SECURITIES AND EXCHANGE COMMISSION
                                                 WASHINGTON, D.C. 20549

# FORM 10-K

FOR 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, 2002OR
(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _____ to____
 Commission File Number 1-8538

ASCENT 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)
| |                                                                |  |                                        
| | 110 West Seventh Street, Fort Worth, Texas                     |  | 76102                                  
| | (Address of Principal Executive Offices)                       |  | (Zip Code)                             

Registrant's Telephone Number, Including Area Code:
                                                     (817) 878-3300

 Registrant's Shareholder and Investor Relations Telephone Number
                                                     (817) 877-3048

Securities
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           X
                  No
                     
     ________          
        _______

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 $2,286,235 as of February 27,
2003. As of February 27, 2003, 6,532,100 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of Registrant's definitive proxy statement for the 2003 Annual Meeting, to be filed with the securities
and Exchange Commission on or before April 30, 2003, are incorporated by reference under part III of thsi Form 10-K.



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# ASCENT ASSURANCE, INC.

# 2002 FORM 10-K ANNUAL
REPORT

# TABLE OF CONTENTS

|         | PART I                                                                                         | Page Number
|-------- | ---------------------------------------------------------------------------------------------- | -----------
|         |                                                                                                |            
|ITEM 1.  | Business                                                                                       | 3          
|ITEM 2.  | Properties                                                                                     | 11         
|ITEM 3.  | Legal Proceedings                                                                              | 11         
|ITEM 4.  | Submission of Matters
                to a Vote of Security Holders                            | 11         
|         |                                                                                                |            
|         | PART II                                                                                        |            
|         |                                                                                                |            
|ITEM 5.  | Market for the Registrant's Common Stock
      and Related Stockholder Matters                 | 12         
|ITEM 6.  | Selected Consolidated Financial Data                                                           | 13         
|ITEM 7.  | Management's Discussion and Analysis of
   Financial Condition and Results of Operations       | 15         
|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        | 67         
|         |                                                                                                |            
|         | PART III                                                                                       |            
|         |                                                                                                |            
|ITEM 10. | Directors and Executive Officers of the Registrant                                             | 68         
|ITEM 11. | Executive Compensation                                                                         | 68         
|ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 68         
|ITEM 13. | Certain Relationships and Related Transactions                                                 | 68         
|         |                                                                                                |            
|ITEM 14. | Controls and Procedures                                                                        | 68         
|         |                                                                                                |            
|         | PART IV                                                                                        |            
|         |                                                                                                |            
|ITEM 15. | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                           | 69         
|         |                                                                                                |            



---

# 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 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. Ascents
predecessor, Westbridge Capital Corp. (Westbridge), filed Chapter 11
reorganization proceedings on September 16, 1998. Ascent emerged from such proceedings on
March 24, 1999. References herein to the Company shall mean for all periods on
or prior to March 31, 1999, Westbridge and its subsidiaries, and for all periods on or
after the close of business on March 31, 1999, Ascent and its subsidiaries.

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, 2002: Florida 
17%, Texas  15 % and Oklahoma  6%. Since 1998, new business has been produced
only in NFL and FLICA, with FLICA underwriting approximately 73% of new policies issued.
Since April 2000, NFL has reinsured approximately 60% of the risk under new major medical
policies issued by FLICA.

The Company also derives fee and
service revenue from (i) telemarketing services, (ii) printing services and (iii) renewal
commissions for prior year sales of unaffiliated insurance products.

# 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
major medical products  These products are similar to comprehensive major
medical products except that benefits are generally limited to hospital/surgical services
(services such as routine well care physician visits and 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 indemnity policies for
hospital confinement and convalescent care for treatment of specified diseases and
event specific policies, which provide fixed benefits or lump sum payments
upon diagnosis of certain types of internal cancer. Benefits are payable directly to the
insured following diagnosis of or treatment for a covered illness or injury. Specified
disease products are generally guaranteed renewable by contract, but are exempt from
HIPAA.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Major medical products comprise
approximately 98% 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 major medical
products currently underwritten by NFL and FLICA are stringently underwritten and 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 Companys business
include product mix, policy benefits, service to policyholders and premium rates. The
Company believes that its 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
Companys ability to remain competitive. The Insurance Subsidiaries are not currently
rated with A.M. Best. The Company believes that its lack of an A.M. Best rating is not a
significant factor affecting its ability to sell its products in the markets that it
serves.

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 Companys 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 Companys 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 Company competes 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
reduce 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 the Company is competitive with respect to the recruitment, training and
retention of such agents. However, there can be no assurance that the Company 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 the Company is permitted to market an 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 Companys 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 Company may wish
to take in order to enhance its 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
Company does business have adopted NAIC model statutes and regulations relating to market
conduct practices of insurance companies. Any limitations or other restrictions imposed on
the Companys 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. The states
in which the Company is licensed have the authority to change the minimum mandated
statutory loss ratios to which the Company is 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 Company writes 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
Company or (ii) any change in the manner in which these minimums are computed or enforced
in the future. Similarly, the Companys 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 guidance, which replaced the current Accounting Practices and
Procedures manual as the NAICs primary guidance on statutory accounting. The
Codification provides guidance for areas where statutory accounting has been silent and
changes current statutory accounting in certain areas. The Texas Department of Insurance
adopted the Codification effective January 1, 2001. The adoption of the Codification did
not materially impact statutory surplus of the Insurance Subsidiaries.

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, 2002 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, 2002, AICTs RBC exceeded Company Action Level
RBC; however, NFICs RBC only exceeded Authorized Control 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 new business in
Florida; however, Florida production represents approximately 30% of the Companys
consolidated new business sales. At December 31, 2002, 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 2003 without prior approval of the Texas Insurance
Commissioner as the companies earned surplus is negative. 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. On September 30,
2000, NFL transferred its 100% ownership of FLICA to Ascent through an extraordinary
dividend approved by the Texas Department of Insurance.

Guaranty
Associations. The Company may be required, under the solvency or guaranty
laws of most states in which it does 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 Company pays 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 Company paid approximately $185,000 during the year ended December
31, 2002.

# FEDERAL REGULATION

HIPAA.This federal regulation 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. Ensuring privacy and security of patient information
           accountability  is a key component of the legislation.
          The other key component is portability, or an individuals
          right, under certain circumstances, to maintain their prior satisfaction of
          waiting periods or pre-existing coverage limitations when leaving the current
          group health coverage 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 will now be 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 is 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 are 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 has formed a HIPAA task
force for the purpose of HIPAA compliance. The Company expects to comply with the
regulations regarding the privacy of individually-identifiable health information prior to
the April 14, 2003 effective date. Due to the uncertainty surrounding the regulatory
requirements, the Company cannot be sure that planned systems and programs will comply
adequately with the regulations that are ultimately approved. Implementation of additional
systems and programs may be required, the cost of which cannot currently be determined.
Further, compliance with these regulations require changes to many operational procedures
which may lead to additional costs that have not yet been identified.

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.

# REORGANIZATION EFFECTIVE
MARCH 24, 1999

On September 16, 1998, Westbridge
commenced its reorganization by filing a voluntary petition for relief under Chapter 11,
Title 11 of the United States Code in the United States Bankruptcy Court for the District
of Delaware (the Bankruptcy Court), along with a disclosure statement (as
amended, the Disclosure Statement) and a proposed plan of reorganization (as
amended, the Plan). The filing of the Disclosure Statement and Plan culminated
months of negotiations between Westbridge and an ad hoc committee (the
Creditors Committee) of holders of its 11% Senior Subordinated Notes due
2002 (the Senior Notes) and its 7-1/2% Convertible Subordinated Notes due 2004
(the Convertible Notes). The Disclosure Statement was approved by entry of an
order by the Bankruptcy Court on October 30, 1998. Following the approval of the Plan by
the holders of allowed claims and equity interests, the Bankruptcy Court confirmed the
Plan on December 17, 1998. The Plan became effective March 24, 1999 (the Effective
Date). On the Effective Date, Westbridges certificate of incorporation and
by-laws were amended and restated in their entirety and pursuant thereto, Ascent emerged
from such reorganization.

The following summary of the Plan
omits certain information set forth in the Plan. Any statements contained herein
concerning the Plan are not necessarily complete, and in each such instance reference is
made to the Plan, a copy of which is incorporated by reference to Exhibit 2 of
Westbridges Current Report on Form 8-K which was filed with the Securities and
Exchange Commission on December 29, 1998. Each such statement is qualified in its entirety
by such reference. The Plan provided for the recapitalization of certain old debt and
equity interests in Westbridge and the issuance of new equity securities and warrants. Key
terms of the Plan included the following:

Cancellation of Existing
Securities.Pursuant to the Plan, the following securities of Westbridge
were canceled as of the Effective Date: (i) $23.3 million aggregate principal amount and
all accrued and unpaid interest on, the Senior Notes, (ii) $77.3 million aggregate
principal amount and all accrued and unpaid interest on, the Convertible Notes, (iii)
$13.2 million aggregate liquidation preference of and all accrued and unpaid dividends on,
Westbridges Series A Convertible Redeemable Exchangeable Preferred Stock (the
Old Preferred Stock), (iv) Westbridges Common Stock, par value $.10 per
share (the Old Common Stock), (v) all outstanding warrants to purchase Old
Common Stock, (vi) all outstanding unexercised stock options to purchase Old Common Stock,
and (vii) all unvested grants of restricted Old Common Stock.

New Equity Capital Structure.Pursuant to Ascents Amended and Restated Certificate of
Incorporation, the total number of shares of capital stock Ascent has the authority to
issue is 30,040,000, consisting of 30,000,000 shares of common stock, par value $.01 per
share (the New Common Stock) and 40,000 shares of preferred stock, par value
$.01 per share, all of which are designated Series A Convertible Preferred Stock (the
New Preferred Stock).

Distributions Under the
Plan

Cash Distribution

To the holders of Senior Notes other
than Credit Suisse First Boston Corporation (CSFB), cash payments totaling
approximately $15.2 million, which equaled the total Allowed 11% Senior Note Claims (as
defined in the Plan) held by creditors other than CSFB, were distributed subject to
completion of the exchange of securities as contemplated by the Plan. In order to provide
the Company with sufficient funds to make the cash distribution to the holders of the 11%
Senior Notes under the Plan, an affiliate of CSFB (the CSFB Affiliate)
purchased all of the shares of the New Preferred Stock which were not otherwise
distributed under the Plan.

Issuance of New Securities

Pursuant to the Plan and the purchase
of New Preferred Stock, 6,500,000 shares of New Common Stock and 23,257 shares of New
Preferred Stock were issued, subject to the completion of the exchange requirements as
contemplated by the Plan, on the Effective Date as follows:

|o |  | To holders of general unsecured claims and Convertible Notes as of December 10, 1998,
6,077,500 shares, and to management at the Effective Date, 32,500 shares, or in aggregate
94% of the New Common Stock issued on the Effective Date. Holders of general unsecured
claims and Convertible Notes received their first distribution of shares in partial
satisfaction and discharge of their allowed claims in April 1999. The second distribution
was made in September 1999 and the remaining shares of New Common Stock were distributed
in November 1999.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | To holders of Old Preferred Stock as of December 10, 1998, 260,000 shares, or 4%, of the
New Common Stock issued on the Effective Date and Warrants (New Warrants) to
purchase an additional 277,505 shares, or 2%, of the New Common Stock issued on the
Effective Date, on a fully diluted basis.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | To holders of Old Common Stock as of December 10, 1998, 130,000 shares, or 2%, of the New
Common Stock issued on the Effective Date and New Warrants to purchase an additional
693,761 shares, or 5%, of the New Common Stock issued on the Effective Date, on a fully
diluted basis. Fractional shares of New Common Stock were not issued in connection with
the Plan. As a result of this provision, certain holders of Old Common Stock received no
distribution of New Common Stock or New Warrants under the Plan.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of December 10,
1998, 8,090 shares of New Preferred Stock, together with the 15,167 additional shares of
New Preferred Stock purchased by the CSFB Affiliate as described above, were convertible
into 4,765,165 shares of the New Common Stock on March 24, 1999. As a result of the New
Preferred Stock received by the CSFB Affiliate, together with the 3,093,998 shares of New
Common Stock received by the CSFB Affiliate in respect of the Convertible Notes owned by
CSFB, the CSFB Affiliate beneficially owned on March 24, 1999 approximately 56.6% of the
New Common Stock on an as converted basis, assuming the exercise of all New Warrants and
issuance of New Common Stock reserved under the 1999 Stock Option Plan as discussed below.
The New Preferred Stock has a stated value of $1,000 per share and a cumulative annual
dividend rate of $102.50 per share payable in January of each year in cash or by the
issuance of additional shares of New Preferred Stock. The New Preferred Stock is
convertible at any time into 204.8897 shares of New Common Stock at an initial conversion
price of $4.88 per share of New Common Stock, subject to customary anti-dilution
adjustments.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Reservation of Additional
New Common Stock

In connection with the New Warrants
described above, 971,266 shares of New Common Stock have been reserved for issuance upon
the exercise of New Warrants. The New Warrants are exercisable at an initial exercise
price of $9.04 per share of New Common Stock, subject to customary anti-dilution
adjustments, and will expire on March 24, 2004.

