (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, 2001 was approximately $33,000 and the
weighted average maturity was 11 years.  Mortgage loans on Tennessee
properties represent 44% of the mortgage loan balances at December 31,
2001, Alabama properties 27%, Texas properties 17%, with Florida and
Kentucky properties representing the remainder of the mortgage loan
balances.  Residential mortgages represent 89% of the mortgage loan
balances at December 31, 2001 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, 2001.

Liquidity of the Parent Company

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, 2001, the outstanding principal balance of the loan was
$812,500.  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.
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, 2001.  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, 2001, the
amount of dividends available to the parent company from American Capitol
not limited by such restrictions is approximately $239,000.  Payments on
the surplus debentures may only be made to the extent statutory capital
and surplus exceeds $2 million.  At December 31, 2001, American Capitol's
statutory capital and surplus was $3,433,200.

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 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, 2001, reinsurance receivables with a carrying value of $44.8
million were recoverable from a single reinsurer, Canada Life Assurance
Company ("Canada Life").  At December 31, 2000, Canada Life had statutory
assets in excess of $31 billion and statutory stockholders' equity of
approximately $3 billion.  Canada Life is rated "Superior" by A.M. Best
Company, an insurance company rating organization.  At December 31, 2001,
reinsurance receivables with a carrying value of $45.4 million were
recoverable from Republic-Vanguard Life Insurance Company ("Republic").
Republic is rated "Excellent" by A.M. Best Company.  At December 31,
2000, Republic had statutory assets of approximately $675 million and
statutory stockholders' equity of approximately $39 million.  At
December 31, 2001, reinsurance receivables with a carrying value of $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 once
the accumulated profits under the treaty reach a specified level.  As of
December 31, 2001, there remains $5,956,285 in profits to be generated
before the Company is entitled to 85% of the profits.  As of December 31,
2000, such number was $6,665,255.

A treaty with Republic provides that the Company is entitled to 70% of
the profits calculated pursuant to a formula contained in the treaty once
the accumulated profits under the treaty reach a specified level.  As of
December 31, 2001, there remains $3,980,591 in profits to be generated
before the Company is entitled to 70% of the profits.  As of December 31,
2000, such number was $6,032,936.  Effective January 1, 2002, the treaty
with Republic was amended to change the percentage of profits to which
the Company is entitled once the accumulated profits under the treaty
reach the specified level from 70% to 85%.  Another result of the
amendment is that the Company will hold and be responsible for managing
the investments supporting the treaty instead of Republic 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 once the accumulated profits, as such profits are calculated
pursuant to a formula contained in the treaty, reach a specified level.
As of December 31, 2001, there remains $2,914,477 in profits to be
generated before the Company can recapture the treaty without a surplus
charge.  As of the initiation of the treaty, March 31, 2001, such number
was $3,500,000.

With regard to the policies not 100% reinsured with Canada Life,
Republic, or Hannover, the Company seeks to limit its exposure to loss on
any single insured by reinsuring the portion of risks in excess of
$50,000 on the life of any individual through various reinsurance
contracts, primarily of the coinsurance and yearly renewable term type.

The Company is contingently liable for amounts ceded to reinsurers in the
event the reinsurers are unable to meet their obligations assumed under
the reinsurance agreements.  Acap evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk to minimize its
exposure to significant losses from reinsurer insolvencies.

ACCOUNTING STANDARDS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
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
recognition of premium revenue and related expenses, the liability for
future policy benefits and contract claims, and the recoverability of
long-lived assets.  All such accounting policies are described in Note 1
to the Company's consolidated financial statements.

Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and for Hedging Activities," requires
companies to recognize all derivatives as either assets or liabilities in
the statement of financial condition and to measure all derivatives at
fair value.  SFAS No. 133 requires that changes in fair value of a
derivative be recognized currently in earnings unless specific hedge
accounting criteria are met.  Upon implementation of SFAS No. 133,
hedging relationships may be redesignated, and securities held to
maturity may be transferred to available for sale or trading.  SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of Financial Accounting Standards Board
Statement No. 133," deferred the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000.  SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" amended
the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments, hedging activities, and decisions made by the
Derivatives Implementation Group.  The Company adopted  the provisions of
SFAS 133, SFAS 137, and SFAS 138 as of January 1, 2001 and this adoption
had no impact on its results of operations, financial condition or cash
flows.

