ACAP CORPORATION

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

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

                     Consolidated Balance Sheet  . . . . . . . .  . . . 9

                     Consolidated Statements of Operations . . . . . . 10

                     Consolidated Statements of Stockholders' Equity . 11

                     Consolidated Statements of Cash Flows . . . . . . 12

                     Notes to Consolidated Financial Statements  . . . 13

                     Independent Auditors' Report  . . . . . . . . . . 29

                     Stockholder Information . . . . . . . . . . . . . 30

                     Directors and Officers  . . . . . . . . . . . . . 31

          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          

          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          <PAGE>
                        PRESIDENT'S REPORT

          CORPORATE     Acap Corporation is a life insurance holding
          PROFILE       company that 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.

                        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.

          CORPORATE     The Company, through its subsidiary, American
          DEVELOPMENTS  Capitol Insurance Company ("American Capitol"),
                        reinsured all of the policies in force of World
                        Service Life Insurance Company of America ("World
                        Service") on a 93.6% coinsurance basis effective
                        June 1, 1996.  American Capitol retroceded all of
                        the World Service policies in force at June 1,
                        1996 to a reinsurer, effective June 30, 1996. 
                        American Capitol retains the coinsurance on all
                        policies issued by World Service subsequent to
                        June 1, 1996.

                        American Capitol also entered contracts, effective
                        June 1, 1996, to provide specified administrative
                        functions for the 18,000 World Service policies as
                        well as approximately 8,000 policies owned by
                        World Service's subsidiary, South Texas Bankers
                        Life Insurance Company ("South Texas"), and the
                        preneed funeral contracts associated with the
                        South Texas policies.  These transactions brought
                        the total number of policies administered by the
                        Company to approximately 105,000.

                        Fortune National Corporation ("Fortune"), formerly
                        the owner of 63.7% of the Company's outstanding
                        common stock, adopted a plan of dissolution and
                        liquidation at its annual stockholder meeting on
                        August 26, 1996.  On August 26, 1996, Fortune had
                        no assets other than its holding of the Company's
                        common stock.  Under the plan, no fractional
                        shares of the Company's common stock were issued. 
                        Fortune stockholders who did not buy from the
                        Company enough Fortune common stock to round up
                        their holdings elected to sell their "odd lot"
                        shares of Fortune common stock to the Company.  As
                        a result of the Company's purchase of the "odd
     <PAGE>             
                        PRESIDENT'S REPORT

                        lot" shares and the conversion of the Company's
                        holding of Fortune common stock into Company
                        common stock, the Company added $320,566 to
                        treasury stock, reducing the number of outstanding
                        shares of Company common stock to approximately
                        7,603.

                        During 1996, the Company sold the corporate
                        "shell" of one life insurance subsidiary,
                        realizing a pre-tax gain of $50,000, and
                        liquidated the corporate "shell" of another life
                        insurance subsidiary.  As of December 31, 1996,
                        the Company had reduced the number of subsidiaries
                        to three, two life insurance companies and a
                        preneed funeral contract marketing company, from a
                        high of six subsidiaries in 1995.
                        
          RESULTS OF    The Company's net income for 1996 of $658,267, or
          OPERATIONS    $56.79 per common share, compares to net income
                        for 1995 of $277,033, or $9.04 per common share. 
                        The 1996 net income includes $275,525 in net
                        realized investment gains, whereas the 1995 net
                        income included $170,003 in net realized
                        investment gains.  Excluding net realized
                        investment gains, pre-tax operating income for the
                        year 1996 was $385,727, compared to pre-tax
                        operating income in 1995 of $330,359.  The Company
                        was able to increase revenues during 1996 without
                        a corresponding increase in general expenses. 
                        Also, 1995's operating income had been adversely
                        affected by unusual mortality experience.

                        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.

          OUTLOOK       The Company faces a number of challenges in 1997
                        as it attempts to build upon the results of 1996. 
                        Competition for life insurance acquisition
                        candidates remains intense, with many competitors
                        having resources much greater than the Company's. 
                        Also, while the Company has benefitted from a
                        relatively low inflation environment in recent
                        years, the Company has already experienced wage
                        inflation during 1997 due to Houston's tight job
                        market.

                        We have the staff and experience to meet the
                        challenges of our business plan.  In keeping with
                        that plan, we continue to search for and evaluate
                        acquisition candidates.
                        
                        William F. Guest, President
                        April 7, 1997
    <PAGE>
                        ACAP CORPORATION
                        MANAGMENT'S FINANCIAL ANALYSIS

          SIGNIFICANT   World Service Transaction
          TRANSACTIONS
                        Effective June 1, 1996, American Capitol Insurance
                        Company ("American Capitol"), a wholly-owned
                        subsidiary of Acap Corporation, reinsured 93.6% of
                        all of the policies of World Service Life
                        Insurance Company of America ("World Service")
                        pursuant to a coinsurance agreement (the
                        "Coinsurance Agreement").  American Capitol paid
                        World Service an initial ceding commission of
                        approximately $1.7 million.  The assets
                        transferred to American Capitol were approximately
                        $19.4 million in cash, approximately $1.9 million
                        of mortgage loans and other assets of
                        approximately $.1 million.

                        Contemporaneous with the signing of the
                        Coinsurance Agreement, the parties executed an
                        administrative agreement (the "Administration
                        Agreement") whereby American Capitol agreed to
                        provide specified administrative functions for the
                        18,000 World Service policies as well as
                        approximately 8,000 policies owned by World
                        Service's subsidiary, South Texas Bankers Life
                        Insurance Company ("South Texas"), and the preneed
                        funeral contracts associated with the South Texas
                        policies.  These transactions brought the total
                        number of policies administered by the Company to
                        approximately 105,000.

                        Effective June 30, 1996, American Capitol
                        retroceded all of the World Service policies in
                        force at June 1, 1996 on a 100% coinsurance basis
                        by amending an existing reinsurance agreement (the
                        "Crown Agreement") with an unaffiliated reinsurer. 
                        American Capitol retains the coinsurance on all
                        policies issued by World Service subsequent to
                        June 1, 1996.  American Capitol also retains the
                        administration of the policies, for which it
                        receives an expense allowance from the reinsurer. 
                        An experience refund formula in the Crown
                        Agreement returns to American Capitol 50% of the
                        profits generated by the reinsured policies above
                        a specified threshold.  Also, at American
                        Capitol's option, the reinsured policies may be
                        recaptured at a price determined by the experience
                        formula.  This transaction, at June 30, 1996,
                        increased reinsurance receivables by approximately
                        $24.2 million to a carrying value of $51.3 million
                        that were associated with a single reinsurer,
                        Crown Life Insurance Company ("Crown").  At
                        December 31, 1995, Crown had assets in excess of
                        $7 billion and stockholders' equity of
                        approximately $0.4 billion.  Crown is rated
                        "Excellent" by A.M. Best Company, an insurance
                        company rating organization.
   <PAGE>
                        ACAP CORPORATION
                        MANAGEMENT'S FINANCIAL ANALYSIS

                        Fortune Liquidation

                        Fortune National Corporation ("Fortune"), formerly
                        the owner of 63.7% of the Company's outstanding
                        common stock, adopted a plan of dissolution and
                        liquidation at its annual stockholder meeting on
                        August 26, 1996.  On August 26, 1996, Fortune had
                        no assets other than its holding of the Company's
                        common stock.  Under the plan, no fractional
                        shares of the Company's common stock were issued. 
                        Fortune stockholders who did not buy from the
                        Company enough Fortune common stock to round up
                        their holdings elected to sell their "odd lot"
                        shares of Fortune common stock to the Company.  As
                        a result of the Company's purchase of the "odd
                        lot" shares and the conversion of the Company's
                        holding of Fortune common stock into Company
                        common stock, the Company added $320,566 to
                        treasury stock, reducing the number of outstanding
                        shares of Company common stock to 7,603.

                        Land Sale

                        On September 10, 1996, American Capitol sold
                        50,000 square feet of undeveloped land to an
                        unaffiliated third party (the "Land Sale").  The
                        Company realized a pre-tax capital gain of
                        $222,025 on the Land Sale.