Pursuant to the Plan, up to 1,251,685
shares, or 10%, of the fully diluted number of shares of New Common Stock issued and
outstanding on the Effective Date have been reserved for issuance to employees and
directors, and up to 387,119 shares, or 3%, of the fully diluted number of shares of New
Common Stock issued on the Effective Date 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.

# EMPLOYEES

At December 31, 2002, the Company
employed 352 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 110 West Seventh Street, Fort Worth, Texas. The lease for this facility
expires in April, 2003. 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, the Companys wholly-owned telemarketing subsidiary,
maintains its facility at 9550 Forest Lane, Dallas, Texas under a lease agreement which
expires in December, 2003. 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 the
disposition of which would have a material adverse effect on the Companys business,
financial position or its 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 6,532,100
shares of Common Stock and 971,266 Warrants outstanding as of February 27, 2003. 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,
2002 was $0.75. There were approximately 331 shareholders of record on December 31, 2002,
representing approximately 1,500 beneficial owners.

OTC Bulletin Board

|               |  |              |  |              
|-------------- |  | ------------ |  | -------------
|               |  | Common       |  | Stock        
|               |  | High         |  | Low          
|2002           |  |              | 
|Fourth Quarter |  | $       0.80 |  | $        0.45
|Third Quarter  |  | 1.25         |  | 0.60         
|Second Quarter |  | 1.11         |  | 0.60         
|First Quarter  |  | 1.13         |  | 0.57         
|               |  |              | 
|2001           |  |              | 
|Fourth Quarter |  | $    1.100   |  | $    0.220   
|Third Quarter  |  | 1.550        |  | 1.050        
|Second Quarter |  | 2.000        |  | 1.100        
|First Quarter  |  | 2.188        |  | 0.750        

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  Regulation, and NOTE 10  Statutory Capital And
Surplus to the Companys Consolidated Financial Statements at Item 8.

# 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,
|----------------------- |  | ------------------------------

| | 2002 | 2001 | 2000 | 1999
| | ---- | ---- | ---- | ----

(in thousands, except per share data)

|                                                |              |             |             |            
|----------------------------------------------- | ------------ | ----------- | ----------- | -----------
|Statement of Operations Data:                  
|Premiums                                        | $ 111,048    | $ 125,206   | $ 119,908   | $   86,371 
|Total revenues                                  | 131,278      | 155,381     | 149,586     | 105,972    
|(Loss) income before income taxes               | (931)        | (2,119)     | (12,939)    | 3,231      
|Net (loss) income(3)                            | (931)        | (2,119)     | (18,942)    | 2,106      
|Preferred stock dividends                       | 3,263        | 2,932       | 2,576       | 1,874      
|(Loss) income applicable to common shareholders | (4,194)      | (5,051)     | (21,518)    | 232        
|                                               
|Loss Per Share(3):                             
|Basic                                           | $     (0.64) | $    (0.78) | $    (3.31) | $    (0.04)
|Diluted                                         | $     (0.64) | $    (0.78) | $    (3.31) | $    (0.04)
|                                               
|Weighted Average Shares Outstanding            
|Basic                                           | 6,505        | 6,500       | 6,500       | 6,500      
|Diluted                                         | 6,505        | 6,500       | 6,500       | 6,610      

ASCENT ASSURANCE, INC.

| |  |      |  |      | Dec | ember 31, |  |      |  | March 31, | 
| |  | ---- |  | ---- | --- | --------- |  | ---- |  | --------- | 
| |  |      |  |     
| |  | 2002 |  | 2001 |     | 2000      |  | 1999 |  | 1999      | 

(in thousands)

|Balance Sheet Data:      |  |           |  |           |  |           |  |           |  |           | 
|------------------------ |  | --------- |  | --------- |  | --------- |  | --------- |  | --------- | 
|Cash and invested assets |  | $ 112,174 |  | $ 116,238 |  | $ 112,235 |  | $ 115,303 |  | $ 129,142 | 
|Total Assets             |  | 155,440   |  | 162,593   |  | 160,478   |  | 163,690   |  | 169,795   | 
|Policy liabilities       |  | 91,559    |  | 98,773    |  | 104,084   |  | 95,895    |  | 95,806    | 
|Notes payable(1)         |  | 18,189    |  | 18,603    |  | 8,947     |  | 7,162     |  | 5,088     | 
|Total liabilities        |  | 119,283   |  | 129,136   |  | 128,698   |  | 116,649   |  | 119,435   | 
|Redeemable convertible   | 
|preferred stock (2)      |  | 33,896    |  | 30,635    |  | 27,705    |  | 23,257    |  | 23,257    | 
|Stockholders' equity     |  | 2,261     |  | 2,822     |  | 4,075     |  | 23,784    |  | 27,103    | 

| |  |  | 
| |  |  | 

|(1) |  | In April 2001, the Company borrowed an additional $11 million. See
               Liquidity, Capital Resources, and Statutory Capital and Surplus at
               Item 7.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | At December 31, 2002, consists of 33,896 shares, which are convertible, at the
               option of the holders thereof, into an aggregate of 6,944,941 shares of common
               stock at a conversion price of $4.88 per share of common stock.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Net loss for the year ended December 31, 2000 includes a non-cash charge of
               $10.4 million related to an increase in the deferred tax asset valuation
               allowance which increased loss per share and decreased book value per share by
               $(1.60). See Financial Condition  Deferred Tax Asset at Item
               7.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | WESTBRIDGE CAPITAL CORP | 
| | ----------------------- | 

|                                      |                |       
|------------------------------------- | -------------- | ------
|                                      |               
|                                      | Three Months   |       
|                                      | Ended          |       
|                                      | March 31, 1999 |       
|                                      |               
|                                      | (in thousands, | except
|Statement of Operations Data:         |               
|Premiums                              | $29,948        |       
|Total revenues                        | 36,814         |       
|Extraordinary loss, net of income tax | -              |       
|Net income (loss)                     | 208            |       
|Preferred stock dividends             | -              |       
|Income (loss) applicable to common   
|stockholders                          | 208            |       
|                                      |               
|Earnings (Loss) Per Share:            |               
|Basic                                 | $    0.03      |       
|Diluted                               | $    0.03      |       
|                                      |               
|Weighted Average Shares Outstanding:  |               
|Basic                                 | 7,032          |       
|Diluted                               | 7,032          |       

# SELECTED CONSOLIDATED
FINANCIAL DATA (CONTINUED)

| | WESTBRIDGE CAPITAL CORP | 
| | ----------------------- | 

|                                       |                  
|-------------------------------------- | -----------------
|                                       |                  
|                                       | December 31, 1998
|                                       |                  
|                                       | (in thousands)   
|Balance Sheet Data:                    |                  
|Total cash and invested assets         | $ 131,708        
|Total assets                           | 169,741          
|Policy liabilities                     | 97,987           
|Notes payable                          | 95,715           
|Total liabilities                      | 219,886          
|Redeemable convertible preferred stock | 11,935           
|Stockholders' deficit                  | (62,080          

# 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 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. To a lesser extent the Company derives revenue from (i)
tele-survey services, (ii) printing services, and (iii) renewal commissions received by
the Company for prior year sales of insurance products for unaffiliated insurance
carriers.

Critical Accounting
Policies. The following discussion provides managements assessment of
financial results and material changes in financial position 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. The
Companys significant accounting policies relate to investments, agent receivables,
deferred policy acquisition costs, deferred tax assets, claim reserves, future policy
benefit reserves, reinsurance and statutory accounting practices. These policies are
discussed below under Financial Condition and in Notes 2 and 10 to the
Companys consolidated financial statements at Item 8. 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. For a
better understanding of this analysis, reference should be made to Item 1 
Business and to Item 8  Financial Statements and Supplementary
Data. Certain reclassifications of prior years amounts have been made to
conform with the 2002 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 the Company 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 |  | the ability of the Company to refinance redeemable preferred stock and notes payable
maturing in March 2004 and April 2004, respectively;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|o |  | the ability of the Company to renew its existing revolving credit facility for the
financing of commission advances to agents which expires in January 2004;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | the Company's ability to meet minimum regulatory
capital requirements for its Insurance Subsidiaries;
|- |  | -----------------------------------------------------------------------------------------------------

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

|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 the Company 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 the Company or the SEC.



# OPERATING RESULTS

Results of operations for Ascent are
reported below for 2002, 2001 and 2000.

|                                                  |  |           |  
|------------------------------------------------- |  | --------- | -
|                                                  |  | 2002      |  
|                                                  |  |           |  
|Premiums                                          |  | $ 111,048 |  
|Other                                             |  | 2,670     |  
|                                                  |  |           |  
|Total insurance operating revenue                 |  | 113,718   |  
|Net investment income                             |  | 7,722     |  
|                                                  |  |           |  
|Total insurance revenues                          |  | 121,440   |  
|                                                 
|Benefits and claims                               |  | 78,299    |  
|Commissions                                       |  | 13,857    |  
|Decrease (increase) in deferred acquisition costs |  | 215       |  
|General and administrative expense                |  | 23,260    |  
|Taxes, licenses and fees                          |  | 3,790     |  
|Interest expense on notes payable to bank         |  | 275       |  
|Recognition of premium deficiency                 |  | -         |  
|                                                  |  |           |  
|Total insurance operating expenses                |  | 119,696   |  
|                                                  |  |           |  
|Insurance operating results                       |  | 1,744     |  
|                                                  |  |           |  
|Fee and service income                            |  | 9,926     |  
|Fee and service expenses                          |  | 10,314    |  
|                                                  |  |           |  
|Fee and service results                           |  | (388      | )
|                                                  |  |           |  
|Net realized (loss) gain on investments           |  | (88       | )
|Interest expense on notes payable                 |  | (2,199    | )
|                                                  |  |           |  
|Loss before income taxes                          |  | (931      | )
|Income tax expense                                |  | -         |  
|                                                  |  |           |  
|Net loss                                          |  | (931      | )
|Preferred stock dividends                         |  | (3,263    | )
|                                                  |  |           |  
|Net loss to common shareholders                   |  | $  (4,194 | )
|                                                  |  |           |  
|Insurance operating ratios*                       | 
|Benefits and claims                               |  | 70.5      | %
|Commissions                                       |  | 12.5      | %
|Decrease (increase) in deferred acquisition costs |  | 0.2       | %
|Recognition of premium deficiency                 |  | -         |  
|General and administrative expense                |  | 20.5      | %
|Taxes, licenses and fees                          |  | 3.4       | %

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

Overview.The Companys pre-tax loss for 2002 was ($931,000) compared
          to a pre-tax loss of ($2.1) million for 2001 and ($12.9) million for 2000. The
          $1.2 million decrease in pre-tax loss for 2002 from 2001 was primarily the
          result of the $4.6 million improvement in insurance operating results in 2002
          which was partially offset by a ($2.1) million decrease in fee and service
          results and an increase in interest expense on the note payable of $862,000.

The $4.6 million and $12.2 million
improvements in insurance operating results for 2002 and 2001, respectively, are
principally attributable to 4.1 and 10.4 percentage point reductions, respectively, in the
benefit and claims to premium ratios, due to a favorable change in major medical product
mix. Since July 2000, the Company has been marketing a new major medical policy in all
significant marketing regions. The new product was designed to produce a substantially
lower benefits ratio than previously marketed major medical products.

Fee and service results decreased
($2.1) million for 2002 compared to 2001 principally due to the impact of the extended
economic downturn on the Companys printing and telemarketing subsidiaries. These
subsidiaries have been impacted by a reduction in the number of customers as well as
reduced order volume from current customers and have also experienced reduced profit
margins.