The Financial Accounting Standards Board's ("FASB") Statement No. 140
(Statement 140), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liability,"  replaced the SFAS Statement
No. 125 (Statement 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," but carries over
most of Statement 125's provisions without change.  Statement 140
elaborates on the qualifications necessary for a special-purpose entity,
clarifies sales accounting criteria in certain circumstances, refines
accounting for collateral, and adds disclosures for collateral,
securitizations, and retained interests in securitized assets.  This
statement should be applied prospectively and is effective for
transactions occurring after June 30, 2001.  Disclosure requirements of
this statement and any changes in accounting for collateral were
effective for fiscal years ending after December 15, 2000.  The adoption
of Statement 140 had no impact on The Company's consolidated financial
statements.

In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets."  Statement
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.
Statement 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.  Statement
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 Statement 142.
Statement 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 Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."  The impact of the
adoption of Statement Nos. 141 and 142 will result in no amortization of
goodwill for 2002. Goodwill amortization recognized in 2001 and 2000 was
$224,608 and $239,262, respectively.


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.

<page>

                              ACAP CORPORATION
                         CONSOLIDATED BALANCE SHEET



                                                       December 31,2001

Assets
Investments:
  Fixed maturities available for sale
  (amortized cost of $ 40,866,976)                     $  41,923,365
  Mortgage loans                                             763,128
  Policy loans                                             5,795,047
  Short-term investments                                   1,107,220
                                                       -------------
   Total investments                                      49,588,760
Cash                                                          414,378
Accrued investment income                                     666,791
Reinsurance receivables                                    94,362,428
Notes receivable                                            4,088,295
Accounts receivable (less allowance for uncollectible
   accounts of $187,444)                                      611,929
Deferred acquisition costs                                  1,292,203
Property and equipment (less accumulated depreciation
   of $969,138)                                               566,349
Costs in excess of net assets of acquired business
(less accumulated amortization of $1,895,727)                 778,044
Net deferred tax asset                                        643,827
Other assets                                                  891,851
                                                        -------------
    Total assets                                         $153,904,855
                                                        =============
---------------------------------------------------------------------

Liabilities
Policy liabilities:
Future policy benefits                                  $131,859,810
Contract claims                                            2,844,066
                                                       -------------
 Total policy liabilities                                134,703,876
                                                       -------------
Other policyholders' funds                                  2,024,987
Other liabilities                                           6,670,838
Note payable                                                  812,500
Deferred gain on reinsurance                                2,985,443
Deferred gain on sale of real estate                          101,090
  Total liabilities                                      $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
 Common stock, par value $.10 per share, authorized
  10,000 shares, issued 8,759 shares                              876
Additional paid-in capital                                  6,259,589
Accumulated deficit                                        (1,862,312)
Treasury stock, at cost, 1,535 common shares                 (507,842)
Accumulated other comprehensive income-net unrealized
  investment gains, net of taxes of $446,022                  865,810
                                                         ------------
  Total stockholders' equity                                6,606,121
                                                         ------------
 Total liabilities and stockholders' equity             $153,904,855
                                                        ============
---------------------------------------------------------------------
See accompanying notes to consolidated financial statements
<page>)


                            ACAP CORPORATION
                 CONSOLIDATED STATEMENTS OF OPERATIONS
                        AND COMPREHENSIVE INCOME

                                            Years Ended December 31,
--------------------------------------------------------------------
                                                2001         2000
--------------------------------------------------------------------
REVENUES
Premiums and other considerations           $14,226,626   14,713,326
Net investment income                         2,478,443    2,198,505
Net realized investment losses                 (306,566)      (5,274)
Reinsurance expense allowance                 3,245,838    3,730,884
Amortization of deferred gain                   287,717      260,320
Other income                                    316,593      522,387
                                            ------------------------
 Total revenues                              20,248,651   21,420,148
                                            ------------------------
--------------------------------------------------------------------
BENEFITS AND EXPENSES

