SECURITIES AND EXCHANGE COMMISSION
                                                 WASHINGTON, D.C. 20549 FORM 10-KFOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934(Mark One)(X) ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003OR
(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _____ to____
 Commission File Number 1-8538ASCENT ASSURANCE, INC.(Exact Name of Registrant as Specified in its Charter)

| | DELAWARE                                                         |  | 73-1165000                             
| | ---------------------------------------------------------------- |  | ---------------------------------------
| | (State or Other Jurisdiction of Incorporation or Organization)   |  | (I.R.S. Employer Identification Number)
| | 3100 Burnett Plaza, Unit 33,801 Cherry Street, Fort Worth, Texas |  | 76102                                  
| | (Address of Principal Executive Offices)                         |  | (Zip Code)                             

Registrant's Telephone Number, Including Area Code:
                                                     (817) 878-3300Securities Registered Pursuant to Section 12(b) of the Act:
                                      NoneSecurities Registered Pursuant to Section 12(g) of the Act:Common Stock (par value $.01)
                  Warrants to purchase Common Stock


Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes         X             No

Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrants knowledge, in the definitive Proxy
Statement or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.

Yes                      No        X

Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.

Yes         X             No

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes                      No        X

The aggregate market value of voting
stock held by non-affiliates of the Registrant amounted to $1,633,963 as of February 25,
2004. As of February 25, 2004, 6,535,850 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of Registrant's definitive proxy statement for the 2004 Annual Meeting, to be filed with the securities
and Exchange Commission on or before April 30, 2004, are incorporated by reference under part III of this Form 10-K.



---

# ASCENT ASSURANCE, INC.

# 2003 FORM 10-K ANNUAL
REPORT

# TABLE OF CONTENTS

|         | PART I                                                                                   | Page Number
|-------- | ---------------------------------------------------------------------------------------- | -----------
|ITEM 1.  | Business                                                                                 | 3          
|ITEM 2.  | Properties                                                                               | 9          
|ITEM 3.  | Legal Proceedings                                                                        | 10         
|ITEM 4.  | Submission of Matters
                to a Vote of Security Holders                      | 10         
|         |                                                                                          |            
|         | PART II                                                                                  |            
|         |                                                                                          |            
|ITEM 5.  | Market for the Registrant's Common Stock
      and Related Stockholder Matters           | 11         
|ITEM 6.  | Selected Consolidated Financial Data                                                     | 12         
|ITEM 7.  | Management's Discussion and Analysis of
   Financial Condition and Results of Operations | 13         
|ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk                               | 27         
|ITEM 8.  | Financial Statements and Supplementary Data                                              | 29         
|ITEM 9.  | Changes in and Disagreements with Accountants
   on Accounting and Financial Disclosure  | 66         
|ITEM 9A. | Controls and Procedures                                                                  | 66         
|         |                                                                                          |            
|         | PART III                                                                                 |            
|         |                                                                                          |            
|ITEM 10. | Directors and Executive Officers of the Registrant                                       | 67         
|ITEM 11. | Executive Compensation                                                                   | 67         
|ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder   |            
|         | Matters                                                                                  | 67         
|ITEM 13. | Certain Relationships and Related Transactions                                           | 67         
|ITEM 14. | Principal Accountant Fees and Services                                                   | 67         
|         |                                                                                          |            
|         | PART IV                                                                                  |            
|         |                                                                                          |            
|ITEM 15. | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                     | 68         
|         |                                                                                          |            



---

# PART I

# ITEM 1  BUSINESS

# GENERAL

Ascent Assurance, Inc.
(Ascent) is the successor to a Delaware company originally incorporated in
1982 as an insurance holding company. Ascent, through its applicable subsidiaries, is
engaged in the development, marketing, underwriting and administration of medical expense
and supplemental health insurance products, primarily to self-employed individuals and
small business owners.

The Companys revenues result
primarily from premiums and fees from the insurance products sold or reinsured by its
wholly-owned life and health insurance subsidiaries, National Foundation Life Insurance
Company (NFL), Freedom Life Insurance Company of America (FLICA),
National Financial Insurance Company (NFIC) and American Insurance Company of
Texas (AICT) and together with NFL, NFIC and FLICA, collectively, the
Insurance Subsidiaries. The Insurance Subsidiaries are licensed to conduct
business in 40 states and the District of Columbia. Each of the following states accounted
for more than 5% of premium revenue for the year ended December 31, 2003: Florida 
18%, Texas  13 %, Colorado  8%, and Oklahoma  6%.

The Company, through applicable
subsidiaries, also derives fee and service revenue from (i) telemarketing services, (ii)
printing services and (iii) renewal commissions for prior year sales of both affiliated
and unaffiliated insurance products, and (iv) commissions on the sale of the benefits of
unaffiliated membership benefit programs.

# MARKETING DISTRIBUTION
SYSTEM

NationalCare®
Marketing, Inc. (NCM), a wholly-owned subsidiary, is the principal
distribution channel for the products of NFL and FLICA. NCM maintains an agency force that
is organized by geographic region. All members of NCMs agency force are independent
contractors and all compensation received is based upon sales production and the
persistency of such production. NCMs agents market the insurance products of NFL and
FLICA on a one-to-one basis to individuals who are either, not covered under group
insurance protection normally available to employees of business organizations or, who
wish to change or supplement existing coverage.

Sales leads for NCMs agents are
generated principally by the Companys tele-survey subsidiary, Precision Dialing
Services (PDS). By utilizing a predictive automated dialing system, PDS is
able to generate quality sales leads that maintain the efficiency of NCMs agency
force. By providing these sales leads, NCM believes that its ability to attract
experienced agents as well as new agents is enhanced.

# DESCRIPTION OF PRODUCTS

The Companys operations are
comprised of one segment, Accident and Health insurance. The principal products currently
underwritten by NFL and FLICA are medical expense reimbursement and supplemental policies.
These products are designed with flexibility as to benefits, deductibles, coinsurance and
premiums. The principal product groups currently underwritten by NFL and FLICA are
summarized below:

| | Comprehensive
major medical products  These products are generally designed to reimburse
insureds for eligible expenses incurred for hospital confinement, surgical expenses,
physician services, outpatient services and the cost of inpatient medicines. The policies
provide a number of options with respect to annual deductibles, coinsurance percentages
and maximum benefits. After the annual deductible is met, the insured is generally
responsible for a percentage of eligible expenses up to a specified annual stop-loss
limit. Thereafter, the remainder of eligible expenses incurred during the calendar year by
such insured is covered up to certain maximum aggregate policy limits. All such products
are guaranteed renewable pursuant to the provisions of the Health Insurance Portability
and Accountability Act, 42 U.S.C. § 300 et seq. (HIPAA).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Hospital/surgical
medical expense products  These products are similar to comprehensive major
medical products except that benefits are generally limited to medical and surgical
services received in a hospital either as an inpatient or outpatient (services such as
outpatient physician office visits and outpatient prescription drugs are excluded) and
deductibles and coinsurance provisions are generally higher. All such products are also
guaranteed renewable pursuant to HIPAA.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Supplemental
specified disease products  These products include blanket group accident
coverages, blanket group hospital daily indemnity coverages, as well as individual
indemnity policies for hospital confinement and convalescent care for treatment of
specified diseases and event specific individual policies, which provide fixed
benefits or lump sum payments directly to the insured upon diagnosis of certain types of
internal cancer or heart disease. Blanket group accident and hospital daily indemnity
insurance coverages are generally not guaranteed renewable by contract, and are exempt
from the guaranteed renewability provisions of HIPAA. Individual hospital indemnity and
specified disease products are generally guaranteed renewable by contract, but are exempt
from the guaranteed renewability provisions of HIPAA.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Major medical and hospital surgical
medical expense products comprise approximately 99% of new business sales. These products
are individually underwritten based upon medical information provided by the applicant
prior to issue. Information provided in the application is verified with the applicant
through a tape-recorded telephone conversation or through written correspondence. In
addition, the underwriting procedures for major medical products currently sold by NFL and
FLICA include a para-med examination or other medical tests, depending on the age of the
applicant.

Prior to 1998, some of the Insurance
Subsidiaries also underwrote Medicare Supplement products designed to provide
reimbursement for certain expenses not covered by the Medicare program. Such Insurance
Subsidiaries continue to receive renewal premiums on Medicare Supplement policies sold
prior to that date.

See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations for a
discussion of premium revenue by product.

# COMPETITION

The accident and health insurance
industry is highly competitive and includes a large number of insurance companies, many of
which have substantially greater financial resources, broader and more diversified product
lines, favorable ratings from A.M. Best Company, Inc. (A.M. Best) and larger
staffs than the Company. Competitive factors applicable to the Insurance
Subsidiaries business include product mix, policy benefits, service to policyholders
and premium rates. The Insurance Subsidiaries believe that their current benefits and
premium rates are generally competitive with those offered by other companies. Management
believes that service to policyholders and prompt and fair payment of claims continue to
be important factors in the Insurance Subsidiaries ability to remain competitive.
The Insurance Subsidiaries are not currently rated with A.M. Best. The Company believes
that the Insurance Subsidiaries lack of an A.M. Best rating is not a significant factor
affecting the ability to sell products in the markets served.

Private insurers and voluntary and
cooperative plans, such as Blue Cross and Blue Shield and HMOs, provide various
alternatives for defraying hospitalization and medical expenses. Much of this health
coverage is sold on a group basis to employer-sponsored groups. The federal and state
governments also provide programs for the payment of the costs associated with medical
care through Medicare and Medicaid. These major medical programs generally cover a
substantial amount of the medical expenses incurred as a result of accidents or illnesses.
The Insurance Subsidiaries major medical products are designed to provide coverage,
which is similar to these major medical insurance programs, but are sold primarily to
persons not covered by an employer-sponsored group.

The Insurance Subsidiaries
supplemental specified disease products are designed to provide coverage which is
supplemental to major medical insurance and may be used to defray non-medical as well as
medical expenses. Since these policies are sold to complement major medical insurance, the
Insurance Subsidiaries compete only indirectly with those insurers providing major medical
insurance, however, other insurers may expand coverage in the future, which could reduce
future sales levels and profit margins. Medicare supplement products are designed to
supplement the Medicare program by reimbursing for expenses not covered by such program.
Future government programs may impact the rate of participation by private entities in
such government programs.

In addition to product and service
competition, there is also very strong competition within the accident and health
insurance market for qualified, effective agents. The recruitment and retention of such
agents is important to the success and growth of the Companys business. Management
believes that NCM is competitive with respect to the recruitment, training and retention
of such agents. However, there can be no assurance that NCM will be able to continue to
recruit or retain qualified, effective agents.

# STATE REGULATION

General.    
          The Company and its Insurance Subsidiaries are subject to regulation and
          supervision in all jurisdictions in which they conduct business. In general,
          state insurance laws establish supervisory agencies with broad administrative
          powers relating to, among other things, the granting and revoking of licenses to
          transact business, regulation of trade practices, premium rate levels, premium
          rate increases, licensing of agents, approval of content and form of policies,
          maintenance of specified minimum statutory reserves and statutory capital and
          surplus, deposits of securities, form and content of required financial
          statements, nature of investments and limitations on dividends to stockholders.
          The purpose of such regulation and supervision is primarily to provide
          safeguards for policyholders rather than to protect the interests of
          stockholders.

The National Association of Insurance
Commissioners (NAIC) is a voluntary association of all of the state insurance
commissioners in the United States. The primary function of the NAIC is to develop model
laws on key insurance regulatory issues that can be used as guidelines for individual
states in adopting or enacting insurance legislation. While the NAIC model laws are
accorded substantial deference within the insurance industry, these laws are not binding
on insurance companies unless enacted into state law and variations from the model laws
from state to state are common.

The Insurance Subsidiaries are all
domiciled in Texas and are therefore subject to regulation under Texas laws. The State of
Texas has enacted insurance holding company laws that require registration and periodic
reporting by insurance companies. Such legislation typically places restrictions on, or
requires prior notice or approval of, certain transactions between insurers and other
companies within the holding company system, including, without limitation, dividend
payments from insurance subsidiaries and the terms of loans and transfers of assets within
the holding company structure.

Product Approvals.Generally, before an insurance company is permitted to market an individual
insurance product in a particular state, it must obtain regulatory approval from that
state and adhere to that states insurance laws and regulations which include, among
other things, specific requirements regarding the form, language, premium rates and policy
benefits of that product. Consequently, although the Insurance Subsidiaries policies
generally provide for the same basic types and levels of coverage in each of the states in
which they are marketed, the policies are not precisely identical in each state or other
jurisdiction in which they are sold. Such regulation may delay the introduction of new
products and may impede, or impose burdensome conditions on, rate increases or other
actions that the Insurance Subsidiaries may wish to take in order to enhance their
operating results. In addition, federal or state legislation or regulatory pronouncements
may be enacted that may prohibit or impose restrictions on the ability to sell certain
types of insurance products or impose other restrictions on the Companys operations.
For example, certain states in which the Insurance Subsidiaries do business have adopted
NAIC model statutes and regulations relating to market conduct practices of insurance
companies. Any limitations or other restrictions imposed on the Insurance
Subsidiaries market conduct practices by the regulators of a state that has adopted
the model statutes and regulations may also be imposed by the regulators in other states
that have adopted such statutes and regulations. No assurances can be given that future
legislative or regulatory changes will not adversely affect the Companys business,
financial condition or results of operations.

In addition, state insurance
departments generally require the maintenance of certain minimum loss ratios on certain
product lines. The states in which the Insurance Subsidiaries are licensed have the
authority to change the minimum mandated statutory loss ratios to which the Insurance
Subsidiaries are subject, the manner in which these ratios are computed and the manner in
which compliance with these ratios is measured and enforced. Most states in which the
Insurance Subsidiaries write health insurance products have adopted the loss ratios
recommended by the NAIC. The Company is unable to predict the impact of (i) any changes in
the mandatory statutory loss ratios relating to products offered by the Insurance
Subsidiaries or (ii) any change in the manner in which these minimums are computed or
enforced in the future. Similarly, the Insurance Subsidiaries ability to increase
its premium rates in response to adverse loss ratios is subject to regulatory approval.
Failure to obtain such approval could have a material adverse effect on the Companys
business, financial condition and results of operations.

NAIC Accounting
Principles. In 1998, the NAIC adopted the Codification of Statutory
Accounting Principles which became the NAICs primary guidance on statutory
accounting. The Texas Department of Insurance adopted the Codification effective January
1, 2001. Statutory accounting practices (SAP) differ in some respects from
accounting principles generally accepted in the United States (GAAP). The
significant differences are:

| |  | o |  | Policy acquisition costs, which consist of commissions and other costs incurred in
connection with acquiring new business, are charged to current operations as incurred for
SAP, whereas, under GAAP these costs are deferred and amortized over the policy term in
order to provide an appropriate matching of revenue and expense.
| |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o |  | Future policy benefit reserves are based on statutory mortality, morbidity and interest
requirements for SAP, while GAAP reserves are based on Company or industry experience.
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o |  | Similar to GAAP, deferred income taxes are provided on temporary differences between the
statutory and tax bases of assets and liabilities for SAP; however, statutory deferred tax
assets are limited based upon admission tests. Under SAP, the change in deferred taxes is
recorded directly to surplus as opposed to GAAP where the change is recorded to current
operations.
| |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o |  | Debt securities are carried at amortized cost for SAP. Under GAAP, investments in debt
securities are classified, as held-to-maturity, available-for-sale, or trading securities,
and the accounting treatment is different for each category. Life and health insurance
companies are required to record an Interest Maintenance Reserve (IMR) to
defer gains and losses resulting from the sale of debt securities prior to maturity. For
SAP the IMR is amortized into income over the original maturity of the investment. Under
GAAP, realized gains and losses are recorded in the income statement during the period in
which the investment is sold.
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Risk-Based
Capital. The NAICs Risk-Based Capital for Life and/or Health Insurers
Model Act (the Model Act) provides a tool for insurance regulators to
determine the levels of statutory capital and surplus an insurer must maintain in relation
to its insurance and investment risks and whether there is a need for possible regulatory
attention. The Model Act (or similar legislation or regulation) has been adopted in states
where the Insurance Subsidiaries are domiciled. The Model Act provides four levels of
regulatory attention, varying with the ratio of the insurance companys total
adjusted capital (defined as the total of its statutory capital and surplus, asset
valuation reserve and certain other adjustments) to its authorized control level
risk-based capital (RBC):

| |  |  | o |  | If a companys total adjusted capital is less than or equal to 200 percent but
greater than 150 percent of its RBC, (the Company Action Level), the company
must submit a comprehensive plan aimed at improving its capital position to the regulatory
authority proposing corrective actions.
| |  |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | o |  | If a companys total adjusted capital is less than or equal to 150 percent but
greater than 100 percent of its RBC (the Regulatory Action Level), the
regulatory authority will perform a special examination of the company and issue an order
specifying the corrective actions that must be followed.
| |  |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | o |  | If a companys total adjusted capital is less than or equal to 100 percent but
greater than 70 percent of its RBC (the Authorized Control Level), the
regulatory authority may take any action it deems necessary, including placing the company
under regulatory control.
| |  |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | o |  | If a companys total adjusted capital is less than or equal to 70 percent of its RBC
(the Mandatory Control Level), the regulatory authority must place the company
under its control.
| |  |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Texas Department of Insurance
adopted the NAICs RBC Model Act during 2000. NFLs and FLICAs statutory
annual statements for the year ended December 31, 2003 filed with the Texas Department of
Insurance reflected total adjusted capital in excess of Company Action Level RBC.

In 1998, NFIC and AICT entered into a
voluntary consent order, pursuant to Article 1.32 of the Texas Insurance Code, providing
for the continued monitoring of the operations of NFIC and AICT by the Texas Department of
Insurance in response to losses sustained in 1997 and 1998 as well as the projected
inability to meet RBC requirements. Both NFIC and AICT ceased the sale and underwriting of
new business in 1998. At December 31, 2003, AICTs RBC exceeded Company Action Level
RBC; however, NFICs RBC only exceeded Regulatory Action Level RBC. Both NFIC and
AICT are in compliance with the terms of the voluntary consent order.

Premium-Writing
Ratios. Under Florida Statutes Section 624.4095, Florida licensed insurance
companies ratio of actual or projected annual written premiums to current or
projected surplus with regards to policyholders (the premium-writing ratio)
may not exceed specified levels for gross and net written premiums as defined by the
statute. If a company exceeds the premium-writing ratio, the Florida Department of
Insurance shall suspend the companys certificate of authority in Florida or,
establish by order, maximum gross or net annual premiums to be written by the company
consistent with maintaining the ratios specified. Only FLICA writes comprehensive major
medical and hospital/surgical medical expense new business in Florida; however, Florida
production represents approximately 31% of the Companys consolidated new business
sales. At December 31, 2003, the premium-writing ratio for FLICA complied with the limit
mandated by Florida law.

Dividends.    
          Dividends paid by the Insurance Subsidiaries are determined by and subject to
          the regulations of the insurance laws and practices of the Texas Department of
          Insurance. Generally, the Texas Insurance Code allows life and health insurance
          companies to make dividend payments from surplus profits or earned surplus
          arising from its business. Earned surplus is defined as unassigned surplus
          excluding any unrealized gains. Texas life and health insurance companies may
          generally pay ordinary dividends or make distributions of cash or other property
          in the current twelve month period with a fair market value equal to or less
          than the greater of 10% of surplus as regards policyholders as of the preceding
          December 31 or the net gain from operations for the twelve month period ending
          on the preceding December 31. Dividends exceeding the applicable threshold are
          considered extraordinary and require the prior approval of the Texas Insurance
          Commissioner.

The Insurance Subsidiaries are
precluded from paying dividends during 2004 without prior approval of the Texas Insurance
Commissioner, as the companies earned surplus is negative. Due to statutory losses
incurred by the Insurance Subsidiaries in prior years, the Company does not expect to
receive any dividends from the Insurance Subsidiaries for the foreseeable future.

Guaranty
Associations. The Insurance Subsidiaries may be required, under the
solvency or guaranty laws of most states in which they do business, to pay assessments (up
to prescribed limits) to fund policyholder losses or liabilities of insurance companies
that become insolvent. Non-affiliated insurance company insolvencies increase the
possibility that such assessments may be required. These assessments may be deferred or
forgiven under most guaranty laws if they would threaten an insurers financial
strength and, in certain instances, may be offset against future premium taxes. The
incurrence and amount of such assessments may increase in the future without notice. The
Insurance Subsidiaries pay the amount of such assessments as they are incurred.
Assessments that cannot be offset against future premium taxes are charged to expense.
Assessments that qualify for offset against future premium taxes are capitalized and are
offset against such future premium taxes. As a result of such assessments, the Insurance
Subsidiaries paid approximately $20,000 during the year ended December 31, 2003.

# FEDERAL REGULATION

HIPAA.This federal regulation, among other things, mandates the
          adoption of standards for the exchange of electronic health information in an
          effort to encourage overall administrative simplification and enhance the
          effectiveness and the efficiency of the healthcare industry. This legislation
          also promotes so-called accountability by requiring compliance with
          certain privacy and security standards in connection with individually
          identifiable protected health information of certain individuals. Another key
          component is portability, or an individuals right, under
          certain circumstances, to satisfy waiting periods or pre-existing coverage
          limitations contained in an individual policy form providing new coverage for
          such individual, as a result of the length of time such individual was covered
          under a prior group health plan.

In December 2000, final regulations
were issued regarding the privacy of individually identifiable health information. This
final rule on privacy applies to both electronic and paper records and imposes extensive
requirements on the way in which health care providers, health plan sponsors, health
insurance companies, and their business associates use and disclose protected information.
Under the new HIPAA privacy rules the Company is now required to (a) comply with a variety
of requirements concerning its use and disclosure of individuals protected health
information, (b) establish rigorous internal procedures to protect health information, and
(c) enter into business associate contracts with other companies that use similar privacy
protection procedures. The final rules do not provide for complete federal preemption of
state laws, but, rather, preempt all contrary state laws unless the state law is more
stringent. The effective date of the rules was April 14, 2003.

In February 2003, rules were
published related to the security of electronic health data, including individual health
information and medical records, for health plans, health care providers, and health care
clearinghouses that maintain or transmit health information electronically. The rules
would require these businesses to establish and maintain confidentiality of this
information. The standards embraced by these rules include the implementation of technical
and organization policies, practices and procedures for security and confidentiality of
health information and protecting its integrity, education and training programs,
authentication of individuals who access this information, systems controls, physical
security and disaster recovery systems, protection of external communications and use of
electronic signatures. The rules were effective April 23, 2003. Most covered entities have
until April 25, 2005 to comply.

Sanctions for failing to comply with
HIPAA standards include criminal penalties of up to $250,000 per violation and civil
sanctions of up to $25,000 per violation. Due to the complex nature of the privacy
regulations, they may be subject to court challenge, as well as further legislative and
regulatory actions that could alter their effect. The Company believes that it is in
compliance with the effective HIPAA regulations.

GLBA.The Financial Services Modernization Act of 1999 (the
          Gramm-Leach-Bliley Act, or GLBA) contains privacy
          provisions and introduced new controls over the transfer and use of
          individuals nonpublic personal data by financial institutions, including
          insurance companies, insurance agents and brokers licensed by state insurance
          regulatory authorities. Numerous pieces of federal and state legislation aimed
          at protecting the privacy of nonpublic personal financial and health information
          are pending. The privacy provisions of GLBA that became effective in July 2001
          require companies to provide written notice of its privacy practices to all of
          the Companys insureds. In addition, the Company provides insureds with an
          opportunity to state their preferences regarding the Companys use of their
          non-public personal information.

GLBA provides that there is no
federal preemption of a states insurance related privacy laws if the state law is
more stringent than the privacy rules imposed under GLBA. Pursuant to the authority
granted under GLBA to state insurance regulatory authorities to regulate, the National
Association of Insurance Commissioners promulgated a new model regulation called Privacy
of Consumer Financial and Health Information Regulation, which was adopted by numerous
state insurance authorities. The Company believes that it is in compliance with the
privacy regulations that became effective in 2001.