                        "Shell" Sale and Liquidation

                        During 1996, the Company sold the corporate
                        "shell" of one life insurance subsidiary (the
                        "Shell Sale"), realizing a pre-tax gain of
                        $50,000, and liquidated the corporate "shell" of
                        another life insurance subsidiary.  As of December
                        31, 1996, the Company had reduced the number of
                        subsidiaries to three, two life insurance
                        companies and a preneed funeral contract marketing
                        company, from a high of six subsidiaries in 1995.

          RESULTS OF    Premiums and other considerations were 62% higher
          OPERATIONS    during 1996 in comparison to 1995.  The Company
                        received approximately $1.2 million in premiums
                        during 1996 from the World Service transaction
                        discussed under "Significant Transactions" above. 
                        All of the premiums reinsured as a result of the
                        World Service transaction for the month of June
                        1996, approximately $400,000, were retained by
                        American Capitol.  Further, under the Coinsurance
                        Agreement, American Capitol reinsures 93.6% of all
                        new business produced by World Service.  This new
                        business is not reinsured under the Crown
                        Agreement, and is therefore reflected in the
                        Company's financial statements.  The volume of
                        World Service's new business has been declining
  <PAGE>                      
                        ACAP CORPORATION
                        MANAGEMENT'S FINANCIAL ANALYSIS
                        
                        and it is uncertain how long or to what degree
                        World Service will continue to support new
                        business production.
                        
                        Premiums for 1995 included approximately $500,000
                        in single premiums related to the conversion of
                        three trust-funded prepaid funeral service plans
                        to an insurance-funded plan.  Excluding these
                        conversions, premiums from the Company's marketing
                        of final expense life insurance and insurance-
                        funded prepaid funeral service contracts has risen
                        from approximately $400,000 during 1995 to
                        approximately $700,000 during 1996.

                        Net investment income was essentially unchanged
                        for 1996 in comparison to 1995.  Investment income
                        before investment expenses increased in 1996 in
                        comparison to 1995 as a result of the larger asset
                        base in 1996.  However, increased investment
                        expenses in 1996, including a $72,000 non-
                        recurring item, largely offset the increase in
                        investment income.

                        Realized investment gains were $275,525 for 1996
                        in comparison to $170,003 for 1995.  The realized
                        investment gains for 1996 are almost exclusively
                        related to the Land Sale and the Shell Sale
                        discussed under "Significant Transactions" above. 
                        The realized investment gains for 1995 were the
                        result of (1) the sale of a "shell" subsidiary and
                        (2) the restructuring of the bond portfolio of a
                        subsidiary.

                        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 1996 was
                        essentially unchanged from 1995.  The additional
                        expense allowance from the amendment to the Crown
                        Agreement to add the policies American Capitol
                        coinsures from World Service largely offset the
                        decline in the reinsurance expense allowance due
                        to normal policy attrition of the reinsured
                        policies.

                        The deferred gain on reinsurance is being
                        amortized based upon the amount of insurance in
                        force under the reinsurance treaties to which the
                        deferred gain relates.  During the first half of
                        1995, the reinsured polices experienced an
                        unusually high level of terminations.  This
                        resulted in a higher than expected amortization of
                        the deferred gain during that period. 
                        Consequently, the amortization of the deferred
                        gain on reinsurance was $79,373 (29%) lower during
                        1996 in comparison to 1995.
  <PAGE>
                        ACAP CORPORATION
                        MANAGEMENT'S FINANCIAL ANALYSIS

                        As a result of the factors noted above, total
                        revenue was 18% higher during 1996 than during
                        1995.  When used below, "total revenue" excludes
                        realized investment gains.

                        Death benefits were 27% of premiums and other
                        considerations during 1996 in comparison to 39% of
                        premiums and other considerations during 1995. 
                        American Capitol had experienced an unusually high
                        level of mortality experience in 1995, whereas
                        1996's mortality experience was in line with
                        expected levels.

                        Other benefits were comparable between 1996 and
                        1995, with other benefits running 76% of premiums
                        and other considerations during 1996 in comparison
                        to 78% of premiums and other considerations during
                        1995.

                        Total expenses (i.e., total benefits and expenses
                        less total policy benefits) were 50% of total
                        revenue for 1996 in comparison to 58% of total
                        revenue for 1995.  As a result of economies of
                        scale and stringent expense controls, the Company
                        was able to significantly increase revenues
                        through the World Service / South Texas
                        transactions without a corresponding increase in
                        total expenses.

                        Total expenses for 1996 include approximately
                        $59,000 in finder's fees related to the World
                        Service transaction and a $40,000 charge related
                        to the settlement of a long-standing agent
                        commission dispute.  Total expenses for 1995
                        include approximately $72,000 in non-recurring
                        actuarial charges related to consultations on the
                        Company's acquisition program and approximately
                        $35,000 in expense related to the settlement of a
                        policy dispute.

                        As a result of a 1995 transaction that increased
                        the reinsurance from 20% to 100% on each of the
                        life policies in force in a life insurance
                        subsidiary acquired August 31, 1994, the Company
                        incurred current (in 1995) federal income taxes of
                        approximately $885,000.  Partially offsetting the
                        increase in the current federal income tax
                        expense, the reinsurance transaction resulted in a
                        deferred federal income tax benefit.  These items
                        are the majority of the difference in federal
                        income tax expense between 1995 and 1996.

          LIQUIDITY     Liquidity of Insurance Subsidiaries
          AND
          CAPITAL       Acap's insurance subsidiaries have a significant
          RESOURCES     portion of their assets invested in debt
  <PAGE>                      
                        ACAP CORPORATION
                        MANAGEMENT'S FINANCIAL ANALYSIS

                        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, 1996, 99.7% 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
                        investment 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 (34%) of the Company's bond
                        portfolio is invested in mortgage-backed
                        securities, with 95% of such mortgage-backed
                        securities classified as collateralized mortgage
                        obligations and 5% 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 mortgage-backed securities principal
                        repayment to be extended.  In general, mortgage-
                        backed securities provide for higher yields than
                        corporate debt securities of similar credit
<PAGE>                        
                        ACAP CORPORATION
                        MANAGEMENT'S FINANCIAL ANALYSIS

                        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 (54%), Z (19%) and sequential
                        (26%) 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.  Planned amortization class securities
                        derive their stability at the expense of cash flow
                        risk for other tranches in a deal, 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.

                        Under an accounting standard adopted in 1993, 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 increasing interest rates during the
                        year, the fair value of the Company's fixed
                        maturity and equity securities decreased $512,422
                        during 1996, following a $2,186,436 increase
                        during 1995.  The accounting standard does not
                        permit the Company to restate its liabilities for
                        changes in interest rates.

                        As of December 31, 1996, American Capitol held 32
                        mortgage loans as investments.  American Capitol's
                        investment policy generally prohibits making new
                        investments in mortgage loans, except in
                        connection with the sale of Company-owned real
                        estate.  However, American Capitol acquired
                        approximately $1.9 million in mortgage loans from
                        World Service during 1996 in connection with the
                        Coinsurance Agreement.  All of the mortgage loans
                        acquired from World Service are personally
                        guaranteed by the owner of World Service.  The
                        average principal balance of American Capitol's
                        mortgage loans at December 31, 1996 was $86,276
<PAGE>                        
                        ACAP CORPORATION
                        MANAGEMENT'S FINANCIAL ANALYSIS
                        
                        and the weighted average maturity was 9 years. 
                        Mortgage loans on Tennessee properties represent
                        41% of the mortgage loan balances at December 31,
                        1996, Texas properties 33%, Alabama properties
                        17%, with Louisiana, Florida and Kentucky
                        properties representing the remainder of the
                        mortgage loan balances.  Commercial mortgages
                        represent 55% of the mortgage loan balances at
                        December 31, 1996 with residential mortgages
                        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.
     
                        At December 31, 1996, the only real estate owned
                        by American Capitol is the home office property,
                        with a book value of $1,433,942.