Net policy benefits                          11,322,513   11,195,353
Commissions and general expenses              9,665,920   10,382,599
Interest expense                                 68,852      109,348
Amortization of costs in excess of net assets
 of acquired business                           224,608      239,662
Amortization of deferred acquisition costs      214,711      263,044
                                            ------------------------
  Total benefits and expenses                21,496,604   22,190,006
--------------------------------------------------------------------

EARNINGS

Loss before federal income tax expense
  (benefit)                                 (1,247,953)    (769,858)
Federal income tax expense (benefit):
  Current                                      351,123      146,312
  Deferred                                    (792,963)    (517,754)
Net loss                                      (806,113)    (398,416)
--------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized investment gains, net of
  taxes of $404,708 in 2001 and
  $440,184 in 2000                             785,612      670,068
Net unrealized investments holding losses
  arising during period, net of taxes of
  $2,734 in 2001 and $ -0- in 2000    	           5,308           --
Less: reclassification adjustment for net
  investment gains included in net income,
  net of taxes of $(45,491) in 2001 and
  $ -0- in 2000         	                       (88,306)          --
-------------------------------------------------------------------
Comprehensive income (loss)                $  (103,499)     271,652
                                                       ========================
-------------------------------------------------------------------

EARNINGS PER SHARE

Basic loss per common share                $   (137.04)      (83.00)
                                           ========================

Diluted loss per common share              $   (137.04)      (83.00)
                                           ========================
-------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


<page>
                           ACAP CORPORATION
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                           Years Ended December 31,
-------------------------------------------------------------------
                                                    2001       2000
-------------------------------------------------------------------
SERIES A PREFERRED STOCK (Including Additional
  Paid-in Capital)                         $  1,850,000   1,850,000
                                            -----------------------
-------------------------------------------------------------------
COMMON STOCK                                        876         876
                                            -----------------------
-------------------------------------------------------------------

ADDITIONAL PAID-IN CAPITAL                    6,259,589   6,259,589
                                            -----------------------
-------------------------------------------------------------------
ACCUMULATED DEFICIT

  Balance, beginning of year                   (872,355)   (272,751)
  Net loss                                     (806,113)   (398,416)
  Preferred stock cash dividends               (183,844)   (201,188)
                                            ------------------------
  Balance, end of year                       (1,862,312)   (872,355)
                                            ------------------------
--------------------------------------------------------------------
TREASURY STOCK

  Balance, beginning of year                   (507,842)   (507,362)
  Change during year                                 --        (480)
                                            ------------------------
  Balance, end of year                         (507,842)   (507,842)
                                            ------------------------
--------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME

  Balance, beginning of year                     80,198    (589,870)
  Change during year                            785,612     670,068
                                            -----------------------
  Balance, end of year                          865,810      80,198
                                            -----------------------
-------------------------------------------------------------------

TOTAL STOCKHOLDERS' EQUITY                 $  6,606,121   6,810,466
--------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

<page>

                          ACAP CORPORATION
              CONSOLIDATED STATEMENTS OF CASH FLOWS

                                           Years Ended December 31,
-------------------------------------------------------------------
                                                    2001       2000
-------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                   $   (806,113)   (398,416)
Adjustments to reconcile net loss to net
 cash provided by (used in) operating
 activities:
 Depreciation and amortization                  414,539     439,777
 Allowance for uncollectible accounts            99,153          --
 Amortization of deferred acquisition costs     214,711     263,044
 Amortization of deferred gain on reinsurance  (287,717)   (260,320)
 Premium and discount amortization              (43,030)      9,453
 Net realized investment losses                 306,566       5,274
 Deferred federal income tax benefit           (792,963)   (517,754)
 Decrease in reinsurance receivables          1,253,218   5,586,706
 Decrease (increase) in accrued investment
 income                                           1,285     (35,256)
 Decrease (increase) in accounts receivable    (125,225)     48,946
 Increase in other assets                      (272,817)   (289,946)
 Decrease in policy liabilities              (1,767,892) (6,007,243)
 Increase in other liabilities                2,160,159     873,696
                                            ------------------------
  Net cash provided by (used in) operating
  activities                                    353,874    (282,039)
                                            ------------------------
--------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of investments
 available for sale and principal repayments on
 mortgage loans                                5,300,205   4,291,443
Purchases of investments available for sale
                                              (4,649,026) (6,410,454)
Net decrease in policy loans                     345,411     222,785
Net decrease (increase) in short-term
 investments                                     (16,554)  3,423,609
Purchases of property and equipment               (7,775)    (82,712)
                                            ------------------------
   Net cash provided by investing activities     972,261   1,444,671
                                            ------------------------
--------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on note payable              (250,000)   (250,000)
Deposits on policy contracts                     967,608   1,046,324
Withdrawals from policy contracts             (1,576,553) (1,753,436)
Preferred stock dividends paid                  (183,844)   (201,188)
Treasury stock purchases                              --        (480)
                                            ------------------------
   Net cash used in financing activities      (1,042,789) (1,158,780)
                                            ------------------------
--------------------------------------------------------------------
Net increase in cash                             283,346       3,852
Cash at beginning of year                        131,032     127,180
                                            ------------------------
Cash at end of year                         $    414,378     131,032
--------------------------------------------========================
See accompanying notes to consolidated financial statements.
<page>