# PENDING HEALTH CARE
REFORM

The health care industry, as one of
the largest industries in the United States, continues to attract much legislative
interest and public attention. In recent years, an increasing number of legislative
proposals have been introduced or proposed in Congress and in some state legislatures that
would effect major changes in the health care system, either nationally or at the state
level. Proposals that have been considered include income tax credits for certain
individuals, cost controls on hospitals, insurance market reforms to increase the
availability of group health insurance to small businesses, patients bills of rights
and requirements that all businesses offer health insurance coverage to their employees.
There can be no assurance that future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not have a
material adverse affect on the business, financial condition or results of the operations
of the Company and its subsidiaries.

# EMPLOYEES

At December 31, 2003, the Company
employed 247 persons. The Company has not experienced any work stoppages, strikes or
business interruptions as a result of labor disputes involving its employees, and the
Company considers its relations with its employees to be good.

# ITEM 2  PROPERTIES

The Companys principal offices
are located at 801 Cherry Street, Unit 33, 3100 Burnett Plaza, Fort Worth, Texas. The
lease for this facility expires February 28, 2011. Westbridge Printing Services, Inc., the
Companys wholly-owned printing subsidiary, maintains its facility at 7333 Jack
Newell Boulevard North, Fort Worth, Texas, under a lease agreement which expires in
October, 2005. Precision Dialing Services (PDS), the Companys
wholly-owned telemarketing subsidiary, maintains its facility at 9550 Forest Lane, Dallas,
Texas under a lease agreement which expired in December 2003. In March 2004, PDS will
relocate to a facility at 1100 East Campbell Road, Richardson, Texas, under a lease
agreement which expires in March 2009. The Company believes that its leased facilities
will meet its existing needs and that the leases can be renewed or replaced on reasonable
terms if necessary.

# ITEM 3  LEGAL
PROCEEDINGS

In the normal course of its business
operations, the Company is involved in various claims and other business related disputes.
In the opinion of Management, the Company is not a party to any pending litigation which
is reasonably likely to have an adverse result or disposition that would have a material
adverse effect on the Companys business consolidated financial position or its
consolidated results of operations.

# ITEM 4  SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted by
the Company to a vote of stockholders, through the solicitation of proxies or otherwise,
during the fourth quarter of the fiscal year for which this report is filed.



# PART II

# ITEM 5  MARKET FOR
REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Price Range of Publicly Traded
Securities. The Companys Common Stock and Warrants are quoted on the
over-the-counter bulletin board (OTC Bulletin Board). There were 6,535,850
shares of Common Stock and 971,266 Warrants outstanding as of February 25, 2004. The high
and low price listed for the Common Stock and Warrants reflects the OTC Bulletin Board
closing bid prices of the Companys securities. The closing bid price on December 31,
2003 was $0.15. There were approximately 310 shareholders of record on December 31, 2003,
representing approximately 1,175 beneficial owners.

|                   |                |              |         |     
|------------------ | -------------- | ------------ | ------- | ----
|OTC Bulletin Board |                |             
|                   |                | Common Stock | Warrant |     
|                   |                | High         | Low     | High
|                   | 2003           |              |         |     
|                   | Fourth Quarter |              |         | $   
|                   | Third Quarter  |              |         |     
|                   | Second Quarter |              |         |     
|                   | First Quarter  |              |         |     
|                  
|                   | 2002           |              |         |     
|                   | Fourth Quarter |              |         | $   
|                   | Third Quarter  |              |         |     
|                   | Second Quarter |              |         |     
|                   | First Quarter  |              |         |     

Dividend Policy

The Company does not anticipate
declaring or paying cash dividends on its Common Stock in the foreseeable future. For
information concerning statutory limitations on the payment of dividends to the Company by
the Insurance Subsidiaries and further discussion of the Companys results of
operations and liquidity, see ITEM 7  Managements Discussion and
Analysis of Financial Condition and Results of Operations, ITEM 1 
Business  State Regulation, and NOTE 11  Statutory Capital And
Surplus to the Companys Consolidated Financial Statements at Item 8.

Reservation of Common
Stock

There are 971,266 shares of common
stock reserved for issuance upon exercise of warrants. The warrants are exercisable at an
initial exercise price of $9.04 share of common stock, subject to customary anti-dilution
adjustments, and will expire on March 24, 2004.

Up to 1,219,585 shares of the fully
diluted number of shares of common stock have been reserved for issuance to employees,
directors and former directors, and up to 387,119 shares of the fully diluted number of
shares of common stock have been reserved for issuance to the Companys marketing
agents under the Companys 1999 Stock Option Plan, which was approved by the
Companys shareholders. For information concerning the Companys equity
compensation plans, see Note 12  Employee Benefit Plans to the
Companys Consolidated Financial Statements at Item 8 and Item 12 
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.

# ITEM 6  SELECTED
CONSOLIDATED FINANCIAL DATA

The information set forth below was
derived from the Consolidated Financial Statements of the Company. The information set
forth below should be read in conjunction with ITEM 7  Managements
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements of the Company and related notes.



|                                          |                                       |                                |      |         |     
|----------------------------------------- | ------------------------------------- | ------------------------------ | ---- | ------- | ----
|                                          | Year Ended December 31,               | Nine Months Ended December 31,
|                                          |                                       |                                | 2003 | 2002    | 2001
|                                          | (in thousands, except per share data)
|Statement of Operations Data:             |                                       |                               
|Premiums                                  |                                       |                                | $    | 101,574 |     
|Total revenues                            |                                       |                                |      | 121,222 |     
|(Loss) income before income taxes         |                                       |                                |      | (1,348  | )   
|Net (loss) income(1)                      |                                       |                                |      | (1,348  | )   
|Preferred stock dividends                 |                                       |                                |      | 1,759   |     
|(Loss) income applicable to common        |                                       |                               
|shareholders                              |                                       |                                |      | (3,107  | )   
|(Loss) Earnings Per Share(1):             |                                       |                               
|Basic                                     |                                       |                                | $    | (0.48   | )   
|Diluted                                   |                                       |                                | $    | (0.48   | )   
|Weighted Average Shares Outstanding:      |                                       |                               
|Basic                                     |                                       |                                |      | 6,531   |     
|Diluted                                   |                                       |                                |      | 6,531   |     
|                                          |                                      
|                                          | 2003                                  | 2002                           | 2001 | 2000    | 1999
|                                          | (in thousands)                       
|Balance Sheet Data:                       |                                       |                               
|Cash and invested assets                  |                                       |                                | $    | 105,239 |     
|Total Assets                              |                                       |                                |      | 143,929 |     
|Policy liabilities                        |                                       |                                |      | 81,068  |     
|Notes payable(2)                          |                                       |                                |      | 15,770  |     
|Total liabilities                         |                                       |                                |      | 106,598 |     
|Redeemable convertible preferred stock(3) |                                       |                                |      | -       |     
|Stockholders' equity(3)                   |                                       |                                |      | 37,331  |     

| |    
| | ---
| | (1)
| | (2)
| | (3)
| | (4)

# ITEM 7 
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

# GENERAL

Business
Overview. Ascent Assurance, Inc. (Ascent or the
Company) is the successor to a Delaware company incorporated in 1982 as an
insurance holding company. Ascent, through its applicable subsidiaries, is principally
engaged in the development, marketing, underwriting, and administration of medical expense
and supplemental health insurance products. The Companys revenues result primarily
from premiums and fees from the insurance products sold by its wholly-owned subsidiaries
National Foundation Life Insurance Company (NFL), Freedom Life Insurance
Company of America (FLICA), National Financial Insurance Company
(NFIC) and American Insurance Company of Texas (AICT), and
together with NFL, NFIC and FLICA, collectively, the Insurance Subsidiaries,
and marketed by NationalCare®Marketing, Inc. (NCM), also a
wholly-owned subsidiary. The Company, through applicable subsidiaries, also derives fee
and service revenue from (i) tele-survey services, (ii) printing services, and (iii)
renewal commissions for prior year sales of both affiliated and unaffiliated insurance
products, and (iv) commissions on the sale of the benefits of unaffiliated membership
benefit programs. See Item 1  Business for a discussion of the
Companys marketing distribution system, health insurance products, and market
competition.

The following discussion provides
managements assessment of operating results and material changes in financial
position and liquidity for the Company. This discussion is based upon the Companys
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the U.S. Certain reclassifications of prior years
amounts have been made to conform with the 2003 presentation.

Forward-Looking
Statements. Statements contained in this analysis and elsewhere in this
document that are not based on historical information are forward-looking statements and
are based on managements projections, estimates and assumptions. In particular,
forward-looking statements can be identified by the use of words such as may,
will, should, expect, anticipate,
estimate, continue, or similar words. Management cautions readers
regarding its forward-looking statements. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. Various statements
contained in Item 1  Business and Item 7  Managements
Discussion and Analysis of Results of Operation and Financial Condition, are
forward-looking statements. These forward-looking statements are based on the intent,
belief or current expectations of the Company and members of its senior management team.
While Ascents management believes that its expectations are based on reasonable
assumptions within the bounds of its knowledge of its business and operations, prospective
investors are cautioned that any such forward-looking statements are not guarantees of
future performance, and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.

Important factors known to management
that could cause actual results to differ materially from those contemplated by the
forward-looking statements in this Report include, but are not limited to:

| |  |  | o |  | any limitation imposed on the Insurance Subsidiaries ability to control the impact
of rising health care costs, especially prescription drugs, and rising medical service
utilization rates through product and benefit design, underwriting criteria, premium rate
increases, utilization management and negotiation of favorable provider contracts;
| |  |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | o |  | the impact of changing health care trends on the Insurance Subsidiaries ability to
accurately estimate claim and settlement expense reserves;
| |  |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | o |  | the ability of the Company to fund competitive commission advances to its agents from
internally generated cash flow or external financing;
| |  |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | o |  | developments in health care reform and other regulatory issues, including the Health
Insurance Portability and Accountability Act of 1996 and increased privacy regulation, and
changes in laws and regulations in key states where the Company operates;
| |  |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | o |  | Ascents ability to make additional investment in its Insurance Subsidiaries in the
form of capital contributions, if needed, in order for such subsidiary to comply with
regulatory capital or debt covenant requirements;
| |  |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | o |  | default by issuers of fixed maturity investments owned by the Insurance Subsidiaries; and
| |  |  | - |  | -----------------------------------------------------------------------------------------

| |  |  | o |  | the loss of key management personnel.
| |  |  | - |  | -------------------------------------

Subsequent written or oral statements
attributable to Ascent or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this Report and those in the Companys
reports previously filed with the SEC. Copies of these filings may be obtained by
contacting Ascent or the SEC.

# CRITICAL ACCOUNTING
POLICIES

The Companys accounting
policies are more fully described in Note 2 of the Consolidated Financial Statements at
Item 8. The Company believes that the following discussion addresses the Companys
most significant accounting policies, which are those that are most important to the
portrayal of the Companys financial condition and results of operations and require
managements most difficult, subjective and complex judgments. The Companys
significant accounting policies relate to revenue recognition, investments, agent
receivables, deferred policy acquisition costs, deferred tax assets, claim reserves,
future policy benefit reserves, reinsurance and statutory accounting practices. The
application of these accounting policies requires management to make significant estimates
and judgments that affect the reported amounts of assets, liabilities and expenses in the
Companys consolidated financial statements. Such estimates and judgments are based
on historical experience, changes in laws and regulations, observance of industry trends,
and various information received from third parties. While the estimates and judgments
associated with the application of these accounting policies may be affected by different
assumptions or conditions, the Company believes the estimates and judgments associated
with the reported consolidated financial statement amounts are appropriate in the
circumstances. Actual results could differ materially from these estimates under different
assumptions or conditions.

Revenue
Recognition. Premium revenues from insurance contracts are recognized when
due from policyholders. Policies for which premium has not been received within the applicable grace period from the due date are cancelled. Fee and service income is recognized when earned, the services
have been provided and collectibility is reasonably assured.

Investments.    
          Investment income is an important source of revenue, and the Companys
          return on invested assets has a material effect on net income. The
          Companys investment policy is subject to the requirements of insurance
          regulatory authorities. In addition, certain assets are held on deposit in
          specified states and invested in specified securities in order to comply with
          state law. Although the Company closely monitors its investment portfolio,
          available yields on newly invested funds and gains or losses on existing
          investments depend primarily on general market conditions. The Companys
          investment portfolio is managed by Seneca Capital Management, LLC, a registered
          investment advisor.

Investment policy is determined by
the applicable Board of Directors of the Company and each of the Insurance Subsidiaries.
The Companys current investment policy is to balance its portfolio between long-term
and short-term investments so as to achieve long-term returns consistent with the
preservation of capital and maintenance of adequate liquidity to meet the payment of the
Companys policy benefits and claims. The current schedule of the Companys
invested asset maturities corresponds with the Companys expectations regarding
anticipated cash flow payments based on the Companys policy benefit and claim cycle,
which the Company believes is medium term in nature. The Company invests primarily in
fixed-income securities of the U.S. Government and its related agencies, investment grade
fixed-income corporate securities and mortgage-backed securities. Also, up to 5% of the
Companys fixed maturity securities may be invested in higher yielding,
non-investment grade securities. The Companys entire fixed maturity portfolio is
classified as available for sale and carried at market value.

The following table provides
information on the Companys fixed maturity investments, in thousands, as of December
31:

|                                     |      |      |   |             
|------------------------------------ | ---- | ---- | - | ------------
|                                     | 2003 | 2002 |  
|                                     |      |      |   | Market Value
|                                     |      |      |   |             
|Fixed Maturities (at market value):  |      |     
|U.S. Government and related agencies |      |      | $ | 10,887      
|State, county and municipal          |      |      |   | 2,297       
|Finance companies                    |      |      |   | 19,209      
|Public utilities                     |      |      |   | 8,645       
|Mortgage-backed securities           |      |      |   | 23,567      
|All other corporate bonds            |      |      |   | 32,363      
|                                     |      |      |   |             
|Total Fixed Maturities               |      |      | $ | 96,968      
|                                     |      |      |   |             

Mortgage-backed securities comprised
24.3% of the Companys fixed maturity portfolio at December 31, 2003 as compared to
33.4% at December 31, 2002. Mortgage-backed securities are subject to risks associated
with variable pre-payments. This may result in these securities having a different actual
cash flow and maturity than expected at the time of purchase. Securities that have an
amortized cost greater than par and are backed by mortgages that prepay faster than
expected will incur a reduction in yield or a loss. Those securities with an amortized
cost lower than par that prepay faster than expected will generate an increase in yield or
a gain. In addition, the Company may incur reinvestment risks if market yields are lower
than the book yields earned on the securities. Prepayments occurring slower than expected
have the opposite impact. The Company may incur disinvestment risks if market yields are
higher than the book yields earned on the securities and the Company is forced to sell the
securities. The degree to which a security is susceptible to either gains or losses is
influenced by 1) the difference between its amortized cost and par, 2) the relative
sensitivity of the underlying mortgages backing the assets to prepayment in a changing
interest rate environment and 3) the repayment priority of the securities in the overall
securitization structure. There are negligible default risks in the mortgage-backed
securities portfolio as a whole as the vast majority of the assets are either guaranteed
by U.S. government-sponsored entities or are supported in the securitization structure by
junior securities enabling the assets to achieve high investment grade status.

The following table summarizes
consolidated investment results (excluding unrealized gains or losses) for the indicated
year (in thousands, except percentages):

|                                               |  |  |  
|---------------------------------------------- |  |  | -
|                                               |  |  |  
|                                               |  |  |  
|Net investment income(1)                       |  |  | $
|Net realized gain (loss) on investments        |  |  |  
|Average gross annual yield on fixed maturities |  |  |  

|   
|---
|(1)

The average gross annual yield on
fixed maturities declined in both 2003 and 2002 due to declining market reinvestment
interest rates. The Companys portfolio has an average effective duration of five
years, which reflects the medium-term nature of its liabilities. As a result, a
significant portion of the portfolio matures and is reinvested each year. Market interest
rates dropped significantly from mid- 2002 to mid-2003. The average yield on a five-year
U.S. Treasury note declined from 4.45% for the first half of 2002 to 3.18% for the second
half of 2002 to 2.75% for the first half of 2003, and increased to 3.20% for the last half
of 2003. At December 31, 2003, the market yield for five year U.S. Treasury Securities was
3.27%. The Company anticipates that the investment yield on its portfolio will continue to
decline if market interest rates remain at 2003 levels.

The following table indicates by
rating the composition of the Companys fixed maturity securities portfolio,
excluding short-term investments at December 31:

|                                |                |      |                |             
|------------------------------- | -------------- | ---- | -------------- | ------------
|                                | 2003           | 2002
|                                |                |      |                | Market Value
|                                |                |      |                |             
|                                | (in thousands) |      | (in thousands) |             
|Ratings(1)                      |                |     
|Investment grade:               |                |     
|U.S. Government and agencies    |                |      | $              | 20,147      
|AAA                             |                |      |                | 16,514      
|AA                              |                |      |                | 1,648       
|A                               |                |      |                | 33,082      
|BBB                             |                |      |                | 23,438      
|Non-Investment grade:           |                |     
|BB                              |                |      |                | 1,640       
|B and below                     |                |      |                | 499         
|                                |                |      |                |             
|Total fixed maturity securities |                |      | $              | 96,968      
|                                |                |      |                |             

|   
|---
|(1)

The NAIC assigns  securities quality ratings and uniform prices called "NAIC  Designations",  which are used by insurers when preparing
their annual  statutory  reports.  The NAIC  assigns  designations  to  publicly-traded  as well as  privately-placed  securities.  The
ratings  assigned by the NAIC range from Class 1 (highest  quality  rating) to Class 6 (lowest quality  rating).  At December 31, 2003,
70.8%,  27.0% and 2.2% of the market value of the Company's fixed maturity  securities were rated NAIC 1, NAIC 2, and NAIC 3 and below,
respectively.

The Company monitors the financial  condition and operations of the securities  rated below investment grade and of certain  investment
grade  securities on which there are concerns  regarding credit quality.  In evaluating  fixed  maturities to determine  whether any of
the unrealized  losses are other than  temporary,  management's  assessments as to the nature of declines in fair values are based upon
historical operating trends,  business prospects,  status of the industry in which the Company operates,  analyst ratings on the issuer
and sector,  the quality of the investments,  the severity and duration of the unrealized losses and the Company's ability or intent to
hold the  investments.  If fair  value is less  than the  carrying  value  and the  decline  in value is  determined  to be other  than
temporary, an appropriate write-down is recorded.

The scheduled contractual  maturities of the Company's fixed maturity securities,  excluding short-term  investments at December 31 are
shown in the table below.  Expected  maturities may differ from contractual  maturities because borrowers may have the right to call or
prepay obligations with or without penalties.

|                                       |                              |      |                              |       
|-------------------------------------- | ---------------------------- | ---- | ---------------------------- | ------
|                                       | 2003                         | 2002
|                                       | Market Value

(in thousands) | %    | Market Value

(in thousands) | %     
|Scheduled Maturity                     |                              |     
|Due in one year or less                |                              |      | $                            | 3,868 
|Due after one year through five years  |                              |      |                              | 23,688
|Due after five years through ten years |                              |      |                              | 28,844
|Due after ten years                    |                              |      |                              | 17,001
|Mortgage-backed securities             |                              |      |                              | 23,567
|                                       |                              |      |                              |       
|Total fixed maturity securities        |                              |      | $                            | 96,968
|                                       |                              |      |                              |       

Agent Receivables.In the ordinary course of business, a subsidiary of Ascent advances
commissions on policies written by its general agencies and their agents. Net agent
receivables were $4.5 million and $6.3 million at December 31, 2003 and 2002,
respectively. Such subsidiary is reimbursed for these advances from the commissions earned
over the respective policys life. In the event that policies lapse prior to the time
the subsidiary has been fully reimbursed, the general agency or the individual agents, as
the case may be, are responsible for reimbursing the outstanding balance of the commission
advance. A reserve for uncollectible agents balances is routinely established based
upon historical experience and projected commission earnings. As of December 31, 2003 and
2002, the allowance for uncollectible commission advances was $3.4 million and $4.6
million, respectively.

Deferred Policy Acquisition
Costs.Policy acquisition costs consisting of commissions and other policy
issue costs, which vary with and are primarily related to the production of new business,
are deferred and amortized over periods not to exceed the estimated premium-paying periods
of the related policies. Projected future levels of premium revenue are estimated using
assumptions as to interest, mortality, morbidity and withdrawals consistent with those
used in calculating liabilities for future policy benefits. Deferred policy acquisition
costs totaled $21.8 million and $22.5 million at December 31, 2003 and 2002, respectively.

A premium deficiency exists if the
present value of future net cash flows plus future policy benefit and claims reserves at
the calculation date is negative or less than net deferred policy acquisition costs. The
calculation of future net cash flows includes assumptions as to future rate increases and
persistency. The Company routinely evaluates the recoverability of deferred acquisition
costs in accordance with GAAP. At December 31, 2003, 2002 and 2001, there were no premium
deficiencies.

Deferred Tax Asset.The Companys net deferred tax asset before valuation allowance at
December 31, 2003 and 2002 was $18.4 million and $16.0 million, respectively. As the
Company reported substantial pre-tax losses for the year ended December 31, 2000,
principally due to losses from major medical products issued prior to July 2000,
applicable GAAP literature required that the Companys net deferred tax asset be
fully reserved as of December 31, 2000. Although the Companys pre-tax losses
declined significantly in 2001, 2002 and 2003, sustained profitability has not been
achieved. Accordingly, the Company has reported no income tax benefit for 2003, 2002, and
2001 and the net deferred tax asset remains fully reserved. Applicable GAAP literature
provides that the deferred tax asset valuation allowance may be eliminated once the
Company achieves sustained profitability, as defined, and management concludes that it is
more likely than not, that all or some portion of the deferred tax asset will be realized.

At December 31, 2003, the Company had
available tax net operating loss carryforwards (NOLs) of $63.4 million that
expire between 2012 and 2018. The establishment of a valuation allowance for GAAP does not
impair the availability of NOLs for utilization in the Companys federal income tax
return.

Claim Reserves.Claim reserves are established by the Insurance Subsidiaries for benefit
payments which have already been incurred by the policyholder but which have not been paid
by the applicable Insurance Subsidiary. Claim reserves totaled $26.2 million at December
31, 2003 as compared to $30.9 million at December 31, 2002. The process of estimating
claim reserves involves the active participation of experienced actuarial consultants with
input from the underwriting, claims, and finance departments. The inherent uncertainty in
estimating claim reserves is increased when significant changes occur. Changes impacting
the Insurance Subsidiaries include: (1) changes in economic conditions; (2) changes in
state or federal laws and regulations, particularly insurance reform measures; (3)
writings of significant blocks of new business and (4) significant changes in claims
payment patterns. Because claim reserves are estimates, management monitors reserve
adequacy over time, evaluating new information as it becomes available and adjusting claim
reserves as necessary. Such adjustments are reflected in current operations.

Management considers many factors
when setting reserves including: (1) historical trends; (2) current legal interpretations
of coverage and liability; (3) loss payments and pending levels of unpaid claims; and (4)
product mix. Based on these considerations, management believes that adequate provision
has been made for the Companys claim reserves. Actual claims paid may deviate,
perhaps substantially, from such reserves. For a reconciliation of claim reserves, see
Note 6 to the Consolidated Financial Statements at Item 8.

Future Policy Benefit Reserves.Policy benefit reserves are established by each of the Insurance
Subsidiaries for benefit payments that have not been incurred, but are estimated to be
incurred, in the future. Policy benefit reserves totaled $54.9 million at December 31,
2003 as compared to $60.7 million at December 31, 2002. Policy benefit reserves are
calculated according to the net level premium reserve method and are equal to the
discounted present value of the applicable Insurance Subsidiarys expected future
policyholder benefits minus the discounted present value of its expected future net
premiums.