                        Liquidity of the Parent Company

                        On January 31, 1995, Acap borrowed $1.5 million
                        from Central National Bank of Waco, Texas.  The
                        note is renewable each April 30 until fully
                        repaid.  The note bears interest at a rate equal
                        to the base rate of a bank plus 1%.  Principal
                        payments on the note are due quarterly.  The note
                        is secured by a pledge of all the outstanding
                        shares of American Capitol.  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. 
                        The principal payments on the bank loan are
                        matched by the principal payments on a surplus
                        debenture issued by American Capitol to Acap.

                        Going forward, the primary sources of funds for
                        Acap are payments on the surplus debenture 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, 1996, the 
                        amount of dividends available to the parent company 
                        from American Capitol not limited by such restrictions 
                        is approximately $500,000.  Payments on the surplus
                        debenture may only be made to the extent statutory
                        capital and surplus exceeds $2 million.  At
                        December 31, 1996, American Capitol's statutory
                        capital and surplus was $3,160,508.
    <PAGE>                    
                        ACAP CORPORATION
                        MANAGEMENT'S FINANCIAL ANALYSIS

                        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 generally accepted accounting
                        principles.

          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, 1996, reinsurance receivables with a
                        carrying value of $51.3 million were associated
                        with a single reinsurer, Crown Life Insurance
                        Company ("Crown").  At December 31, 1995, Crown
                        had assets in excess of $7 billion and
                        stockholders' equity of approximately $0.4
                        billion.  Crown is rated "Excellent" by A.M. Best
                        Company, an insurance company rating organization. 
                        At December 31, 1996, reinsurance receivables with
                        a carrying value of $3.5 million were associated
                        with Alabama Reassurance Company ("Alabama Re"). 
                        The Alabama Re reinsurance receivables are secured
                        by a trust account containing a $6.2 million
                        letter of credit granted in favor of an insurance
                        subsidiary of the Company.

                        With regard to the policies not 100% reinsured
                        with Crown or Alabama Re, 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    In March 1995, the Financial Accounting Standards
          STANDARDS     Board ("FASB") issued Statement of Financial
                        Accounting Standards ("SFAS") No. 121, "Accounting
                        for the Impairment of Long-Lived Assets and for
                        Long-Lived Assets to be Disposed Of."  SFAS No.
                        121, which must be adopted by fiscal years
                        beginning after December 15, 1995, establishes
  <PAGE>                      
                        ACAP CORPORATION
                        MANAGEMENT'S FINANCIAL ANALYSIS

                        accounting standards for the impairment of long-
                        lived assets, certain identifiable intangibles,
                        and goodwill related to (1) those assets to be
                        held and used in the business, and (2) for assets
                        to be disposed of.  The Company adopted SFAS No.
                        121 in 1996.  In connection with the review of
                        goodwill required by SFAS No. 121, management
                        determined that, due to changes in market
                        conditions, the remaining amortization period of a
                        significant portion of the goodwill should be
                        reduced from 33 years to 10 years.  This change
                        resulted in additional amortization of $135,568
                        during 1996.

                        In October 1995, the FASB issued SFAS No. 123,
                        "Accounting for Stock-Based Compensation."  SFAS
                        No. 123 provides a choice for accounting for
                        employee stock compensation plans.  A company can
                        elect to use the new fair-value-based method of
                        accounting for employee stock compensation plans,
                        under which compensation cost is measured and
                        recognized in results of operations, or continue
                        to account for these plans under the current
                        accounting standards.  Entities electing to remain
                        with the present accounting method must make
                        disclosures of what net income and earnings per
                        share would have been if the fair-value-based
                        method of accounting had been applied.  During
                        1996, the Company elected to continue to account
                        for employee stock compensation plans under the
                        current accounting standards.  The Company
                        currently has only immaterial stock options
                        outstanding.

          SUBSEQUENT    On January 31, 1997, World Service assumed all of
          EVENT         the policies of South Texas, with a retroactive
                        effective date of June 1, 1996.  Under the terms
                        of the Coinsurance Agreement, World Service's
                        assumption of the South Texas policies
                        automatically made the South Texas policies
                        subject to the Coinsurance Agreement.  American
                        Capitol paid World Service an initial ceding
                        commission of approximately $100,000 related to
                        the South Texas policies.  In anticipation of the
                        assumption by World Service and the resulting
                        coinsurance to American Capitol, South Texas had
                        transferred $6.8 million in assets to American
                        Capitol in 1996, which are reflected as a deposit
                        in "Other Liabilities" in the Company's December
                        31, 1996 balance sheet.  The assets were
                        transferred to Crown in 1996 and are reflected in
                        "Reinsurance Receivables" in the Company's
                        December 31, 1996 balance sheet.



 <PAGE>
              Acap Corporation
              Consolidated Balance Sheet                 December 31, 1996
    --------------------------------------------------------------------------
    ASSETS
      Investments:
        Fixed maturities available for sale 
         (amortized cost $28,523,900). . . . . . . . . . .   $ 29,326,925
        Equity securities (cost $14,137)  . . . . . . . . .         3,575
        Mortgage loans  . . . . . . . . . . . . . . . . . .     2,760,835
        Real estate . . . . . . . . . . . . . . . . . . . .     1,433,942
        Policy loans  . . . . . . . . . . . . . . . . . . .     6,185,273
        Short-term investments  . . . . . . . . . . . . . .     1,669,416
                                                             --------------
           Total investments  . . . . . . . . . . . . . . .    41,379,966
      Cash  . . . . . . . . . . . . . . . . . . . . . . . .        36,353
      Accrued investment income . . . . . . . . . . . . . .       559,625
      Reinsurance receivables . . . . . . . . . . . . . . .    57,605,194
      Accounts receivable (less allowance for        
         uncollectible accounts of $88,387)   . . . . . . .       132,189
      Deferred acquisition costs  . . . . . . . . . . . . .     1,664,153
      Property and equipment (less accumulated depreciation     
         of $564,679) . . . . . . . . . . . . . . . . . . .       156,559
      Costs in excess of net assets of acquired business 
         (less accumulated amortization of $712,464). . . .     1,961,310
      Other assets  . . . . . . . . . . . . . . . . . . . .       312,125
                                                            ---------------
                                                             $103,807,474
                                                            ===============
    --------------------------------------------------------------------------
    LIABILITIES
    Policy liabilities:
      Future policy benefits  . . . . . . . . . . . . . .    $ 82,737,870
      Contract claims . . . . . . . . . . . . . . . . . .         789,393
                                                             --------------
        Total policy liabilities . . . . . . . . . . . .       83,527,263
        Other policyholders' funds  . . . . . . . . . . . . .   1,859,304
        Other liabilities . . . . . . . . . . . . . . . . . .   7,423,707
        Deferred tax liability  . . . . . . . . . . . . . . .   1,629,597
        Note payable  . . . . . . . . . . . . . . . . . . . .   1,062,500
        Deferred gain on reinsurance  . . . . . . . . . . . .   2,410,238
                                                             --------------
           Total liabilities  . . . . . . . . . . . . . . .    97,912,609
    --------------------------------------------------------------------------
    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 8,754 shares                              876
    Additional paid-in capital  . . . . . . . . . . . . .       6,259,189
    Accumulated deficit . . . . . . . . . . . . . . . . .      (2,388,086)
    Treasury stock, at cost, 1,151 common shares  . . . .        (426,419)
    Net unrealized investment gains, net of taxes of $203,357     599,305
                                                             ---------------
        Total stockholders' equity . . . . . . . . . . .        5,894,865
                                                             ---------------
                                                             $103,807,474
                                                             ===============
          See accompanying notes to consolidated financial statements.
<PAGE>
              Acap Corporation
              Consolidated Statements of Operations
    