                         ACAP CORPORATION
            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,
approximately 46% at December 31, 2001, is 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 18% 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 accumulated deficit; (d) investments in fixed
maturities 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 the excess of the value of the consideration over the net
assets assumed is amortized over a period not to exceed seventeen years,
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;
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; and whereas under the statutory basis of accounting only, 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, 2001 the amount of dividends available to the parent company
from subsidiaries not limited by such restrictions is approximately
$239,000.

The combined net income of the Company's insurance subsidiaries as
determined using statutory accounting practices, was $3,178,741 and
$5,729,831 for the years ended December 31, 2001 and 2000, respectively.
The consolidated statutory stockholders' equity of the Company's
insurance subsidiaries amounted to $3,433,200 and $3,057,327 at December
31, 2001 and 2000, 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
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 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:




                                           2001               2000
                                           ----               ----
Balance, beginning of year              $1,506,914       1,769,958
Amortized during the year                 (214,711)       (263,044)
                                        --------------------------
Balance, end of year                    $1,292,203       1,506,914
                                        ==========================


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 $189,931 and
$200,115 for the years ended December 31, 2001 and 2000, 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

The costs in excess of net assets of acquired business are amortized on a
straight-line basis over the estimated lives of seven and seventeen
years.  Beginning January 1, 2002, the costs in excess of net assets of
acquired business will no longer be amortized, but instead tested for
impairment at least annually in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142.

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,
2001.

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, 2001, however it is possible that the
ultimate liability may vary significantly from these estimated amounts.

H. Loss per Share

Loss per common share for 2001 was computed as follows:
-----------------------------------------------------------------------
                                                Weighted
                                 Income      Average Shares   Per Share
                              (Numerator)     (Denominator)      Amount
                              -----------    -------------    ---------

Net loss                     $  (806,113)
Preferred dividends             (183,844)
                                --------
BASIC AND DILUTED LOSS PER SHARE
Loss to common shareholders  $  (989,957)         7,224       $(137.04)
                             ==========================================
-----------------------------------------------------------------------
Loss per common share for 2000 was computed as follows:
-----------------------------------------------------------------------

                                                Weighted
                                Income      Average Shares  Per Share
                             (Numerator)     (Denominator)     Amount
                             ----------     -------------   ---------

Net loss                     $  (398,416)
Preferred dividends             (201,188)
                             ------------

BASIC AND DILUTED LOSS  PER SHARE
Loss to common shareholders  $  (599,604)        7,224        $(83.00)
                             =========================================

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

I. Participating Policies

Acap maintains both participating and nonparticipating life insurance
policies. Participating business represented approximately 32% and 18% of
the life insurance in force at December 31, 2001 and 2000, and 42% and
47% of life insurance premium income at December 31, 2001 and 2000,
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.