Interest expense on the note payable
issued in April 2001 of $11 million increased to $2.2 million in 2002 from $1.3 million in
2001 due to the longer period outstanding for 2002 and the increase in the note payable
balance to $13.5 million as of December 31, 2002 for interest paid in kind. In addition,
dividends on the redeemable convertible preferred stock increased during 2002 due to the
payment of such dividends in kind. At December 31, 2002, total redeemable convertible
preferred stock outstanding was $33.9 million. The redeemable preferred stock and note
payable mature in March 2004 and April 2004, respectively. The Company must obtain
additional financing to retire these obligations when due or restructure these facilities.
Failure of the Company to successfully refinance these facilities could have a material
adverse impact on the Companys liquidity, capital resources and results of
operations (see Liquidity, Capital Resources and Statutory Capital and Surplus.)

The Company reported no income tax
benefit for 2002 and 2001 and incurred tax expense for 2000 of $6.0 million due to the
establishment of a valuation allowance beginning December 31, 2000 for all net deferred
tax assets. (See Financial Condition  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 major medical, supplemental specified disease 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
          medicines. Hospital surgical major medical products are similar to comprehensive
          major medical products except that benefits are generally limited to
          hospital/surgical services and deductibles and coinsurance provisions are
          generally higher. Supplemental specified disease products include indemnity
          policies for hospital confinement and convalescent care for treatment of
          specified diseases and event specific policies, which provide fixed
          benefits or lump sum payments upon diagnoses of certain types of internal cancer
          or other catastrophic diseases. 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:

|                                |  |            | 
|------------------------------- |  | ---------- | 
|                                |  | 2002       | 
|                                |  |            | 
|Major medical:                  | 
|First-year                      |  | $   22,336 | 
|Renewal                         |  | 47,572     | 
|                                |  |            | 
|                                |  | $   69,908 | 
|                                |  |            | 
|Supplemental specified disease: | 
|First-year                      |  | 340        | 
|Renewal                         |  | 22,328     | 
|                                |  |            | 
|                                |  | $   22,668 | 
|                                |  |            | 
|Medicare supplement:            | 
|Renewal                         |  | $   16,416 | 
|                               
|Other                           |  | 2,056      | 
|                                |  |            | 
|Consolidated Premium Revenue    |  | $ 111,048  | 
|                                |  |            | 

Total premiums for 2002 decreased
$14.2 million, or 11.3%, as compared to 2001 principally as a result of accelerated
lapsing of major medical products marketed prior to July 2000 and the normal lapsing of
supplemental specified disease and Medicare supplement policies. Total premiums for 2001
increased $5.3 million, or 4.4% as compared to 2000 as new business production exceeded
the expected decline in premiums from the older, closed blocks of business. Comprehensive
major medical products comprised 98% and 97% of new business sales in 2002 and 2001,
respectively, and represented 63% of consolidated premium revenue for 2002 as compared to
62% for 2001 and 55% for 2000.

In July 2000, the Company began
marketing a new comprehensive major medical policy in all significant marketing regions.
The new major medical policy is designed to produce a substantially lower benefits and
claims to premium ratio than previously marketed products. Annual premiums for new major
medical policies in force at December 31, 2002 were $40.5 million as compared to $29.2
million at December 31, 2001 and $8.7 million at December 31, 2000.

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 4.1 percentage point improvement in the
ratio of consolidated benefits and claims to consolidated premiums in 2002 as compared to
2001 and the 10.4 percentage point improvement in 2001 as compared to 2000 is principally
attributable to the new major medical product introduced in July 2000. As discussed above,
this product was designed to produce a lower benefits and claims to premium ratio. Each
year, the new major medical product comprises a greater percentage of total major medical
premium revenue.

Commissions.For 2002, the commissions to premiums ratio decreased by 1.7
          percentage points from 2001 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. The commissions to premiums ratio
          declined by 0.8 percentage point in 2001, as compared to 2000, due to a higher
          percentage of renewal premiums to total premiums.

General and Administrative
Expense. General and administrative expenses decreased by $2.1 million in
2002 as compared to 2001, principally due to the decline in first year premiums and new
policy issue cost. General and administrative expenses decreased $2.9 million in 2001 as
compared to 2000 due to non-recurring expenses incurred in 2000 related to the
implementation of the Companys new policy administration and claims data processing
systems and efficiencies realized in 2001 from such systems.

Net Investment Income.Net investment income decreased $1.1 million in 2002 and $0.9 million in
2001 as compared to the corresponding prior year primarily due to a decline in receivables
from agents and lower market interest rates for fixed maturity investments.

# FINANCIAL CONDITION

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 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:

|                                     |  |              |    |      
|------------------------------------ |  | ------------ | -- | -----
|                                     |  | 20           | 02 |      
|                                     |  |             
|                                     |  | Market Value |    | %    
|                                     |  |             
|Fixed Maturities (at market value):  | 
|U.S. Government and related agencies |  | $11,308      |    | 11.4 
|State, county and municipal          |  | 1,726        |    | 1.7  
|Finance companies                    |  | 17,834       |    | 18.0 
|Public utilities                     |  | 6,785        |    | 6.9  
|Mortgage-backed securities           |  | 33,058       |    | 33.4 
|All other corporate bonds            |  | 28,340       |    | 28.6 
|                                     |  |              |    |      
|Total Fixed Maturities               |  | $99,051      |    | 100.0
|                                     |  |              |    |      

Mortgage-backed securities comprised
33.4% of the Companys fixed maturity portfolio at December 31, 2002 as compared to
11.9% at December 31, 2001. 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):

|                                               |  |         |  
|---------------------------------------------- |  | ------- | -
|                                               |  | 2002    |  
|                                               |  |        
|Net investment income (1)                      |  | $ 6,238 |  
|Net realized (loss) gain on investments        |  | (88     | )
|Average gross annual yield on fixed maturities |  | 6.6     | %
|                                              

|(1) |  | Excludes interest on receivables from agents of $1.5 million, $2.0 million and
               $1.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                                |  |                |  |       | 
|------------------------------- |  | -------------- |  | ----- | 
|                                |  | 2002           |  |       | 
|                                |  |               
|                                |  | Market Value   |  | %     | 
|                                |  |               
|                                |  | (in thousands) |  |       | 
|Ratings(1)                      | 
|Investment grade:               | 
|U.S. Government and agencies    |  | $   35,366     |  | 35.7  | 
|AAA                             |  | 10,813         |  | 10.9  | 
|AA                              |  | 4,607          |  | 4.7   | 
|A                               |  | 30,459         |  | 30.7  | 
|BBB                             |  | 16,132         |  | 16.3  | 
|Non-Investment grade:           | 
|BB                              |  | 1,552          |  | 1.6   | 
|B and below                     |  | 122            |  | 0.1   | 
|                                |  |                |  |       | 
|Total fixed maturity securities |  | $   99,051     |  | 100.0 | 
|                                |  |                |  |       | 
|                               

|(1) |  | Ratings are the lower of those assigned primarily by Standard & Poors
               and Moodys, when available, and are shown in the table using the Standard
               & Poors rating scale. Unrated securities are assigned ratings based on
               the applicable NAIC designation or the rating assigned to comparable debt
               outstanding of the same issuer. NAIC 1 fixed maturity securities have been
               classified as A and NAIC 2 fixed maturity securities have been
               classified as BBB.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, 2002, 81.7%, 16.6% and 1.7% of the market value of the Companys fixed
maturity securities were rated NAIC 1, NAIC 2, and NAIC 3 and below, respectively.

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.

|                                       |  |               |    |       | 
|-------------------------------------- |  | ------------- | -- | ----- | 
|                                       |  | 20            | 02 |       | 
|                                       |  |               |    |      
|                                       |  | Market Value  |    | %     | 
|                                       |  |               |    |      
|                                       |  | (in thousand) |    |       | 
|Scheduled Maturity                     | 
|Due in one year or less                |  | $    6,604    |    | 6.7   | 
|Due after one year through five years  |  | 21,042        |    | 21.2  | 
|Due after five years through ten years |  | 24,489        |    | 24.7  | 
|Due after ten years                    |  | 13,858        |    | 14.0  | 
|Mortgage-backed securities             |  | 33,058        |    | 33.4  | 
|                                       |  |               |    |       | 
|Total fixed maturity securities        |  | $  99,051     |    | 100.0 | 
|                                       |  |               |    |       | 

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 $6.3 million and $7.4 million at December 31, 2002 and 2001,
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, 2002 and
2001, the allowance for uncollectible commission advances was $4.6 million and $4.0
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 $25.4 million and $25.6 million at December 31, 2002 and 2001, 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. As a result of losses from major medical products issued
prior to July 2000, the Company determined that a premium deficiency of $1.5 million
existed at December 31, 2000 related to medical expense reimbursement products issued
subsequent to the Companys fresh start date of March 31, 1999. Accordingly, deferred
policy acquisition costs were reduced by $1.5 million at December 31, 2000. At December
31, 2002 and 2001, there were no premium deficiencies.

Deferred Tax Asset.The Companys net deferred tax asset before valuation allowance at
December 31, 2002 and 2001 was $16.0 million and $17.8 million, respectively. As the
Company reported cumulative pre-tax losses of ($9.7) million since the fresh start date of
March 31, 1999 through 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. The
Company reported additional pre-tax losses of ($0.9) million in 2002 and ($2.1) million in
2001 and has now reported cumulative pre-tax losses since the fresh start date of ($12.8)
million. Accordingly, the Company has reported no income tax benefit for 2002 and 2001 and
the net deferred tax asset remains fully reserved. The Company expects to record no income
tax benefit or expense until the Company achieves a cumulative pre-tax income position
since the fresh start date of March 31, 1999. Applicable GAAP literature provides that the
deferred tax asset valuation allowance may be eliminated once the Company is no longer in
a cumulative loss position, as defined.

At December 31, 2002, the Company had
available tax net operating loss carryforwards (NOLs) of $54.9 million that
expire between 2003 and 2017. 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 $30.9 million at December
31, 2002 as compared to $37.2 million at December 31, 2001. 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 as a result of the implementation of a new claims administration system
in May 2000. 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.

Future Policy Benefit Reserves.Policy benefit reserves are established by each of the Insurance
Subsidiaries for their benefit payments that have not been incurred, but, are estimated to
be incurred in the future. Policy benefit reserves totaled $60.7 million at December 31,
2002 as compared to $61.6 million at December 31, 2001. The 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. Except for purposes of
reporting to insurance regulatory authorities and for tax filing, the Insurance
Subsidiaries claim reserves and policy benefit reserves are determined in accordance
with GAAP.

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. The sharp increase in claim loss
ratios experienced by certain Insurance Subsidiaries during 2000 was indicative of
inadequate pricing for major medical products marketed prior to July 2000.

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.
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, 2002, approximately
$0.5 million of the $2.4 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). Under SAP, certain assumptions used in determining
the policy benefit reserves, such as claim costs and investment return assumptions, are
often more conservative than those appropriate for use under GAAP. In particular, SAP
interest rate assumptions for investment results are fixed by statute and are generally
lower than those used for GAAP. Another significant difference is that under SAP, unlike
GAAP, the Insurance Subsidiaries are required to expense all sales and other policy
acquisition costs as they are incurred rather than capitalizing and amortizing them over
the expected life of the policy. The effect of this requirement is moderated by the
allowance under SAP of an accounting treatment known as the two year preliminary
term reserve valuation method. This reserve method allows the Insurance Subsidiaries
to defer any accumulation of policy benefit reserves until after the second policy year.
The immediate charge off of sales and acquisition expenses and the sometimes conservative
claim cost and other 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).

# 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 $5.0 million, $6.6
          million and $4.9 million for the years ended December 31, 2002, 2001 and 2000,
          respectively. The variance in cash used by operations from year to year is
          principally due to the variance 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  Regulations at Item 1). Ascents principal
uses of cash are for capital contributions to maintain minimum statutory capital and
surplus requirements for the Insurance Subsidiaries and general and administrative
expenses. Ascent funded capital contributions to the Insurance Subsidiaries totaling
approximately $2.3 million, $19.3 million and $8.2 million during 2002, 2001 and 2000,
respectively, as a result of combined statutory losses incurred by the Insurance
Subsidiaries for those years of $2.7 million, $12.7 million and $17.0 million,
respectively. As of December 31, 2002, Ascent had approximately $375,000 in unrestricted
cash and invested assets. In February 2003, Ascent funded contributions of $252,000 to two
of its insurance subsidiaries.

The statutory losses incurred during
recent years resulted from (1) significant losses on major medical products marketed prior to
July 2000 (see Operating Results) 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). Claims experience
adverse to managements current estimates might require capital contributions to the
Insurance Subsidiaries in excess of those currently projected for 2003. Additional
financing might be required by Ascent in order to make any such excess
contributions. As a result, adverse claims experience could have a material adverse effect
on the Insurance Subsidiaries ability to meet minimum statutory capital and surplus
requirements and maintain new business production at current levels and therefore, have a
material adverse impact on Ascents liquidity and capital resources and results of
operations.