                                                     Years Ended December 31,
    --------------------------------------------------------------------------
                                                       1996         1995
    --------------------------------------------------------------------------
    REVENUES                                                                  
    Premiums and other considerations . . . . .     $2,556,529    1,581,864
    Net investment income . . . . . . . . . . .      1,304,791    1,297,361
    Net realized investment gains   . . . . . .        275,525      170,003
    Reinsurance expense allowance . . . . . . .      1,884,578    1,897,257
    Amortization of deferred gain on reinsurance       198,933      278,306
    Other income  . . . . . . . . . . . . . . .         50,411       83,918
                                                    -----------------------
      Total revenues . . . . . . . . . . . . .       6,270,767    5,308,709
                                                    -----------------------     
    -----------------------------------------------------------------------    
    BENEFITS AND EXPENSES
    Death benefits  . . . . . . . . . . . . . .        685,537      612,125
    Other benefits  . . . . . . . . . . . . . .      1,943,758    1,234,174
    Commissions and general expenses  . . . . .      2,514,726    2,576,224
    Interest expense  . . . . . . . . . . . . .        110,930      165,929
    Amortization of costs in excess of net
       acquired business  . . . . . . . . . . .        239,662      104,095
    Amortization of deferred acquisition costs         114,902      115,800
                                                     -----------------------
       Total benefits and expenses  . . . . .        5,609,515    4,808,347
                                                     -----------------------
    ------------------------------------------------------------------------
    EARNINGS                                                
    Income before federal income tax expense
       (benefit) . . . . .                             661,252      500,362
    Federal income tax expense (benefit):                   
       Current . . . . . . . . . . . . . . . . .       111,605    1,004,727
       Deferred  . . . . . . . . . . . . . . . .      (108,620)    (781,398)
                                                     -----------------------
    Net income  . . . . . . . . . . . . . . . .     $  658,267      277,033
                                                     =======================
    ------------------------------------------------------------------------
    EARNINGS PER SHARE                                      
    Net income per common share . . . . . . . .     $    56.79         9.04
                                                    ========================
    ------------------------------------------------------------------------
          See accompanying notes to consolidated financial statements.









                                                                           


  

<PAGE>
              Acap Corporation
              Consolidated Statements of Stockholders' Equity
    
                                                     Years Ended December 31,
                                                             1996       1995
     -------------------------------------------------------------------------
     PREFERRED STOCK 
       (Including Additional Paid-in Capital)  . . $   1,850,000   1,850,000
                                                   --------------------------
     ------------------------------------------------------------------------
     COMMON STOCK  . . . . . . . . . . . . . . . .           876         876
                                                   --------------------------   
     ------------------------------------------------------------------------   
     ADDITIONAL PAID-IN CAPITAL
       Balance, beginning of year  . . . . . . .       6,259,069   6,259,069

       Change during year  . . . . . . . . . . .             120        -- 
                                                   --------------------------
       Balance, end of year  . . . . . . . . . .       6,259,189   6,259,069
                                                   --------------------------
     ------------------------------------------------------------------------
     ACCUMULATED DEFICIT                                     
        Balance, beginning of year  . . . . . . .     (2,854,416) (2,931,417)
        Net income  . . . . . . . . . . . . . . .        658,267     277,033
        Preferred stock cash dividends  . . . . .       (191,937)   (200,032)
                                                     ------------------------
        Balance, end of year  . . . . . . . . . .     (2,388,086) (2,854,416)
                                                     ------------------------
     ------------------------------------------------------------------------
     TREASURY STOCK                                          
        Balance, beginning of year  . . . . . . .       (105,853)   (105,853)
        Change during year  . . . . . . . . . . .       (320,566)       -- 
                                                     ------------------------
        Balance, end of year  . . . . . . . . . .       (426,419)   (105,853)
                                                     ------------------------   
     ------------------------------------------------------------------------ 
     NET UNREALIZED INVESTMENT GAINS (LOSSES)                
        Balance, beginning of year  . . . . . . .       1,111,727 (1,074,709)
        Change during year  . . . . . . . . . . .        (512,422) 2,186,436
                                                     ------------------------
        Balance, end of year  . . . . . . . . . .         599,305  1,111,727
                                                     ------------------------
     ------------------------------------------------------------------------
     TOTAL STOCKHOLDERS' EQUITY  . . . . . . . .     $  5,894,865  6,261,403
                                                     ========================
     ------------------------------------------------------------------------
     See accompanying notes to consolidated financial statements.
     
     
     
     
     
     
     
     
     



<PAGE>
              Acap Corporation
              Consolidated Statements of Cash Flows
                                                     Years Ended December 31,
   ----------------------------------------------------------------------------
                                                           1996        1995
    CASH FLOWS FROM OPERATING ACTIVITIES                   ----        ----
    Net income  . . . . . . . . . . . . . . . .       $    658,267    277,033
    Adjustments to reconcile net income to net
      cash provided by operating activities:                                  
       Depreciation and amortization . . . . . .           325,998    190,600
       Amortization of deferred acquisition costs          114,902    115,800
       Amortization of deferred gain on reinsurance       (198,933)  (278,306)
       Premium and discount amortization . . . .            13,702    (33,640)
       Realized gains on investments . . . . . .          (275,525)  (170,003)
       Deferred federal income tax benefit . . .          (108,620)  (781,398)
       Decrease in reinsurance receivables   . .         1,851,696  1,411,458
       Decrease (increase) in accrued investment income   (333,623)    36,488
       Increase in accounts receivable . . . . .            (9,461)   (97,448)
       Decrease in other assets  . . . . . . . .             2,857    652,387
       Increase (decrease) in policy liabilities           551,695   (325,559)
       Increase (decrease) in other liabilities             54,637   (219,436)
                                                      ------------------------
         Net cash provided by operating activities       2,647,592    777,976
                                                   ------------------------     
    CASH FLOWS FROM INVESTING ACTIVITIES                    
    Proceeds from sales of investments available
      for sale and principal repayments on 
      mortgage loans . . . . . . .                       3,751,347  5,231,345
    Purchases of investments available for sale        (24,360,337)(8,011,380)
    Proceeds from sale of real estate . . . . .            338,845         --
    Net decrease in policy loans  . . . . . . .            536,707    318,167
    Net decrease (increase) in short-term investments     (626,365)11,422,323
    Proceeds from sale of subsidiary  . . . . .             50,000         --
    Purchase of subsidiaries  . . . . . . . . .                 -- (1,952,300)
    Proceeds from coinsurance agreement . . . .         19,371,962         --
    Purchases of property and equipment . . . .           (224,040)   (24,746)
                                                    --------------------------
    Net cash provided by (used in) investing          
    activities  . . . . . . . . .                       (1,161,881) 6,983,409  
                                                    --------------------------

    CASH FLOWS FROM FINANCING ACTIVITIES                    
    Proceeds from issuance of note payable  . .                 --  1,500,000
    Principal payments on notes payable . . . .           (250,000)(8,487,500)
    Deposits on policy contracts  . . . . . . .          1,135,278  1,316,280
    Withdrawals from policy contracts . . . . .         (2,266,312)(2,151,240)
    Preferred dividends paid  . . . . . . . . .           (191,937)  (200,032)
                                                    --------------------------
      Net cash used in financing activities . .         (1,572,971)(8,022,492)
                                                    -------------------------- 
    Net decrease in cash  . . . . . . . . . . .            (87,260)  (261,107)
    Cash at beginning of year . . . . . . . . .            123,613    384,720
                                                    --------------------------
    Cash at end of year . . . . . . . . . . . .       $     36,353    123,613
                                                    ==========================
    
    See accompanying notes to consolidated financial statements.


<PAGE>
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          1. SUMMARY       Principles of Consolidation and Nature of
             OF            Operations
             SIGNIFICANT  
             ACCOUNTING    The consolidated financial statements of Acap
             POLICIES      Corporation ("Acap" or "the Company"), include
                           its wholly-owned subsidiaries, American Capitol
                           Insurance Company ("American Capitol"); through
                           November 22, 1996, Family Life Insurance Company
                           of Texas ("Family"); Imperial Plan, Inc.
                           ("Imperial Plan"); Texas Imperial Life Insurance
                           Company ("Texas Imperial"); through
                           September 30, 1995, Trans-Western Life Insurance
                           Company ("Trans-Western") and, from February 2,
                           1995 through December 31, 1996, Oakley-Metcalf
                           Insurance Company ("Oakley").  All significant
                           intercompany transactions and accounts have been
                           eliminated in consolidation.  Controlling
                           interest in the Company, approximately 41% at
                           December 31, 1996, 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.  Acap's life insurance operations are
                           conducted through its wholly-owned life
                           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 10% of the Company's
                           direct collected premium.