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.  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. Accounting Standards

Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and for Hedging Activities," requires
companies to recognize all derivatives as either assets or liabilities in
the statement of financial condition and to measure all derivatives at
fair value.  SFAS No. 133 requires that changes in fair value of a
derivative be recognized currently in earnings unless specific hedge
accounting criteria are met.  Upon implementation of SFAS No. 133,
hedging relationships may be redesignated, and securities held to
maturity may be transferred to available for sale or trading.  SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of Financial Accounting Standards Board
Statement No. 133," deferred the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000.  SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" amended
the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments, hedging activities, and decisions made by the
Derivatives Implementation Group.  The Company adopted  the provisions of
SFAS 133, SFAS 137, and SFAS 138 as of January 1, 2001 and this adoption
had no  impact on its results of operations, financial condition or cash
flows.

SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liability, replaced SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, but carries over most of SFAS No. 125's provisions without
change.  SFAS No. 140 elaborates on the qualifications necessary for a
special-purpose entity, clarifies sales accounting criteria in certain
circumstances, refines accounting for collateral, and adds disclosures
for collateral, securitizations, and retained interests in securitized
assets.  This statement should be applied prospectively and is effective
for transactions occurring after June 30, 2001.  Disclosure requirements
of this statement and any changes in accounting for collateral were
effective for fiscal years ending after December 15, 2000.  The adoption
of SFAS No. 140  had no impact on the Company's consolidated 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
require 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.  The impact of the adoption of SFAS Nos. 141
and 142 will result in no amortization of goodwill for 2002.  Goodwill
amortization recognized in 2001 and 2000 was $224,608 and $239,262,
respectively.

2. INVESTMENTS

A. Fixed Maturity Securities

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
                         =============================================
----------------------------------------------------------------------
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:
----------------------------------------------------------------------
                                           2001              2000
                                           ----              ----
Proceeds on sales                       $2,477,661        1,335,942
                                        ===========================

Gross realized gains on sales               11,930               --
Gross realized losses on sales             (14,745)          (9,741)
                                        ----------------------------
Net realized losses on sales                (2,815)          (9,741)
Realized gains (losses) on transactions
 other than sales                         (438,422)           4,467
                                        ---------------------------
 Net realized losses                    $ (441,237)          (5,274)
                                        ============================
--------------------------------------------------------------------

The amortized cost and estimated fair value of fixed maturity securities
at December 31, 2001 by contractual maturity is 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.

                                          Amortized            Fair
                                             Cost             Value
                                             ----             -----

Maturing in one year or less           $ 2,863,207        2,915,206
Maturing after one year through
 five years                              7,765,824        8,128,960
Maturing after five years through
 ten years                              13,029,635       13,242,924
Maturing after ten years                11,550,346       11,641,695
                                        ---------------------------
                                        35,209,012       35,928,785
Mortgage-backed securities               5,657,964        5,994,580
                                        ---------------------------
                                       $40,866,976       41,923,365
                                       ============================
-------------------------------------------------------------------

A summary of the fair value of mortgage-backed securities by type
as of December 31, 2001 follows:
-------------------------------------------------------------------

Collateralized mortgage obligations:
  Planned amortization class                 $3,897,708
  Z                                             783,974
  Sequential                                    809,549
                                                -------
                                              5,491,231
Pass-through securities                         503,349
                                              ---------
                                             $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, 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).

B. Mortgage Loans

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

The distribution of principal balances on mortgage loans held as of
December 31, 2001 by contractual maturity follows.  Actual maturities may
differ from contractual maturities because borrowers may have the right
to prepay obligations with or without penalties.
-------------------------------------------------------------------------
                                                               Principal
                                                                 Balance

Maturing in one year or less                                  $   33,431
Maturing after one year through five years                       187,943
Maturing after five years through ten years                      134,713
Maturing after ten years                                         407,041
                                                              ----------
                                                              $  763,128
                                                              ==========
------------------------------------------------------------------------

The distribution of mortgage loans by class of loan and geographic
distribution follows:
------------------------------------------------------------------------
                                                               Principal
                                                                 Balance

Commercial loans:
  Texas                                                       $   84,346
                                                              ==========

Residential loans:
  Tennessee                                                   $  335,466
  Alabama                                                        206,035
  Florida                                                         57,547
  Texas                                                           46,299
  Kentucky                                                        33,435
                                                              ----------

                                                              $  678,782
                                                              ==========
------------------------------------------------------------------------

C. Investment Income
-----------------------------------------------------------------------
A summary of net investment income follows:

-----------------------------------------------------------------------
                                              2001           2000
Interest on fixed maturities             $ 2,312,713      2,001,749
Interest on mortgage loans	                    68,332         76,610
Interest on policy loans                      53,698         38,944
Interest on cash and short-term investments   44,163         89,148
Miscellaneous investment income               73,014         56,660
                                           ------------------------
                                           2,551,920      2,263,111
Investment expense                           (73,477)       (64,606)
                                           -------------------------
                                         $ 2,478,443      2,198,505
                                         ===========================
--------------------------------------------------------------------

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, 2000        $       --	     (589,870)   (589,870)
Change during the year             105,451      564,617     670,068
                                 ==================================
Balance, December 31, 2000         105,451      (25,253)     80,198
Change during the year            (105,451)     891,063     785,612
                                 ----------------------------------
Balance, December 31, 2001      $       --      865,810     865,810
                                 ==================================
--------------------------------------------------------------------

E. Net Realized Investment Gains (Losses)

A summary of net realized investment gains (losses) follows:
-------------------------------------------------------------------
                                           2001               2000

Fixed maturities                    $   (441,237)            (5,274)
Equity securities                        134,671                 --
                                     -------------------------------
                                    $   (306,566)            (5,274)
                                    ================================
--------------------------------------------------------------------


A pretax realized investment loss of approximately $440,000 was taken as
a result of the write down of the book value of two different issues of
fixed maturity investments.

F. Other Investment Disclosures

At December 31, 2001, bonds with a fair value of $5,702,977 were on
deposit with various regulatory authorities.

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 at December 31, 2001 were as
follows:

--------------------------------------------------------------------
                                         Balance
                                       Sheet Amount         Category

National Rural Utility                  $1,260,211    Fixed maturity
AT&T                                     1,254,852    Fixed maturity
Hydro Quebec                             1,184,204    	Fixed maturity
Merrill Lynch                            1,093,298    	Fixed maturity
Ford Motor Company                       1,051,325    	Fixed maturity
General Electric Capital Corp            	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 Security                      722,394    	Fixed maturity
General Electric Capitol Mortgage
 Services                                  674,205    Fixed maturity

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

3. FAIR VALUES

The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 2001 are as follows:

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

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, 2001 the
outstanding principal balance of the loan was $812,500.  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.  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 renewed in 2001.  As of
December 31, 2001 no funds have been borrowed on these notes.

5. COMMITMENTS 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.  Total remaining lease obligations under
the above are $357,771 in 2002.  American Capitol paid $400,767 in 2001
and $396,000 in 2000 in connection with this lease agreement.

B. Reinsurance

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.

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.

At December 31, 2001, reinsurance receivables with a carrying value of
$45.4 million were recoverable from Republic-Vanguard Life Insurance
Company ("Republic"). Republic is rated "Superior" by A.M. Best Company,
an insurance rating organization.  At December 31, 2000, Republic had
statutory assets of approximately $675 million and statutory
stockholders' equity of approximately $39 million.  At December 31, 2001,
reinsurance receivables with a carrying value of $44.8 million were
recoverable from a single reinsurer, Canada Life Assurance Company
("Canada Life").  At December 31, 2000, Canada Life had statutory assets
in excess of $31 billion and statutory stockholders' equity of
approximately $3 billion.  Canada Life is rated "Superior" by A.M. Best
Company.  At December 31, 2001, reinsurance receivables with a carrying
value of $2.0 million were recoverable from Hannover.  The Hannover
reinsurance receivables are secured by a trust account containing a
$3,570,000 letter of credit granted in favor of an insurance subsidiary
of the Company.  At December 31, 2001, the remaining reinsurance
receivables were recoverable from various other reinsurers.

The Company is liable for amounts ceded to reinsurers in the event the
reinsurers are unable to meet their obligations assumed under the
reinsurance agreements.  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.

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.