These present value determinations
are based upon assumed fixed investment yields, the age of the insured(s) at the time of
policy issuance, expected morbidity and persistency rates, and expected future
policyholder benefits. In determining the morbidity, persistency rate, claim cost and
other assumptions used in determining the Insurance Subsidiaries policy benefit
reserves, each Insurance Subsidiary relies primarily upon its own benefit payment history
and upon information developed in conjunction with actuarial consultants and industry
data. Persistency rates have a direct impact upon policy benefit reserves because the
determinations for this reserve are, in part, a function of the number of policies in
force and expected to remain in force to maturity. If persistency is higher or lower than
expected, future policyholder benefits will also be higher or lower because of the
different than expected number of policies in force, and the policy benefit reserves will
be increased or decreased accordingly.

Policy benefit reserve requirements
are also interrelated with product pricing and profitability. Each of the applicable
Insurance Subsidiaries must price their respective products at a level sufficient to fund
their policyholder benefits and still remain profitable. Because such claim and
policyholder benefits represent the single largest category of its operating expenses,
inaccuracies in the assumptions used to estimate the amount of such benefits can result in
the Insurance Subsidiaries failing to price their respective products appropriately and to
generate sufficient premiums to fund the payment thereof.

Because the discount factor used in
calculating policy benefit reserves is based upon the rate of return of the investments
designed to fund this reserve, the amount of the reserve is dependent upon the yield on
these investments. Provided that there is no material adverse experience with respect to
these benefits, changes in future market interest rates will not have an impact on the
profitability of policies already sold. Because fluctuations in future market interest
rates affect the yield on new investments, they also affect the discount factor used to
establish, and thus the amount of, its policy benefit reserves for new sales. In addition,
because an increase in the policy benefit reserves in any period is treated as an expense
for income statement purposes, market interest rate fluctuations can directly affect the
profitability for policies sold in such period. It is not possible to predict future
market interest rate fluctuations.

In accordance with GAAP, the
Insurance Subsidiaries actuarial assumptions are generally fixed, and absent
materially adverse benefit experience, they are not generally adjusted. Each of the
Insurance Subsidiaries monitors the adequacy of its policy benefit reserves on an ongoing
basis by periodically analyzing the accuracy of its actuarial assumptions. The adequacy of
policy benefit reserves may also be impacted by the development of new medicines and
treatment procedures which may alter the incidence rates of illness and the treatment
methods for illness and accident (such as out-patient versus in-patient care) or prolong
life expectancy. Changes in coverage provided by major medical insurers or government
plans may also affect the adequacy of reserves if, for example, such developments had the
effect of increasing or decreasing the incidence rate and per claim costs of occurrences
against which the applicable Insurance Subsidiary insures. An increase in either the
incidence rate or the per claim costs of such occurrences could result in the need to post
additional reserves, which could have a material adverse effect upon an Insurance
Subsidiaries business, financial condition or results of operations (see
Liquidity, Capital Resources and Statutory Capital and Surplus).

Reinsurance.    
          As is customary in the insurance industry, the Insurance Subsidiaries reinsure,
          or cede, portions of the coverage provided to policyholders to other insurance
          companies on both an excess of loss and a coinsurance basis. Cession of
          reinsurance is utilized by an insurer to limit its maximum loss; thereby,
          providing a greater diversification of risk and minimizing exposures on larger
          risks. Reinsurance does not discharge the primary liability of the original
          insurer with respect to such insurance, but the Company, in accordance with
          prevailing insurance industry practice, reports reserves and claims after
          adjustment for reserves and claims ceded to other companies through reinsurance.

The Insurance Subsidiaries reinsure
risks under each of their respective major medical policies on an excess of loss basis so
that its net payments on any one life insured under the policy are limited for any one
calendar year to $125,000. Risks under its Medicare Supplement policies are not reinsured.
Certain risks under the Insurance Subsidiaries Accidental Death policies are one
hundred percent (100%) reinsured. Under its life insurance reinsurance agreement, FLICA
and NFL retain fifty percent (50%) of the coverage amount of each of its life insurance
policies in force up to a maximum of $65,000. NFL reinsures, through an excess of loss
reinsurance treaty, a closed block of annually renewable term life insurance policies.
NFLs retention limit is $25,000 per year. In accordance with industry practice, the
reinsurance arrangements in force with respect to these policies are terminable by either
party with respect to claims incurred after the termination and expiration dates.

At December 31, 2003, approximately
$1.4 million of the $3.1 million recoverable from reinsurers is related to paid losses. Of
this balance, all was recoverable from reinsurers rated A or higher by the
A.M. Best Company.

Statutory Accounting
Practices. The Insurance Subsidiaries are required to report their results
of operations and financial position to state regulatory agencies based upon statutory
accounting practices (SAP). See Item 1  Business 
State Regulation for a description of the principle differences between GAAP and SAP
accounting. The immediate charge off of sales and acquisition expenses and the sometimes
conservative claim cost and other reserve valuation assumptions under SAP generally cause
a lag between the sale of a policy and the emergence of reported earnings. Because this
lag can reduce gain from operations on a SAP basis, it can have the effect of reducing the
amount of funds available for dividend distributions from the Insurance Subsidiaries (see
Liquidity, Capital Resources and Statutory Capital and Surplus).

# RESTRUCTURING OF
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND NOTES PAYABLE TO RELATED PARTY

On December 31, 2003, the Company
completed an exchange of the redeemable convertible preferred stock and restructuring of
the notes payable of Ascent held by Special Situations Holdings, Inc.  Westbridge
(SSHW) and Credit Suisse First Boston Management LLC (CSFBM),
respectively, both affiliates of Credit Suisse First Boston LLC (CSFB)
(together, SSHW and CSFBM, the CSFB entities) that resulted in, among other
things, an extension of the maturity dates of such preferred stock and notes held by the
CSFB entities from March 24, 2004 and April 17, 2004, respectively, to March 24, 2010. The
restructuring was effected pursuant to an Exchange Agreement dated as of December 31, 2003
between the Company, SSHW, and CSFBM (the Exchange Agreement).

Prior to the restructuring, SSHW held
36,567 shares plus accrued dividends equal to 937 shares of 10.25% Series A Convertible
Preferred Stock (Series A Preferred) of the Company with a stated value of
approximately $37.5 million. Pursuant to the Exchange Agreement, SSHW received 37,504
shares of 5.5% Series B Convertible Preferred Stock (Series B Preferred) of
the Company in exchange for the shares of Series A Preferred and accrued dividends held by
SSHW. The conversion price of the Series B Preferred is $.85246 per share (or 1,173.1
shares of common stock per share of Series B Preferred) versus $4.88 per share for the
Series A Preferred (or 204.9 shares of common stock per share of Series A Preferred). The
shares of the Series A Preferred were cancelled.

Prior to the restructuring, CSFB,
through SSHW, was the Companys largest stockholder, owning approximately 49% of the
outstanding shares of common stock of the Company and, on an as converted, fully-diluted
basis assuming conversion of the outstanding Series A Preferred, approximately 75.4% of
the common stock. As a result of the exchange for Series B Preferred, CSFB, through SSHW,
now owns on an as converted, fully diluted basis, 93% of the common stock with the
remaining 7% held by public stockholders. At a stockholders meeting to be held no
later than June 30, 2004, the stockholders of the Company will be asked to adopt an
amendment to the Companys certificate of incorporation to authorize additional
shares of common stock in an amount necessary to permit the conversion of Series B
Preferred in full. Upon the effectiveness of such amendment and obtaining of all necessary
insurance regulatory approvals, the Series B Preferred will convert into common stock and
no preferred stock will remain outstanding. Under the Exchange Agreement, CSFB has agreed
to be present in person or by proxy at the stockholders meeting and to vote all of
its shares of common stock held by SSHW in favor of such amendment of the Companys
certificate of incorporation. The Company expects that conversion of the Series B
Preferred will be effected as planned prior to June 30, 2004. The table below shows the
pro forma impact on the stockholders equity section of the Companys balance
sheet, assuming that the conversion was completed as of December 31, 2003:

|                                       |  |  |  
|-------------------------------------- |  |  | -
|                                       |  |  |  
|                                       |  |  |  
|Stockholders' Equity                   |  | 
|Redeemable convertible preferred stock |  |  | $
|Common stock                           |  |  |  
|Capital in excess of par value         |  |  |  
|Accumulated other comprehensive income |  |  |  
|Retained Deficit                       |  |  |  
|                                       |  |  |  
|Total Stockholders' Equity             |  |  | $
|                                       |  |  |  
|Number of common shares outstanding    |  |  |  
|                                       |  |  |  

Following the conversion of the
Series B Preferred Stock, SSHW will have sufficient voting power to be able to approve a
short-form merger with the Company without a vote of the Board or the stockholders not
affiliated with CSFB. However, CSFB has agreed in the Exchange Agreement that the Company
will not consummate such a transaction at a cash price per share that does not reflect
fair value under the applicable Delaware law as reasonably determined by the controlling
stockholder; provided that, prior to January 1, 2005, such price cannot be less that $.40
per share. The stockholders not affiliated with CSFB would have appraisal rights under
Delaware law in connection with any short-form merger.

The restructuring of the notes
payable to CSFBM in the amount of $15.3 million as of December 31, 2003 (including accrued
interest) was effected by an amendment to the Credit Agreement dated as of April 17, 2001
between the Company and CSFBM (the CSFBM Credit Agreement). In addition to the
extension of the maturity date to March 24, 2010, the interest rate of the note payable
was reduced from 12% to 6% per annum. A $1.5 million facility fee, of which $1.35 million
was accrued as of December 30, 2003, payable upon maturity of the note payable was waived.
On December 31, 2003, the balance of the accrued facility fee was credited directly to
capital in excess of par value. In the event that the Company fails to receive the
approval of its stockholders in favor of the amendment to the certificate of incorporation
described above by June 30, 2004, other than if such failure is the direct or indirect
result of any action taken or failed to be taken by the CSFB entities, such failure shall
constitute an event of default under the notes payable which, among other things, will
result in the holder of the Series B Convertible Preferred Stock having the right to vote
on all matters, other than the election of directors, thereafter brought to the
stockholders of the Company. CSFBM has also agreed that the notes payable will be
subordinate to up to $10 million in borrowings under the Companys agent debit
balance credit facility. The Company, certain of its subsidiaries, CSFBM and the lender
under such credit facility have entered into an Intercreditor and Subordination Agreement
dated as of December 31, 2003 to give effect to this subordination agreement.



# OPERATING RESULTS

Results of operations for Ascent are
reported below for the years ended December 31, 2003, 2002 and 2001.

|                                                  |  |  |  
|------------------------------------------------- |  |  | -
|                                                  |  |  |  
|                                                  |  |  |  
|Premiums                                          |  |  | $
|Other                                             |  |  |  
|                                                  |  |  |  
|Total insurance operating revenue                 |  |  |  
|Net investment income                             |  |  |  
|Net realized gain (loss) on investments           |  |  |  
|                                                  |  |  |  
|Total insurance revenues                          |  |  |  
|Benefits and claims                               |  |  |  
|Commissions                                       |  |  |  
|Change in deferred acquisition costs              |  |  |  
|General and administrative expense                |  |  |  
|Taxes, licenses and fees                          |  |  |  
|Interest expense on bank facilities               |  |  |  
|                                                  |  |  |  
|Total insurance operating expenses                |  |  |  
|                                                  |  |  |  
|Insurance operating results                       |  |  |  
|                                                  |  |  |  
|Fee and service income                            |  |  |  
|Fee and service expenses                          |  |  |  
|                                                  |  |  |  
|Fee and service results                           |  |  |  
|                                                  |  |  |  
|Interest expense on note payable to related party |  |  |  
|Interest expense on Series A Preferred Stock      |  |  |  
|                                                  |  |  |  
|Loss before income taxes                          |  |  |  
|Income tax expense                                |  |  |  
|                                                  |  |  |  
|Net loss                                          |  |  |  
|Series A Preferred Stock dividends                |  |  |  
|                                                  |  |  |  
|Net loss to common shareholders                   |  |  | $
|                                                  |  |  |  
|Insurance operating ratios*                       |  | 
|Benefits and claims                               |  |  |  
|Commissions                                       |  |  |  
|Change in deferred acquisition costs              |  |  |  
|General and administrative expense                |  |  |  
|Taxes, licenses and fees                          |  |  |  

*Ratios are  calculated as a percent of premiums with the exception of the general and  administrative  expense  ratio,  which is
               calculated as a percent of total insurance operating revenue.

Overview. The Company  reported  pre-tax  losses of ($1.3)  million,  ($0.9)  million,  and ($2.1)  million  for 2003,  2002 and 2001,
respectively.  The results of operations for 2003 are not comparable to 2002 and 2001 due to the third quarter 2003  implementation  of
Statement of Financial  Accounting  Standards No. 150,  "Accounting for Certain  Financial  Instruments  with  Characteristics  of Both
Liabilities and Equity ("SFAS 150") as discussed in Note 2 to the  Consolidated  Financial  Statements at Item 8. Pursuant to SFAS 150,
dividends of $1.9 million  accrued  subsequent to June 30, 2003 on the Company's  Series A Preferred  stock were classified as interest
expense,  a component of pre-tax income,  instead of a direct deduction to common  stockholders'  equity.  In accordance with SFAS 150,
prior period  financial  statements  were not  restated.  Excluding  the impact of SFAS 150, the $1.4  million  improvement  in pre-tax
income for 2003 as compared  to 2002 was  comprised  of a $1.2  million  increase in  insurance  operating  results and a $0.5  million
improvement  in fee and  service  operations,  net of a ($.03)  million  increase in  interest  expense on the note  payable to related
party.  The $1.2  million  improvement  in pre-tax  loss for 2002 as compared to 2001 was due to a $4.1  million  increase in insurance
operating  results offset by a ($2.0) million  decrease in fee and service results and a ($0.9) million increase in interest expense on
the note payable to related party.

The primary  factor  behind the  improvement  in insurance  operating  results for both 2003 and 2002 as compared to the  corresponding
prior year period is the decline in the benefits  and claims to premium  ratio for both years.  For the past several  years the Company
has focused on improving its product pricing for both new insurance  product sales and in force insurance  policies.  The benefits of a
lower claims and benefit ratio have been offset in both 2003 and 2002 by 1) reduced  interest  income from the Company's bond portfolio
due to  declining  market  re-investment  rates,  2)  reduced  interest  income on  agent's  balances  receivable  due to a decline  in
outstanding  agents'  balances as a result of lower new  business  production  and 3) an  increase  in the  general and  administrative
expense ratio due to reduced coverage of fixed general and administrative expenses as a result of lower premium revenues.

Fee and service operating  results improved in 2003 as compared to 2002 as a result of expense reduction  initiatives for the Company's
tele-survey and printing  subsidiaries.  These operations were significantly  impacted in 2002 by the economic downturn and experienced
a reduction in the number of customers, reduced order volume from continuing customers and lower profit margins in comparison to 2001.

Interest  expense on the note payable to CSFBM, a related party,  issued in April 2001 for an original  principal amount of $11 million
was $2.5 million for 2003,  $2.2 million for 2002 and $1.3 million for 2001. Such interest  expense  includes the accrual of a facility
fee pursuant to the terms of the CSFBM  Credit  Agreement  of $0.5  million in 2003 and 2002 and $0.3  million in 2001.  As  previously
discussed (see  "Restructuring  of Redeemable  Preferred  Stock and Notes Payable to Related  Party"),  the CSFBM Credit  Agreement was
amended to waive  the facility  fee on December  31,  2003.  Interest  expense on the note payable to CSFBM has been paid "in kind"
through the  issuance of  additional  notes  payable.  As of December 31,  2003,  the balance of the note payable to related  party was
$15.3  million.  The December 31, 2003  amendment to the CSFBM Credit  Agreement  also reduced the interest rate on the note payable to
related party from 12% to 6% and will result in a reduction of interest expense in 2004.

As previously  discussed (see "Restructuring of Redeemable  Preferred Stock and Notes Payable to Related Party"),  the Company's Series
A Preferred was exchanged for Series B Preferred on December 31, 2003.  The Company  expects that the Series B Preferred  will be fully
converted into common stock prior to June 30, 2004 and that no preferred  stock will remain  outstanding.  Upon full  conversion of the
Series B Preferred, the preferred stock dividend will be eliminated.

The Company  reported  no income tax  benefit for 2003,  2002 and 2001 due to the  establishment  of a  valuation  allowance  beginning
December 31, 2000 for all net deferred tax assets.  (See "Critical Accounting Policies - Deferred Tax Asset".)

The following narratives discuss the principal components of insurance operating results.

Premiums.  The Insurance  Subsidiaries'  premium  revenue is derived  principally  from the  following  medical  expense  reimbursement
products:  comprehensive major medical,  hospital/surgical medical expense,  supplemental products including specified disease coverage
and Medicare  supplement.  Comprehensive  major medical  products are generally  designed to reimburse  insureds for eligible  expenses
incurred for hospital  confinement,  surgical  expenses,  physician  services,  outpatient  services,  and the cost of  laboratory  and
diagnostic  services,  as well as inpatient  medicines.  Hospital surgical medical expense products are similar to comprehensive  major
medical  products with respect to benefits for inpatient  services,  except that  deductibles and coinsurance  provisions are generally
higher.  However,  benefits for outpatient  services are generally more limited under  hospital/surgical  medical expense coverage than
comprehensive  major medical coverage.  Supplemental  products include blanket group accident  coverages,  blanket group hospital daily
indemnity  coverages,  as well as  individual  indemnity  policies for hospital  confinement  and  convalescent  care for  treatment of
specified  diseases and "event  specific"  individual  policies,  which  provide  fixed  benefits or lump sum payments  directly to the
insured  upon  diagnosis  of certain  types of  internal  cancer or heart  disease.  Prior to 1998,  the  Insurance  Subsidiaries  also
underwrote Medicare supplement products and continue to receive renewal premiums from such policies.

Premium revenue, in thousands, for each major product line is set forth below:

|                                |  |  |  
|------------------------------- |  |  | -
|                                |  |  |  
|                                |  |  |  
|Major medical:                  |  | 
|First-year                      |  |  | $
|Renewal                         |  |  |  
|                                |  |  |  
|                                |  |  | $
|                                |  |  |  
|Supplemental specified disease: |  | 
|First-year                      |  |  |  
|Renewal                         |  |  |  
|                                |  |  |  
|                                |  |  | $
|                                |  |  |  
|Medicare supplement:            |  | 
|Renewal                         |  |  | $
|                               
|Other                           |  |  |  
|                                |  |  |  
|Consolidated Premium Revenue    |  |  | $
|                                |  |  |  

Total premiums decreased by 8.5% in
2003 and 11.3% in 2002 as compared to the corresponding prior year period. This decline in
premium revenue is primarily attributable to lower new business sales resulting from 1)
delays in new product deliveries to NCM and 2) a disciplined pricing philosophy focused
upon profitability. The decline in both first year and renewal premiums for 2002 was also
attributable to the accelerated lapsing of unprofitable major medical products marketed
prior to July 2000.

In July 2003, NCM began selling a new
line of medical insurance products, consisting of three products with varying degrees of
benefits, designed to provide increased consumer choice and price flexibility for cost
conscious consumers. As of December 31, 2003, the new products had been introduced in 19
of the 24 states in which NCM markets health insurance products.

Benefits and
Claims. Benefits and claims are comprised of (1) claims paid, (2) changes
in claim reserves for claims incurred (whether or not reported), and (3) changes in future
policy benefit reserves (see Financial Condition  Claims Reserves and
Future Policy Benefit Reserves). The 3.0 percentage point improvement in the
ratio of consolidated benefits and claims to consolidated premiums in 2003 as compared to
2002 and the 4.1 percentage point improvement in 2002 as compared to 2001 is principally
attributable to the Companys adherence to a disciplined pricing philosophy for both
new major medical product sales and in force insurance policies and the accelerated
lapsing of unprofitable major medical products marketed prior to July 2000.

For the past several years, the costs
of medical services covered by the Companys major medical insurance policies has
increased dramatically, with medical inflation averaging 15% to 20% annually in comparison
to an average increase in the consumer price index of 3%. To maintain the 2003 ratio of
claims and benefits to premium into future periods, the Company must accurately estimate
future medical inflation and implement timely premium rate increases for both new major
medical product sales and the majority of its in force insurance policies, including
supplemental specified disease and Medicare supplement policies.

Commissions.    
          The commissions to premiums ratio decreased by 0.8 and 1.7 percentage points in
          2003 and 2002, respectively, as compared to the corresponding prior year as a
          result of the decrease in first year major medical premiums. Commission rates on
          first year premiums are significantly higher than those for renewal premiums.

# LIQUIDITY, CAPITAL
RESOURCES, AND STATUTORY CAPITAL AND SURPLUS

General.The primary sources of cash for the Companys consolidated
          operations are premiums and fees from insurance policies, sales and maturity of
          invested assets and investment income while the primary uses of cash are
          payments of insurance policy benefits, claims and commissions, and general
          operating expenses. Net cash used in operations totaled $1.1 million, $5.0
          million and $6.6 million for the years ended December 31, 2003, 2002 and 2001,
          respectively. The decrease in cash used by operations from year to year is
          principally due to a decline in the cash basis ratio of benefits and claims to
          premiums.

Ascent is a holding company, the
principal assets of which consist of the capital stock of its subsidiaries and invested
assets. Ascents principal sources of funds are comprised of dividends from its
non-insurance subsidiaries. The Insurance Subsidiaries are precluded from paying dividends
without prior approval of the Texas Insurance Commissioner, as the Insurance
Subsidiaries earned surplus is negative due to statutory losses incurred in recent
years (see Business  State Regulation at Item 1). Ascents
principal uses of cash are for making discretionary additional investments in its
Insurance Subsidiaries in the form of capital contributions to maintain certain minimum
statutory capital and surplus levels in the Insurance Subsidiaries and general and
administrative expenses. Ascent funded capital contributions to the Insurance Subsidiaries
totaling approximately $812,000, $2.3 million and $19.3 million during 2003, 2002, and
2001, respectively. The Insurance Subsidiaries reported statutory net income (losses) for
2003, 2002, and 2001 of $1.1 million, ($2.7) million, and ($12.7) million, respectively.
As of December 31, 2003, Ascent had approximately $2.4 million in unrestricted cash and
invested assets as compared to $375,000 at December 31, 2002.

The statutory losses incurred during
2002 and 2001 resulted from (1) significant losses on major medical products marketed
prior to July 2000 due to higher than expected claim frequency and (2) costs associated
with increased new business production which must be expensed under statutory accounting
(for GAAP, such costs are deferred and amortized as related premiums are recorded). Major
medical claims experience adverse to managements current estimates or adverse claims
experience for other insurance products may cause Ascent to make capital contributions to
the Insurance Subsidiaries in excess of those currently projected for 2004. As a result,
adverse claims experience could have a material adverse effect on Ascents liquidity
and capital resources and results of operations.

Related Party Financing.Ascent received debt financing to fund an $11 million capital contribution
to FLICA in April 2001 from CSFBM, which is an affiliate of SSHW (Ascents largest
common stockholder), and a subsidiary of CSFB. The credit agreement relating to that loan
(CSFBM Credit Agreement) provided Ascent with total loan commitments of $11
million, all of which were drawn in April 2001. Under restructured terms (see
Restructuring of Redeemable Convertible Preferred Stock and Notes Payable to Related
Party), the loan bears interest at a rate of 6% per annum and matures in March 2010.
Absent any acceleration following an event of default, the Company may elect to pay
interest in kind by issuance of additional notes. During 2003 and 2002, Ascent issued $1.7
million and $1.5 million, respectively, in additional notes for payment of interest in
kind which increased the note payable balance at December 31, 2003 to approximately $15.3
million.

The CSFBM Credit Agreement is
secured, pursuant to a guarantee and security agreement and pledge agreements, by
substantially all of the assets of Ascent and its subsidiaries (excluding the capital
stock and the assets of AICT, FLICA, NFL, NFIC, NCM, Ascent Funding, Inc. and Ascent Management, Inc., some or all of which is pledged as collateral for bank financing
described below). Ascents subsidiaries (other than those listed above) have also
guaranteed Ascents obligations under the CSFBM Credit Agreement. At December 31,
2003, there were no events of default.