                           Basis of Presentation

                           The consolidated financial statements have been
                           prepared in accordance with generally accepted
                           accounting principles.  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) deferred federal income
 <PAGE>                    
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           taxes are provided for temporary differences
                           between assets and liabilities reported for
                           financial reporting purposes and reported for
                           federal income tax purposes;  (d) certain assets
                           (principally furniture and equipment, agents'
                           debit balances and certain other receivables)
                           are reported as assets rather than being charged
                           to accumulated deficit;  (e) investments in
                           fixed maturities available for sale are recorded
                           at fair value rather than at amortized cost; 
                           and (f) 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 nine years, whereas, for
                           statutory purposes, this excess is not allowed
                           and acquisitions are accounted for as equity
                           investments.

                           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,
                           1996, the amount of dividends available to the
                           parent company from subsidiaries not limited by
                           such restrictions is approximately $500,000. 
                           The combined net income of the Company's
                           insurance subsidiaries (where applicable, from
                           the date such subsidiary was acquired), as
                           determined using statutory accounting practices,
                           was $812,871 and $7,454,344 for the years ended
                           December 31, 1996 and 1995, respectively.  The
                           consolidated statutory stockholders' equity of
                           the Company's insurance subsidiaries amounted to
                           $3,160,508 and $2,716,261 at December 31, 1996
                           and 1995, respectively.  The total adjusted
                           statutory stockholders' equity of the Company's
                           insurance subsidiaries exceeds the applicable
                           Risk-Based Capital requirements.

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

 <PAGE>                          
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         
                           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.
                           
                           Investments

                           Investments are reported on the following bases:

                           All of the Company's debt and equity 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.

                           Mortgage loans on real estate are carried at
                           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%.

                           Real estate consists of the home office
                           property.  The home office building is carried
                           at cost less accumulated depreciation. 
                           Depreciation is computed using the straight line
                           method over twenty years. Accumulated
                           depreciation at December 31, 1996 was $92,250. 
                           Tenant improvements are amortized over the term
                           of the lease.  Land is carried at the lower of
                           cost or fair value.  Foreclosed real estate is
                           carried at the lower of cost or fair value
                           determined at the date of foreclosure.

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

                           Write-downs and other realized gains and losses,
                           determined on the specific identification
                           method, are accounted for in the consolidated
                           statements of operations in net realized
                           investment gains.

                           Deferred Acquisition Costs

                           Deferred acquisition costs are the cost of
                           policies acquired through the purchase of
                           insurance companies, representing the
 <PAGE>                          
         ACAP CORPORATION
         NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
                           
                           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 year
                           ended December 31, 1996 are summarized as
                           follows:

                            Balance at December 31, 1995  . . . . $1,779,055
                            Amortized during the year . . . . . .   (114,902)
                                                                  -----------
                            Balance at December 31, 1996  . . . . $1,664,153
                                                                  ===========

                           The amortization of deferred acquisition costs
                           is expected to be consistent with the above
                           amortization level over the next five years.

                           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 five to ten years.  Depreciation
                           expense was $42,678 and $44,907 for the years
                           ended December 31, 1996 and 1995, 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.

                           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 remaining terms of five years and nine
                           years.

                           Recognition of Premium Revenue and Related
                           Expenses, Liability for Future Policy Benefits
 <PAGE>                          
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         
                           and Contract Claims

                           For traditional insurance contracts, premiums
                           are recognized as revenue when due.  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,
                           1996.

                           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.

 <PAGE>
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           
                           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.
                           
                           Earnings per Share

                           Earnings per common share were computed as
                           follows:
                                                      Years ended December 31,
                                                             1996      1995
                                                             ----      ----
                            Net income  . . . . . . . . . $ 658,267   277,033
                            Preferred dividends . . . . .  (191,937) (200,032)
                                                           -------------------
                                                            466,330    77,001

                            Divided by weighted average
                              common shares outstanding       8,212     8,516
                                                           ------------------
                            Net income per common share   $   56.79      9.04
                                                           ===================

                           Participating Policies

                           Acap maintains both participating and non-
                           participating life insurance policies. 
                           Participating business represented approximately
                           13% and 11% of the life insurance in force, and
                           11% and 8% of life insurance premium income at
                           December 31, 1996 and 1995, respectively. 
                           Dividends to participating policyholders are
                           determined annually and are payable only upon
                           declaration of the Boards of Directors of the
                           insurance subsidiaries.

                           Federal Income Taxes

                           The Company accounts for income taxes in
                           accordance with SFAS No. 109 which 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 that is 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.

                           Statement of Cash Flows

                           For purposes of reporting cash flows, cash
                           includes cash on hand, in demand accounts, in
  <PAGE>                         
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         
                           money market accounts and in savings accounts.

                           Accounting Standards
                           In March 1995, the Financial Accounting
                           Standards Board ("FASB") issued SFAS No. 121,
                           "Accounting for the Impairment of Long-Lived
                           Assets and for Long-Lived Assets to be Disposed
                           Of."  SFAS No. 121, which must be adopted for
                           fiscal years beginning after December 15, 1995,
                           establishes accounting standards for the
                           impairment of long-lived assets, certain
                           identifiable intangibles, and goodwill related
                           to (1) those assets to be held and used in the
                           business, and (2) for assets to be disposed of. 
                           The Company adopted SFAS No. 121 in 1996.  In
                           connection with the review of goodwill required
                           by SFAS No. 121, management determined that, due
                           to changes in market conditions, the remaining
                           amortization period of a significant portion of
                           the goodwill should be reduced from 33 years to
                           10 years.  This change resulted in additional
                           amortization of $135,368 during 1996.

                           In October 1995, the FASB issued SFAS No. 123,
                           "Accounting for Stock-Based Compensation."  SFAS
                           No. 123 provides a choice for accounting for
                           employee stock compensation plans.  A company
                           can elect to use the new fair-value-based method
                           of accounting for employee stock compensation
                           plans, under which compensation cost is measured
                           and recognized in results of operations, or
                           continue to account for these plans under the
                           current accounting standards.  Entities electing
                           to remain with the present accounting method
                           must make disclosures of what net income and
                           earnings per share would have been if the fair-
                           value-based method of accounting had been
                           applied.  In 1996, the Company elected not to
                           use the fair-value-based method.  The Company
                           currently has only immaterial stock options
                           outstanding.

          2. INVESTMENTS   Fixed Maturity and Equity Securities

                           The amortized cost and fair values of
                           investments in fixed maturity and equity
                           securities as of December 31, 1996 are as
                           follows:








<PAGE>
         ACAP CORPORATION                                                   
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                   Gross     Gross
                                       Amortized Unrealized Unrealized   Fair
                                         Cost      Gains     Losses     Value
                                         ----      -----     ------     -----
            Fixed maturity securities                               
            Government securities     $ 3,299,334   41,032  (2,399)   3,337,967
            Corporate securities       13,270,202  311,165 (85,214)  13,496,153
            Asset-backed securities     2,364,367   79,737  (2,834)   2,441,270
            Mortgage-backed securities  9,589,997  506,956 (45,418)  10,051,535
                                      -----------------------------------------
                                       28,523,900  938,890 (135,865) 29,326,925
                                      ----------------------------------------- 
            Equity securities              14,137      --   (10,562)      3,575
                                      -----------------------------------------
                                      $28,538,037  938,890 (146,427) 29,330,500
                                      =========================================
                           
                           A summary of proceeds from the sales ofinvestments 
                           in fixed maturity securities, exclusive of proceeds 
                           from maturities, and the gross gains and losses 
                           realized on those sales follows:
                                                           1996         1995
                                                           ----         ----
                          Proceeds on sales . . . . .     $2,571,322 3,297,458
                                                       =======================
                          Gross realized gains on sales   $   37,123   149,889
                          Gross realized losses on sales     (34,109)  (43,226)
                                                       ------------------------
                          Net realized gains on sales .        3,014   106,663
                          Realized gains on transactions         
                            other than sales  . . . . .          833     3,475
                                                        ----------------------
                          Net realized gains  . . . . .   $    3,847   110,138
                                                        ====================== 
                           
                           The amortized cost and estimated fair value of
                           fixed maturity securities at December 31, 1996,
                           by contractual maturity, are shown below. 
                           Expected maturities will differ from contractual
                           maturities because borrowers may have the right
                           to call or prepay obligations with or without
                           call or prepayment penalties.           