CSFB Financing and Preferred
Stock.Ascent received debt financing to fund an $11 million capital
contribution to FLICA in April 2001 from Credit Suisse First Boston Management Corporation
(CSFB), which is an affiliate of Special Situation Holdings, Inc. 
Westbridge (Ascents largest common stockholder). The credit agreement relating to
that loan (CSFB Credit Agreement) provided Ascent with total loan commitments
of $11 million, all of which were drawn in April 2001. The loan bears interest at a rate
of 12% per annum and matures in April, 2004. Absent any acceleration following an event of
default, the Company may elect to pay interest in kind by issuance of additional notes.
During 2002 and 2001, Ascent issued $1.5 million and $987,000, respectively, in additional
notes for payment of interest in kind which increased the note payable balance at December
31, 2002 to approximately $13.5 million. The CSFB Credit Agreement provides for a facility
fee of $1.5 million which is payable upon maturity or upon a change in control, as
defined. This facility fee is being accrued as additional interest payable over the term
of the loan. The CSFB 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 CSFB Credit
Agreement. At December 31, 2002, there were no events of default.

Ascents redeemable convertible
preferred stock is 100% owned by Special Situations Holdings, Inc.  Westbridge,
which is the Companys largest common stockholder and is also an affiliate of CSFB.
Dividends may be paid in cash or by issuance of additional shares of preferred stock, at
the Companys option. During 2002, Ascent paid preferred stock dividends through the
issuance of 3,261, 2,930 and 2,575 additional shares of preferred stock in 2002, 2001 and
2000, respectively. The preferred stock is mandatorily redeemable in cash in March 2004.

The Company must obtain additional
financing to retire the redeemable preferred stock and note payable when due in early 2004
or restructure these facilities. Failure of the Company to successfully refinance these
facilities could have a material adverse impact on the Companys liquidity, capital
resources and results of operation.

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. AFI has entered into a Credit Agreement (the Credit Agreement) with
LaSalle Bank, NA (LaSalle) that currently provides AFI with a $4.5 million
revolving loan facility, the proceeds of which are used to purchase agent advance
receivables from NCM and other affiliates. In connection with this commission advancing
program approximately $3.0 million was outstanding under the Credit Agreement at December
31, 2002.

The Credit Agreement expires January
5, 2004, at which time the outstanding principal and interest will be due and payable.
Under the terms of the Credit Agreement, agent advances made within six months of the
expiration date (after July 5, 2003) are not eligible for financing. Failure of the
Company to obtain additional renewals of the Credit Agreement beyond January 2004 could
have a material adverse impact on Ascents liquidity and capital resources. Lack of
adequate financing would impair the Companys ability to pay competitive commission
advances and reduce new business sales needed to replace the normal lapsing of existing
policies. Therefore, failure by Ascent to maintain new business sales at current levels
would result in declining premium revenue and could have a material adverse impact on
Ascents results of operations.

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, 2002 are net agent receivables of $6.3 million
and a cash collateral account pledged to LaSalle of $2.6 million. In addition, Ascent has
guaranteed AFIs obligations under the Credit Agreement, and has pledged all of the
issued and outstanding shares of the capital stock of AFI, NFL, FLICA and NFIC as
collateral for that guaranty (the Guaranty Agreement). As of December 31,
2002, there were no events of default under the Credit or Guaranty Agreements.

In July 1999, Ascent Management, Inc.
(AMI) received a $3.3 million term loan from LaSalle, proceeds of which were
used to fund system replacement costs. Advances under the term loan facility are secured
by substantially all of AMIs assets and the Guaranty Agreement. Under the terms of
the loan, principal is payable in 60 equal monthly installments beginning January 31,
2000. At December 31, 2001, approximately $1.6 million was outstanding under the term loan
facility.

On January 31, 2003, pursuant to the
terms of the Credit Agreement, AFI liquidated the $2.6 million cash collateral account
pledged to LaSalle. Approximately $640,000 of the funds were used to reduce the
outstanding loan balance under the Credit Agreement to $2.4 million as of January 31,
2003. Pursuant to an agreement with LaSalle, AFI paid a dividend of $1.6 million to Ascent
on January 31, 2003. The proceeds of this dividend were used to fully pay off AMIs
term loan facility. In addition, AMIs assets and capital stock were pledged as
collateral under the Credit Agreement.

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.

# 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 (89.8%) 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 Conditions
and Results of Operations and Note 3  Investments to
the Companys Consolidated Financial Statements.) Approximately 1.7% 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 95% 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, 2002, 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 $2.2 million and $4.4
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 $2.2 million and $4.4 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, 2002 and 2001                                                       |  | 32         
|                                                                                                               
|Consolidated
Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000                      |  | 33         
|                                                                                                               
|Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002
        2001 and 2000     |  | 34         
|                                                                                                               
|Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 31, 2002,
2001 and 2000 |  | 35         
|                                                                                                               
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000                      |  | 36         
|                                                                                                               
|Notes to the Consolidated Financial Statements                                                                  |  | 37         
|                                                                                                               
|Financial Statement Schedules:                                                                                 
|                                                                                                               
|II.    
          Condensed Financial Information of Registrant                                                 |  | 60         
|                                                                                                               
|III.    
          Supplementary Insurance Information                                                          |  | 65         
|                                                                                                               
|IV.    
          Reinsurance                                                                                   |  | 66         
|                                                                                                               
|V.    
          Valuation and Qualifying Accounts                                                              |  | 67         

| | 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
and StockholdersAscent Assurance, Inc.

We have audited the accompanying
consolidated balance sheet of Ascent Assurance, Inc., as of December 31,
2002, and the related consolidated statements of operations, comprehensive income, stockholders equity, and
cash flows for the year ended December 31, 2002. Our audit also included the financial
statement schedules as of December 31, 2002 and for the year 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 audit.

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 audit provides 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, 2002, and
the consolidated results of its operations and its cash flows for the year 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.

/s/ Ernst & Young LLP

Dallas, TexasFebruary 26, 2003



# Report of Independent
Accountants

To the Board of Directorsand
Stockholders ofAscent Assurance, Inc.

In our opinion, the 2001 and 2000 consolidated
financial statements listed in the accompanying index present fairly, in all material
respects, the financial position of Ascent Assurance, Inc. and its subsidiaries at
December 31, 2001 and the results of theiroperations and their cash flows for the
years ended December 31, 2001 and 2000 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the financial
statement schedules as of December 31, 2001 and for the years ended December 31, 2001 and 2000 listed in the accompanying index present fairly, in all material
respects, the information set forth therein when read in conjunction with the related
consolidatedfinancial 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 audits 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 audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLPDallas, Texas 
March 8, 2002



---

# ASCENT ASSURANCE, INC.CONSOLIDATED
BALANCE SHEETS

| | December 31, | 
| | ------------ | 

| |  |      | 
| |  | ---- | 
| |  |     
| |  | 2002 | 
| |  |     

|Assets | (in thousands, except per share data)
|------ | -------------------------------------

|Investments:                                                                 |  |             |   |             |   |  | 
|---------------------------------------------------------------------------- |  | ----------- | - | ----------- | - |  | 
|Fixed Maturities:                                                            | 
|Available-for-sale, at market value (amortized cost                          | 
|$95,580 and $90,475)                                                         |  | $    99,051 |   | $    90,217 |  
|Short-term investments                                                       |  | 10,877      |   | 21,801      |  
|Other investments, at market value (cost $381 and $1,746)                    |  | 368         |   | 1,883       |  
|                                                                             |  |             |   |            
|Total Investments                                                            |  | 110,296     |   | 113,901     |  
|                                                                            
|Cash                                                                         |  | 1,878       |   | 2,337       |  
|Accrued investment income                                                    |  | 1,312       |   | 1,710       |  
|Receivables from agents, net of allowance for doubtful                       | 
|accounts of $4,630 and $4,013                                                |  | 6,298       |   | 7,412       |  
|Deferred policy acquisition costs, net                                       |  | 25,385      |   | 25,600      |  
|Property and equipment, net of accumulated                                   |  |             |  
|depreciation of $4,986 and $3,904                                            |  | 3,806       |   | 5,436       |  
|Other assets                                                                 |  | 6,465       |   | 6,197       |  
|                                                                             |  |             |   |            
|Total Assets                                                                 |  | $   155,440 |   | $   162,593 |   |  | 
|                                                                             |  |             |   |            
|Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity | 
|Liabilities:                                                                 | 
|Policy liabilities and accruals:                                             | 
|Future policy benefits                                                       |  | $    60,660 |   | $   61,571  |  
|Claim reserves                                                               |  | 30,899      |   | 37,202      |  
|                                                                             |  |             |   |            
|Total Policy Liabilities and Accruals                                        |  | 91,559      |   | 98,773      |  
|                                                                            
|Accounts payable and other liabilities                                       |  | 9,535       |   | 11,760      |  
|Notes payable to bank                                                        |  | 4,660       |   | 6,616       |  
|Notes payable to related party                                               |  | 13,529      |   | 11,987      |  
|                                                                             |  |             |   |            
|Total Liabilities                                                            |  | 119,283     |   | 129,136     |  
|                                                                             |  |             |   |            
|Commitments and Contingencies                                                | 
|Redeemable convertible preferred stock                                       |  | 33,896      |   | 30,635      |  
|                                                                             |  |             |   |            
|Stockholders' Equity                                                         | 
|Common stock ($0.01 par value, 30,000,000 shares                             | 
|authorized; 6,517,100 and 6,500,000 shares issued                            | 
|and outstanding)                                                             |  | 65          |   | 65          |  
|Capital in excess of par value                                               |  | 28,072      |   | 28,017      |  
|Accumulated other comprehensive income                                       | 
|(loss), net of tax                                                           |  | 3,457       |   | (121        | )
|Retained Deficit                                                             |  | (29,333     | ) | (25,139     | )
|                                                                             |  |             |   |            
|Total Stockholders' Equity                                                   |  | 2,261       |   | 2,822       |  
|                                                                             |  |             |   |            
|Total Liabilities, Redeemable Convertible                                    | 
|Preferred Stock and Stockholders' Equity                                     |  | $ 155,440   |   | $ 162,593   |  
|                                                                             |  |             |   |            

See
the Notes to the Consolidated Financial Statements.



ASCENT ASSURANCE, INC
                           CONSOLIDATED STATEMENTS OF OPERATIONS

| | Year Ended December 31,
| | -----------------------

|                                                  |  |               |      |               
|------------------------------------------------- |  | ------------- | ---- | --------------
|                                                  |  |              
|                                                  |  | 2002          |      | 2001          
|                                                  |  |              
|Revenues:                                         |  | (in thous     | ands | except per sha
|Premiums:                                         | 
|First-year                                        |  | $    23,131   |      | $    29,984   
|Renewal                                           |  | 87,917        |      | 95,222        
|                                                  |  |               |      |               
|Total Premiums                                    |  | 111,048       |      | 125,206       
|                                                 
|Net investment income                             |  | 7,722         |      | 8,867         
|Fee and service income                            |  | 9,926         |      | 17,376        
|Other insurance revenues                          |  | 2,670         |      | 3,540         
|Net realized (loss) gain on investments           |  | (88           | )    | 392           
|                                                  |  |               |      |               
|Total Revenue                                     |  | 131,278       |      | 155,381       
|                                                  |  |               |      |               
|Benefits, claims and expenses:                    | 
|Benefits and claims                               |  | 78,299        |      | 93,376        
|Decrease (increase) in deferred acquisition costs |  | 215           |      | (889          
|Commissions                                       |  | 13,857        |      | 17,793        
|General and administrative expense                |  | 23,260        |      | 25,339        
|Fee and service operating income                  |  | 10,314        |      | 15,703        
|Taxes, license and fees                           |  | 3,790         |      | 4,245         
|Interest expense on notes payable                 |  | 2,474         |      | 1,933         
|Recognition of premium deficiency                 |  | -             |      | -             
|                                                  |  |               |      |               
|Total Expenses                                    |  | 132,209       |      | 157,500       
|                                                 
|Loss before income taxes                          |  | (931          | )    | (2,119        
|Federal income tax expense                        |  | -             |      | -             
|                                                  |  |               |      |               
|Net Loss                                          |  | (931          | )    | (2,119        
|                                                 
|Preferred stock dividends                         |  | 3,263         |      | 2,932         
|                                                  |  |               |      |               
|Loss applicable to common stockholders            |  | $     (4,194  | )    | $    (5,051   
|                                                  |  |               |      |               
|Basic and diluted net loss per common share       |  | $       (0.64 | )    | $      (0.78  
|                                                  |  |               |      |               
|Weighted average shares outstanding:              | 
|Basic                                             |  | 6,505         |      | 6,500         
|                                                  |  |               |      |               
|Diluted                                           |  | 6,505         |      | 6,500         
|                                                  |  |               |      |               

See
the Notes to the Consolidated Financial Statements.