Related Party Preferred
Stock. Ascents redeemable convertible preferred stock is 100% owned
by SSHW, which is the Companys largest common stockholder and is also an affiliate
of CSFBM and a subsidiary of CSFB. On December 31, 2003, the Company completed an exchange
of Series A Preferred for Series B Preferred (see Restructuring of Convertible
Preferred Stock and Notes Payable to Related Party). Dividends may be paid in cash
or by issuance of additional shares of preferred stock, at the Companys option.
During 2003, Ascent paid dividends on the Series A Preferred through the issuance of
3,608, 3,261 and 2,930 additional shares of preferred stock in 2003, 2002 and 2001,
respectively. The Series B Preferred is mandatorily redeemable in cash in March 2010 and
has a dividend rate of 5.5%.

Bank Financing.The majority of commission advances to NCMs agents are financed
through Ascent Funding, Inc. (AFI), an indirect wholly owned subsidiary of
Ascent. On December 31, 2003, AFI entered into a Credit Agreement (the Credit
Agreement) with Frost National Bank (Frost) that provides AFI with a
$3.0 million revolving loan facility, the proceeds of which are used to purchase agent
advance receivables from NCM and other affiliates. As of December 31, 2003, $500,000 was
outstanding under the Credit Agreement. The Credit Agreement matures on January 15, 2005,
at which time the outstanding principal and interest will be due and payable. The Company
maintains an agent receivable financing arrangement to facilitate growth in new business
sales.

AFIs obligations under the
Credit Agreement are secured by liens upon substantially all of AFIs assets.
AFIs principal assets at December 31, 2003 are net agent receivables of $4.6
million. In addition, NCM and Ascent have guaranteed AFIs obligation under the
Credit Agreement, and have pledged all of the issued and outstanding shares of the capital
stock of AFI, NFL, and FLICA as collateral for those guaranties (the Guaranty
Agreements). As of December 31, 2003, there were no events of default under the
Credit or Guaranty Agreements.

AFI formerly financed agent
receivables through a Credit Agreement (the LaSalle Credit Agreement) with
LaSalle Bank NA (LaSalle). On January 31, 2003, pursuant to terms of the
LaSalle Credit Agreement, AFI liquidated a $2.6 million cash collateral account pledged to
LaSalle. Pursuant to an agreement with LaSalle, AFI paid a dividend of $1.6 million to
Ascent. The proceeds were used to fully pay off Ascent Management Inc.s
(AMI) term loan facility with LaSalle on January 31, 2003. On November 28,
2003, the amount outstanding of $1.4 million under the LaSalle Credit Agreement was paid
off, the revolving loan facility and all guaranties provided by AAI were terminated, and
all collateral held by LaSalle was returned to the Company.

Inflation.Inflation impacts claim costs and overall operating costs and,
          although inflation has been lower in the last few years, hospital and medical
          costs have still increased at a higher rate than general inflation, especially
          prescription drug costs. New, more expensive and wider use of pharmaceuticals is
          inflating health care costs. The Company will continue to establish premium
          rates in accordance with trends in hospital and medical costs along with
          concentrated efforts in various cost containment programs. However, there can be
          no assurance that these efforts will fully offset the impact of inflation or
          that increases in premium rates will equal or exceed increasing healthcare
          costs.

# CONTRACTUAL OBLIGATIONS

The following table provides
information on the Companys known contractual obligations, in thousands, as of
December 31, 2003:

|                                 |                        |  |   |        | 
|-------------------------------- | ---------------------- |  | - | ------ | 
|                                 | Payments due by period
|Contractual obligations          |                        |  |   | Total  | 
|                                 |                        |  |   |        | 
|Note payable to related party(1) |                        |  | $ | 15,270 | 
|Note payable to bank(2)          |                        |  |   | 500    | 
|Capital lease obligations        |                        |  |   | 609    | 
|Operating lease obligations      |                        |  |   | 7,126  | 
|                                 |                        |  |   |        | 
|                                 |                        |  | $ | 23,505 | 
|                                 |                        |  |   |        | 

(1)   Excludes interest at a rate equal to 6% that may be paid in cash or in kind by issuance of additional notes.
         (2)   Excludes interest at a rate equal to the Prime Rate, plus one-half percent per annum.

# ITEM 7A 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Companys primary objectives
in managing its cash flow and investments are to maximize investment income and yield
while preserving capital and minimizing credit risks. To attain these objectives,
investment policies and strategies are developed using expected underwriting results,
forecasted federal tax positions, regulatory requirements, forecasted economic conditions
including expected fluctuations in interest rates and general market risks.

Market risk represents the potential
for loss due to adverse changes in the fair market value of financial instruments. The
market risks associated with the financial instruments of the Company primarily relate to
the Companys investment portfolio that consists largely (94%) of fixed income
securities. The Companys investment portfolio is exposed to market risk through
fluctuations in interest rates, changes in credit quality and principal prepayments.

Interest Rate
Risk. Interest rate risk is the price sensitivity of a fixed income
security to changes in interest rates. The Company evaluates the potential changes in
interest rates and market prices within the context of asset and liability management.
Asset and liability management involves forecasting the payout pattern of the
Companys liabilities, consisting primarily of accident and health claim reserves, to
determine duration and then matching the duration of the liabilities to fixed income
investments with a similar duration. Through active portfolio asset and liability
management, the Company believes that interest rate risk is mitigated.

Credit Risk. The
Company invests primarily in fixed-income securities of the U.S. Government and its
related agencies, investment grade fixed-income corporate securities and mortgage-backed
securities. (See Item 7  Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 4 
Investments to the Companys Consolidated Financial Statements.)
Approximately 2.2% of the Companys fixed-income portfolio market value is comprised
of less than investment grade securities. The Companys investment policy allows up
to 5% of the Companys fixed maturity securities to be invested in higher yielding,
non-investment grade securities. Due to the overall high quality of the Companys
investment portfolio (over 97% investment grade), management believes the Company has
marginal risk with regard to credit quality.

Prepayment Risk.
Mortgage-backed securities investors are compensated primarily for prepayment risk rather
than credit quality risk. During periods of significant interest rate volatility, the
underlying mortgages may repay more quickly or more slowly than anticipated. If the
repayment of principal occurs earlier than anticipated during periods of declining
interest rates, investment income may decline due to the reinvestment of these funds at
the lower current market rates. To manage prepayment risk, the Company limits the type of
mortgage-backed structures invested in and restricts the portfolios total exposure
in mortgage-backed securities. If the repayment occurs later than expected during periods
of increasing interest rates, the cost of funds to pay liabilities may increase due to the
mismatching of assets and liabilities.

Sensitivity
Analysis. The Company regularly conducts various analyses to gauge the
financial impact of changes in interest rate on its financial condition. The ranges
selected in these analyses reflect managements assessment as being reasonably
possible over the succeeding twelve-month period. The magnitude of changes modeled in the
accompanying analyses should, in no manner, be construed as a prediction of future
economic events, but rather, be treated as a simple illustration of the potential impact
of such events on the Companys financial results.

The sensitivity analysis of interest
rate risk assumes an instantaneous shift in a parallel fashion across the yield curve,
with scenarios of interest rates increasing and decreasing 50 and 100 basis points from
their levels at December 31, 2003, and with all other variables held constant. A 50 and
100 basis point increase in market interest rates would result in a pre-tax decrease in
the market value of the Companys fixed income investments of $2.6 million and $5.2
million, respectively. Similarly, a 50 and 100 basis point decrease in market interest
rates would result in a pre-tax increase in the market value of the Companys fixed
income investments of $2.6 million and $5.2 million, respectively.



# ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and
Financial Statement Schedules Covered by the Following Reports of Independent Auditors.

|                                                                                                                            |  | Page Number
|--------------------------------------------------------------------------------------------------------------------------- |  | -----------
|                                                                                                                           
|Reports of Independent Auditors                                                                                             |  | 30         
|                                                                                                                           
|Ascent Assurance, Inc. Financial Statements:                                                                               
|                                                                                                                           
|Consolidated Balance Sheets at December 31, 2003 and 2002                                                                   |  | 32         
|                                                                                                                           
|Consolidated
Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001                                  |  | 33         
|                                                                                                                           
|Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2003,
        2002         and 2001 |  | 34         
|                                                                                                                           
|Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 31, 2003,
         2002 and 2001    |  | 35         
|                                                                                                                           
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001                                  |  | 36         
|                                                                                                                           
|Notes to the Consolidated Financial Statements                                                                              |  | 37         
|                                                                                                                           
|Financial Statement Schedules:                                                                                             
|                                                                                                                           
|II.    
          Condensed Financial Information of Registrant                                                             |  | 58         
|                                                                                                                           
|III.    
          Supplementary Insurance Information                                                                      |  | 63         
|                                                                                                                           
|IV.    
          Reinsurance                                                                                               |  | 64         
|                                                                                                                           
|V.    
          Valuation and Qualifying Accounts                                                                          |  | 65         

| | All other Financial Statement Schedules are omitted because they are not applicable or the
required Information is shown in the Financial Statements or notes thereto. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 



---

# Report of Independent
Auditors

The Board of Directors
Ascent Assurance, Inc.

We have audited the accompanying
consolidated balance sheets of Ascent Assurance, Inc., as of December 31, 2003 and 2002,
and the related consolidated statements of operations, comprehensive (loss) income,
stockholders equity, and cash flows for the years then ended. Our audits also
included the financial statement schedules as of December 31, 2003 and 2002, and for the
years then ended listed in the Index at Item 15(a)(2). These financial statements and
schedules are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements and schedules based on our audits.

We conducted our audit in accordance
with auditing standards generally accepted in the United States. 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 financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of Ascent Assurance, Inc., at December 31, 2003 and 2002, and the
consolidated results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States. Also, in
our opinion, the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material respects the
information set forth therein.

As discussed in Note 2 to the
consolidated financial statements, effective July 1, 2003, the Company adopted the
provisions of Statement of Accounting Standards No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.

/s/ Ernst & Young LLP

Dallas, Texas February 24,
2004



---

# Report of Independent
Accountants

To the Board of Directorsand
Stockholders ofAscent Assurance, Inc.

In our opinion, the 2001 consolidated
financial statements listed in the accompanying index present fairly, in all material
respects, the results of operations and cash flows of Ascent Assurance, Inc. and its
subsidiaries for the year ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedules as of December 31, 2001 and for the year ended December 31,
2001 listed in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement schedules are the
responsibility of the Companys management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on our
audits. We conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the
accounting principles used, and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

/s/
PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLPDallas,
Texas

March 8, 2002



ASCENT ASSURANCE, INC.
                                           CONSOLIDATED BALANCE SHEETS

|                                                                         |                                   | 
|------------------------------------------------------------------------ | --------------------------------- | 
|                                                                         | December 31,                     
|                                                                         |                                   | 
|                                                                         |                                   | 
|                                                                         | (in thousands, except share data)
|Assets                                                                   |                                   | 
|Investments:                                                             |                                   | 
|Fixed Maturities:                                                        |                                   | 
|Available-for-sale, at market value (amortized cost $93,922 and $95,580) |                                   | 
|Short-term investments                                                   |                                   | 
|Other investments, at market value (cost $383 and $381)                  |                                   | 
|                                                                         |                                   | 
|Total Investments                                                        |                                   | 
|Cash                                                                     |                                   | 
|Accrued investment income                                                |                                   | 
|Receivables from agents, net of allowance for doubtful accounts of       |                                   | 
|$3,439 and $4,630                                                        |                                   | 
|Deferred policy acquisition costs, net                                   |                                   | 
|Property and equipment, net of accumulated depreciation of               |                                   | 
|$5,000 and $4,986                                                        |                                   | 
|Other assets                                                             |                                   | 
|                                                                         |                                   | 
|Total Assets                                                             |                                   | 
|                                                                         |                                   | 
|Liabilities, Redeemable Convertible Preferred Stock and                  |                                   | 
|Stockholders' Equity                                                     |                                   | 
|Liabilities:                                                             |                                   | 
|Policy liabilities and accruals:                                         |                                   | 
|Future policy benefits                                                   |                                   | 
|Claim reserves                                                           |                                   | 
|                                                                         |                                   | 
|Total Policy Liabilities and Accruals                                    |                                   | 
|Accounts payable and other liabilities                                   |                                   | 
|Notes payable to bank                                                    |                                   | 
|Notes payable to related party                                           |                                   | 
|                                                                         |                                   | 
|Total Liabilities                                                        |                                   | 
|                                                                         |                                   | 
|Commitments and Contingencies                                            |                                   | 
|Redeemable convertible Series A preferred stock                          |                                   | 
|                                                                         |                                   | 
|Stockholders' Equity                                                     |                                   | 
|Redeemable convertible Series B preferred stock ($1,000 stated value,    |                                   | 
|40,000 shares authorized, 37,504 shares issued and outstanding)          |                                   | 
|Common stock ($0.01 par value, 30,000,000 shares authorized;             |                                   | 
|6,532,100 and 6,517,100 shares issued and outstanding)                   |                                   | 
|Capital in excess of par value                                           |                                   | 
|Accumulated other comprehensive income                                   |                                   | 
|Retained Deficit                                                         |                                   | 
|                                                                         |                                   | 
|Total Stockholders' Equity                                               |                                   | 
|                                                                         |                                   | 
|Total Liabilities, Redeemable Convertible Preferred Stock                |                                   | 
|and Stockholders' Equity                                                 |                                   | 
|                                                                         |                                   | 

See
the Notes to the Consolidated Financial Statements.



ASCENT ASSURANCE, INC.
                                           CONSOLIDATED STATEMENTS OF OPERATIONS

|                                            |                         |  |                                      
|------------------------------------------- | ----------------------- |  | -------------------------------------
|                                            | Year Ended December 31,
|                                            |                         |  |                                      
|                                            |                         |  |                                      
|Revenues:                                   |                         |  | (in thousands, except per share data)
|Premiums:                                   |                         | 
|First-year                                  |                         |  | $                                    
|Renewal                                     |                         |  |                                      
|                                            |                         |  |                                      
|Total Premiums                              |                         |  |                                      
|                                           
|Net investment income                       |                         |  |                                      
|Fee and service income                      |                         |  |                                      
|Other insurance revenues                    |                         |  |                                      
|Net realized gain (loss) on investments     |                         |  |                                      
|                                            |                         |  |                                      
|Total Revenues                              |                         |  |                                      
|                                            |                         |  |                                      
|Benefits, claims and expenses:              |                         | 
|Benefits and claims                         |                         |  |                                      
|Change in deferred acquisition costs        |                         |  |                                      
|Commissions                                 |                         |  |                                      
|General and administrative expense          |                         |  |                                      
|Fee and service operating expense           |                         |  |                                      
|Taxes, license and fees                     |                         |  |                                      
|Interest expense on notes payable           |                         |  |                                      
|Interest expense on redeemable convertible 
|Series A preferred stock                    |                         |  |                                      
|                                            |                         |  |                                      
|Total Expenses                              |                         |  |                                      
|                                           
|Loss before income taxes                    |                         |  |                                      
|Federal income tax expense                  |                         |  |                                      
|                                            |                         |  |                                      
|Net Loss                                    |                         |  |                                      
|                                           
|Series A preferred stock dividends          |                         |  |                                      
|                                            |                         |  |                                      
|Loss applicable to common stockholders      |                         |  | $                                    
|                                            |                         |  |                                      
|Basic and diluted net loss per common share |                         |  | $                                    
|                                            |                         |  |                                      
|Weighted average shares outstanding:        |                         | 
|Basic                                       |                         |  |                                      
|                                            |                         |  |                                      
|Diluted                                     |                         |  |                                      
|                                            |                         |  |                                      

See the Notes to the Consolidated Financial Statements.



# ASCENT ASSURANCE, INC.CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

|                                                    |                         |  |  
|--------------------------------------------------- | ----------------------- |  | -
|                                                    | Year Ended December 31,
|                                                    |                         |  |  
|                                                    |                         |  |  
|                                                    | (in thousnads)          |  |  
|Net loss                                            |                         |  | $
|Other comprehensive (loss) income:                  |                         | 
|Unrealized holding (loss)gain arising during period |                         |  |  
|Reclassification adjustment of (gain) loss on sales |                         | 
|of investments in net loss                          |                         |  |  
|                                                    |                         |  |  
|Comprehensive (loss) income                         |                         |  | $
|                                                    |                         |  |  

See
the Notes to the Consolidated Financial Statements.



# ASCENT ASSURANCE, INC.CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(in thousands, except
share data)

|                                         |                                                |              |                     |                        |           |                   |                    |       
|---------------------------------------- | ---------------------------------------------- | ------------ | ------------------- | ---------------------- | --------- | ----------------- | ------------------ | ------
|                                         | Redeemable ConvertibleSeries B Preferred Stock | Common Stock | Capital InExcess of | AccumulatedOther Comp. |           | Retained(Deficit) | TotalStockholders'
|                                         | Shares                                         | Amount       | Shares              | Amount                 | Par Value | Income (Loss)     | Earnings           | Equity
|Balance at January 1, 2001               |                                                |              |                     | -                      |           |                   | -                  |       
|Net loss                                 |                                                |              |                     | (2,119                 | )         |                   | (2,119             | )     
|Series A Preferred stock dividend        |                                                |              |                     | (2,932                 | )         |                   | (2,932             | )     
|Other comprehensive income               |                                                |              |                     | 2,203                  |           |                   | 2,203              |       
|Decrease in deferred tax asset valuation |                                                |             
|allowance attributable to unrealized     |                                                |             
|gains on investments                     |                                                |              |                     | 1,198                  |           |                   | 1,198              |       
|Amortization of unearned compensation    |                                                |              |                     | 397                    |           |                   | 397                |       
|                                         |                                                |              |                     |                        |           |                   |                    |       
|Balance at December 31, 2001             |                                                |              |                     | -                      |           |                   | -                  |       
|                                         |                                                |              |                     |                        |           |                   |                    |       
|Net loss                                 |                                                |              |                     | (931                   | )         |                   | (931               | )     
|Series A Preferred stock dividend        |                                                |              |                     | (3,263                 | )         |                   | (3,263             | )     
|Other comprehensive income               |                                                |              |                     | 3,578                  |           |                   | 3,578              |       
|Amortization of unearned compensation    |                                                |              |                     | 55                     |           |                   | 55                 |       
|Common stock issued                      |                                                |              |                     | 17,100                 |           |                   | -                  |       
|                                         |                                                |              |                     |                        |           |                   |                    |       
|Balance at December 31, 2002             |                                                |              |                     | -                      |           |                   | -                  |       
|                                         |                                                |              |                     |                        |           |                   |                    |       
|Net loss                                 |                                                |              |                     | (1,348                 | )         |                   | (1,348             | )     
|Series A Preferred stock dividend        |                                                |              |                     | (1,759                 | )         |                   | (1,759             | )     
|Other comprehensive loss                 |                                                |              |                     | (398                   | )         |                   | (398               | )     
|Amortization of unearned compensation    |                                                |              |                     | 6                      |           |                   | 6                  |       
|Waiver of facility fee on notes          |                                                |             
|payable to related party                 |                                                |              |                     | 1,353                  |           |                   | 1,353              |       
|Common stock issued                      |                                                |              |                     | 15,000                 |           |                   | -                  |       
|Redeemable convertible Series B          |                                                |             
|preferred stock issued                   |                                                |              |                     | 37,504                 |           |                   | 37,504             |       
|                                         |                                                |              |                     |                        |           |                   |                    |       
|Balance at December 31, 2003             |                                                |              |                     | 37,504                 |           | $                 | 37,504             |       
|                                         |                                                |              |                     |                        |           |                   |                    |       

See
the Notes to the Consolidated Financial Statements.



# ASCENT ASSURANCE, INC.CONSOLIDATED
STATEMENTS OF CASH FLOWS

|                                                                         |                         |  |               
|------------------------------------------------------------------------ | ----------------------- |  | --------------
|                                                                         | Year Ended December 31,
|                                                                         |                         |  |               
|                                                                         |                         |  |               
|Cash Flow From Operating Activities:                                     |                         |  | (in thousands)
|Net loss                                                                 |                         |  | $             
|Adjustments to reconcile net loss to cash used for operating activities: |                         | 
|Decrease in accrued investment income                                    |                         |  |               
|Decrease (increase) in deferred acquisition costs                        |                         |  |               
|Decrease in receivables from agents                                      |                         |  |               
|Provision for uncollectible agent receivables                            |                         |  |               
|Decrease (increase) in other assets                                      |                         |  |               
|Decrease in policy liabilities and accruals                              |                         |  |               
|Increase (decrease) in accounts payable and accruals                     |                         |  |               
|Amortization and depreciation                                            |                         |  |               
|Amortization of deferred costs                                           |                         |  |               
|Interest expense on notes payable to related party                       |                         |  |               
|Interest expense on redeemable convertible Series A preferred stock      |                         |  |               
|Other, net                                                               |                         |  |               
|                                                                         |                         |  |               
|Net Cash Used for Operating Activities                                   |                         |  |               
|                                                                         |                         |  |               
|Cash Flow From Investing Activities:                                     |                         | 
|Purchase of fixed maturity investments                                   |                         |  |               
|Sales of fixed maturity investments                                      |                         |  |               
|Maturities and calls of fixed maturity investments                       |                         |  |               
|Net decrease (increase) in short term and other investments              |                         |  |               
|Purchase of equity securities                                            |                         |  |               
|Sales of equity securities                                               |                         |  |               
|Property and equipment purchased                                         |                         |  |               
|                                                                         |                         |  |               
|Net Cash Provided by (Used for) Investing activities                     |                         |  |               
|                                                                         |                         |  |               
|Cash Flow From Financing Activities:                                     |                         | 
|Retirement of Series A redeemable convertible preferred stock            |                         |  |               
|Issuance of Series B redeemable convertible preferred stock              |                         |  |               
|Issuance of notes payable                                                |                         |  |               
|Repayment of notes payable                                               |                         |  |               
|Deferred debt costs                                                      |                         |  |               
|                                                                         |                         |  |               
|Net Cash (Used for) Provided by Financing Activities                     |                         |  |               
|                                                                         |                         |  |               
|Increase (Decrease) in Cash During Period                                |                         |  |               
|Cash at Beginning of Period                                              |                         |  |               
|                                                                         |                         |  |               
|Cash at End of Period                                                    |                         |  | $             
|                                                                         |                         |  |               

See
the Notes to the Consolidated Financial Statements.



# ASCENT ASSURANCE, INC.NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003

# NOTE 1 
DESCRIPTION OF BUSINESS

Ascent Assurance, Inc.
(Ascent) is the successor to a Delaware company originally incorporated in
1982 as an insurance holding company. Ascent, through its applicable subsidiaries, is
engaged in the development, marketing, underwriting and administration of medical expense
and supplemental health insurance products, primarily to self-employed individuals and
small business owners.

The Companys revenues result
primarily from premiums and fees from the insurance products sold by its wholly-owned
subsidiaries National Foundation Life Insurance Company (NFL), Freedom Life
Insurance Company of America (FLICA), National Financial Insurance Company
(NFIC) and American Insurance Company of Texas (AICT), and
together with NFL, NFIC and FLICA, collectively, the Insurance Subsidiaries,
and marketed by NationalCare® Marketing, Inc. (NCM), also a
wholly-owned subsidiary. The insurance subsidiaries are licensed to conduct business in 40
states and the District of Columbia. Each of the following states accounted for more than
5% of premium revenue for the year ended December 31, 2003: Florida  18%, Texas
 13%, Colorado  8%, and Oklahoma  6%. The Company has no significant
concentrations of credit risks.

The Companys operations are
comprised of one segment, Accident and Health insurance. The principal products currently
underwritten are medical expense reimbursement and supplemental policies. The Company,
through applicable subsidiaries, also derives fee and service revenue from (i)
telemarketing services, (ii) printing services, and (iii) renewal commissions for prior
year sales of both affiliated and unaffiliated insurance products, and (iv) commissions on
the sale of the benefits of unaffiliated membership benefit programs.