                                                      Amortized       Fair
                                                         Cost        Value
                                                         ----        -----
         Maturing in one year or less  . . . . . .  $    399,665      402,239
         Maturing after one year through five years    7,630,502    7,639,104
         Maturing after five years through ten years   7,756,498    7,894,391
         Maturing after ten years  . . . . . . . . .   3,147,238    3,339,656
                                                      -----------------------
                                                      18,933,903   19,275,390
         Mortgage-backed securities  . . . . . . . .   9,589,997   10,051,535
                                                      -----------------------
                                                    $ 28,523,900   29,326,925

<PAGE>                                                                       
                           A summary of the fair value of mortgage-backed
                           securities by type as of December 31, 1996
                           follows:

                            Collateralized mortgage obligations:
                              Planned amortization class  . . . . .$ 5,190,947
                              Z . . . . . . . . . . . . . . . . . .  1,775,743
                              Sequential  . . . . . . . . . . . . .  2,442,696
                              Other . . . . . . . . . . . . . . . .    135,201
                                                                    ----------
                                                                     9,544,587
                            Pass-through securities . . . . . . . .    506,948
                                                                    ----------
                                                                   $10,051,535
                                                                   ===========

                           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, 1996, 99.7% of the Company's
                           fixed maturity securities were rated investment
                           grade (i.e., rated BBB-/Baa3 or higher by
                           Standard & Poor or Moody).

                           Mortgage Loans

                           The weighted average interest rate of mortgage
                           loans held as of December 31, 1996 was 8.6%.

                           The distribution of principal balances on
                           mortgage loans held as of December 31, 1996 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  . . . . .    $  726,249
                        Maturing after one year through five years    521,695
                        Maturing after five years through ten years   473,668
                        Maturing after ten years  . . . . . . .     1,039,223
                                                                    ----------
                                                                   $2,760,835
                                                                   ==========



<PAGE>
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                    Principal
                                                                     Balance
                                                                     -------
                            Commercial loans:
                              Texas . . . . . . . . . . . . . . . .$  801,431
                              Tennessee . . . . . . . . . . . . . .   589,306
                              Louisiana . . . . . . . . . . . . . .   102,847
                              Alabama . . . . . . . . . . . . . . .    37,935
                                                                   ----------
                                                                   $1,531,519
                                                                   ==========
                            Residential loans:
                              Tennessee . . . . . . . . . . . . . .$  542,012
                              Alabama . . . . . . . . . . . . . . .   441,766
                              Texas . . . . . . . . . . . . . . . .   106,149
                              Florida . . . . . . . . . . . . . . .    64,490
                              Louisiana . . . . . . . . . . . . . .    38,749
                              Kentucky  . . . . . . . . . . . . . .    36,150
                                                                   ----------
                                                                   $1,229,316
                                                                   ==========

                           Investment Income

                           A summary of net investment income follows:

                                                            1996         1995
                                                            ----         ----
              Interest on fixed maturities  . . . . . . $1,300,036   1,249,118
              Interest on mortgage loans  . . . . . . . .  165,819      89,397
              Interest on policy loans  . . . . . . . . .   39,315      44,721
              Interest on cash and short-term investments   55,558     114,375
              Real estate income  . . . . . . . . . . . .   53,461      40,600
              Dividends on equity securities  . . . . . .       --       5,632
              Miscellaneous investment income . . . . . .   59,767      42,943
                                                         ----------------------
                                                          1,673,956  1,586,786
              Investment expense  . . . . . . . . . . . .  (369,165)  (289,425)
                                                         $1,304,791  1,297,361
                                                         ======================
                           Unrealized Investment Gains (Losses)

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








<PAGE>
         ACAP CORPORATION                                           
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         
                                           Fixed      Equity
                                         Maturities  Securites       Total
                                         ----------  ---------       -----      
         Balance, January 1, 1995       $ (868,930)   (205,779)   (1,074,709)
         Change during the year          2,158,157      28,279     2,186,436
                                        -------------------------------------
         Balance, December 31,1995       1,289,227    (177,500)    1,111,727
         Change during the year           (689,784)    177,362      (512,422)
                                        -------------------------------------
         Balance, December 31, 1996     $  599,443        (138)      599,305
                                        ===================================== 

                           Net Realized Investment Gains

                           A summary of net realized investment gains
                           follows:
                                                            1996      1995
                                                            ----      ----
         Fixed maturities  . . . . . . . . . . . . . . .  $ 3,847   110,138
         Equity securities 
             (including investment in subsidiaries). . .   49,653    59,865
         Real estate . . . . . . . . . . . . . . . . . .  222,025        --
                                                         -------------------
                                                         $275,525   170,003
                                                         ===================  
                         Other Investment Disclosures

                           At December 31, 1996, bonds with a fair value of
                           $5,226,030 and a $25,000 certificate of deposit
                           were on deposit with various regulatory
                           authorities.

                           Investment income was not accrued on non-income
                           producing investments of $450,000 in 1996 and 1995.

                           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, 1996 were as follows:

                                                    Balance
                                                 Sheet Amount    Category
                                                 ------------    --------       
         EQCC Home Equity  . . . . . . . . . . .  $1,499,188   Fixed maturity
         Home office building and property . . .   1,433,942      Real estate
         General Electric  . . . . . . . . . . .   1,155,154   Fixed maturity
         Merrill Lynch . . . . . . . . . . . . .   1,101,572   Fixed maturity
         American Express  . . . . . . . . . . .     999,818       Short term
         Bank America  . . . . . . . . . . . . .     943,590   Fixed maturity
         Ford Motor Credit Corporation . . . . .     875,249   Fixed maturity
         Chase Manhattan Corporation . . . . . .     832,578   Fixed maturity
         Goldman Sachs . . . . . . . . . . . . .     814,980   Fixed maturity
         RAST  . . . . . . . . . . . . . . . . .     758,438   Fixed maturity
         Commercial Credit Corporation . . . . .     641,170   Fixed maturity
         Coca Cola   . . . . . . . . . . . . . .     632,964   Fixed maturity

<PAGE>                                                                     
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          3. FAIR          The carrying values and estimated fair values of
             VALUES        the Company's financial instruments as of
                           December 31, 1996 are as follows:

                                                         Carrying     Fair
                                                          Amount      Value
                                                          ------      -----
                      Assets:                                    
                      Fixed maturities  . . . . . .    $29,326,925  29,326,925
                      Equity securities   . . . . .          3,575       3,575
                      Mortgage loans  . . . . . . .      2,760,835   2,762,106
                      Policy loans  . . . . . . . .      6,185,273   6,185,273
                      Short-term investments  . . .      1,669,416   1,669,416
                      Liabilities:                               
                      Note payable  . . . . . . . .      1,062,500   1,062,500
                                                                       
                           Estimated market values of publicly-traded fixed
                           maturity 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, 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          As a source of funds to repay the $5 million
             PAYABLE       surplus debenture issued in connection with the
                           acquisition of Family, on January 31, 1995 the
                           Company borrowed $1.5 million from Central
                           National Bank of Waco, Texas.  The note is
                           renewable by the bank each April 30 until fully
                           repaid.  The note bears interest at a rate equal
                           to the base rate of a bank plus 1%.  Principal
                           payments on the note of $62,500 are due
                           quarterly (a six year amortization) beginning
                           April 30, 1995.  The note is secured by the
                           Company's pledge of all the outstanding shares
                           of Acap's subsidiary, American Capitol.  The
                           loan agreement contains certain restrictions and
 <PAGE>                          
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         
                           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.

          5. COMMITMENTS   Leases
             AND
            CONTINGENCIES  The Company had no material leases in 1996 or
                           1995.

                           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.