ASCENT ASSURANCE, INC. 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

| | Year Ended December 31,
| | -----------------------

| |  |      | 
| |  | ---- | 
| |  |     
| |  | 2002 | 
| |  |     
| |  |      | 

| | (in thousands) | 
| | -------------- | 

|                                      |  |                   |  |                    |  |                  | 
|------------------------------------- |  | ----------------- |  | ------------------ |  | ---------------- | 
|Net loss                              |  | $           (931) |  | $        (2,119)   |  | $       (18,942) | 
|Other comprehensive income (loss):    | 
|Unrealized holding gain arising       | 
|during period, net of tax             |  | 3,490             |  | 2,595              |  | 1,227            | 
|Reclassification adjustment of (gain) | 
|loss on sales of investments          | 
|in net loss, net of tax               |  | 88                |  | (392)              |  | 300              | 
|                                      |  |                   |  |                    |  |                 
|Comprehensive Income (Loss)           |  | $          2,647  |  | $               84 |  | $      (17,415)  | 
|                                      |  |                   |  |                    |  |                 

See
the Notes to the Consolidated Financial Statements.



ASCENT ASSURANCE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(in thousands, except
share data)

|                                         |  |               |  |                |  |                               
|---------------------------------------- |  | ------------- |  | -------------- |  | ------------------------------
|                                         |  |               |  |                |  |                               
|                                         |  | Common Shares |  | Stock Amount   |  | Capital In Excess of Par value
|                                        
|Balance at December 31, 1999             |  | 6,500,000     |  | $           65 |  | $   27,338                    
|                                        
|Net loss                                 |  |               |  |                |  |                               
|Preferred stock dividend                 |  |               |  |                |  |                               
|Other comprehensive income, net of tax   |  |               |  |                |  |                               
|Amortization of unearned compensation    |  |               |  |                |  | 282                           
|                                         |  |               |  |                |  |                               
|Balance at December 31, 2000             |  | 6,500,000     |  | 65             |  | 27,620                        
|                                         |  |               |  |                |  |                               
|                                        
|Net loss                                 |  |               |  |                |  |                               
|Preferred stock dividend                 |  |               |  |                |  |                               
|Other comprehensive income, net of tax   |  |               |  |                |  |                               
|Decrease in deferred tax asset valuation |  |               | 
|allowance attributable to unrealized     | 
|gains on investments                     |  |               |  |                |  |                               
|Amortization of unearned compensation    |  |               |  |                |  | 397                           
|                                         |  |               |  |                |  |                               
|Balance at December 31, 2001             |  | 6,500,000     |  | 65             |  | 28,017                        
|                                         |  |               |  |                |  |                               
|                                        
|Net loss                                 |  |               |  |                |  |                               
|Preferred stock dividend                 |  |               |  |                |  |                               
|Other comprehensive income, net of tax   |  |               |  |                |  |                               
|Amortization of unearned compensation    |  |               |  |                |  | 55                            
|Common stock issued                      |  | 17,100        |  |                | 
|                                         |  |               |  |                |  |                               
|Balance at December 31, 2002             |  | 6,517,100     |  | $        65    |  | $   28,072                    
|                                         |  |               |  |                |  |                               

See
the Notes to the Consolidated Financial Statements.



ASCENT ASSURANCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

| | Year Ended December 31,
| | -----------------------

|                                                       |  |            | 
|------------------------------------------------------ |  | ---------- | 
|                                                       |  |           
|                                                       |  | 2002       | 
|                                                       |  |           
|Cash Flow From Operating Activities:                   |  |            | 
|Net loss                                               |  | $    (931) | 
|Adjustments to reconcile net loss to                   | 
|cash used for operating activities:                    |  |           
|Recognition of premium deficiency                      |  | -          | 
|Decrease in accrued investment income                  |  | 398        | 
|Decrease (increase) in deferred acquisition costs      |  | 215        | 
|Decrease in receivables from agents                    |  | 497        | 
|                                                      
|Provision for uncollectible agent receivables          |  | 617        | 
|(Increase) decrease in other assets                    |  | (426)      | 
|(Decrease) increase in policy liabilities and accruals |  | (7,215)    | 
|(Decrease) increase in accounts payable and accruals   |  | (2,225)    | 
|Decrease in deferred income taxes, net                 |  | -          | 
|Amortization and depreciation                          |  | 1,868      | 
|Amortization of deferred debt costs                    |  | 158        | 
|Other, net                                             |  | 2,094      | 
|                                                       |  |            | 
|Net Cash Used for Operating Activities                 |  | (4,950)    | 
|                                                       |  |            | 
|Cash Flow From Investing Activities:                   | 
|Purchase of fixed maturity investments                 |  | (62,903)   | 
|Sales of fixed maturity investments                    |  | 48,649     | 
|Maturities and calls of fixed maturity investments     |  | 8,560      | 
|Net decrease (increase) in short term and              | 
|other investments                                      |  | 12,379     | 
|Property and equipment purchased                       |  | (238)      | 
|                                                       |  |            | 
|Net Cash Provided by (Used for) investing activities   |  | 6,447      | 
|                                                       |  |            | 
|Cash Flow From Financing Activities:                   | 
|Issuance of notes payable                              |  | 69         | 
|Repayment of notes payable                             |  | (2,025)    | 
|Deferred debt costs                                    |  | -          | 
|                                                       |  |            | 
|Net Cash (Used for) Provided by Financing Activities   |  | (1,956)    | 
|                                                       |  |            | 
|Decrease in Cash During Period                         |  | (459)      | 
|Cash at Beginning of Period                            |  | 2,337      | 
|                                                       |  |            | 
|Cash at End of Period                                  |  | $   1,878  | 
|                                                       |  |            | 

See
the Notes to the Consolidated Financial Statements.

---

ASCENT ASSURANCE, INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

# 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 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, 2002: Florida - 17%,
Texas - 15% 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.
To a lesser extent the Company derives revenue from (i)
telemarketing services, (ii) printing services, and (iii) renewal commissions received by
the Company for prior year sales of insurance products underwritten by unaffiliated
insurance carriers.

# 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 2002 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, net of applicable deferred income taxes 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 DPAC is the
cost of insurance purchased on acquired business. 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 $6.3 million and $7.4 million at December 31, 2002 and 2001,
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, 2002 and
2001, the allowance for uncollectible commission advances was $4.6 million and $4.0
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 2-10 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 as a result of the
implementation of a new claims administration system in May 2000. 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 deferred tax asset at
December 31, 2002 and 2001 is fully reserved as discussed at Note 9.

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 collectibility 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 2002, 2001 and 2000, stock options
of 1,014,650, 1,085,850 and 944,600, respectively, and the conversion of the preferred stock (see Note7) 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,
| | -----------------------

| |  |      | 
| |  | ---- | 
| |  |     
| |  | 2002 | 

| | (in thousands, except per share data)
| | -------------------------------------

|                                    |  |                | 
|----------------------------------- |  | -------------- | 
|Basic:                              |  |                | 
|Loss to common shareholders         |  | $    (4,194)   | 
|                                    |  |                | 
|Weighted average shares outstanding |  | 6,505          | 
|                                    |  |                | 
|Loss earnings per share             |  | $      (0.64)  | 
|                                    |  |                | 
|Diluted:                            | 
|Loss to common shareholders         |  | $    (4,194)   | 
|                                    |  |                | 
|Weighted average shares outstanding |  | 6,505          | 
|                                    |  |                | 
|Diluted loss per share              |  | $       (0.64) | 
|                                    |  |                | 

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 estimates or contemplated include, but are not limited to:

| | o |  | the ability of the Company to refinance  redeemable  preferred stock and notes payable maturing in March 2004
      and April 2004, respectively;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | the ability of the Company to renew its existing  revolving  credit  facility for the financing of commission
      advances to agents which expires in January 2004;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | the Companys ability to
meet minimum regulatory capital requirements for its Insurance Subsidiaries;
| | - |  | -----------------------------------------------------------------------------------------------------

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

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

Recently Issued Accounting
Pronouncements. In 1998, the NAIC adopted the Codification of Statutory
Accounting Principles guidance that replaced the Accounting Practices and Procedures manual as
the NAICs primary guidance on statutory accounting. The Codification provides
guidance for areas where statutory accounting has been silent and changes current
statutory accounting in certain areas. The Insurance Department of the State of domicile
of the Companys Insurance Subsidiaries adopted the Codification effective January 1,
2001. Codification did not materially impact the statutory surplus of the Companys
Insurance Subsidiaries.

In June, 1998, the FASB issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133). This statement (as amended by SFAS No. 137, Accounting For
Derivative Instruments and Hedging Activities, Deferral of the Effective Date of SFAS No.
133, an amendment of SFAS No. 133) is effective for fiscal years beginning after
June 15, 2000. The pronouncement established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The adoption of SFAS 133 did not have a material impact on the
Companys results of operations, liquidity or financial position.

In March 2000, the FASB issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation  an interpretation of APB Opinion No. 25 (FIN 44).
The Company adopted FIN 44 on a prospective basis effective July 1, 2000. The adoption of
FIN 44 did not have a material impact on the Companys results of operations,
liquidity or financial position.

In June 2001, the FASB issued SFAS
No. 141, Business Combinations (SFAS 141). This statement supercedes APB
Opinion No. 16, Business Combinations and FASB Statement No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises, and
establishes accounting and reporting standards for business combinations. Under the
statement, all business combinations in the scope of the statement are to be accounted for
using one method, the purchase method. The provisions of the statement apply to all
business combinations initiated after June 30, 2001. As the Company has not been a part of
any business combination initiated after the effective date, the Companys financial
statements are not affected by SFAS 141.

In June 2001, the FASB issued SFAS
142, Goodwill and Other Intangible Assets. SFAS 142 supersedes APB 17, 
Intangible Assets, and is effective for fiscal years beginning after December
15, 2001. SFAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. SFAS 142 (1) prohibits the amortization of
goodwill and indefinite-lived intangible assets, (2) requires testing of goodwill and
indefinite-lived intangible assets on an annual basis for impairment (and more frequently
if the occurrence of an event or circumstance indicates an impairment), (3) requires that
reporting units be identified for the purpose of assessing potential future impairments of
goodwill and (4) removes the forty-year limitation on the amortization period of
intangible assets that have finite lives. The Company adopted SFAS 142 on January 1, 2002
and did not recognize an impairment loss. The Company has no goodwill or indefinite-lived
intangible assets. The Company has identified intangible assets totaling $2.8 million
included in deferred policy acquisition costs representing the estimated present value of
future profits of certain insurance policies acquired prior to March 1999. The Company has
determined that there is no indication of impairment related to these assets and that the
useful lives assigned to the assets are appropriate. The Company tests
these intangibles for impairment annually or more frequently if the occurrence of an event
or circumstances indicates impairment.

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 will be effective for financial statements issued for
fiscal years beginning after June 15, 2002. An entity shall recognize the cumulative
effect of adoption of SFAS No. 143 as a change in accounting principle. The Company does
not expect the adoption of the statement to materially impact the Companys results
of operations and financial position.

In August 2001, the FASB approved
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
The Statement requires that long-lived assets to be disposed of other than by sale be
considered held and used until they are disposed of. SFAS No. 144 requires that long-lived
assets to be disposed of by sale be accounted for under the requirements of SFAS No. 121.
SFAS No. 121 requires that such assets be measured at the lower of carrying amounts or
fair value less cost to sell and to cease depreciation (amortization). SFAS No. 144
requires a probability-weighted cash flow estimation approach in situations where
alternative courses of action to recover the carrying amount of a long-lived asset are
under consideration or a range of possible future cash flow amounts are estimated. As a
result, discontinued operations will no longer be measured on a net realizable basis, and
future operating losses will no longer be recognized before they occur. Additionally,
goodwill will be removed from the scope SFAS No. 121. As a result, goodwill will not be
required to be allocated to long-lived assets to be tested for impairment. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years. The Company does not expect the adoption of this statement to
materially impact the Companys results of operations and financial position.