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Basis of
Presentation. The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
(GAAP) and include the accounts of Ascent Assurance, Inc. and its
subsidiaries. All significant inter-company accounts and transactions have been
eliminated. Certain reclassifications of prior years amounts have been made to
conform to the 2003 financial statement presentation.

Cash
Equivalents. Cash equivalents consist of highly liquid instruments with
maturities at the time of acquisition of three months or less. Cash equivalents are stated
at cost, which approximates market.

Short-Term
Investments. Short-term investments are stated at cost, which approximates
market.

Investments.The Companys fixed maturity portfolio is classified as
          available-for-sale and is carried at estimated market value. Equity securities
          (common and non-redeemable preferred stocks), which are included in other
          investments, are also carried at estimated market value. Changes in aggregate
          unrealized appreciation or depreciation on fixed maturity and equity securities
          are reported directly in stockholders equity and, accordingly, will have no effect on current operations.

Deferred Policy Acquisition
Costs (DPAC).Policy acquisition costs consisting of
commissions and other policy issue costs, which vary with and are primarily related to the
production of new business, are deferred and amortized over periods not to exceed the
estimated premium-paying periods of the related policies. Also included in Other Assets is
the the value of business acquired. The amortization of these costs is
based on actuarially estimated future premium revenues, and the amortization rate is
adjusted periodically to reflect actual experience. Projected future levels of premium
revenue are estimated using assumptions as to interest, mortality, morbidity and
withdrawals consistent with those used in calculating liabilities for future policy
benefits.

Agent Receivables.In the ordinary course of business, a subsidiary of Ascent advances
commissions on policies written by its general agencies and their agents. Net agent
receivables were $4.5 million and $6.3 million at December 31, 2003 and 2002,
respectively. Such subsidiary is reimbursed for these advances from the commissions earned
over the respective policys life. In the event that policies lapse prior to the time
the subsidiary has been fully reimbursed, the general agency or the individual agents, as
the case may be, are responsible for reimbursing the outstanding balance of the commission
advances. A reserve for uncollectible agents balances is routinely established based
upon historical experience and projected commission earnings. As of December 31, 2003 and
2002, the allowance for uncollectible commission advances was $3.4 million and $4.6
million, respectively.

Property and Equipment.Property and equipment is stated on the basis of cost and consists
primarily of furniture, fixtures, leasehold improvements and software. Depreciation is
computed principally by the straight-line method for financial reporting purposes using
estimated useful lives of 2 to 10 years.

Future Policy Benefits.Liabilities for future policy benefits not yet incurred are computed
primarily using the net level premium method including actuarial assumptions as to
investment yield, mortality, morbidity, withdrawals, persistency and other assumptions
which were appropriate at the time, the policies were issued. Assumptions used are based
on the experience of each of the Insurance Subsidiaries, as adjusted to provide for
possible adverse deviation. Generally, these actuarial assumptions are fixed and, absent
material adverse benefit experience, are not adjusted.

Claim Reserves.
Claim reserves represent the estimated liabilities on claims reported plus claims incurred
but not yet reported. The process of estimating claim reserves involves the active
participation of experienced actuarial consultants with input from the underwriting,
claims, and finance departments. The inherent uncertainty in estimating claim reserves is
increased when significant changes occur. Changes impacting the Insurance Subsidiaries
include: (1) changes in economic conditions; (2) changes in state or federal laws and
regulations, particularly insurance reform measures; (3) writings of significant blocks of
new business and (4) significant changes in claims payment patterns. Because claim
reserves are estimates, management monitors reserve adequacy over time, evaluating new
information as it becomes available and adjusting claim reserves as necessary. Such
adjustments are reflected in current operations.

Notes Payable.
Notes payable are stated at cost, which approximates market.

Federal Income Taxes.The Company records income taxes based on the asset and liability approach,
which requires the recognition of deferred tax liabilities and assets for the expected
future tax consequence of temporary differences between the carrying amounts and the tax
basis of assets and liabilities. The tax effect of future taxable temporary differences
(liabilities) and future deductible temporary differences (assets) are separately
calculated and recorded when such differences arise. A valuation allowance, reducing any
recognized deferred tax asset, must be recorded if it is determined that it is more likely
than not that such deferred tax asset will not be realized. The net deferred tax asset at
December 31, 2003 and 2002 is fully reserved as discussed at Note 10.

Recognition of Revenue.Premium revenues from insurance contracts are recognized when due from
policyholders. Fee and service income is recognized when earned, the services have been
provided and collectiblity is reasonably assured.

Earnings Per Share.Under GAAP, there are two measures of earnings per share: basic
earnings per share and diluted earnings per share. Basic earnings per
share are computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted earnings per share
reflect the potential dilution that could occur if securities or other contracts to issue
common stock were converted or exercised. For the years 2003, 2002 and 2001, stock options
of 918,050, 1,014,650 and 1,085,850, respectively, and the conversion of the preferred
stock (see Note 7) could potentially dilute basic earnings per share in the future, but
were not included in the computation of diluted earnings per share because to do so would
have been anti-dilutive.

The following tables reflect the
calculation of basic and diluted earnings per share:

|                                       |                                       |  |  
|-------------------------------------- | ------------------------------------- |  | -
|                                       | Year Ended December 31,              
|                                       |                                       |  |  
|                                       |                                       |  |  
|                                       | (in thousands, except per share data) |  |  
|Basic:                                 |                                       | 
|Loss applicable to common shareholders |                                       |  | $
|                                       |                                       |  |  
|Weighted average shares outstanding    |                                       |  |  
|                                       |                                       |  |  
|Loss earnings per share                |                                       |  | $
|                                       |                                       |  |  
|Diluted:                               |                                       | 
|Loss applicable to common shareholders |                                       |  | $
|                                       |                                       |  |  
|Weighted average shares outstanding    |                                       |  |  
|                                       |                                       |  |  
|Diluted loss per share                 |                                       |  | $
|                                       |                                       |  |  

Use of Estimates.The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the
reporting period. The Companys significant accounting estimates relate to
investments, agent receivables, deferred policy acquisition costs, deferred tax assets,
claim reserves, future policy benefit reserves, reinsurance and statutory accounting
practices. Important factors known to management that could cause actual results to differ
materially from those estimated or contemplated include, but are not limited to:

| | o |  | any limitation imposed on the Insurance Subsidiaries ability to control the impact
of rising health care costs, especially prescription drugs, and rising medical service
utilization rates through product and benefit design, underwriting criteria, premium rate
increases, utilization management and negotiation of favorable provider contracts;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | the impact of changing health care trends on the Insurance Subsidiaries ability to
accurately estimate claim and settlement expense reserves;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | the ability of the Company to fund competitive commission advances to its agents from
internally generated cash flow or external financing;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | developments in health care reform and other regulatory issues, including the Health
Insurance Portability and Accountability Act of 1996 and increased privacy regulation, and
changes in laws and regulations in key states where the Company operates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Ascents ability to make additional investment in its Insurance Subsidiaries in the
form of capital contributions, if needed, in order for such subsidiary to comply with
minimum regulatory capital requirements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | default by issuers of fixed maturity investments owned by the Insurance Subsidiaries; and
| | - |  | -----------------------------------------------------------------------------------------

| | o |  | the loss of key management personnel.
| | - |  | -------------------------------------

Change in Accounting Estimates.
During the third quarter of 2003, the Company
redetermined the estimated useful life of certain software programs used by the Company to
manage policyholder data. Effective July 1, 2003, the original estimated life was extended
by twenty-four months, reducing software amortization expense by approximately $276,000
for the year ended December 31, 2003. The reduction in loss per basic and diluted share
outstanding was approximately $0.04 for the year ended December 31, 2003.

Recently Issued Accounting
Pronouncements.In May 2003, the FASB issued SFAS No. 150, Accounting
For Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. This Statement established standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is within its
scope as a liability measured at fair value. The Statement was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was effective at
the beginning of the first interim period beginning after June 15, 2003. Ascent
implemented SFAS 150 effective with the beginning of the third quarter 2003. As a result,
Ascents Series A Redeemable Convertible Preferred Stock of approximately $36.6
million was classified as a liability in the Companys interim September 30, 2003
balance sheet. At December 31, 2003, the outstanding shares of Ascents Series A
Redeemable Convertible Preferred Stock were exchanged for shares of Ascents Series B
Redeemable Convertible Preferred Stock (see Note 3  Restructuring of Redeemable
Convertible Preferred Stock and Notes Payable to Related Party).

Also, under SFAS 150, amounts paid in
excess of the initial measurement amount to holders of the mandatorily redeemable
preferred stock classified as liabilities are to be reflected in interest cost. All
amounts paid to or accrued prior to the reclassification of the stock as a liability shall
not be reclassified as interest cost upon implementation. As a result, the Company
reflected in interest costs the dividends paid or accrued to the holders of the Series A
Redeemable Convertible Preferred Stock for the six-month period ended December 31, 2003.
All dividend amounts paid or accrued prior to the implementation of SFAS 150 are reflected
as preferred stock dividends.

# NOTE 3 
RESTRUCTURING OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND NOTES PAYABLE TO RELATED
PARTY

On December 31, 2003, the Company
completed an exchange of the redeemable convertible preferred stock and restructuring of
the notes payable of AAI held by Special Situations Holdings, Inc.  Westbridge
(SSHW) and Credit Suisse First Boston Management LLC (CSFBM),
respectively, both affiliates of Credit Suisse First Boston LLC (CSFB)
(together, SSHW and CSFBM, the CSFB entities), that resulted in, among other
things, an extension of the maturity dates of such preferred stock and notes held by the
CSFB entities from March 24, 2004 and April 17, 2004, respectively, to March 24, 2010. The
restructuring was effected pursuant to an Exchange Agreement dated as of December 31, 2003
between the Company and CSFBM (the Exchange Agreement).

Prior to the restructuring, SSHW held
36,567 shares plus accrued dividends equal to 937 shares of 10.25% Series A Convertible
Preferred Stock (Series A Preferred) of the Company with a stated value of
approximately $37.5 million. Pursuant to the Exchange Agreement, SSHW received 37,504
shares of 5.5% Series B Convertible Preferred Stock (Series B Preferred) of
the Company in exchange for the shares of Series A Preferred and accrued dividends held by
SSHW. The conversion price of the Series B Preferred is $.85246 per share (or 1,173.1
shares of common stock per share of Series B Preferred) versus $4.88 per share for the
Series A Preferred (or 204.9 shares of common stock per share of Series A Preferred). The
shares of the Series A Preferred were cancelled.

Prior to the restructuring, CSFB,
through SSHW, was the Companys largest stockholder, owning approximately 49% of the
outstanding shares of common stock of the Company and, on an as converted, fully-diluted
basis assuming conversion of the outstanding Series A Preferred, approximately 75.4% of
the common stock. As a result of the exchange for Series B Preferred, CSFB, through SSHW,
now owns on an as converted, fully diluted basis, 93% of the common stockholders with the
remaining 7% held by public stockholders. At a stockholders meeting to be held no later
than June 30, 2004, the stockholders of the Company will be asked to adopt an amendment to
the Companys certificate of incorporation to authorize additional shares of common
stock in an amount necessary to permit the conversion of the Series B Preferred in full.
Upon the effectiveness of such amendment and obtaining of all necessary insurance
regulatory approvals, the Series B Preferred will convert into common stock and no
preferred stock will remain outstanding. Under the Exchange Agreement, CSFB has agreed to
be present in person or by proxy at the stockholders meeting and to vote all of its shares
of common stock held by SSHW in favor of such amendment of the Companys certificate
of incorporation.

The restructuring of the notes
payable to CSFBM in the amount of $15.3 million (including accrued interest) was effected
by an amendment to the Credit Agreement dated as of April 17, 2001 between the Company and
CSFBM. In addition to the extension of the maturity date to March 24, 2010, the interest
rate of the note payable was reduced from 12% to 6% per annum. A $1.5 million facility
fee, of which $1.35 million was accrued as of December 30, 2003, payable upon maturity of
the note payable was waived. On December 31, 2003, the balance of the accrued facility fee
was credited directly to capital in excess of par value. In the event that the Company
fails to receive the approval of its stockholders in favor of the amendment to the
certificate of incorporation described above by June 30, 2004, other than if such failure
is the direct or indirect result of any action taken or failed to be taken by the CSFB
entities, such failure shall constitute an event of default under the notes payable which,
among other things, will result in the holder of the Series B Preferred having the right
to vote on all matters, other than the election of directors, thereafter brought to the
stockholders of the Company. CSFBM has also agreed that the notes payable will be
subordinate to up to $10 million in borrowings under the Companys agent debit
balance credit facility. The Company, certain of its subsidiaries, CSFBM and the lender
under such credit facility have entered into an Intercreditor and Subordination Agreement
dated as of December 31, 2003 to give effect to this subordination agreement.

# NOTE 4  INVESTMENTS

Major categories of investment income
are summarized as follows:

|                                    |                         |  |               
|----------------------------------- | ----------------------- |  | --------------
|                                    | Year Ended December 31,
|                                    |                         |  |               
|                                    |                         |  |               
|                                    |                         |  | (in thousands)
|Fixed maturities                    |                         |  | $             
|Short-term investments              |                         |  |               
|Interest on receivables from agents |                         |  |               
|Other                               |                         |  |               
|                                    |                         |  |               
|                                    |                         |  |               
|Less: Investment expenses           |                         |  |               
|                                    |                         |  |               
|Net investment income               |                         |  | $             
|                                    |                         |  |               

Realized gain (loss) on investments
are summarized as follows (in thousands):

|                                    |                         |  |  
|----------------------------------- | ----------------------- |  | -
|                                    | Year Ended December 31,
|                                    |                         |  |  
|                                    |                         |  |  
|Fixed maturities                    |                         |  | $
|Equity securities                   |                         |  |  
|                                    |                         |  |  
|Realized gain (loss) on investments |                         |  | $
|                                    |                         |  |  

Unrealized (depreciation)
appreciation on investments is reflected directly in stockholders equity as a
component of accumulated other comprehensive (loss) income and is summarized as follows:

|                                           |                         |  |  
|------------------------------------------ | ----------------------- |  | -
|                                           | Year Ended December 31,
|                                           |                         |  |  
|                                           |                         |  |  
|Balance at beginning of period             |                         |  | $
|Unrealized (depreciation) appreciation,    |                         | 
|on fixed maturities available-for-sale     |                         |  |  
|Unrealized appreciation (depreciation)     |                         | 
|on equity securities and other investments |                         |  |  
|                                           |                         |  |  
|Balance at end of period                   |                         |  | $
|                                           |                         |  |  

Estimated market values represent the
quoted closing sales prices of marketable securities. The amortized cost and estimated
market values of investments in fixed maturities are summarized by category as follows:



|                                                            |               |                      |                       |                     
|----------------------------------------------------------- | ------------- | -------------------- | --------------------- | --------------------
|December 31, 2003 Available-for-Sale                        | AmortizedCost | GrossUnrealizedGains | GrossUnrealizedLosses | EstimatedMarketValue
|                                                            |               |                      | (in thousands)       
|U.S. Government and governmental agencies and   authorities |               |                      | $                     | 10,356              
|States, municipalities, and political subdivisions          |               |                      |                       | 2,282               
|Finance companies                                           |               |                      |                       | 18,289              
|Public utilities                                            |               |                      |                       | 8,432               
|Mortgage-backed securities                                  |               |                      |                       | 23,810              
|All other corporate bonds                                   |               |                      |                       | 30,753              
|                                                            |               |                      |                       |                     
|Balance at December 31, 2003                                |               |                      | $                     | 93,922              
|                                                            |               |                      |                       |                     
|December 31, 2002 Available-for-Sale                        | AmortizedCost | GrossUnrealizedGains | GrossUnrealizedLosses | EstimatedMarketValue
|                                                            |               |                      | (in thousands)       
|U.S. Government and governmental agencies and   authorities |               |                      | $                     | 10,566              
|States, municipalities, and political subdivisions          |               |                      |                       | 1,625               
|Finance companies                                           |               |                      |                       | 16,910              
|Public utilities                                            |               |                      |                       | 6,936               
|Mortgage-backed securities                                  |               |                      |                       | 32,460              
|All other corporate bonds                                   |               |                      |                       | 27,083              
|                                                            |               |                      |                       |                     
|Balance at December 31, 2002                                |               |                      | $                     | 95,580              
|                                                            |               |                      |                       |                     

The amortized cost and estimated
market value of investments in available-for-sale fixed maturities as of December 31,
2003, are shown below, in thousands, summarized by year to contractual maturity.
Mortgage-backed securities are listed separately. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations
with or without penalties.

|                                       |                |                     
|-------------------------------------- | -------------- | --------------------
|                                       | AmortizedCost  | EstimatedMarketValue
|                                       | (in thousands)
|Due in one year or less                |                |                     
|Due after one year through five years  |                |                     
|Due after five years through ten years |                |                     
|Due after ten years                    |                |                     
|Mortgage-backed securities             |                |                     
|                                       |                |                     
|                                       |                |                     
|                                       |                |                     

A summary of unrealized appreciation
on investments in fixed maturities and equity securities available-for-sale, which is
reflected directly in stockholders equity as a component of accumulated other
comprehensive loss, is as follows:

|                                         |              | 
|---------------------------------------- | ------------ | 
|                                         | December 31,
|                                         |              | 
|                                         |              | 
|                                         |              | 
|Amortized cost                           |              | 
|Estimated market value                   |              | 
|                                         |              | 
|Excess of market value to amortized cost |              | 
|Estimated tax                            |              | 
|                                         |              | 
|Unrealized appreciation                  |              | 
|                                         |              | 

Net unrealized appreciation on
investments at December 31, 2003 consists of gross unrealized gains of $4 million and
gross unrealized losses of $1 million. Gross unrealized losses consist of thirty-eight
issues of investment-grade fixed maturities with $26.2 million fair value with unrealized
losses of $0.9 million that have been in an unrealized loss position for less than one
year and four issues of fixed maturities with $1.5 million fair value with unrealized
losses of $0.1 million that have been in an unrealized loss position for one year or more.

Unrealized losses on investment grade
securities principally relate to changes in market interest rates or changes in credit
spreads since the securities were acquired. The Company monitors the financial condition
and operations of the securities rated below investment grade and of certain investment
grade securities on which there are concerns regarding credit quality.

In evaluating fixed maturities to
determine whether any of the unrealized losses are other than temporary, managements
assessments as to the nature of declines in fair values are based upon historical
operating trends, business prospects, status of the industry in which the company
operates, analyst ratings on the issuer and sector, the quality of the investments, the
severity and duration of the unrealized losses and the Companys ability and intent to
hold the investments. If fair value is less than the carrying value and the decline in
value is determined to be other than temporary, an appropriate write-down is recorded through realized losses.

Proceeds from sales and maturities of
investments in fixed maturity securities were approximately $69.2 million, $57.2 million
and $37.9 million for 2003, 2002 and 2001 respectively. Gross gains of $0.7 million and
gross losses of ($0.5) million were realized on fixed maturity investment sales during
2003. Gross gains of $1.6 million and gross losses of ($1.8) million were realized on
fixed maturity investment sales during 2002. Gross gains of $0.7 million and gross losses
of ($0.3) million were realized on fixed maturity investment sales during 2001. The basis
used in determining the cost of securities sold was the specific identification method.

Included in fixed maturities at
December 31, 2003 and 2002, are high-yield, unrated or less than investment grade
corporate debt securities comprising approximately 2.2% and 1.7% of fixed maturities at
December 31, 2003 and 2002, respectively.

Investment securities on deposit with
insurance regulators in accordance with statutory requirements at December 31, 2003 and
2002 had a par value totaling $21.1 million and $20.9 million, respectively, and market
value totaling $23.1 million and $23.1 million, respectively. At December 31, 2002, the
Company had pledged short-term investments totaling $2.6 million in connection with its
receivables financing program (see Note 7).

# NOTE 5  FUTURE
POLICY BENEFITS

Future policy benefits for Accident
and Health insurance products have been calculated using assumptions (which generally
contemplate the risk of adverse deviation) for lapses, interest, mortality and morbidity
appropriate at the time the policies were issued. The more material assumptions are as
follows:

| | Lapses |  | Issues through 1980 are based on industry experience; 1981 through 2003 issues are based
on industry experience and applicable Insurance Subsidiary experience, where available.
Policies acquired in acquisitions are based on recent experience of the blocks acquired.
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest |  | Issues through 1980 are 6.5% graded to 4.5% in 25 years; most 1981 through 1992 issues are
10% graded to 7% in 10 years. Issues for 1993 through 2002 are 7% level. Issues for 2003
are 5% level.
| | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Mortality |  | Issues through 1980 use the 1955-1960 Ultimate Table; issues subsequent to 1980 through
1992 use the 1965-1970 Ultimate Table. Issues for 1993 and later years use the 1975-1980
Ultimate Table.
| | --------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Morbidity |  | Based on industry tables published in 1974 by Tillinghast, Nelson and Warren, Inc. and the
1985 NAIC cancer tables, as well as other population statistics and morbidity studies.
Issues for 2003 are based on the July 2002 Milliman Health Cost Guidelines adjusted for
the Insurance Subsidiaries anticipated claims levels.
| | --------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 6  CLAIM
RESERVES

The following table provides a
reconciliation of the beginning and ending claim reserve balances, on a
gross-of-reinsurance basis, for 2003, 2002 and 2001, to the amounts reported in the
Companys consolidated balance sheets:

|                                                 |                         |  |  
|------------------------------------------------ | ----------------------- |  | -
|                                                 | Year Ended December 31,
|                                                 |                         |  |  
|                                                 |                         |  |  
|                                                 | (in thousands)         
|                                                 |                         |  |  
|Balance, beginning of the year (gross)           |                         |  | $
|Less:  Reinsurance recoverable on claim reserves |                         |  |  
|                                                 |                         |  |  
|Net balance at beginning of period               |                         |  |  
|Incurred related to:                             |                         | 
|Current year                                     |                         |  |  
|Prior years                                      |                         |  |  
|                                                 |                         |  |  
|Total incurred                                   |                         |  |  
|                                                 |                         |  |  
|Paid related to:                                 |                         | 
|Current year                                     |                         |  |  
|Prior years                                      |                         |  |  
|                                                 |                         |  |  
|Total paid                                       |                         |  |  
|                                                 |                         |  |  
|Balance at end of period                         |                         |  |  
|Plus: Reinsurance recoverable on claim reserves  |                         |  |  
|                                                 |                         |  |  
|Balance at end of period (gross)                 |                         |  | $
|                                                 |                         |  |  

The process of estimating claim
reserves involves the active participation of experienced actuarial consultants with input
from the underwriting, claims, and finance departments. The inherent uncertainty in
estimating claim reserves is increased when significant changes occur. Changes impacting
the Insurance Subsidiaries include: (1) changes in economic conditions; (2) changes in
state or federal laws and regulations, particularly insurance reform measures; (3)
writings of significant blocks of new business and (4) significant changes in claims
payment patterns. Because claim reserves are estimates, management monitors reserve
adequacy over time, evaluating new information as it becomes available and adjusting claim
reserves as necessary. Such adjustments are reflected in current operations.

Claims incurred related to prior
years were a $0.2 million benefit and a $0.4 million expense for 2003 and 2002,
respectively and approximated 1% of the prior year claim liability for both years. Claims
incurred related to prior years for 2001 provided a benefit of $1.8 million, which was
primarily attributable to actual medical trends for the latter part of 2000 developing
more favorably than managements estimates.

Included in reinsurance recoverables
on claim reserves is approximately $1.4 million, $0.5 million, and $0.9 million relating
to paid claims as of December 31, 2003, 2002 and 2001, respectively.