                           At December 31, 1996, reinsurance receivables
                           with a carrying value of $51.3 million were
                           associated with a single reinsurer, Crown Life
                           Insurance Company ("Crown").  At December 31,
                           1995, Crown had assets in excess of $7 billion
                           and stockholders' equity of approximately $0.4
                           billion.  Crown is rated "Excellent" by A.M.
                           Best Company, an insurance company rating
                           organization.  At December 31, 1996, reinsurance
                           receivables with a carrying value of $3.5
                           million were associated with Alabama Reassurance
                           Company ("Alabama Re").  While Alabama Re is not
                           currently rated by A.M. Best Company, the
                           Alabama Re reinsurance receivables are secured
                           by a trust account containing a $6.2 million
                           letter of credit granted in favor of an
                           insurance subsidiary of the Company.  At
                           December 31, 1996, the remaining reinsurance
                           receivables were associated with various other
                           reinsurers.

                           The Crown and Alabama Re 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
<PAGE>                           
         ACAP COPRORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         
                           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 Crown or Alabama Re, 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.

                           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.  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 Crown and Alabama Re as
                           discussed above, management does not believe the
                           Company has significant concentrations of credit
                           risk related to reinsurance, or otherwise.

                           Prior to June 1, 1996, the Company had an
                           immaterial amount of reinsurance in force
                           whereby the Company was the assuming party. 
                           Effective June 1, 1996, the Company, through
                           American Capitol, reinsured all of the policies
                           in force of World Service Life Insurance Company
                           of America ("World Service") on a 93.6%
                           coinsurance basis.  American Capitol retroceded
                           all of the World Service policies in force at
                           June 1, 1996 to Crown, effective June 30, 1996. 
                           American Capitol retains the coinsurance on all
                           policies issued by World Service subsequent to
                           June 1, 1996.

                           The effect of reinsurance on premiums and
                           benefits follows:





<PAGE>
         ACAP CORPORATION                                               
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                      Years ended December 31,
                                                            1996       1995
                                                            ----       ----
                     Direct premiums . . . . . . . .   $ 6,375,153   7,884,105
                     Reinsurance assumed . . . . . .     1,919,915       3,655
                     Reinsurance ceded . . . . . . .    (5,738,539) (6,305,896)
                                                        -----------------------
                     Net premiums  . . . . . . . . .   $ 2,556,529   1,581,864
                                                        =======================
                     
                     Direct policy benefits  . . . .   $ 5,740,316   5,059,540
                     Reinsurance assumed . . . . . .     1,420,751         (26)
                     Reinsurance ceded . . . . . . .    (4,531,772) (3,213,215)
                                                        -----------------------
                     Net policy benefits . . . . . .   $ 2,629,295   1,846,299
                                                       ========================
                           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  Cash payments for interest expense for the years
             INFORMATION   ended December 31, 1996 and 1995 were $115,578
             REGARDING     and $418,876, respectively.  Net cash payments
             CASH FLOWS    of $73,764 and $1,017,013 for federal income
                           taxes were made during the years ended December
                           31, 1996 and 1995, respectively.

                           The following reflects assets acquired and
                           liabilities assumed relative to the acquisition
                           by the Company of a life insurance company in
                           1995, and the consideration given and the net
                           cash flow relative to such acquisition.


                   Assets of acquired subsidiary . . . . .      $ 4,393,403
                   Liabilities of acquired subsidiary  . .       (1,833,887)
                                                                ------------
                   Cost of acquisition . . . . . . . . . .      $ 2,559,516
                                                                ============
                   Cash paid for acquisition . . . . . . .      $ 2,559,516
                                                                ============
                            
                   Net cash from acquisition:
                   Cash of acquired company  . . . . . . .      $   607,216
                   Cash paid for acquisition . . . . . . .       (2,559,516)
                                                                ------------
                   Net cash used by acquisition  . . . . .      $(1,952,300)
                                                                ============

  
  <PAGE>                         
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         
                           The following reflects assets acquired and
                           liabilities assumed relative to the coinsurance
                           agreement for the policies of World Service by
                           the Company, the consideration given for such
                           reinsurance and the net cash flow relative to
                           such coinsurance on June 1, 1996.

                    Assets acquired . . . . . . . . . . . .     $ 21,399,538
                    Liabilities assumed . . . . . . . . . .      (23,098,650)
                                                                -------------
                    Cost of reinsurance . . . . . . . . . .     $ (1,699,112)
                                                                =============
                    Cash paid for reinsurance . . . . . . .     $ (1,699,112)
                                                                =============
                    Net cash from coinsurance:
                    Cash acquired . . . . . . . . . . . . .     $ 21,071,074
                    Cash paid for reinsurance . . . . . . .       (1,699,112)
                                                                -------------
                    Net cash provided from coinsurance  . .     $ 19,371,962
                                                                =============

                           The following reflects assets and liabilities
                           transferred in connection with a coinsurance
                           treaty whereby all policies assumed from World
                           Service were 100% retroceded to an unaffiliated
                           reinsurer, the ceding commission received and
                           the net cash flow related to the coinsurance
                           treaty on June 30, 1996.

                    Assets transferred  . . . . . . . . . .     $ 21,519,743
                    Liabilities transferred . . . . . . . .      (23,218,855)
                                                                 ------------
                    Net cash transferred  . . . . . . . . .     $ (1,699,112)
                                                                =============
                    Ceding commission received  . . . . . .     $  1,699,112
                                                                =============
                    Net cash provided from coinsurance  . .     $          0
                                                                =============

                           The following reflects assets transferred and
                           cash received on the sale of the Company's
                           wholly-owned subsidiary, Family Life Insurance
                           Company of Texas, to an unaffiliated third party
                           during the year ended December 31, 1996.


                    Assets transferred  . . . . . . . . . .      $ (307,231)
                    Sales price received  . . . . . . . . .         357,231
                                                                 -----------
                    Net cash provided from sale . . . . . .        $ 50,000
                                                                 ===========
                            
          7. FEDERAL       Acap and American Capitol file a consolidated
             INCOME        federal income tax return.  The other
             TAXES         subsidiaries of the Company file separate
                           federal income tax returns.  At December 31, 1996,
 <PAGE>                          
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         
                           Acap had a remaining tax net operating loss 
                           carryover of approximately $1,100,000 that
                           will expire during the years 2001 through 2010
                           if not previously utilized.  At December 31,
                           1996, the Company had alternative minimum tax
                           carryforwards of approximately $388,000 that are
                           available for an indefinite period to reduce
                           future regular federal income taxes and tax
                           capital loss carryforwards of approximately
                           $140,000 that will expire in the year 2000 if
                           not previously utilized.

                           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, 1996, 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 for the
                           years 1996 and 1995 computed at the applicable
                           federal tax rate of 34% to the amount recorded
                           in the consolidated financial statements is as
                           follows:

                                                           1996        1995
                                                           ----        ----
         Federal income tax expense at statutory rate   $ 224,826     170,123
         Small life insurance company special deduction  (204,124)   (596,918)
         Change in valuation allowance . . . . . . . .    247,385     616,489
         Tax underpayment (refund) . . . . . . . . . .    (32,478)     15,084
         Other, net  . . . . . . . . . . . . . . . . .   (232,624)     18,551
                                                        ----------------------
         Total federal income tax expense  . . . . . .  $   2,985     223,329
                                                        ======================

                           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, 1996 are as follows:
  
  
  <PAGE>
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Deferred Tax Assets:
         Allowance for investment losses . . . . . . . . . . .   $134,238
         Deferred gain on reinsurance  . . . . . . . . . . . .    810,483
         Net operating loss carryforwards  . . . . . . . . . .    381,125
         Alternative minimum tax credit carryforwards  . . . .    388,006
         Other . . . . . . . . . . . . . . . . . . . . . . . .     97,117
                                                                ------------
         Total gross deferred tax assets . . . . . . . . . . .  1,810,969
         Less:  Valuation allowance  . . . . . . . . . . . . . (1,796,617)
                                                                ------------
         Deferred tax assets . . . . . . . . . . . . . . . . .     14,352
                                                                ------------
         Deferred Tax Liabilities:
         Net unrealized gains on available-for-sale securities    203,357
         Deferred policy acquisition costs . . . . . . . . . .    408,605
         Policy reserves and policy funds  . . . . . . . . . .  1,029,387
         Other . . . . . . . . . . . . . . . . . . . . . . . .      2,600
                                                              ------------
         Deferred tax liabilities  . . . . . . . . . . . . . .  1,643,949
                                                              ------------
         Net deferred tax liability  . . . . . . . . . . . . .$(1,629,597)
                                                              ============

                           A valuation allowance of $1,796,617 was
                           established at December 31, 1996 against the
                           deferred tax asset.  The net change in the total
                           valuation allowance for the years ended December
                           31, 1996 and 1995 was an increase of $247,385
                           and an increase of $616,489, respectively. 
                           Management believes that it is more likely than
                           not that the deferred tax assets are
                           recoverable.
          