In April 2002, the FASB issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, which required
all gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a result, the
criteria in Opinion 30 will now be used to classify those gains and losses. The provisions
of this Statement related to the rescission of SFAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002. SFAS No. 145 amends SFAS No. 13 to require that certain
lease modifications that have economic effects similar to sale-leaseback transactions be
accounted for in the same manner as sales-leaseback transactions. The provisions of this
Statement related to SFAS No. 13 shall be effective for transactions occurring after May
15, 2002. The Company does not expect the adoption of the statement to materially impact
the Companys results of operations and financial position.

On June 28, 2002, the FASB voted in
favor of issuing SFAS No. 146, Accounting for Exit or Disposal Activities.
SFAS No. 146 addresses significant issues regarding the recognition, measurement and
reporting of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the guidance that
the Emerging Issues Task Force (EITF) has set forth in the EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)". The scope of
SFAS No. 146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS 146 will be effective
for financial statements issued for fiscal years beginning after December 31, 2002. The
Company does not expect the adoption of SFAS No. 146 to materially impact the Companys
results of operations and financial position.

In October 2002, the FASB issued SFAS
No. 147, Acquisitions of Certain Financial Institution, an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9". The statement removes
acquisitions of financial institutions from the scope of FASB Statements No. 72, and
Interpretation 9 and requires those transactions to be accounted for in accordance with
FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and
Other Intangible Assets. SFAS No. 147 is effective for acquisitions on or after
October 1, 2002. The Company does not expect the adoption of the statement to materially
impact the Companys results of operations and financial position.

In November 2002, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 45 (FIN 45), 
Guarantees, an interpretation of FASB Statement No. 5, Accounting for Contingencies.
This interpretaion elaborates on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of certain guarantees, a liability for the fair value of
the obligation undertaken in issuing the guarantees. This interpretation is effective on a propective basis
for guarantees issued or modified after December 31, 2002 and for financial statements of interim or
annual periods ending after December 15, 2002. This interpretation did not have a material impact on the
Companys financial position or results of operations.

In December 2002, the FASB issued
SFAS No. 148, Accounting and Stock-Based Compensation  Transition and
Disclosure an amendment of FASB Statement No. 123". This statement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It also amends the disclosure
provisions of that Statement to require prominent disclosure about the effects on reported
net income of an entitys accounting policy decisions with respect to stock-based
employee compensation. Finally, this statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim financial
information. SFAS No. 148 is effective for financial statements for fiscal years ending
after December 15, 2002. The Company has complied with the requirements of SFAS No. 148 in
the preparation of this statement (See Note 11 of the Notes To The Consolidated Financial
Statements).



# NOTE 3  INVESTMENTS

Major categories of investment income
are summarized as follows:

| | Year Ended December 31, | 
| | ----------------------- | 

|                                    |  |        | 
|----------------------------------- |  | ------ | 
|                                    |  |       
|                                    |  | 2002   | 
|                                    |  |        | 
|                                    |  |        | 
|                                   
|Fixed maturities                    |  | $6,154 | 
|Short-term investments              |  | 195    | 
|Interest on receivables from agents |  | 1,484  | 
|Other                               |  | 51     | 
|                                    |  |        | 
|                                    |  | 7,884  | 
|Less: Investment expenses           |  | 162    | 
|                                    |  |        | 
|Net investment income               |  | $7,722 | 
|                                    |  |        | 

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

| | Year Ended December 31, | 
| | ----------------------- | 

|                                    |  |               | 
|----------------------------------- |  | ------------- | 
|                                    |  |              
|                                    |  | 2002          | 
|                                    |  |               | 
|                                    |  |               | 
|                                   
|Fixed maturities                    |  | $       (178) | 
|Equity securities                   |  | 90            | 
|                                    |  |               | 
|Realized (loss) gain on investments |  | $        (88) | 
|                                    |  |               | 

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, | 
| | ----------------------- | 

|                                                    |  |                
|--------------------------------------------------- |  | ---------------
|                                                    |  |                
|                                                    |  | 2002           
|                                                    |  |                
|                                                    |  |                
|Balance at beginning of period                      |  | $          (121
|Unrealized appreciation, net of tax, on fixed       |  |                
|maturities available-for-sale                       |  | 3,729          
|Unrealized (depreciation) appreciation, net of tax, |  |                
|on equity securities and other investments          |  | (151           
|                                                    |  |                
|Balance at end of period                            |  | $        3,457 
|                                                    |  |                

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:

|                                      |  |                |  |                       
|------------------------------------- |  | -------------- |  | ----------------------
|                                      |  |                |  |                       
|                                      |  | Amortized Cost |  | Gross Unrealized Gains
|December 31, 2002 Available-for-Sale  |  |                |  |                       
|                                      |  |                |  | (in                   
|U.S. Government and governmental      | 
|agencies and authorities              |  | $    10,566    |  | $        749          
|States, municipalities, and political | 
|subdivisions                          |  | 1,625          |  | 105                   
|Finance companies                     |  | 16,910         |  | 999                   
|Public utilities                      |  | 6,936          |  | 240                   
|Mortgage-backed securities            |  | 32,460         |  | 600                   
|All other corporate bonds             |  | 27,083         |  | 1,592                 
|                                      |  |                |  |                       
|Balance at December 31, 2002          |  | $     95,580   |  | $     4,285           
|                                      |  |                |  |                       
|                                     
|                                      |  | Amortized Cost |  | Gross Unrealized Gains
|December 31, 2001 Available-for-Sale  |  |                |  |                       
|                                      |  |                |  | (in                   
|U.S. Government and governmental      | 
|agencies and authorities              |  | $   10,581     |  | $        273          
|States, municipalities, and political | 
|subdivisions                          |  | 2,197          |  | 33                    
|Finance companies                     |  | 20,025         |  | 373                   
|Public utilities                      |  | 7,651          |  | 62                    
|Mortgage-backed securities            |  | 10,754         |  | 87                    
|All other corporate bonds             |  | 39,267         |  | 527                   
|                                      |  |                |  |                       
|Balance at December 31, 2001          |  | $   90,475     |  | $     1,355           
|                                      |  |                |  |                       

The amortized cost and estimated
market value of investments in available-for-sale fixed maturities as of December 31,
2002, 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.

| |  |               
| |  | --------------
| |  | Amortized Cost
| |  |               

| | (in thousands) | 
| | -------------- | 

|                                       |  |                
|-------------------------------------- |  | ---------------
|                                       |  |                
|Due in one year or less                |  | $         6,499
|Due after one year through five years  |  | 19,931         
|Due after five years through ten years |  | 22,909         
|Due after ten years                    |  | 13,781         
|Mortgage-backed securities             |  | 32,460         
|                                       |  |                
|                                       |  | $       95,580 
|                                       |  |                

A summary of unrealized appreciation (depreciation)
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, | 
| | ------------ | 

| |  |     
| |  | ----
| |  |     
| |  | 2002
| |  |     

| | (in thousands) | 
| | -------------- | 

|                                                   |  |                
|-------------------------------------------------- |  | ---------------
|                                                   |  |                
|Amortized cost                                     |  | $        95,624
|Estimated market value                             |  | 99,081         
|                                                   |  |                
|Excess (deficit) of market value to amortized cost |  | 3,457          
|Estimated tax                                      |  | -              
|                                                   |  |                
|Unrealized appreciation (depreciation), net of tax |  | $         3,457
|                                                   |  |                

Proceeds from sales and maturities of
investments in fixed maturity securities were approximately $57.2 million, $37.9 million and $54.1
million for 2002, 2001 and 2000 respectively. 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, 2002 and 2001, are high-yield, unrated or less than investment grade
corporate debt securities comprising approximately 1.7% and 0.4% of fixed maturities at
December 31, 2002 and 2001, respectively.

Investment securities on deposit with
insurance regulators in accordance with statutory requirements at December 31, 2002 and
2001 had a par value totaling $20.9 million and $26.4 million, respectively, and market value totaling $23.1 million and $26.9
million, respectively. At December 31, 2002 and 2001, the Company had pledged short-term investments totaling $2.6 million in
connection with its receivables financing program (see Note 6).

# NOTE 4  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 withdrawals, interest, mortality and
morbidity appropriate at the time the policies were issued. The more material assumptions
are as follows:

| | Withdrawals |  | Issues through 1980 are based on industry experience; 1981 through 2002 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 except for certain NationalCare® and
Supplemental Hospital Income issues which are 8% graded to 6% in 8 years and LifeStyles
Products which are 9% graded to 7% in 10 years. 1993 and later issues are 7% level.
Certain policies acquired in 1992 are 6.4% level while other policies acquired in 1993 and
1994 are 6% level. Policies acquired in the acquisition of NFIC and AICT are 7% level.
| | -------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# NOTE 5  CLAIM
RESERVES

The following table provides a
reconciliation of the beginning and ending claim reserve balances, on a
gross-of-reinsurance basis, for 2002, 2001 and 2000, to the amounts reported in the
Companys consolidated balance sheets:

| | Year Ended December 31, | 
| | ----------------------- | 

|                                                 |  |         | 
|------------------------------------------------ |  | ------- | 
|                                                 |  |        
|                                                 |  | 2002    | 
|                                                 |  |         | 
|                                                 |  |         | 
|                                                 |  |         | 
|Balance, beginning of the year (gross)           |  | $37,202 | 
|Less:  Reinsurance recoverable on claim reserves |  | 2,000   | 
|                                                 |  |         | 
|Net Balance at beginning of period               |  | 35,202  | 
|Incurred related to:                             | 
|Current year                                     |  | 78,001  | 
|Prior years                                      |  | 417     | 
|                                                 |  |         | 
|Total incurred                                   |  | 78,418  | 
|                                                 |  |         | 
|Paid related to:                                 | 
|Current year                                     |  | 55,918  | 
|Prior years                                      |  | 28,083  | 
|                                                 |  |         | 
|Total paid                                       |  | 84,001  | 
|                                                 |  |         | 
|Balance at end of period                         |  | 29,619  | 
|Plus: Reinsurance recoverable on claim reserves  |  | 1,280   | 
|                                                 |  |         | 
|Balance at end of period (gross)                 |  | $30,899 | 
|                                                 |  |         | 

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 as a result of the implementation of a new claims administration system
in May 2000. 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 for 2000 of $1.55 million
was primarily attributable to higher than expected medical inflation and utilization. Claims incurred related to prior years for 2001
of $1.785 million was primarily attributable to actual medical trends for the latter part of 2000 developing more favorably than managements
estimates. Claims incurred related to prior years for 2002 of $0.417 million approximated managements estimates.

Included in reinsurance recoverables
on claim reserves is approximately $0.5 million, $0.9 million and $1.5 million relating to
paid claims as of December 31, 2002, 2001 and 2000, respectively.

# NOTE 6  FINANCING
ACTIVITIES

CSFB Financing.Ascent received debt financing to fund an $11 million capital contribution
to FLICA in April 2001 from Credit Suisse First Boston Management Corporation
(CSFB), which is an affiliate of Special Situations Holdings, Inc. 
Westbridge (Ascents largest stockholder.) The credit agreement relating to that loan
(CSFB Credit Agreement) provided Ascent with total loan commitments of $11
million, all of which were drawn in April 2001. The loan bears interest at a rate of 12%
per annum and matures in April, 2004. Terms of the CSFB Credit Agreement are equivalent to terms that exist in arms-length
credit transactions. The Company must obtain additional financing to
retire the note payable when it matures or restructure the terms of the note.

Absent any acceleration following an
event of default, the Company may elect to pay interest in kind by issuance of additional
notes. During 2002 and 2001, Ascent issued $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, 2002 to approximately $13.5 million. The CSFB Credit Agreement provides
for a facility fee of $1.5 million which is payable upon maturity or upon a change in
control, as defined. This facility fee is being accrued as additional interest payable
over the term of the loan.

The CSFB 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 Corporation 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 CSFB 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.
At December 31, 2002, 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. AFI has
entered into a Credit Agreement (the Credit Agreement) with LaSalle that
currently provides AFI with a $4.5 million revolving loan facility, the proceeds of which
are used to purchase agent advance receivables from NCM and other affiliates. The Credit Agreement is senior to all other financing
arrangements of the Company. As of December 31, 2002, $3.0 million was outstanding under the Credit Agreement. AFI incurs a
commitment fee on the unused portion of the Credit Agreement at a rate of 0.50% per annum.
Interest of $0.2 million, $0.4 million and $0.5 million was expensed and paid in 2002,
2001 and 2000, respectively.