# NOTE 7  FINANCING
ACTIVITIES

CSFB Financing.Ascent received debt financing to fund an $11 million capital contribution
to FLICA in April 2001 from CSFBM, which is an affiliate of SSHW (Ascents largest
stockholder.) The credit agreement relating to that loan (CSFBM Credit
Agreement) provided Ascent with total loan commitments of $11 million, all of which
were drawn in April 2001. Under reconstructed terms (see Note 3  Restructuring of
Redeemable Convertible Preferred Stock and Notes Payable to Related Party), the loan bears
interest at a rate of 6% per annum and matures in April 2010. Terms of the CSFBM Credit
Agreement are equivalent to terms that exist in arms-length credit transactions.

Absent any acceleration following an
event of default, the Company may elect to pay interest in kind by issuance of additional
notes. During 2003, 2002 and 2001, Ascent issued $1.7 million, $1.5 million and $987,000,
respectively, in additional notes for payment or interest in kind, which increased the
note payable balance at December 31, 2003 to approximately $15.3 million.

The CSFBM Credit Agreement is
secured, pursuant to a guarantee and security agreement and pledge agreements, by
substantially all of the assets of Ascent and its subsidiaries (excluding the capital
stock and the assets of AICT, FLICA, NFL, NFIC, NCM, Ascent Funding, Inc. and Ascent Management, Inc., some or all of which is pledged as collateral for bank financing
described below). Ascents subsidiaries (other than those listed above) have also
guaranteed Ascents obligations under the CSFBM Credit Agreement. Under this
agreement, the Company is required to meet certain restrictive requirements including
minimum statutory capital and surplus, and RBC ratios for its Insurance Subsidiaries,
minimum net worth and other customary covenants. At December 31, 2003, there were no
events of default.

Bank Financing.The majority of commission advances to NCMs agents are financed
through Ascent Funding, Inc. (AFI), an indirect wholly owned subsidiary of
Ascent. On December 31, 2003, AFI entered into a Credit Agreement (the Credit
Agreement) with Frost National Bank (Frost) that provides AFI with a
$3.0 million revolving loan facility, the proceeds of which are used to purchase agent
advance receivables from NCM and other affiliates. As of December 31, 2003, $500,000 was
outstanding under the Credit Agreement. The Credit Agreement matures on January 15, 2005,
at which time the outstanding principal and interest will be due and payable.

AFIs obligations under the
Credit Agreement are secured by liens upon substantially all of AFIs assets.
AFIs principal assets at December 31, 2003 are net agent receivables of $4.5
million. In addition, NCM and Ascent have guaranteed AFIs obligation under the
Credit Agreement, and have pledged all of the issued and outstanding shares of the capital
stock of AFI, NFL, and FLICA as collateral for those guaranties (the Guaranty
Agreements). Ascent, certain of its subsidiaries, CSFBM and Frost have entered into
an Intercreditor and Subordination Agreement dated as of December 31, 2003 to give effect
to a subordination of the notes payable to CSFBM to up to $10 million in borrowings under
the Credit Agreement. As of December 31, 2003, there were no events of default under the
Credit or Guaranty Agreements.

AFI formerly financed agent
receivables through a Credit Agreement (the LaSalle Credit Agreement) with
LaSalle Bank NA (LaSalle). On January 31, 2003, pursuant to terms of the
LaSalle Credit Agreement, AFI liquidated a $2.6 million cash collateral account pledged to
LaSalle. Pursuant to an agreement with LaSalle, AFI paid a dividend of $1.6 million to
Ascent. The proceeds were used to fully pay off Ascent Management Inc.s
(AMI) term loan facility with LaSalle on January 31, 2003. On November 28,
2003, the amount outstanding of $1.4 million under AFIs LaSalle Credit Agreement was
paid off, AFIs revolving loan facility and all guaranties provided by AAI were
terminated, and all collateral held by LaSalle was returned to the Company. Interest of
$78,000, $0.3 million and $0.6 million was expensed and paid in 2003, 2002 and 2001,
respectively on credit facilities with LaSalle.

# NOTE 8  REDEEMABLE
CONVERTIBLE PREFERRED STOCK

The Company has authorized 40,000
shares of non-voting preferred stock. At December 31, 2003, 37,504 shares of Series B
Preferred were outstanding all of which are owned by SSHW, which is the Companys
largest common stockholder and is also an affiliate of CSFB. The Series B Preferred Stock
has been classified as Stockholders Equity in the Consolidated Balance Sheet at
December 31, 2003 as the terms include substantive conversion features and conversion is
probable.

The following summarizes the
significant terms of the Series B Preferred:

| | o |  | Stated value of $1,000 per share.
| | - |  | ---------------------------------

| | o |  | Cumulative annual dividend rate of $50.50 per share payable, at a minimum, annually in
arrears by the last day of January in each year by issuance of cash or additional shares
of preferred stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Each share of preferred stock is convertible at any time into 1,173.0756 shares of common
stock at an initial conversion price of $0.85246 per share, subject to customary
anti-dilution adjustments.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | The preferred stock is mandatorily redeemable in cash on March 24, 2010 in an amount equal
to the stated value per share plus all accrued and unpaid dividends thereon to the date of
redemption.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As described in Note 3 
Restructuring of Redeemable Preferred and Notes Payable to Related Party, the shares of
Series B Preferred were issued in exchange for 36,567 shares plus accrued dividends equal
to 937 shares of 10.25% Series A Preferred. Prior to cancellation on December 31, 2003,
the Series A Preferred had a stated value of $1,000 per share with a cumulative annual
dividend rate of $102.50 per share payable, at a minimum, annually in arrears by the last
day of January in each year by issuance of cash or additional shares of preferred stock.
Each share of Series A Preferred was convertible on or before March 24, 2004 into 204.8897
shares of common stock at an initial conversion price of $4.88 per share, subject to
customary anti-dilution adjustment.

During 2003, Ascent paid dividends on
the Series A Preferred through the issuance of 3,608 additional shares of preferred stock
and $2,076 in cash for fractional shares. During 2002, the Company paid Series A Preferred
dividends through the issuance of 3,261 additional shares of preferred stock and $1,831 in
cash for fractional shares. In December 2001, the Company paid Series A Preferred
dividends through the issuance of 2,930 additional shares of preferred stock and $1,603 in
cash for fractional shares.

# NOTE 9  DEFERRED
POLICY ACQUISITION COSTS (DPAC)

A summary of DPAC follows (in
thousands):

|                               |                         |  |  
|------------------------------ | ----------------------- |  | -
|                               | Year Ended December 31,
|                               |                         |  |  
|                               |                         |  |  
|Balance at beginning of period |                         |  | $
|Deferrals                      |                         |  |  
|Amortization expense           |                         |  |  
|                               |                         |  |  
|Balance at end of period       |                         |  | $
|                               |                         |  |  

The Company routinely evaluates the
recoverability of deferred acquisition costs in accordance with GAAP. In general, a
premium deficiency exists if the present value of future net cash flow plus future policy
benefit and claim reserves at the calculation date is negative or less than net deferred
policy acquisition costs. The calculation of future net cash flow includes assumptions as
to future rate increases, investment income and persistency. Premium deficiencies did not exist for the years
reported.

NOTE 10  INCOME TAXES

The provision for income taxes is
calculated as the amount of income taxes expected to be payable for the current year plus
(or minus) the deferred income tax expense (or benefit) represented by the change in the
deferred income tax assets and liabilities at the beginning and end of the year. The
effect of changes in tax rates and federal income tax laws are reflected in income from
continuing operations in the period such changes are enacted.

The tax effect of future taxable
temporary differences (liabilities) and future deductible temporary differences (assets)
are separately calculated and recorded when such differences arise. A valuation allowance,
reducing any recognized deferred tax asset, must be recorded if it is determined that it
is more likely than not that such deferred tax asset will not be realized.

No federal income taxes were paid or
incurred in 2003, 2002, and 2001. The Company and its wholly-owned subsidiaries file a
consolidated federal income tax return. Prior to 2002, FLICA filed a separate federal
income tax return.

The differences between the effective
tax rate and the amount derived by multiplying the loss before income taxes by the federal
income tax rate for the Companys last three years is shown below. The change in
valuation allowance results from current year losses and the true-up of prior
year deferred tax items.

|                              |                         |  |  
|----------------------------- | ----------------------- |  | -
|                              | Year Ended December 31,
|                              |                         |  |  
|                              |                         |  |  
|Statutory tax rate            |                         |  | $
|Change in valuation allowance |                         |  |  
|Other items, net              |                         |  |  
|                              |                         |  |  
|Effective tax rates           |                         |  | $
|                              |                         |  |  

Deferred taxes are recorded for
temporary differences between the financial reporting basis and the federal income tax
basis of the Companys assets and liabilities. The sources of these differences and
the estimated tax effect of each are as follows:

|                                                  |                         | 
|------------------------------------------------- | ----------------------- | 
|                                                  | Year Ended December 31,
|                                                  |                         | 
|                                                  |                         | 
|                                                  |                         | 
|Deferred Tax Assets:                              |                         | 
|Policy reserves                                   |                         | 
|Net operating loss carryforwards                  |                         | 
|Other deferred tax assets                         |                         | 
|                                                  |                         | 
|Total deferred tax asset                          |                         | 
|                                                  |                         | 
|Deferred Tax Liabilities:                         |                         | 
|Unrealized gain on investments                    |                         | 
|Deferred policy acquisition costs                 |                         | 
|Other deferred tax liabilities                    |                         | 
|                                                  |                         | 
|Total deferred tax liability                      |                         | 
|                                                  |                         | 
|Net Deferred Tax Asset Before Valuation Allowance |                         | 
|Less Valuation Allowance                          |                         | 
|                                                  |                         | 
|Net Deferred Tax Asset                            |                         | 
|                                                  |                         | 

Realization of the Companys
deferred tax asset is dependent upon the return of the Companys operations to
profitability. However, projections of future profitability are significantly discounted
when evaluating the recoverability of deferred tax assets and do not overcome the negative
evidence of cumulative losses. Accordingly, the Company has recorded a 100% deferred tax asset valuation allowance at December 31, 2003 and 2002.

Under the provisions of pre-1984 life
insurance tax regulations, NFL was taxed on the lesser of taxable investment income or
income from operations, plus one-half of any excess of income from operations over taxable
investment income. One-half of the excess (if any) of the income from operations over
taxable investment income, an amount which was not currently subject to taxation, plus
special deductions allowed in computing the income from operations, were placed in a
special memorandum tax account known as the policyholders surplus account. The
aggregate accumulation in the account at December 31, 2003, approximated $2.5 million.
Federal income taxes will become payable on this account at the then current tax rate
when, and to the extent that, the account exceeds a specific maximum, or when and if
distributions to stockholders, other than stock dividends and other limited exceptions,
are made in excess of the accumulated previously taxed income. The Company does not
anticipate any transactions that would cause any part of the amount to become taxable and,
accordingly, deferred taxes that would approximate $0.9 million have not been provided on
such amount.

At both December 31, 2003 and 2002,
NFL had approximately $7.8 million in its shareholders surplus account from which it could
make distributions to the Company without incurring any federal tax liability. The amount
of dividends that may be paid by NFL to the Company is limited by statutory regulations.

At December 31, 2003, the Company and
its wholly-owned subsidiaries have aggregate net operating loss carryforwards of approximately $63.4 million for regular
tax and $63.1 million for alternative minimum tax purposes, which will expire in 2012
through 2018.

# NOTE 11  STATUTORY
CAPITAL AND SURPLUS

Under the applicable laws of the
states in which insurance companies are licensed, the companies are required to maintain
minimum amounts of capital and surplus. Effective September 28, 2000, NFL and FLICA
redomesticated from the states of Delaware and Mississippi, respectively, to the state of
Texas. As a result, NFL, FLICA, NFIC and AICT are Texas domestic companies and are subject
to regulation under Texas insurance laws. Under the Texas Insurance Code, the insurance
subsidiaries are required to maintain aggregate capital and surplus of $1.4 million. The
following states where the companies are licensed require greater amounts of capital and
surplus: California $2.5 million of capital and $2.5 million of surplus, Michigan $7.5
million of aggregate capital and surplus and Nebraska and Tennessee $1 million of capital
and $1 million of surplus. Accordingly, the minimum aggregate statutory capital and
surplus NFL, FLICA, NFIC and AICT must each maintain equals $5 million, $7.5 million, $5
million and $2 million, respectfully. At December 31, 2003, aggregate statutory capital
and surplus for NFL, FLICA, NFIC, and AICT was approximately $7.2 million, $8.8 million,
$1.6 million and $2.0 million, respectively. Although NFICs capital and surplus was
less than $5 million at December 31, 2003, NFIC voluntarily ceased writing new business
effective December 15, 1997. Moreover, NFICs capital and surplus exceeds the minimum
requirements of its state of domicile, Texas. AICT is wholly-owned by NFIC. Accordingly,
statutory capital and surplus of NFIC includes the statutory capital and surplus of AICT.

As a result of losses from major
medical products marketed prior to July 2000, FLICA required significant capital
contributions during 2002 and 2001 to comply with minimum statutory capital and surplus
requirements. In April 2001, Ascent obtained debt financing of $11 million from a
subsidiary of CSFB. The proceeds of this loan were used to fund an $11 million capital
contribution to FLICA. Major medical claims experience adverse to managements
current estimates or adverse claims experience for other insurance products may cause
Ascent to make capital contributions to the Insurance Subsidiaries in excess of those
currently projected for 2004. As a result, adverse claims experience could have a material
adverse effect on Ascents liquidity and capital resources and results of operations.

Dividends paid by the Insurance
Subsidiaries are subject to the regulations of the insurance laws and practices of the
Texas Department of Insurance. The Texas Insurance Code allows life and health insurance
companies to make dividend payments from surplus profits or earned surplus arising from
its business. Earned surplus is defined as unassigned surplus excluding any unrealized
gains. Texas life and health insurance companies may generally pay ordinary dividends or
make distributions of cash or other property within any twelve month period with a fair
market value equal to or less than the greater of 10% of surplus as regards policyholders
as of the preceding December 31 or the net gain from operations for the twelve month
period ending on the preceding December 31. Dividends exceeding the applicable threshold
are considered extraordinary and require the prior approval of the Texas Insurance
Commissioner.

The Insurance Subsidiaries are
precluded from paying dividends during 2004 without prior approval of the Texas Insurance
Commissioner as the companies earned surplus is negative. Generally, all states
require insurance companies to maintain statutory capital and surplus that is reasonable
in relation to their existing liabilities and adequate to their financial needs. The Texas
Department of Insurance also maintains discretionary powers relative to the declaration
and payment of dividends based upon an insurance companys financial position. Due to
recent statutory losses incurred by the Insurance Subsidiaries, the Company does not
expect to receive any dividends from the Insurance Subsidiaries for the foreseeable
future.

In December 1992, the NAIC adopted
the Risk-Based Capital for Life and/or Health Insurers Model Act (the Model
Act). The Model Act provides a tool for insurance regulators to determine the levels
of statutory capital and surplus an insurer must maintain in relation to its insurance and
investment risks and whether there is a need for possible regulatory attention. The Model
Act (or similar legislation or regulation) has been adopted in states where the Insurance
Subsidiaries are domiciled. The Model Act provides four levels of regulatory attention,
varying with the ratio of the insurance companys total adjusted capital (defined as
the total of its statutory capital and surplus, asset valuation reserve and certain other
adjustments) to its authorized control level risk-based capital (RBC):

| | o |  | If a companys total adjusted capital is less than or equal to 200 percent but
greater than 150 percent of its RBC, (the Company Action Level), the company
must submit a comprehensive plan aimed at improving its capital position to the regulatory
authority proposing corrective actions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | If a companys total adjusted capital is less than or equal to 150 percent but
greater than 100 percent of its RBC (the Regulatory Action Level), the
regulatory authority will perform a special examination of the company and issue an order
specifying the corrective actions that must be followed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | If a companys total adjusted capital is less than or equal to 100 percent but
greater than 70 percent of its RBC (the Authorized Control Level), the
regulatory authority may take any action it deems necessary, including placing the company
under regulatory control.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | If a companys total adjusted capital is less than or equal to 70 percent of its RBC
(the Mandatory Control Level), the regulatory authority must place the company
under its control.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Texas Department of Insurance
adopted the NAICs Model Act during 2000. NFLs and FLICAs statutory
annual statements for the year ended December 31, 2003 filed with the Texas Department of
Insurance reflect total adjusted capital in excess of Company Action Level RBC.

In 1998, NFIC and AICT entered into a
voluntary consent order, pursuant to Article 1.32 of the Texas Insurance Code, providing
for the continued monitoring of the operations of NFIC and AICT by the Texas Department of
Insurance in response to losses sustained in 1997 and 1998 as well as the projected
inability to meet RBC requirements. Both NFIC and AICT ceased the sale and underwriting of
new business in 1998. At December 31, 2003, AICTs RBC exceeded Company Action Level
RBC; however, NFICs RBC only exceeded Regulatory Action Level RBC. Both NFIC and
AICT are in compliance with the terms of the voluntary consent order.

Under Florida Statutes Section
624.4095, Florida licensed insurance companies ratio of actual or projected annual
written premiums to current or projected surplus as regards to policyholders (the
premium-writing ratio) may not exceed specified levels for gross and net written
premiums as defined by the statute. If a company exceeds the premium-writing ratio, the
Florida Department of Insurance shall suspend the companys certificate of authority
in Florida or establish by order maximum gross or net annual premiums to be written by the
company consistent with maintaining the ratios specified. At December 31, 2003, the
premium-writing ratio for FLICA, which currently underwrites insurance policies in
Florida, met the limit mandated by Florida law.

The statutory financial statements of
the Insurance Subsidiaries are prepared using accounting methods that are prescribed or
permitted by the insurance department of the respective companies state of domicile.
Prescribed statutory accounting practices include the NAIC Codification of Statutory
Accounting practices as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not so
prescribed.

A reconciliation of capital and
surplus, and net loss as reported on a statutory basis by the Companys Insurance
Subsidiaries to the Companys consolidated GAAP stockholders equity and net
loss is as follows:



|                                                  |                         |  |               
|------------------------------------------------- | ----------------------- |  | --------------
|                                                  | December 31,           
|                                                  |                         |  |               
|                                                  |                         |  |               
|                                                  |                         |  | (in thousands)
|Combined statutory capital and surplus            |                         |  | $             
|Deferred acquisition costs                        |                         |  |               
|Future policy benefits and claims                 |                         |  |               
|Unrealized gain (loss) on investments, net of tax |                         |  |               
|Income taxes                                      |                         |  |               
|Non-admitted assets                               |                         |  |               
|Asset valuation reserve                           |                         |  |               
|Interest maintenance reserve                      |                         |  |               
|Other                                             |                         |  |               
|Cumulative capital contributions to insurance     |                         | 
|subsidiaries                                      |                         |  |               
|Redeemable convertible sseries B preferred stock  |                         |  |               
|Non-insurance subsidiaries and eliminations       |                         |  |               
|                                                  |                         |  |               
|Consolidated GAAP stockholders' equity            |                         |  | $             
|                                                  |                         |  |               
|                                                 
|                                                  | Year Ended December 31,
|                                                  |                         |  |               
|                                                  |                         |  |               
|                                                  |                         |  | (in thousands)
|Combined statutory income (loss)                  |                         |  | $             
|Deferred acquisition costs, net of amortization   |                         |  |               
|Future policy benefits and claims                 |                         |  |               
|Income taxes                                      |                         |  |               
|Other                                             |                         |  |               
|Non-insurance subsidiaries and elimination        |                         |  |               
|                                                  |                         |  |               
|Consolidated GAAP net loss                        |                         |  | $             
|                                                  |                         |  |               

# NOTE 12  EMPLOYEE
BENEFIT PLANS

In September 1986, a subsidiary of
the Company established a retirement savings plan (401(k) plan) for its
employees. As amended in August 1999, such employees are eligible to participate in the
401(k) plan upon completion of six months of service. The 401(k) plan is qualified under
Section 401(a) of the Internal Revenue Code (IRC) and the trust established to
hold the assets of the 401(k) plan is tax-exempt under Section 501 (a) of the IRC. The
subsidiary is the plan administrator, and may amend, terminate or suspend contributions to
the plan at any time it may deem advisable. Employees of this subsidiary who participate
may contribute up to 100% of pre-tax compensation, including commissions, bonuses and
overtime, but not to exceed $12,000 ($13,000 in 2004). This subsidiary may make
discretionary contributions, determined by its Board of Directors, up to 50% of the
employees first 6% of deferred compensation, but not to exceed a matching
contribution of $6,000 per plan participant ($6,150 in 2004). Certain IRC required
limitations, may be imposed for participants who are treated as highly compensated
employees for purposes of the IRC. Participants vest 25% after one year of service,
50% after two years of service, 75% after three years of service and 100% after 4 years of
service. Employee contributions are invested in any of ten investment funds at the
discretion of the employee. Contributions to the 401(k) plan in 2003, 2002 and 2001 by
the Companys subsidiaries approximated $119,000, $72,000 and $81,000, respectively.

1999 Stock Option
Plan On March 24, 1999, Ascents Board of Directors adopted the 1999
Stock Option Plan (the 1999 Plan) in order to further and promote the interest
of Ascent, its subsidiaries and its shareholders by enabling Ascent and its subsidiaries
to attract, retain and motivate employees of one of its subsidiaries, non-employee
directors and consultants (including marketing agents) or those who will become such
employees, non-employee directors and consultants (including marketing agents). Pursuant
to the 1999 Plan, 1,251,685 shares of common stock are reserved for issuance to such
employees and directors and 387,119 shares are reserved for issuance to marketing agents.
The maximum term of an award under the 1999 Plan is 10 years.

The 1999 Plan became effective on the
date of its adoption by the Company and will remain in effect until December 31, 2008,
except with respect to awards (as that term is defined in the 1999 Plan) then outstanding,
unless terminated or suspended by Ascents Board of Directors at that time. After
such date no further awards shall be granted under the 1999 Plan.

A summary of stock option activity is
as follows:

|                               |                         |  | 
|------------------------------ | ----------------------- |  | 
|                               | Year Ended December 31,
|                               |                         |  | 
|                               |                         |  | 
|Outstanding at January 1       |                         |  | 
|Granted                        |                         |  | 
|Exercised                      |                         |  | 
|Forfeited / Cancelled/ Expired |                         |  | 
|                               |                         |  | 
|Outstanding at December 31     |                         |  | 
|                               |                         |  | 

The weighted average option exercise
price was $2.32, $2.30 and $2.63 for options outstanding at December 31, 2003, 2002 and
2001, respectively. For options granted, weighted average exercise price was $0.65 and $1.49 for 2002, and 2001.
For options forfeited/cancelled/expired in 2003, 2002 and 2001, the weighted
average exercise price was $2.59, $3.23 and $2.77, respectively. For options exercised in
2003 and 2002, the weighted average exercise price was $.01.

The weighted average fair value of
options granted during 2002 and 2001 was $0.47 and $1.26. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing model with
the following significant weighted-average assumptions used for grants in 2002 and 2001,
respectively: dividend yield of 0% for both years; expected volatility of 1.214 and 1.218;
risk-free interest rate of 4.32% for 2002 and 4.65% for 2001; expected life of 3 years for
2002 and 5 years for 2001. The Company did not grant any stock options in 2003.

Because the Companys employee
stock options have characteristics significantly different from those of traded options,
and because change in the subjective input assumptions can materially affect the fair
value estimate, in managements opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock options.

The Company applies the intrinsic
value method, in accordance with APB 25, in accounting for its stock options issued to
employees and non-employee directors. Accordingly, no compensation expense has been
recognized for options granted with an exercise price equal to market value at the date of
grant. The Company applies the fair value method in accounting for stock options issued to
consultants (including marketing agents).

Compensation cost recognized in the
income statement for stock-based employee and consultants (including marketing agents)
compensation awards was approximately $6,000 in 2003, $55,000 in 2002, and $400,000 in
2001.