On June 10, 1999, the Court approved a Liquidation Plan Regarding the
Insolvency and Liquidation of The Statesman National Life Insurance
Company (the "Liquidation Plan") executed by American Capitol, Texas
Imperial, Statesman, the Department, and the National Organization of
Life and Health Insurance Guaranty Associations ("NOLHGA").  Pursuant to
the Liquidation Plan, American Capitol and Texas Imperial assumed all
life insurance policies issued by Statesman since September 30, 1998 as
well as all of the Medicare supplement and hospital indemnity health
insurance policies in force in Statesman.  Participating guaranty
associations, represented by NOLHGA, funded the transaction with a
combination of cash and promissory notes.  Pursuant to the Liquidation
Plan, three years after the closing of the assumption transactions, the
actual results of the Medicare supplement policies in question will be
compared to the projected results for the three year period and, if the
actual results have been better than projected ("excess profits"), the
participating guaranty associations will be entitled to participate in
the excess profits as a refund in an amount prescribed by a formula set
out in the Liquidation Plan.  If the actual results are worse than the
projected results, the guaranty associations are not obligated to
compensate the Company for such shortfall.  The excess profits owed to
the guaranty associations were approximately $4.7 million and $2.8
million at December 31, 2001 and 2000, respectively, and are included in
other liabilities. The assumption transactions closed on June 18, 1999
with an effective date of June 1, 1999.

The effect of reinsurance on premiums and benefits follows:
--------------------------------------------------------------------


                                           Years ended December 31,
                                           ------------------------
                                          2001               2000

Direct premiums                       $21,565,676        23,499,234
Reinsurance assumed                       280,066           656,255
Reinsurance ceded                      (7,619,116)       (9,442,163)
                                      ------------------------------
Net premiums                          $14,226,626        14,713,326
                                      ==============================


Direct policy benefits                $18,068,621        17,235,014
Reinsurance assumed                       317,343           403,125
Reinsurance ceded                      (7,063,451)       (6,442,786)
Net policy benefits                   $11,322,513        11,195,353
                                      ==============================

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

C. Litigation

Acap and its subsidiaries are involved in various 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, 2001
and 2000 were $76,499 and $111,458, respectively.  Net cash payments of
$375,000 and $240,757 for federal income taxes were made during the years
ended December 31, 2001 and 2000, respectively.

7. FEDERAL INCOME TAXES

Acap and its subsidiaries file a consolidated federal income tax return.
At December 31, 2001, Acap had a remaining tax net operating loss
carryforward of approximately $750,000 that will expire during the years
2002 through 2019 if not previously utilized.  At December 31, 2001, the
Company had alternative minimum tax carryforwards of approximately
$725,000 that are available for an indefinite period to reduce future
regular federal income taxes.

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, 2001, 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 2001 and 2000
computed at the applicable federal tax rate of 34% to the amount recorded
in the consolidated financial statements is as follows:

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

                                                  2001           2000
                                                  ----           ----

Federal income tax benefit at statutory rate   $ (424,304)    (261,752)
Small life insurance company special
 deduction                                       (400,804)    (167,428)
Change in valuation allowance                     320,769       14,875
Goodwill                                           76,367       81,486
Other, net                                        (13,868)     (38,623)
Total federal income tax benefit               $ (441,840)    (371,442)
                                               ========================
-----------------------------------------------------------------------

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, 2001 are as follows:
---------------------------------------------------------------------
Deferred Tax Assets:
Deferred gain on reinsurance                              $ 1,111,776
Deferred gain on sale of real estate                           34,371
Net operating loss carryforwards                              253,589
Alternative minimum tax credit carryforwards	                  724,994
Deferred policy acquisition costs                           1,006,982
Fixed maturity write downs                                    188,439
Other                                                         126,684
                                                          -----------
Total gross deferred tax assets                             3,446,835
Less:  valuation allowance                                 (1,570,907)
Deferred tax assets                                         1,875,928
                                                          -----------

Deferred Tax Liabilities:
Policy reserves and policy funds                              701,303
Net unrealized gains on available for sale securities         446,022
Other                                                          84,776
Deferred tax liabilities                                    1,232,101
                                                          -----------
Net deferred tax asset                                    $   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 $1,570,907 was established at December 31, 2001
against the deferred tax asset.  The net change in the total valuation
allowance for the years ended December 31, 2001 and 2000 was an increase
of $320,769 and $14,875, 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.