The Credit Agreement expires January
5, 2004 at which time the outstanding principal and interest will be due and payable.
Under the terms of the Credit Agreement, agent advances made within six months of the
expiration date (after July 5, 2003) are not eligible for financing. Failure of the
Company to obtain additional renewals of the Credit Agreement beyond January 2004 could
have a material adverse impact on Ascents liquidity and capital resources. Lack of
adequate financing would impair the Companys ability to pay competitive commission
advances and reduce new business sales needed to replace the normal lapsing of existing
policies. Therefore, failure by Ascent to maintain new business sales at current levels
would result in declining premium revenue and could have a material adverse impact on
Ascents results of operations.

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, 2002 are net agent receivables of $6.3 million
and a short-term investment account pledged to LaSalle of $2.6 million. In addition,
Ascent has guaranteed AFIs obligations under the Credit Agreement, and has pledged
all of the issued and outstanding shares of the capital stock of AFI, NFL, FLICA and NFIC
as collateral for that guaranty (the Guaranty Agreement). Under these agreements, 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. As of December 31,
2002, there were no events of default under the Credit or Guaranty Agreements.

In July 1999, Ascent Management, Inc.
(AMI) entered into a $3.3 million term loan agreement with LaSalle, secured by
substantially all of AMIs assets and the guarantee of Ascent. Principal is payable
in 60 equal monthly installments beginning January 31, 2000. As of December 31, 2002, $1.6
million was outstanding under the term loan facility (weighted average interest rate of
6.16%). Interest of $70,000 was expensed and paid in 2002. Interest of $0.2 million was
expensed and paid in 2001 and 2000.

On January 31, 2003, pursuant to the
terms of the Credit Agreement, AFI liquidated the $2.6 million cash collateral account
pledged to LaSalle. Approximately $640,000 of the funds were used to reduce the
outstanding loan balance under the Credit Agreement to $2.4 million as of January 31,
2003. Pursuant to an agreement with LaSalle, AFI paid a dividend of $1.6 million to Ascent
in January 31, 2003. The proceeds of this dividend were used to fully pay off AMIs
term loan facility on January 31, 2003. In addition, AMIs assets and capital stock
were pledged as collateral under the Credit Agreement.

# NOTE 7  REDEEMABLE CONVERTIBLE PREFERRED
STOCK

The Company has authorized 40,000
shares of non-voting preferred stock. At December 31, 2002, 33,896 shares of preferred
stock were outstanding, all of which are owned by Special Situations Holdings, Inc. 
Westbridge, which is the Companys largest common stockholder and is also an
affiliate of CSFB.

The following summarizes the
significant terms of the preferred stock:

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

| | o |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Each share of preferred stock is convertible at any time in 204.8897 shares of common
stock at an initial conversion price of $4.88 per share, subject to customary
anti-dilution adjustments.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The preferred stock is mandatorily
redeemable in cash on March 24, 2004 in an amount equal to the stated value per share plus
all accrued and unpaid dividends thereon to the date of redemption. The Company must
obtain additional financing to retire the preferred stock when due or restructure the
terms of the preferred stock.

During 2002, Ascent paid preferred
stock dividends through the issuance of 3,261 additional shares of preferred stock and
$1,831 in cash for fractional shares. During 2001, the Company paid preferred stock dividends
through the issuance of 2,930 additional shares of preferred stock and $1,603 in cash for fractional shares.
In December 2000, the Company paid preferred stock dividends
through the issuance of 2,575 additional shares of preferred stock and $825 in cash for fractional shares.

# NOTE 8  DEFERRED
POLICY ACQUISITION COSTS (DPAC)

A summary of DPAC follows (in
thousands):

| | Year Ended December 31, | 
| | ----------------------- | 

|                                        |  |           | 
|--------------------------------------- |  | --------- | 
|                                        |  |          
|                                        |  | 2002      | 
|                                        |  |           | 
|Balance at beginning of period          |  | $  25,600 | 
|Deferrals                               |  | 9,250     | 
|Adjustment of Fresh Start Balance Sheet |  | -         | 
|Recognition of premium deficiency       |  | -         | 
|Amortization expense                    |  | (9,465)   | 
|                                        |  |           | 
|Balance at end of period                |  | $  25,385 | 
|                                        |  |           | 

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 and persistency. As a result of losses in 2000 for certain major
medical products, the Company determined that a premium deficiency of $1.5 million existed
at December 31, 2000 with respect to policies issued subsequent to March 31, 1999.
Accordingly, deferred policy acquisition costs were reduced by $1.5 million at December
31, 2000 by a non-cash charge to expense.

# NOTE 9  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 taxes were paid in 2002 and 2001.
Federal taxes recovered in 2000 were $1.2 million. 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. Prior to 2000, NFIC and AICT filed a separate consolidated tax
return.

The provision for U.S.
federal income taxes charged to continuing operations was as follows:

| | Year Ended December 31,
| | -----------------------

|                                 |  |                 | 
|-------------------------------- |  | --------------- | 
|                                 |  |                
|                                 |  | 2002            | 
|                                 |  |                 | 
|Current                          |  | $             - | 
|Deferred                         |  | -               | 
|                                 |  |                 | 
|Total provision for income taxes |  | $             - | 
|                                 |  |                 | 

The differences between the effective
tax rate and the amount derived by multiplying the (loss) income before income taxes by
the federal income tax rate for the Companys last three years was as follows:

| | Year Ended December 31,
| | -----------------------

|                              |  |                | 
|----------------------------- |  | -------------- | 
|                              |  |               
|                              |  | 2002           | 
|                              |  |                | 
|Statutory tax rate            |  | $      (34%)   | 
|Change in valuation allowance |  | 33%            | 
|Other items, net              |  | 1%             | 
|                              |  |                | 
|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, | 
| | ----------------------- | 

|                                        |  |                 
|--------------------------------------- |  | ----------------
|                                        |  |                 
|                                        |  | 2002            
|                                        |  |                 
|                                        |  |                 
|Deferred Tax Assets:                    | 
|Policy reserves                         |  | $      4,014    
|Net operating loss carryforwards        |  | 18,678          
|Other deferred tax assets               |  | 1,327           
|                                        |  |                 
|Total deferred tax asset                |  | 24,019          
|                                        |  |                 
|Deferred Tax Liabilities:               | 
|Unrealized gain on investments          |  | 1,176           
|Deferred policy acquisition costs       |  | 3,323           
|Other deferred tax liabilities          |  | 3,522           
|                                        |  |                 
|Total deferred tax liability            |  | 8,021           
|                                        |  |                 
|Net Deferred Tax Asset Before Valuation | 
|Allowance                               |  | 15,998          
|Less Valuation Allowance                |  | (15,998         
|                                        |  |                 
|Net Deferred Tax Asset                  |  | $              -
|                                        |  |                 

As of December 31, 2002, the Company
has reported cumulative pre-tax losses since the fresh start date of March 31, 1999.
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 increased its
deferred tax asset valuation allowance by $10.4 million to $18.3 million to fully reserve
the remaining net deferred tax assets as of December 31, 2000. As a result of limitations
arising from the action of sections 108 and 382 of the Internal Revenue Code, the
Companys net operating loss carryforwards and valuation allowance as of December 31,
1999 were reduced by $9.1 million. Changes in the valuation allowance
applicable to the net deferred tax asset for the three years ended December 31, 2002 are as follows:

| | Year Ended December 31, | 
| | ----------------------- | 

|                                                     |  |            | 
|---------------------------------------------------- |  | ---------- | 
|                                                     |  |           
|                                                     |  | 2002       | 
|                                                     |  |            | 
|Balance, beginning of year                           |  | $ (17,841) | 
|                                                    
|Decrease in valuation allowance related to permanent |  |           
|limitations of net operating loss carryforwards      |  | -          | 
|                                                    
|Decrease in valuation allowance attributable         |  |           
|to unrealized gains or (losses) on investments       |  | 1,176      | 
|                                                    
|(Increase)/decrease in valuation allowance charged   |  |           
|to income                                            |  | 667        | 
|                                                     |  |            | 
|Balance, end of year                                 |  | $ (15,998) | 
|                                                     |  |            | 

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, 2002, 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, 2002 and 2001,
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, 2002, the Company and
its wholly-owned subsidiaries have aggregate net operating loss carryforwards, net of
bankruptcy related tax attribute reductions, of approximately $55.4 million for regular
tax and $55.3 million for alternative minimum tax purposes, which will expire in 2003
through 2017.

# NOTE 10  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 $1.5 million of capital and $2.5 million of surplus, Washington $4.8
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 which NFL and NFIC must each maintain is $5.0 million. FLICA must maintain a
minimum of $4.8 million and AICT must maintain $2.0 million. At December 31, 2002,
aggregate statutory capital and surplus for NFL, FLICA, NFIC and AICT was approximately
$6.3 million, $7.2 million, $1.7 million and $2.3 million, respectively. Although
NFICs capital and surplus is less than $5.0 million at December 31, 2002, 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 2000 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. Claims experience in excess of managements current
expectations could have a material adverse impact on the Insurance Subsidiaries
ability to meet minimum statutory capital and surplus requirements and maintain new
business production at current levels and therefore have a material adverse impact 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 2003 without prior approval of the Texas Insurance
Commissioner as the companies earned surplus is negative. On September 30, 2000, NFL
transferred its 100% ownership of FLICA to Ascent through an extraordinary dividend
approved by the Texas Department of Insurance. 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, 2002 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, 2002, AICTs RBC exceeded Company Action Level
RBC; however, NFICs RBC only exceeded Authorized Control 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, 2002, 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, | 
| | ------------ | 

|                                                  |  |            |  
|------------------------------------------------- |  | ---------- | -
|                                                  |  |           
|                                                  |  | 2002       |  
|                                                  |  |            |  
|                                                  |  |            |  
|                                                  |  |            |  
|Combined statutory capital and surplus            |  | $   15,183 |  
|                                                 
|Deferred acquisition costs                        |  | 25,385     |  
|Future policy benefits and claims                 |  | (5,303     | )
|Unrealized gain (loss) on investments, net of tax |  | 4,276      |  
|Income taxes                                      |  | (783       | )
|Non-admitted assets                               |  | 37         |  
|Asset valuation reserve                           |  | 248        |  
|Interest maintenance reserve                      |  | 1,786      |  
|Other                                             |  | 377        |  
|Capital contributions to insurance subsidiari     |  | (39,001    | )
|Non-insurance subsidiaries and eliminations       |  | 56         |  
|                                                  |  |            |  
|Consolidated GAAP stockholders' equity            |  | $    2,261 |  
|                                                  |  |            |  

| | December 31, | 
| | ------------ | 

|                                                |  |             |  
|----------------------------------------------- |  | ----------- | -
|                                                |  |            
|                                                |  | 2002        |  
|                                                |  |             |  
|                                                |  |             |  
|                                                |  |             |  
|Combined statutory loss                         |  | $    (2,677 | )
|                                               
|Deferred acquisition costs, net of amortization |  | (215        | )
|Future policy benefits and claims               |  | 976         |  
|Recognition of premium deficiency               |  | -           |  
|Income taxes                                    |  | -           |  
|Other                                           |  | 690         |  
|Non-insurance subsidiaries and elimination      |  | 295         |  
|                                                |  |             |  
|Consolidated GAAP net loss                      |  | $     (931  | )
|                                                |  |             |  

# NOTE 11  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 10% of pre-tax compensation, including commissions, bonuses and
overtime. This subsidiary may make discretionary contributions, determined by its Board of
Directors, up to 50% of the employees first 3% of deferred compensation. 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 2002, 2001 and 2000 by the Companys subsidiaries
approximated $72,000, $81,000 and $92,000, 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, | 
| | ----------------------- | 

|                              |  |           |  
|----------------------------- |  | --------- | -
|                              |  |          
|                              |  | 2002      |  
|                              |  |           |  
|Outstanding at January 1      |  | 1,085,850 |  
|Granted                       |  | 135,000   |  
|Exercised                     |  | (17,100   | )
|Forfeit / Cancelled / Expired |  | (189,100  | )
|                              |  |           |  
|Outstanding at December 31    |  | 1,014,650 |  
|                              |  |           |  

The weighted  average option exercise price was $2.30,  $2.63 and $2.82 for options  outstanding at December 31, 2002,
2001 and 2000,  respectively.  For options granted,  weighted  average  exercise price was $0.65,  $1.49 and $1.63 for
2002,  2001 and 2000.  For  options  forfeited / cancelled / expired,  the  weighted  average  exercise  price was  $3.23,  $2.77 and $2.74,
respectively.  For options exercised in 2002, the weighted average exercise price was $.01.