          8. AMERICAN      On July 18, 1988, the Board of Directors of
             CAPITOL KEY   American Capitol approved a Key Employee Stock
             EMPLOYEE      Option Plan ("the Plan").  Under the terms of
             STOCK OPTION  the non-qualified Plan, the Compensation
             PLAN          Committee of the Board of Directors of American
                           Capitol is authorized to grant stock options to
                           any employee the Compensation Committee
                           determines is 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 the
                           options were granted.  The options generally
                           expire 20% annually over a five year period and
                           are exercisable immediately upon grant.






<PAGE>
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                              Number of Shares
                                                              ----------------
                                            Option Price        1996    1995
                                            ------------        ----    ----
         Outstanding at January 1        $131 1/4 - $187 1/2      68     102
         Cancelled during the year       $131 1/4                 --     (34)
                                                               ---------------
         Outstanding at December 31      $187 1/2                 68      68
                                                               ===============
         Available for future grant                              377     173
                                                               ===============
                                                                         
           9. CAPITAL      Acap has two classes of capital stock: 
               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."

                           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 non-voting,
                           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.  Prior to August 26, 1996, the Series
                           A Preferred Stock had been exchangeable, at the
                           option of the holders, into shares of common
                           stock of Fortune National Corporation
                           ("Fortune").  Effective August 26, 1996, Fortune
                           adopted a plan of dissolution and liquidation. 
                           Consequently, the exchange option of Series A
<PAGE>                           
         ACAP CORPORATION
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         
                           Preferred Stock expired.  There was no activity
                           related to the Series A Preferred Stock for the
                           two years ended December 31, 1996 other than
                           payments of dividends.

                           Common Stock

                           Fortune, formerly the owner of 63.7% of the
                           Company's outstanding Common Stock, adopted a
                           plan of dissolution and liquidation at its
                           annual stockholder meeting on August 26, 1996. 
                           At that date, Fortune had no assets other than
                           its holding of the Company's Common Stock. 
                           Under the plan, no fractional shares of the
                           Company's Common Stock were issued.  Fortune
                           stockholders who did not buy from the Company
                           enough Fortune common stock to round up their
                           holdings elected to sell their "odd lot" shares
                           of Fortune common stock to the Company.  As a
                           result of the Company's purchase of the "odd
                           lot" shares and the conversion of the Company's
                           holding of Fortune common stock into company
                           Common Stock, the Company added $320,566 (910
                           shares) to treasury stock, reducing the number
                           of outstanding shares of Company Common Stock to
                           approximately 7,603.  There was no activity
                           related to the Common Stock during 1995.
          

          10.  SUBSEQUENT  On January 31, 1997, World Service assumed all
                 EVENT     of the policies of South Texas Bankers Life
                           Insurance Company ("South Texas"), the wholly-
                           owned subsidiary of World Service, with a
                           retroactive effective date of June 1, 1996. 
                           Under the terms of American Capitol's
                           coinsurance agreement with World Service, World
                           Service's assumption of the South Texas policies
                           automatically made the South Texas policies
                           subject to the coinsurance agreement.  American
                           Capitol paid World Service an initial ceding
                           commission of approximately $100,000 related to
                           the South Texas policies.  In anticipation of
                           the assumption by World Service and the
                           resulting coinsurance to American Capitol, South
                           Texas had transferred $6.8 million in assets to
                           American Capitol in 1996, which are reflected as
                           a deposit in "Other Liabilities" in the
                           Company's December 31, 1996 balance sheet.  The
                           assets were transferred to Crown in 1996 and are
                           reflected as "Reinsurance Receivables" in the
                           Company's December 31, 1996 balance sheet.
  
  
  
  
  
  <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, 1996, and the related
                       consolidated statements of operations,
                       stockholders' equity, and cash flows for the years
                       ended December 31, 1996 and 1995.  These
                       consolidated financial statements are the
                       responsibility of the Company's management.  Our
                       responsibility is to express an opinion on these
                       consolidated financial statements based on our
                       audits.

                       We conducted our audits in accordance with
                       generally accepted auditing standards.  Those
                       standards require that we plan and perform the
                       audit to obtain reasonable assurance about whether
                       the 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,
                       1996, and the results of their operations and their
                       cash flows for the years ended December 31, 1996
                       and 1995, in conformity with generally accepted
                       accounting principles.

                       As discussed in Note 1 to the consolidated
                       financial statements, the Company adopted the
                       provisions of the Financial Accounting Standards
                       Board's Statement of Financial Accounting Standards
                       No. 121, "Accounting for the Impairment of Long-
                       Lived Assets and Long-Lived Assets to be Disposed
                       Of," in 1996.



                                                                           
                                                   KPMG Peat Marwick LLP


                       Houston, Texas
                       March 21, 1997
   <PAGE>

         ACAP CORPORATION
         STOCKHOLDER INFORMATION
          

          MARKET       The common stock of Acap is traded over-the-counter
          INFORMATION  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.

                                                 1996            1995
                                                 ----            ----
                                             High    Low      High    Low
                                             ----    ---      ----    ---
                        First quarter . . .  $230    180      125     100

                        Second quarter. . .   231    230      135     100
                        
                        Third quarter . . .   245    230      135     135

                        Fourth quarter. . .   325    245      180     135

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

          HOLDERS      The approximate number of holders of record of
                       Acap's common stock as of March 24, 1997 was 806.

          DIVIDENDS    Acap declared no common stock dividends in 1996 or
                       1995.  At present, management anticipates that no
                       dividends will be declared or paid with respect to
                       Acap's common stock during 1997.

          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 Lana S. Vaughn, Stockholder Services,
                       Acap Corporation, 10555 Richmond Avenue, Houston,
                       TX 77042.

          TRANSFER     The registrar and transfer agent for the Company's
          AGENT        common stock is Continental Stock Transfer and
                       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     Requests for information should be directed by mail
          RELATIONS    to Lana S. Vaughn, Stockholder Services, Acap
                       Corporation, 10555 Richmond Avenue, Houston, TX
                       77042 or by calling (713) 974-2242.
  <PAGE>
         ACAP CORPORATION
         STOCKHOLDER INFORMATION
          
          
          INDEPENDENT  The Company's financial statements for the year
          AUDITORS     1996 were audited by the independent accounting
                       firm of KPMG Peat Marwick LLP, 700 Louisiana,
                       Houston, TX 77002.

          ANNUAL       Stockholders are invited to attend the Annual
          MEETING      Meeting of Stockholders which will be held on
                       Monday, April 28, 1997 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     R. Wellington Daniels
          DIRECTORS    Investor; Retired Director of National Accounts,
          OF ACAP      American Cyanamid

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

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

          OFFICERS OF  William F. Guest
          ACAP         Chairman of the Board and President

                       John D. Cornett
                       Executive Vice President and Treasurer

                       H. Kathleen Musselwhite
                       Secretary and Assistant Treasurer

          OFFICERS OF  William F. Guest
          AMERICAN     Chairman of the Board
          CAPITOL AND
          TEXAS        John D. Cornett
          IMPERIAL     President

                       H. Kathleen Musselwhite
                       Secretary, Treasurer and Controller

                       Richard M. Ridley
                       Vice President

                       Dan R. Stites
                       Vice President

                       Carolyn M. Rawlins
                       Assistant Secretary

                       Linda G. Stark
                       Assistant Vice President

                       C. Stratton Hill, Jr., M.D.
                       Medical Director













<PAGE>
























































                                   ACAP CORPORATION

                     10555 Richmond Avenue  Houston, Texas 77042
<PAGE>