The following table illustrates the
effect on net loss and loss per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.



|                                                 |                         |  |  
|------------------------------------------------ | ----------------------- |  | -
|                                                 | Year Ended December 31,
|                                                 |                         |  |  
|                                                 |                         |  |  
|Loss applicable to common stockholders           |                         |  | $
|Total stock-based employee compensation expense  |                         | 
|determined under fair value based method for all |                         | 
|awards, net of related tax effects               |                         |  |  
|                                                 |                         |  |  
|Pro forma net loss                               |                         |  | $
|                                                 |                         |  |  
|Loss per share:                                  |                         | 
|Basic - as reported                              |                         |  | $
|Basic - pro forma                                |                         |  | $
|Diluted - as reported                            |                         |  | $
|Diluted - pro forma                              |                         |  | $

For purposes of pro forma disclosure,
the estimated fair value of the stock compensation is amortized to expense over the
stocks vesting period. The effect on net loss of the stock compensation amortization
for the year presented above is not likely to be representative of the effects on reported
income or loss for future years.

The following table summarizes
information about the stock options outstanding at December 31, 2003:

| |                     |                     |                                           |                    
| | ------------------- | ------------------- | ----------------------------------------- | -------------------
| | Options Outstanding | Options Exercisable
|
| | ExercisePrices      | NumberOutstanding   | Weighted AverageRemainingContractual Life | # SharesExercisable
| | $                   | 0.01                |                                           |                    
| | $                   | 0.65                |                                           |                    
| | $                   | 1.49                |                                           |                    
| | $                   | 1.63                |                                           |                    
| | $                   | 4.39                |                                           |                    
| |                     |                     |                                           |                    
| |                     |                     |                                           |                    
| |                     |                     |                                           |                    

# NOTE 13 
REINSURANCE

The Insurance Subsidiaries cede
insurance to other insurers and reinsurers on both life and accident and health business.
Reinsurance agreements are used to limit maximum losses and provide greater diversity of
risk. Each Insurance Subsidiary remains liable to policyholders to the extent the
reinsuring companies are unable to meet their treaty obligations. Total premiums ceded to
other companies were $3.7 million, $4.0 million and $2.8 million for 2003, 2002 and 2001,
respectively. Face amounts of life insurance in force ceded approximated $13.5 million,
$17.2 million and $16.6 million at December 31, 2003, 2002 and 2001, respectively.
Benefits and claims ceded to other companies were $3.9 million, $3.7 million and $3.2 million, respectively.

The Insurance Subsidiaries reinsure
their respective risks under their Medical Expense policies on an excess of loss basis so
that its net payments on any one life insured under the policy are limited for any one
calendar year to $125,000. Risks under its Medicare Supplement policies are not reinsured.
Risks under certain Accidental Death policies are one hundred percent (100%) reinsured.
Under its life insurance reinsurance agreement, FLICA and NFL retain fifty percent (50%)
of the coverage amount of each of its life insurance policies in force up to a maximum of
$65,000. NFL reinsures, through an excess of loss reinsurance treaty, a closed block of
annually renewable term life insurance policies. NFLs retention limit is $25,000 per
year. In accordance with industry practice, the reinsurance arrangements in force with
respect to these policies are terminable by either party with respect to claims incurred
after the termination and expiration dates. All reinsurers of the Companys Insurance
Subsidiaries are rated A or higher by the A.M. Best Company.

# NOTE 14 
COMMITMENTS AND CONTINGENCIES

The Companys future minimum
lease payments for non-cancelable operating leases, relating primarily to office
facilities and data processing equipment having a remaining term in excess of one year, at
December 31, 2003 aggregated $7.3 million. The amounts due by year are as follows: 2004
 $1.5 million; 2005  $1.4 million; 2006  $1.1 million; 2007  $1.0
million; 2008  $1.0 million; and thereafter  $1.1 million. Aggregate rental
expense included in the consolidated financial statements for all operating leases
approximated $2.2 million, $1.8 million and $2.0 million in 2003, 2002 and 2001,
respectively.

In the normal course of its business
operations, the Company is involved in various claims, other business related suits
(alleging actual as well as substantial exemplary damages) and regulatory matters. In the
opinion of management, the Company is not a party to any pending litigation which is
reasonably likely to have an adverse result or disposition that would have a material
adverse effect on the Companys business, consolidated financial position or
consolidated results of operations.

The Companys Insurance
Subsidiaries are subject to extensive governmental regulation and supervision at both
federal and state levels. Such regulation includes premium rate levels, premium rate
increases, policy forms, minimum loss ratios, dividend payments, claims settlement,
licensing of insurers and their agents, capital adequacy, transfer of control, and amount
and type of investments. Additionally, there are numerous health care reform proposals and
regulatory initiatives under consideration which if enacted could have significant impact
on the Companys results of operations.



# NOTE 15  QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)

Summarized quarterly financial
information for each of the Companys last two years of operations is as follows:

|                                        |               |  |                |          
|--------------------------------------- | ------------- |  | -------------- | ---------
|                                        | Quarter Ended
|                                        |               |  |                | March2003
|                                        |               |  |                |          
|                                        |               |  | (in thousands)
|Premium income                          |               |  | $              | 26,309   
|Net investment income                   |               |  |                | 1,680    
|Net realized gain (loss) on investments |               |  |                | 109      
|Fee, service and other income           |               |  |                | 3,268    
|                                        |               |  |                |          
|Total revenues                          |               |  | $              | 31,366   
|                                        |               |  |                |          
|Income (loss) before income taxes(1)    |               |  |                | 189      
|Net income (loss)(1)                    |               |  |                | 189      
|Preferred stock dividend(1)             |               |  |                | 869      
|Loss applicable to common stockholders  |               |  |                | (680     
|Loss per share:                         |               | 
|Basic                                   |               |  | $              | (0.10    
|Diluted                                 |               |  | $              | (0.10    
|                                        |               |  |                |          
|                                        | Quarter Ended
|                                        |               |  |                | March2002
|                                        |               |  |                |          
|                                        |               |  | (in thousands)
|Premium income                          |               |  | $              | 28,934   
|Net investment income                   |               |  |                | 2,022    
|Net realized gain (loss) on investments |               |  |                | 51       
|Fee, service and other income           |               |  |                | 3,365    
|                                        |               |  |                |          
|Total revenues                          |               |  | $              | 34,372   
|                                        |               |  |                |          
|(Loss) income before income taxes       |               |  |                | (359     
|Net (loss) income                       |               |  |                | (359     
|Preferred stock dividend                |               |  |                | 785      
|Loss applicable to common stockholders  |               |  |                | (1,144   
|Loss per share:                         |               | 
|Basic                                   |               |  | $              | (0.18    
|Diluted                                 |               |  | $              | (0.18    

|(1) | For the quarters ended September 2003 and December 2003, Series A redeemable convertible preferred stock dividends of
     $914 and $937, respectively, were recorded as interest expense as required under FAS150 (see Note 2  Summary of Significant
     Accounting Policies).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 16  FAIR
VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions
were used by the Company in estimating fair value disclosures for financial instruments:

Cash and short-term
investments.The carrying amount reported in the balance sheet for cash and
short-term investments approximates its fair value.

Accounts receivable and
accounts payable.The carrying amounts reported in the balance sheet for
accounts receivable and accounts payable approximates their fair value.

Available-for-sale securities.The fair values for available-for-sale securities are based on quoted
market prices (See Note 4).

Notes payable.The carrying amounts of the Companys notes payable approximate their
fair value.



# SCHEDULE II

# ASCENT ASSURANCE, INC.
(PARENT COMPANY)CONDENSED BALANCE SHEETS

(in thousands)

|                                                           |              | 
|---------------------------------------------------------- | ------------ | 
|                                                           | December 31,
|                                                           |              | 
|                                                           |              | 
|Assets:                                                    |              | 
|Cash                                                       |              | 
|Short-term investments                                     |              | 
|Fixed maturities:                                          |              | 
|Available-for-sale at market value (amortized cost $1,494) |              | 
|Equity securities, at market value                         |              | 
|Investment in consolidated subsidiaries                    |              | 
|Receivables from affiliates                                |              | 
|Other assets                                               |              | 
|                                                           |              | 
|Total Assets                                               |              | 
|                                                           |              | 
|Liabilities:                                               |              | 
|Notes payable to related party                             |              | 
|Payable to subsidiaries                                    |              | 
|Other liabilities                                          |              | 
|                                                           |              | 
|Total Liabilities                                          |              | 
|                                                           |              | 
|Redeemable Convertible Series A Preferred Stock            |              | 
|                                                           |              | 
|Stockholders' Equity:                                      |              | 
|Redeemable Convertible Series B Preferred Stock            |              | 
|Common stock                                               |              | 
|Capital in excess of par value                             |              | 
|Accumulated other comprehensive income                     |              | 
|Retained Deficit                                           |              | 
|                                                           |              | 
|Total Stockholders' Equity                                 |              | 
|                                                           |              | 
|Total Liabilities, Redeemable Convertible                  |              | 
|Preferred Stock and Stockholders' Equity                   |              | 
|                                                           |              | 

| | The
financial statement should be read in conjunction with the Consolidated Financial
Statements and the accompanying notes thereto. | 
| | ------------------------------------------------------------------------------------------------------------------------------------ | 



# SCHEDULE II

# ASCENT ASSURANCE, INC.
(PARENT COMPANY)CONDENSED STATEMENTS OF OPERATIONS

|                                                                    |                         |  |               
|------------------------------------------------------------------- | ----------------------- |  | --------------
|                                                                    | Year Ended December 31,
|                                                                    |                         |  |               
|                                                                    |                         |  |               
|                                                                    |                         |  | (in thousands)
|Net investment income                                               |                         |  | $             
|Realized gain on investments                                        |                         |  |               
|                                                                    |                         |  |               
|                                                                    |                         |  |               
|                                                                    |                         |  |               
|Inter-company interest on advances to subsidiaries                  |                         |  |               
|General and administrative expenses                                 |                         |  |               
|Interest expense on notes payable                                   |                         |  |               
|Taxes, licenses and fees                                            |                         |  |               
|Interest expense on redeemable convertible Series A preferred stock |                         |  |               
|                                                                    |                         |  |               
|                                                                    |                         |  |               
|                                                                    |                         |  |               
|Loss before income taxes and equity in                              |                         | 
|undistributed  net earning of subsidiaries                          |                         |  |               
|Federal income taxes                                                |                         |  |               
|                                                                    |                         |  |               
|                                                                    |                         |  |               
|Equity in undistributed net income of subsidiaries                  |                         |  |               
|                                                                    |                         |  |               
|Net loss                                                            |                         |  |               
|                                                                   
|Series A preferred stock dividends                                  |                         |  |               
|                                                                    |                         |  |               
|Loss applicable to common shareholders                              |                         |  | $             
|                                                                    |                         |  |               

| | The
financial statement should be read in conjunction with the Consolidated Financial
Statements and the accompanying notes thereto. | 
| | ------------------------------------------------------------------------------------------------------------------------------------ | 



# SCHEDULE II

# ASCENT ASSURANCE, INC.
(PARENT COMPANY)CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

|                                                     |                         |  |               
|---------------------------------------------------- | ----------------------- |  | --------------
|                                                     | Year Ended December 31,
|                                                     |                         |  |               
|                                                     |                         |  |               
|                                                     |                         |  | (in thousands)
|Net loss                                             |                         |  | $             
|Other comprehensive (loss) income:                   |                         | 
|Unrealized holding (loss) gain arising during period |                         |  |               
|Reclassification adjustment of (loss) gain on        |                         | 
|sales of investments included in net income          |                         |  |               
|Other comprehensive income (loss) on                 |                         | 
|investment in subsidiaries:                          |                         | 
|Unrealized holding (loss) gain during period         |                         |  |               
|Reclassification adjustment of (gain) loss on        |                         | 
|sales of investments included in net loss            |                         |  |               
|                                                     |                         |  |               
|Comprehensive (loss) income                          |                         |  | $             
|                                                     |                         |  |               

| | The
financial statement should be read in conjunction with the Consolidated Financial
Statements and the accompanying notes thereto. | 
| | ------------------------------------------------------------------------------------------------------------------------------------ | 



# SCHEDULE II

ASCENT ASSURANCE, INC.
(PARENT COMPANY)CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except share data)

|                                                |                                                |              |                     |                        |           |                   |                    |       
|----------------------------------------------- | ---------------------------------------------- | ------------ | ------------------- | ---------------------- | --------- | ----------------- | ------------------ | ------
|                                                | Redeemable ConvertibleSeries B Preferred Stock | Common Stock | Capital InExcess of | AccumulatedOther Comp. |           | Retained(Deficit) | TotalStockholders'
|                                                | Shares                                         | Amount       | Shares              | Amount                 | Par Value | Income (Loss)     | Earnings           | Equity
|Balance at January 1, 2001                      |                                                |              |                     | -                      |           |                   | -                  |       
|Net loss                                        |                                                |              |                     | (2,119                 | )         |                   | (2,119             | )     
|Series A Preferred stock dividend               |                                                |              |                     | (2,932                 | )         |                   | (2,932             | )     
|Other comprehensive income                      |                                                |              |                     | 2,203                  |           |                   | 2,203              |       
|Decrease in deferred tax asset valuation        |                                                |             
|allowance attributable to unrealized            |                                                |             
|gains on investments                            |                                                |              |                     | 1,198                  |           |                   | 1,198              |       
|Amortization of unearned compensation           |                                                |              |                     | 397                    |           |                   | 397                |       
|                                                |                                                |              |                     |                        |           |                   |                    |       
|Balance at December 31, 2001                    |                                                |              |                     | -                      |           |                   | -                  |       
|                                                |                                                |              |                     |                        |           |                   |                    |       
|Net loss                                        |                                                |              |                     | (931                   | )         |                   | (931               | )     
|Series A Preferred stock dividend               |                                                |              |                     | (3,263                 | )         |                   | (3,263             | )     
|Other comprehensive income                      |                                                |              |                     | 3,578                  |           |                   | 3,578              |       
|Amortization of unearned compensation           |                                                |              |                     | 55                     |           |                   | 55                 |       
|Common stock issued                             |                                                |              |                     | 17,100                 |           |                   | -                  |       
|                                                |                                                |              |                     |                        |           |                   |                    |       
|Balance at December 31, 2002                    |                                                |              |                     | -                      |           |                   | -                  |       
|                                                |                                                |              |                     |                        |           |                   |                    |       
|Net loss                                        |                                                |              |                     | (1,348                 | )         |                   | (1,348             | )     
|Series A Preferred stock dividend               |                                                |              |                     | (1,759                 | )         |                   | (1,759             | )     
|Other comprehensive loss                        |                                                |              |                     | (398                   | )         |                   | (398               | )     
|Amortization of unearned compensation           |                                                |              |                     | 6                      |           |                   | 6                  |       
|Waiver of facility fee on notes                 |                                                |             
|payable to related party                        |                                                |              |                     | 1,353                  |           |                   | 1,353              |       
|Common stock issued                             |                                                |              |                     | 15,000                 |           |                   | -                  |       
|Redeemable convertible Series B preferred stock |                                                |             
|issued                                          |                                                |              |                     | 37,504                 |           |                   | 37,504             |       
|                                                |                                                |              |                     |                        |           |                   |                    |       
|Balance at December 31, 2003                    |                                                |              |                     | 37,504                 |           | $                 | 37,504             |       
|                                                |                                                |              |                     |                        |           |                   |                    |       

| | The
financial statements should be read in conjunction with the Consolidated Financial
Statements and the accompanying notes thereto. | 
| | ------------------------------------------------------------------------------------------------------------------------------------- | 



# SCHEDULE II

# ASCENT ASSURANCE, INC.
(PARENT COMPANY)CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS

(in thousands)

|                                                                    |                         |  |  
|------------------------------------------------------------------- | ----------------------- |  | -
|                                                                    | Year Ended December 31,
|                                                                    |                         |  |  
|                                                                    |                         |  |  
|Cash Flow from Operating Activities:                                |                         | 
|Net income (loss)                                                   |                         |  | $
|Adjustments to reconcile net loss to cash provided by operating     |                         | 
|activities:                                                         |                         | 
|Equity in undistributed net income of subsidiaries                  |                         |  |  
|Increase in receivables from subsidiaries                           |                         |  |  
|Decrease (increase) in other assets                                 |                         |  |  
|Decrease in other liabilities                                       |                         |  |  
|Decrease in payables to subsidiaries                                |                         |  |  
|Interest expense on notes payable to related party                  |                         |  |  
|Interest expense on redeemable convertible Series A preferred stock |                         |  |  
|Other, net                                                          |                         |  |  
|                                                                    |                         |  |  
|Net Cash Used For Operating Activities                              |                         |  |  
|Cash Flow from Investing Activities:                                |                         | 
|Proceeds from sale of fixed maturity investments                    |                         |  |  
|Cost of fixed maturity investments acquired                         |                         |  |  
|Proceeds from equity securities sold                                |                         |  |  
|Net change in short-term and other investments                      |                         |  |  
|Dividends received from subsidiaries                                |                         |  |  
|Capital contributions to subsidiaries                               |                         |  |  
|                                                                    |                         |  |  
|Net Cash Provided by (Used For) Investing Activities                |                         |  |  
|                                                                    |                         |  |  
|Cash Flow from Financing Activities:                                |                         | 
|Retirement of redeemable convertible Series A preferred stock       |                         |  |  
|Issuance of redeemable convertible Series B preferred Stock         |                         |  |  
|Issuance of note payable                                            |                         |  |  
|                                                                    |                         |  |  
|Net Cash Provided by Financing Activities                           |                         |  |  
|                                                                    |                         |  |  
|Increase (Decrease) in Cash During the Period                       |                         |  |  
|Cash at Beginning of Period                                         |                         |  |  
|                                                                    |                         |  |  
|Cash at End of Period                                               |                         |  | $
|                                                                    |                         |  |  

| | The
financial statement should be read in conjunction with theConsolidated Financial
Statements and the accompanying notes thereto. | 
| | ----------------------------------------------------------------------------------------------------------------------------------- | 



# SCHEDULE III

# SUPPLEMENTARY
INSURANCE INFORMATION

(in thousands)

|                             |                                |                                                    |                                     |                |                     |                          |                                       |                        |                 
|---------------------------- | ------------------------------ | -------------------------------------------------- | ----------------------------------- | -------------- | ------------------- | ------------------------ | ------------------------------------- | ---------------------- | ----------------
|Segment                      | DeferredPolicyAcquisitionCosts | FuturePolicyBenefits,Losses,Claimsand LossExpenses | OtherPolicyClaimsAndBenefitsPayable | PremiumRevenue | NetInvestmentIncome | BenefitsandClaimsExpense | Amortizationof PolicyAcquisitionCosts | OtherOperatingExpenses | PremiumsWritten*
|                             |                                |                                                    |                                     |                |                     |                          |                                       |                        |                 
|Year Ended December 31, 2003 |                                |                                                    |                                     |                |                    
|Total                        |                                |                                                    | $                                   | 21,819         |                     | $                        | 54,872                                |                        | $               
|                             |                                |                                                    |                                     |                |                     |                          |                                       |                        |                 
|Year Ended December 31, 2002 |                                |                                                    |                                     |                |                    
|Total                        |                                |                                                    | $                                   | 22,546         |                     | $                        | 60,660                                |                        | $               
|                             |                                |                                                    |                                     |                |                     |                          |                                       |                        |                 
|Year Ended December 31, 2001 |                                |                                                    |                                     |                |                    
|Total                        |                                |                                                    | $                                   | 22,557         |                     | $                        | 61,571                                |                        | $               
|                             |                                |                                                    |                                     |                |                     |                          |                                       |                        |                 

*Premium
Written  Amounts do not apply to life insurance/other.



# SCHEDULE IV

# REINSURANCE

(in thousands, except
percentages)

|                             |             |                        |                            |            |                                 
|---------------------------- | ----------- | ---------------------- | -------------------------- | ---------- | --------------------------------
|                             | GrossAmount | Ceded toOtherCompanies | AssumedFrom OtherCompanies | Net Amount | Percentageof AmountAssumedto Net
|Year Ended December 31, 2003 |             |                        |                            |            |                                 
|Life insurance in force      |             |                        | $                          | 43,675     |                                 
|                             |             |                        |                            |            |                                 
|Premiums:                    |             |                       
|Life                         |             |                        |                            | 557        |                                 
|Accident and health          |             |                        |                            | 102,974    |                                 
|Other                        |             |                        |                            | 280        |                                 
|                             |             |                        |                            |            |                                 
|Total premiums               |             |                        | $                          | 103,811    |                                 
|                             |             |                        |                            |            |                                 
|Year Ended December 31, 2002 |             |                       
|Life insurance in force      |             |                        | $                          | 53,054     |                                 
|                             |             |                        |                            |            |                                 
|Premiums:                    |             |                       
|Life                         |             |                        | $                          | 587        |                                 
|Accident and health          |             |                        |                            | 113,077    |                                 
|Other                        |             |                        |                            | 325        |                                 
|                             |             |                        |                            |            |                                 
|Total premiums               |             |                        | $                          | 113,989    |                                 
|                             |             |                        |                            |            |                                 
|Year Ended December 31, 2001 |             |                       
|Life insurance in force      |             |                        | $                          | 53,128     |                                 
|                             |             |                        |                            |            |                                 
|Premiums:                    |             |                       
|Life                         |             |                        | $                          | 572        |                                 
|Accident and health          |             |                        |                            | 125,846    |                                 
|Other                        |             |                        |                            | 390        |                                 
|                             |             |                        |                            |            |                                 
|Total premiums               |             |                        | $                          | 126,808    |                                 
|                             |             |                        |                            |            |                                 



# SCHEDULE V

VALUATION AND
QUALIFYING ACCOUNTS(in thousands)

|                                           |                              |                                                  |                        |                       
|------------------------------------------ | ---------------------------- | ------------------------------------------------ | ---------------------- | ----------------------
|                                           | Balance atBeginningof Period | Additions(Reductions)Charged toCosts andExpenses | Deductions(Charge-Off) | Balance atEnd OfPeriod
|Year Ended December 31, 2003:              |                              |                                                  |                        |                       
|Allowance for doubtful agents' receivables |                              |                                                  | $                      | 4,630                 
|                                           |                              |                                                  |                        |                       
|Deferred tax valuation allowance           |                              |                                                  | $                      | 15,998                
|                                           |                              |                                                  |                        |                       
|Year Ended December 31, 2002:              |                              |                                                 
|Allowance for doubtful agents' receivables |                              |                                                  | $                      | 4,013                 
|                                           |                              |                                                  |                        |                       
|Deferred tax valuation allowance           |                              |                                                  | $                      | 17,841                
|                                           |                              |                                                  |                        |                       
|Year Ended December 31, 2001:              |                              |                                                 
|Allowance for doubtful agents' receivables |                              |                                                  | $                      | 3,711                 
|                                           |                              |                                                  |                        |                       
|Deferred tax valuation allowance           |                              |                                                  | $                      | 18,263                
|                                           |                              |                                                  |                        |                       

# ITEM 9  CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Effective October 2, 2002, the
Company dismissed PricewaterhouseCoopers, LLP as its independent accountant and engaged
Ernst & Young, LLP as the accountant for the Company for the fiscal year ended
December 31, 2002. Further information relating to the change in accountants is
incorporated herein by reference to Item 4 from the Companys Form 8-K, which was
filed on October 9, 2002.

# ITEM 9A  CONTROLS
AND PROCEDURES

Evaluation of disclosure
controls and procedures. Under the supervision and with the participation of
Ascents management, including the Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of its disclosure controls and
procedures as of December 31, 2003, the end of the period covered by this report. In
designing and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, as the
Companys control and procedures are designed to do, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on such evaluation, Ascents Chief Executive Officer
and Chief Financial Officer have concluded that, as of December 31, 2003, the end of the
period covered by this report, the Companys disclosure controls and procedures were
effective to ensure that information required to be disclosed by Ascent in the reports
that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities and
Exchange Commission.

Changes in internal
controls. There were no changes in the Companys internal controls over
financial reporting that have materially affected, or, are reasonably likely to material
affect, these controls during the period covered by this annual report.