8. SEGMENT INFORMATION

The Company operates in two reportable segments: Life and Health.
Financial information by industry segment is summarized as follows:

Year Ending December 31, 2001       Life        Health          Total

Revenues:
Premiums                      $  2,264,765   11,961,861   14,226,626
Net investment income            2,275,531      202,912    2,478,443
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
                                ------------------------------------
    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 costs in excess
  of net assets of acquired
  business                         224,608           --      224,608
  Amortization of deferred
  acquisition costs                 93,217      121,494      214,711
                                ------------------------------------
    Benefits and Expenses        8,196,855   13,299,749   21,496,604
                                ------------------------------------
Pretax Loss 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
                               =====================================


Year Ending December 31, 2000         Life          Health     Total
Revenues:
  Premiums                       2,127,898   12,585,428   14,713,326
  Net investment income          1,925,329      273,176    2,198,505
  Realized investment losses        (5,274)          --       (5,274)
  Reinsurance expense allowance  3,730,884           --    3,730,884
  Amortization of deferred gain    260,320           --      260,320
  Other income                     258,752      263,635      522,387
                                ------------------------------------
  Revenues                       8,297,909   13,122,239   21,420,148
                                ------------------------------------
Benefits and Expenses:
  Net policy benefits            2,546,964	    8,648,389   11,195,353
  Commissions and general
   expenses                      5,349,219    5,033,380   10,382,599
  Interest expense                 109,348           --      109,348
  Amortization of costs in
   excess of net assets of
    acquired business              239,662           --      239,662
  Amortization of deferred
   acquisition costs               100,438      162,606      263,044
                                ------------------------------------
    Benefits and Expenses        8,345,631   13,844,375   22,190,006
                                ------------------------------------
Pretax Loss from Continuing
 Operations                   $    (47,722)    (722,136)    (769,858)
                                  ===================================
Identifiable Assets
 (as of December 31, 2000)    $147,257,134    7,606,463  154,863,597
                              ======================================


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

9. AMERICAN CAPITOL KEY EMPLOYEE STOCK OPTION PLAN

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 must be 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, 2001, options to purchase 500 of the 761
shares of Acap common stock owned by American Capitol had been granted,
with a weighted average option price of $246.00 per share.  During 2000,
options to purchase 100 shares were forfeited.

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

                                         Avg.          Number of Shares
                                      Option Price     2001      2000

Outstanding at January 1	               $246.00          400       500

Options forfeited                      $240.00           --       100

Outstanding at December 31             $246.00          400       400

Available for future grant                              361       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 2001 or 2000 other
than the payment of dividends.

B. Common Stock

A reconciliation of the number of shares of Common Stock issued and
outstanding follows:
---------------------------------------------------------------------
                                                   2001          2000

Number of shares issued at January 1              8,759         8,759
Number of treasury shares held at January 1      (1,535)       (1,533)
Treasury shares purchased during the year            --            (2)

Number of shares outstanding at December 31       7,224         7,224
                                                =====================

---------------------------------------------------------------------
<page>


                                  ACAP CORPORATION
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Acap Corporation


We have audited the accompanying consolidated balance sheet of Acap
Corporation and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations and comprehensive income,
stockholders' equity, and cash flows for the years ended December 31,
2001 and 2000.  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, 2001, and the results of
their operations and their cash flows for the years ended December 31,
2001 and 2000, in conformity with accounting principles generally
accepted in the United States of America.



KPMG LLP


Houston, Texas
March 8, 2002



<page>

                            ACAP CORPORATION
                         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.

---------------------------------------------------------------------
                                          2001           2000
                                          ----           ----

                                      High     Low    High     Low
                                      ----     ---    ----     ---
First quarter                         $512     460     600     525
Second quarter                         450     400     600     525
Third quarter                          357     350     500     490
Fourth quarter                         380     355     500     490

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


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 25, 2002 was 605.


Dividends

Acap declared no common stock dividends in 2001 or 2000.  At present,
management anticipates that no dividends will be declared or paid with
respect to Acap's common stock during 2002.  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 2001 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 13, 2002 at 8:00 a.m. at the Company's
office at 10555 Richmond Avenue, Houston, Texas, on the second floor.



<page>
                           ACAP CORPORATION
                        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 ofAcap
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
<page>

























                              ACAP CORPORATION

            10555 Richmond Avenue, 2nd Floor   Houston, Texas 77042