# PART III

# ITEM 10  DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to directors and
executive officers is incorporated herein by reference to Proposal 1  Election
of Directors, Certain Information Regarding the Board of Directors,
Certain Information Regarding the Executive Officers, Report of the
Audit Committee and Stock Ownership from the Companys definitive
proxy statement for the 2004 Annual Meeting of Stockholders, which will be filed on or
before April 30, 2004.

# ITEM 11  EXECUTIVE
COMPENSATION

Executive compensation is
incorporated herein by reference to Certain Information Regarding the Executive
Officers from the Companys definitive proxy statement for the 2004 Annual
Meeting of Stockholders, which will be filed on or before April 30, 2004.

# ITEM 12  SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information pertaining to security
ownership of certain beneficial owners and management is incorporated herein by reference
to Stock Ownership from the Companys definitive proxy statement for the
2004 Annual Meeting of Stockholders, which will be filed on or before April 30, 2004.

The
following table provides information for the Companys stock option plan as of
December 31, 2003:

|                                 |                                                                                            |                                                                            |                                                                                                                                        
|-------------------------------- | ------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------
|Plan Category                    | Number of Securitiesto be Issued UponExercise of OutstandingOptions, Warrants andRights(a) | Weighted AverageExercise Price ofOutstandingOptions, Warrantsand Rights(b) | Number of SecuritiesRemaining Available forFuture Issuance Under EquityCompensation Plans (Excludingsecurities reflected in Col. (a)(c)
|Equity compensation plans        |                                                                                            |                                                                            |                                                                                                                                        
|approved by security holders     |                                                                                            |                                                                            |                                                                                                                                        
|Equity compensation plans        |                                                                                            |                                                                           
|not approved by security holders |                                                                                            |                                                                            |                                                                                                                                        
|                                 |                                                                                            |                                                                            |                                                                                                                                        
|Total                            |                                                                                            |                                                                            |                                                                                                                                        
|                                 |                                                                                            |                                                                            |                                                                                                                                        

# ITEM 13  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

Information pertaining to certain
relationships and related transactions is incorporated herein by reference to Stock
Ownership from the Companys definitive proxy statement for the 2004 Annual
Meeting of Stockholders, which will be filed on or before April 30, 2004.

# ITEM 14  PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Information pertaining to principal
accountant fees and services is incorporated herein by reference to Principal
Accounting Firm Fees from the Companys definitive proxy statement for the 2004
Annual Meeting of Stockholders, which will be filed on or before April 30, 2004.



# PART IV

# ITEM 15  EXHIBITS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)    
          The documents set forth below are filed as part of this report.

(1) Financial Statements:

Reference is made to Item 8,
Index to Financial Statements and Financial Statement Schedules.

Financial Statements and Report of Ernst & Young LLP, Independent Auditors, and Report of PricewaterhouseCoopers LLP, Independent
Accountants 

Report of Ernst &
Young LLP, Independent AuditorsReport of PricewaterhouseCoopers LLP, Independent
AccountantsConsolidated Balance Sheets at December 31, 2003 and 2002 
Consolidated Statements of Operations
for the Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of
Comprehensive (Loss) Income for the Years Ended December 31, 2003, 2002 and 2001 Consolidated
Statements of Changes in Stockholders Equity for the Years Ended December 31, 2003, 2002
and 2001 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002
and 2001 Notes to the Consolidated Financial Statements

(2) Financial Statement
Schedules:

Reference is made to Item 8,
Index to Financial Statements and Financial Statement Schedules.

The following financial statement
schedules are filed as part of this report on 10-K and should be read in conjunction with
the financial statements:

Schedule II 
Condensed Financial Information of RegistrantSchedule III  Supplementary
Insurance InformationSchedule IV  ReinsuranceSchedule V  Valuation
and Qualifying Accounts

All other schedules are omitted
because they are not applicable, or not required, or because the required information is
included in the financial statements or notes thereto.

(3) Exhibits:

The following exhibits are filed
herewith. Exhibits incorporated by reference are indicated in the parentheses following
the description.

|2.1 |  | First Amended Plan of Reorganization of Westbridge Capital Corp. Under Chapter 11 of the
Bankruptcy Code, dated as of October 30, 1998 (incorporated by reference to Exhibit 2 to
the Companys Form 8-K filed on September 21, 1998).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.2 |  | Amended Disclosure Schedule Accompanying the First Amended Plan of Reorganization of
Westbridge Capital Corp. Under Chapter 11 of the Bankruptcy Code (incorporated by
reference to Exhibit 2 to the Companys Form 8-K filed on September 21, 1998).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.3 |  | Findings of Fact, Conclusions of Law, and Order confirming the First Amended Plan of
Reorganization of Westbridge Capital Corp. dated October 30, 1998, as modified
(incorporated by reference to Exhibit 2 to the Companys Form 8-K filed on December
29, 1998).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.1 |  | Second Amended and Restated Certificate of Incorporation of the Company filed with the
Secretary of State of Delaware on March 24, 1999 (incorporated by reference to Exhibit 3.1
to the Ascents Form 8-A filed on March 25, 1999).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  | Amended and Restated By-Laws of Ascents, effective as of March 24, 1999
(incorporated by reference to Exhibit 3.2 to Ascents Form 8-A filed on March 25,
1999).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.3 |  | Amendment to the By-Laws of Ascent, effective as of April 5, 2000 (incorporated by
reference to Exhibit 3.3 to Ascents Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.4 |  | Certificate of Elimination of Series A Preferred  Stock of Ascent  Assurance,  Inc. dated December 31, 2003  (incorporated  by
         reference to Exhibit 3.1 to Ascent's 8-K filed on January 6, 2004).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.5 |  | Certificate of Designation for Series B Convertible  Participating  Preferred Stock of Ascent  Assurance,  Inc. dated December
         31, 2003 (incorporated by reference to Exhibit 3.2 to Ascent's 8-K filed on January 6, 2004).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Form of Common Stock Certificate
(incorporated by reference to Exhibit 4.1 to Ascents Form 8-A filed on March 25,
1999).
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Form of Warrant Certificate, included in the Form of Warrant Agreement (incorporated by
reference to Exhibit 4.2 to Ascents Form 8-A filed on March 25, 1999).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Form of Warrant Agreement dated as of March 24, 1999, between Ascent and LaSalle National
Bank, as warrant agent (incorporated by reference to Exhibit 4.3 to Ascents Form 8-A
filed on March 25, 1999).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Form of Preferred Stock Certificate (incorporated by reference to Exhibit 4.4 to
Ascents Annual Report on Form 10-K for the year ended December 31, 1998).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Credit Agreement dated as of June 6, 1997 between Westbridge Funding Corporation and
LaSalle National Bank (incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Guaranty Agreement dated as of June 6, 1997 by Westbridge Capital Corp. in favor of
LaSalle National Bank (incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Pledge Agreement dated as of June 6, 1997 between Westbridge Marketing Corporation and
LaSalle National Bank (incorporated by reference to Exhibit 10.3 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | Security Agreement dated as of June 6, 1997 between Westbridge Funding Corporation for the
benefit of LaSalle National Bank (incorporated by reference to Exhibit 10.4 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Second Amended and Restated Receivables Purchase and Sale Agreement, dated as of June 6,
1997 between National Foundation Life Insurance Company, National Financial Insurance
Company, American Insurance Company of Texas, Freedom Life Insurance Company of America,
and Westbridge Funding Corporation (incorporated by reference to Exhibit 10.5 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Amended and Restated Non-Insurance Company Sellers Receivables Purchase and Sale
Agreement, dated as of June 6, 1997 between American Senior Security Plans, L.L.C.,
Freedom Marketing, Inc., Health Care-One Insurance Agency, Health Care-One Marketing
Group, Inc., LSMG, Inc., Senior Benefits of Texas, Inc., and Westbridge Marketing
Corporation (incorporated by reference to Exhibit 10.6 to the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | Lock-Up Agreement, dated as of September 16, 1998, by and among the Company and Credit
Suisse First Boston Corporation (incorporated by reference to Exhibit 10.1 to the
Companys Form 8-K filed on September 21, 1998).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Stock Purchase Agreement, dated as of September 16, 1998, between the Company and Credit
Suisse First Boston Corporation (incorporated by reference to Exhibit 10.2 to the
Companys Form 8-K filed on September 21, 1998).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | First Amendment and Waiver to Credit Agreement among Westbridge Funding Corporation,
Westbridge Capital Corp. and LaSalle National Bank dated as of September 8, 1998
(incorporated by reference to Exhibit 10.11 to the Companys Annual Report on Form
10-K for the year ended December 31, 1998).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | First Amendment to Guaranty Agreement dated as of March 24, 1999 between Westbridge
Capital Corp. in favor of LaSalle National Bank (incorporated by reference to Exhibit
10.12 to the Companys Annual Report on Form 10-K for the year ended December 31,
1998).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Registration Rights Agreement dated as of March 24, 1999 between Ascent and Special
Situations Holdings, Inc.  Westbridge (incorporated by reference to Exhibit 10.13 to
the Companys Annual Report on Form 10-K for the year ended December 31, 1998).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | 1999 Stock Option Plan dated as of March 24, 1999 (incorporated by reference to
Ascents Schedule 14A filed with the Commission on April 30, 1999).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | Installment Note Agreement dated July 20, 1999 between Ascent Management, Inc. and LaSalle
Bank National Association (incorporated by reference to Exhibit 10.4 to Ascents
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Second Amendment to Credit Agreement dated August 12, 1999 between Ascent Funding, Inc.
and LaSalle Bank National Association (incorporated by reference to Exhibit 10.5 to
Ascents Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Second Amendment to Guaranty Agreement dated July 20, 1999 between Ascent Assurance, Inc.
and LaSalle Bank National Association (incorporated by reference to Exhibit 10.6 to
Ascents Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Third Amendment to Guaranty Agreement dated April 17, 2000 between Ascent Assurance, Inc.
and LaSalle Bank National Association (incorporated by reference to Exhibit 10.7 to
Ascents Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | Fourth Amendment to Guaranty Agreement dated August 10, 2000 between Ascent Assurance,
Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.10 to
Ascents Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | First Amendment to Pledge Agreement, dated as of November 30, 2000, by and among Ascent
Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to
Exhibit 10.22 to Ascents Annual Report on Form 10-K for the year ended December 31,
2000).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Fifth Amendment to Guaranty Agreement, dated as of November 30, 2000, by and among Ascent
Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to
Exhibit 10.23 to Ascents Annual Report on Form 10-K for the year ended December 31,
2000).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Third Amendment to Credit Agreement, dated as of November 30, 2000, by and among Ascent
Funding, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit
10.24 to Ascents Annual Report on Form 10-K for the year ended December 31, 2000).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | First Amendment to Security Agreement, dated as of November 30, 2000, by and among Ascent
Management, Inc. and LaSalle Bank National Association (incorporated by reference to
Exhibit 10.25 to Ascents Annual Report on Form 10-K for the year ended December 31,
2000).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Credit Agreement dated April 17, 2001 between Ascent Assurance, Inc. and Credit Suisse
First Boston Management Corporation (incorporated by reference to Exhibit 10.1 to
Ascents Form 8-K filed April 25, 2001).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Guaranty and Security  Agreement dated April 17, 2001 among Foundation  Financial  Services,  Inc.,  NationalCare(R)Marketing,
         Inc.,  LifeStyles  Marketing Group,  Inc.,  Precision Dialing Services,  Inc., Senior Benefits L.L.C. and Westbridge  Printing
         Services,  Inc., and Credit Suisse First Boston Management Corporation  (incorporated by reference to Exhibit 10.2 to Ascent's
         Form 8-K filed April 25, 2001).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | Pledge Agreement dated April 17, 2001 between Ascent Assurance, Inc. and Credit Suisse
First Boston Management Corporation (incorporated by reference to Exhibit 10.3 to
Ascents Form 8-K filed April 25, 2001).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Sixth Amendment to Guaranty Agreement and Waiver dated April 17, 2001 between Ascent
Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to
Exhibit 10.4 to Ascents Form 8-K filed April 25, 2001).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | Fourth Amendment to Credit Agreement dated April 17, 2001 between Ascent Funding, Inc. and
LaSalle Bank National Association (incorporated by reference to Exhibit 10.5 to
Ascents Form 8-K filed April 25, 2001).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.27 |  | Fifth Amendment to Credit Agreement dated November 27, 2001 between Ascent Funding, Inc.
and LaSalle Bank National Association (incorporated by reference to Exhibit 10.31 to
Ascents Annual Report on Form 10-K for the year ended December 31, 2001).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.28 |  | Employment Agreement, dated September 16, 2001, by and among Ascent, Ascent Management,
Inc., and Mr. Patrick J. Mitchell (incorporated by reference to Exhibit 10.32 to
Ascents Annual Report on Form 10-K for the year ended December 31, 2001).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.29 |  | Employment Agreement dated September 16, 2001, by and among Ascent, Ascent Management,
Inc., and Mr. Patrick H. ONeill (incorporated by reference to Exhibit 10.33 to
Ascents Annual Report on Form 10-K for the year ended December 31, 2001).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.30 |  | Sixth Amendment to Credit Agreement dated May 15, 2002 between Ascent Funding, Inc. and
LaSalle Bank National Association (incorporated by reference to Exhibit 10.23 to
Ascents Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.31 | Seventh Amendment to Credit Agreement dated November 20, 2002 between Ascent Funding, Inc.
and LaSalle Bank National Association (incorporated by reference to Exhibit 10.35 to
Ascents Annual Report on Form 10-K for the year ended December 31, 2002).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.32 |  | Employment Agreement dated as of December 18, 2002, by and between Ascent, Ascent
Management, Inc. and Mr. Patrick J. Mitchell (incorporated by reference to Exhibit 10.36
to Ascents Annual Report on Form 10-K for the year ended December 31, 2002).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.33 |  | Employment Agreement dated as of December 18, 2002, by and between Ascent, Ascent
Management, Inc. and Mr. Patrick H. ONeill (incorporated by reference to Exhibit
10.37 to Ascents Annual Report on Form 10-K for the year ended December 31, 2002).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.34 |  | Employment Agreement dated as of January 10, 2003, by and between Ascent, Ascent
Management, Inc. and Mr. Konrad H. Kober (incorporated by reference to Exhibit 10.38 to
Ascents Annual Report on Form 10-K for the year ended December 31, 2002).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.35 |  | Employment Agreement dated as of January 10, 2003, by and between Ascent, Ascent
Management, Inc. and Ms. Cynthia B. Koenig (incorporated by reference to Exhibit 10.39 to
Ascents Annual Report on Form 10-K for the year ended December 31, 2002).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.36 |  | Seventh Amendment to Guaranty Agreement dated January 27, 2003 between Ascent and LaSalle
Bank National Association (incorporated by reference to Exhibit 10.40 to Ascents
Annual Report on Form 10-K for the year ended December 31, 2002).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.37 |  | Eighth Amendment to Credit Agreement dated January 27, 2003 between Ascent Funding, Inc.
and LaSalle Bank National Association (incorporated by reference to Exhibit 10.41 to
Ascents Annual Report on Form 10-K for the year ended December 31, 2002).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.38 |  | Second Amendment to Security Agreement dated January 27, 2003 between Ascent Management,
Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.42 to
Ascents Annual Report on Form 10-K for the year ended December 31, 2002).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.39 |  | First Amendment to Pledge Agreement dated January 27, 2003 between Ascent and LaSalle Bank
National Association (incorporated by reference to Exhibit 10.43 to Ascents Annual
Report on Form 10-K for the year ended December 31, 2002).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.40 |  | Termination Agreement dated January 31, 2003 executed by LaSalle Bank National Association
acknowledging payment in full of Ascent Management, Inc. note payable (incorporated by
reference to Exhibit 10.44 to Ascents Annual Report on Form 10-K for the year ended
December 31, 2002).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.41 |  | First Amendment to Credit Agreement dated February 26, 2003 between Ascent and Credit
Suisse First Boston Management Corporation (incorporated by reference to Exhibit 10.45 to
Ascents Annual Report on Form 10-K for the year ended December 31, 2002).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.42 |  | Ninth Amendment to Credit Agreement dated July 25, 2003 between Ascent Funding, Inc. and
LaSalle Bank National Association (incorporated by reference to Exhibit 10.35 to
Ascents Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.43* |  | Termination Agreement Dated November 25, 2003 between Ascent Funding, Inc. and LaSalle Bank National Association.
|------ |  | -----------------------------------------------------------------------------------------------------------------

|10.44 |  | Exchange  Agreement  Among  Ascent  Assurance,  Inc.,  Credit  Suisse  First Boston  Management,  LLC, and Special  Situations
         Holdings,  Inc. -  Westbridge  dated  December  31, 2003  (incorporated  by reference to Exhibit 10.1 to Ascent's 8-K filed on
         January 6, 2004).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.45 |  | First Amendment to Registration  Rights Agreement  between Ascent  Assurance,  Inc. and Special  Situations  Holdings,  Inc. -
         Westbridge dated December 31, 2003 (incorporated by reference to Exhibit 10.2 to Ascent's 8-K filed on January 6, 2004).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.46 |  | Second Amendment to Credit Agreement dated December 31, 2003 between Ascent Assurance,
Inc. and Credit Suisse First Boston Management, LLC (incorporated by reference to Exhibit
10.3 to Ascents 8-K filed on January 6, 2004).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.47 |  | First Amendment and Waiver to Guaranty and Security Agreement dated December 31, 2003 between Foundation  Financial  Services,
         Inc.,  NationalCare(R)Marketing,  Inc.,  Lifestyles Marketing Group, Inc., Precision Dialing Services,  Inc., Senior Benefits,
         LLC, and Westbridge  Printing  Services,  Inc. and Credit Suisse First Boston  Management,  LLC  (incorporated by reference to Exhibit
10.4 to Ascents 8-K filed on January 6, 2004)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.48 |  | Intercreditor and Subordination Agreement among the Frost National Bank, Credit Suisse
First Boston Management, LLC, and Ascent Assurance, Inc. and named subsidiaries dated
December 31, 2003 (incorporated by reference to Exhibit 10.5 to Ascents 8-K filed on
January 6, 2004).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.49* |  | Credit Agreement dated as of December 31, 2003 among Ascent Funding, Inc., Ascent
Assurance, Inc., NationalCare®Marketing, Inc. and the Frost National Bank
including exhibits to such agreement, Pledge and Security Agreement dated December 31,
2003 between NationalCare® Marketing, Inc. and Frost National Bank, Pledge
and Security Agreement dated December 31, 2003 between Ascent Assurance, Inc. and Frost
National Bank, Revolving Promissory Note dated December 31, 2003 between Ascent Funding,
Inc. and Frost National Bank, Security Agreement dated December 31, 2003 between Ascent
Funding, Inc. and Frost National Bank, Waiver of Jury Trial and Notice of Final Agreement
dated December 31, 2003 between Ascent Funding, Inc. and Frost National Bank and
Intercreditor and Subordination Agreement among Frost National Bank, Credit Suisse First
Boston Management, LLC and Ascent Assurance, Inc. and named subsidiaries dated December
31, 2003 (see 10.48 above).
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21.1* |  | List of Subsidiaries of Ascent Assurance, Inc.
|----- |  | ----------------------------------------------

|23.1* |  | Consent of Ernst
& Young, LLP
|----- |  | -----------------------------

|23.2* |  | Consent of
PricewaterhouseCoopers, LLP
|----- |  | --------------------------------------

|31.1* |  | Certification  of Patrick J.  Mitchell,  Chairman and Chief  Executive  Officer of the Company  pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.2* |  | Certification  of Cynthia B. Koenig,  Chief  Financial  Officer and  Treasurer  of the Company  pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.1* |  | Certification of Patrick J. Mitchell, Chairman and Chief Executive Officer and Cynthia B.
Koenig, Senior Vice President, Chief Financial Officer and Treasurer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# (b) Reports on Form 8-K

The registrant filed a Report on Form
8-K dated November 12, 2003 under Item 9. Regulation FD Disclosure and also
under Item 12. Results of Operations and Financial Condition attaching a copy
of the registrants press release reporting the registrants financial results for the third
quarter of 2003.

On January 6, 2004, the registrant
filed a report on Form 8-K dated December 31, 2003 reporting information regarding the
restructuring of Ascents preferred stock and note payable.




*Filed Herewith.


SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on
the 27 day of February 2004.

| | ASCENT ASSURANCE, INC                            
| | -------------------------------------------------
|
| | /s/ Cynthia B. Koenig                            
| | Cynthia B. Koenig                                
| | Senior Vice President and Chief Financial Officer
| | (Principal Financial and Accounting Officer)     

Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.

|                                               |  |                                                                                        
|---------------------------------------------- |  | ---------------------------------------------------------------------------------------
|SIGNATURE                                      |  | TITLE                                                                                  
|                                               |  |                                                                                        
|/s/ Patrick J. Mitchell(Patrick J. Mitchell)   |  | Director, Chairman of the Boardand Chief Executive Officer(Principal Executive Officer)
|                                              
|/s/ Alan H. Freudenstein(Alan H. Freudenstein) |  | Director                                                                               
|                                              
|/s/ Gregory M. Grimaldi(Gregory M. Grimaldi)   |  | Director                                                                               
|                                              
|/s/ George R. Hornig(George R. Hornig)         |  | Director                                                                               
|                                              
|/s/ David G. Kaytes(David G. Kaytes)           |  | Director                                                                               
|                                              
|/s/ Michael A. Kramer(Michael A. Kramer)       |  | Director                                                                               
|                                              
|/s/ Paul E. Suckow(Paul E. Suckow)             |  | Director                                                                               
|                                              



# Exhibit 21.1

# SUBSIDIARIES OF ASCENT
ASSURANCE, INC.

|    | Percentage Subsidiary                               | Ownership | 
|--- | --------------------------------------------------- | --------- | 
|   
|1.  | National Foundation Life Insurance Company (Texas)  | 100%      | 
|   
|2.  | American Insurance Company of Texas (Texas)         | 100%      | 
|   
|3.  | National Financial Insurance Company (Texas)        | 100%      | 
|   
|4.  | Freedom Life Insurance Company of America (Texas)   | 100%      | 
|   
|5.  | Ascent Funding, Inc. (Delaware)                     | 100%      | 
|   
|6.  | Foundation Financial Services, Inc. (Nevada)        | 100%      | 
|   
|7.  | NationalCare® Marketing, Inc. (Delaware)            | 100%      | 
|   
|8.  | Westbridge Printing Services, Inc. (Delaware)       | 100%      | 
|   
|9.  | Ascent Management, Inc. (Delaware)                  | 100%      | 
|   
|10. | Precision Dialing Services, Inc. (Delaware)         | 100%      | 
|   
|11. | Senior Benefits, LLC (Arizona)                      | 100%      | 
|   
|12. | LifeStyles Marketing Group, Inc. (Delaware)         | 100%      | 
|   
|13. | Health Care-One Insurance Agency, Inc. (California) | 50%       | 
|   
|14. | Pacific Casualty Company, Inc. (Hawaii)             | 100%      | 
|   



# Exhibit 23.1

# CONSENT OF INDEPENDENT
AUDITORS

We consent to the incorporation by
reference in the Registration Statement (Form S-8 No. 333-82155) pertaining to the Ascent
Assurance, Inc. 1999 Stock Option Plan of our report dated February 24, 2004, with respect
to the consolidated financial statements and schedules of Ascent Assurance, Inc. included
in the Form 10-K for the year ended December 31, 2003.

/s/ Ernst & Young,
LLP

Ernst & Young, LLPDallas,
TexasFebruary 24, 2004



# Exhibit 23.2

# CONSENT OF INDEPENDENT
ACCOUNTANTS

We hereby consent to the
incorporation by reference in the Registration Statement on Form S-8 (No. 333-82155) of
Ascent Assurance, Inc. and its subsidiaries (Ascent) of our report dated March 8, 2002
relating to the financial statements and financial statement schedules of Ascent and its
subsidiaries for the year ended December 31, 2001, which appears in this Form 10-K.

/s/
PricewaterhouseCoopers, LLP

PricewaterhouseCoopers,
LLPDallas, Texas       February 25, 2004