The weighted  average fair value of options  granted during 2002, 2001 and 2000 was $0.47,  $1.26 and $1.57.  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, 2001 and 2000,  respectively:  dividend
yield of 0% for all years;  expected volatility of 1.214, 1.218 and 1.839;  risk-free interest rate of 4.32% for 2002,
4.65% for 2001 and 6.57% for 2000; expected life of 3 years for 2002 and 5 years for 2001 and 2000.

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
$55,000 in 2002, $400,000 in 2001 and $300,000 in 2000.

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

| | Year Ended December 31, | 
| | ----------------------- | 

|                                                                                                                                                 |  |             | 
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | 
|                                                                                                                                                 |  |            
|                                                                                                                                                 |  | 2002        | 
|                                                                                                                                                 |  |             | 
|Net loss to common stockholders                                                                                                                  |  | $   (4,194) | 
|Total stock-based employee compensation expense determined under fair value based method for
             all awards, net of related tax effects |  | (273)       | 
|                                                                                                                                                 |  |             | 
|Pro forma net loss                                                                                                                               |  | $   (4,467) | 
|                                                                                                                                                 |  |             | 
|Loss per share:                                                                                                                                  | 
|Basic - as reported                                                                                                                              |  | $    (0.64) | 
|Basic - pro forma                                                                                                                                |  | $    (0.69) | 
|                                                                                                                                                 | 
|Diluted - as reported                                                                                                                            |  | $    (0.64) | 
|Diluted - pro forma                                                                                                                              |  | $    (0.69) | 

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 net loss for future years.

The following table summarizes
information about the stock options outstanding at December 31, 2002:

|Option Outstanding | Option Exercisable
|------------------ | ------------------

| |                                  |  |                    | 
| | -------------------------------- |  | ------------------ | 
| |                                 
| | Weighted Average Exercise Prices |  | Number Outstanding | 
| |                                  |  |                    | 
| | $      0.01                      |  | 253,800            | 
| | $      0.65                      |  | 135,000            | 
| | $      1.49                      |  | 155,750            | 
| | $      1.63                      |  | 18,150             | 
| | $      4.39                      |  | 451,950            | 
| |                                  |  |                    | 
| |                                  |  | 1,014,650          | 
| |                                  |  |                    | 

# NOTE 12 
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 $4.0 million, $2.8 million and $4.0 million for 2002, 2001 and 2000,
respectively. Face amounts of life insurance in force ceded approximated $17.2 million,
$16.6 million and $12.6 million at December 31, 2002, 2001 and 2000, 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 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 13 
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, 2002 aggregated $4.6 million. The amounts due by year are as follows: 2003
 $1.2 million; 2004  $1.1 million; 2005  $1.0 million; 2006  $0.4
million; 2007  $0.4 million; and thereafter  $ 0.5 million. The Companys principal office lease for which lease
payments totaled approximately $500,000 in 2002 expires in April 2003. The Company expects to enter into a new principal office
lease with comparable terms and conditions. Aggregate rental
expense included in the consolidated financial statements for all operating leases
approximated $1.8 million, $2.0 million and $2.1 million in 2002, 2001 and 2000,
respectively.

In the normal course of their
business operations, the Insurance Subsidiaries, continue to be involved in various
claims, lawsuits (alleging actual as well as substantial exemplary damages) and regulatory
matters. In the opinion of management, the disposition of these or any other legal matters
will not have a material adverse effect on the Companys business, consolidated
financial position or 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 14  QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)

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

|                                        |  |            |   |           
|--------------------------------------- |  | ---------- | - | ----------
|                                        |  |            |   | Quarter   
|                                        |  |           
|                                        |  | March 2002 |   | June  2002
|                                        |  |            |   |           
|                                        |  |            |  
|Premium income                          |  | $ 28,934   |   | $ 28,022  
|Net investment income                   |  | 2,022      |   | 1,940     
|Net realized gain (loss) on investment  |  | 51         |   | (468      
|Fee, service and other income           |  | 3,365      |   | 3,131     
|                                        |  |            |   |           
|Total revenues                          |  | $ 34,372   |   | $ 32,625  
|                                        |  |            |   |           
|(Loss) income before income taxes       |  | (359       | ) | 31        
|Net (loss) income                       |  | (359       | ) | 31        
|Preferred stock dividend                |  | 785        |   | 805       
|Loss applicable to common stockholders  |  | (1,144     | ) | (774      
|Loss per share:                         | 
|Basic                                   |  | $   (0.18  | ) | $   (0.12 
|Diluted                                 |  | $   (0.18  | ) | $   (0.12 
|                                        |  |            |  
|                                        |  |            |   | Quarter   
|                                        |  |           
|                                        |  | March 2001 |   | June  2001
|                                        |  |            |   |           
|                                        |  |            |  
|Premium income                          |  | $ 31,974   |   | $ 31,941  
|Net investment income                   |  | 2,322      |   | 2,294     
|Net realized gain (loss) on investments |  | 42         |   | 52        
|Fee, service and other income           |  | 5,609      |   | 5,362     
|                                        |  |            |   |           
|Total revenues                          |  | $ 39,947   |   | $ 39,649  
|                                        |  |            |   |           
|(Loss) income before income taxes       |  | (1,051     | ) | (764      
|Net income                              |  | (1,051     | ) | (764      
|Preferred stock dividend                |  | 710        |   | 710       
|Loss applicable to common               | 
|stockholders                            |  | (1,761     | ) | (1,474    
|Loss per share:                         | 
|Basic                                   |  | $   (0.27  | ) | $   (0.23 
|Diluted                                 |  | $   (0.27  | ) | $   (0.23 

# NOTE 15  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 accouts 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 3).

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)

|
|
|

|                                               |  |           
|---------------------------------------------- |  | ----------
|                                               |  |           
|                                               |  | 2002      
|                                               |  |           
|Assets:                                        | 
|Cash                                           |  | $      347
|Short-term investments                         |  | 28        
|Equity securities, at market value             |  | 9         
|Investment in consolidated subsidiaries        |  | 51,528    
|Receivables from affiliates                    |  | 1,897     
|Other assets                                   |  | 216       
|                                               |  |           
|Total Assets                                   |  | 54,025    
|                                               |  |           
|Liabilities:                                   | 
|Note payable                                   |  | 13,529    
|Payable to subsidiaries                        |  | 2,813     
|Other liabilities                              |  | 1,526     
|                                               |  |           
|Total Liabilities                              |  | 17,868    
|                                               |  |           
|Redeemable Convertible Preferred Stock         |  | 33,896    
|                                               |  |           
|Stockholders' Equity:                          | 
|Common stock                                   |  | 65        
|Capital in excess of par value                 |  | 28,072    
|Accumulated other comprehensive income (loss), |  |           
|net of tax                                     |  | 3,457     
|Retained Deficit                               |  | (29,333   
|                                               |  |           
|Total Stockholders' Equity                     |  | 2,261     
|                                               |  |           
|Total Liabilities, Redeemable Convertible      | 
|Preferred Stock and Stockholders' Equity       |  | $ 54,025  
|                                               |  |           

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, | 
| | ----------------------- | 

|                                                   |  |           |  
|-------------------------------------------------- |  | --------- | -
|                                                   |  |          
|                                                   |  | 2002      |  
|                                                   |  |           |  
|                                                   |  |           |  
|                                                   | 
|Net investment income                              |  | $      18 |  
|Realized gain on investments                       |  | -         |  
|                                                   |  |           |  
|                                                   |  | 18        |  
|                                                   |  |           |  
|Inter-company interest on advances to subsidiaries |  | -         |  
|General and administrative expenses                |  | 646       |  
|Interest expense on notes payable                  |  | 2,199     |  
|Taxes, licenses and fees                           |  | 63        |  
|                                                   |  |           |  
|                                                   |  | 2,908     |  
|                                                   |  |           |  
|Loss before income taxes and equity in             | 
|undistributed  net earning of subsidiaries         |  | (2,890    | )
|Expense from income taxes                          |  | -         |  
|                                                   |  |           |  
|                                                   |  | (2,890    | )
|Equity in undistributed net income (loss) of       | 
|subsidiaries                                       |  | 1,959     |  
|                                                   |  |           |  
|Net loss                                           |  | (931      | )
|Preferred stock dividends                          |  | 3,263     |  
|                                                   |  |           |  
|Loss applicable to common shareholders             |  | $(4,194   | )
|                                                   |  |           |  

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)STATEMENTS OF COMPREHENSIVE INCOME

| | Year Ended December 31, | 
| | ----------------------- | 

|                                              |  |          | 
|--------------------------------------------- |  | -------- | 
|                                              |  |         
|                                              |  | 2002     | 
|                                              |  |          | 
|                                              |  |          | 
|                                             
|Net loss                                      |  | $  (931) | 
|Other comprehensive income (loss):            | 
|Unrealized holding gain (loss) arising during | 
|period, net of tax                            |  | (4)      | 
|Reclassification adjustment of gain on        | 
|sales of investments included in net          | 
|income, net of tax                            |  | -        | 
|Other comprehensive income (loss) on          | 
|investment in subsidiaries:                   | 
|Unrealized holding gain during period,        | 
|net of tax                                    |  | 3,494    | 
|Reclassification adjustment of gain on sales  | 
|of investments included in net income, net    | 
|of tax                                        |  | 88       | 
|                                              |  |          | 
|Comprehensive income (loss)                   |  | $ 2,647  | 
|                                              |  |          | 

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)STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share data)

|                                                                                                  |  |                |  |              |  |                               
|------------------------------------------------------------------------------------------------- |  | -------------- |  | ------------ |  | ------------------------------
|                                                                                                  |  | Common   Share |  | Stock Amount |  | Capital in Excess of Par Value
|                                                                                                  | 
|Balance at December 31, 1999                                                                      |  | 6,500,000      |  | $        65  |  | $    27,338                   
|                                                                                                  |  |                |  |              |  |                               
|Net loss                                                                                          |  |                |  |              |  |                               
|Preferred stock dividend                                                                          |  |                |  |              |  |                               
|Other comprehensive income, net of tax                                                            |  |                |  |              |  |                               
|Amortization of unearned compensation                                                             |  |                |  |              |  | 282                           
|                                                                                                  |  |                |  |              |  |                               
|Balance at December 31, 2000                                                                      |  | 6,500,000      |  | 65           |  | 27,620                        
|                                                                                                  |  |                |  |              |  |                               
|Net loss                                                                                          |  |                |  |              |  |                               
|Preferred stock dividend                                                                          |  |                |  |              |  |                               
|Other comprehensive income, net of tax                                                            |  |                |  |              |  |                               
|Decrease in deferred tax asset valuation allowance attributable to unrealized gain on investments |  |                | 
|                                                                                                  |  |                |  |              |  |                               
|Amortization of unearned compensation                                                             |  |                |  |              |  | 397                           
|                                                                                                  |  |                |  |              |  |                               
|Balance at December 31, 2001                                                                      |  | 6,500,000      |  | 65           |  | 28,017                        
|                                                                                                  |  |                |  |              |  |                               
|Net loss                                                                                          |  |                |  |              |  |                               
|Preferred stock dividend                                                                          |  |                |  |              |  |                               
|Other comprehensive income, net of tax                                                            |  |                |  |              |  |                               
|Amortization of unearned compensation                                                             |  |                |  |              |  | 55                            
|Common Stock Options Exercised                                                                    |  | 17,100         |  |              |  |                               
|                                                                                                  |  |                |  |              |  |                               
|Balance at December 31, 2002                                                                      |  | 6,517,100      |  | $        65  |  | $    28,072                   
|                                                                                                  |  |                |  |              |  |                               

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 REGISTRANTSTATEMENT OF CASH FLOWS

| | Year Ended December 31, | 
| | ----------------------- | 

|                                                     |  |          |  
|---------------------------------------------------- |  | -------- | -
|                                                     |  |         
|                                                     |  | 2002     |  
|                                                     |  |          |  
|Cash Flow from Operating Activities:                 | 
|Net loss                                             |  | $  (931  | )
|Adjustments to reconcile net loss                    |  |          |  
|to cash provided by operating activities:            | 
|Equity in undistributed net (loss) income of         | 
|subsidiaries                                         |  | (1,959   | )
|Decrease (increase) in accrued investment income     |  | -        |  
|Decrease in deferred tax asset                       |  | -        |  
|Increase in receivables from subsidiaries            |  | (1,242   | )
|Decrease (increase) in other assets                  |  | 187      |  
|Decrease in other liabilities                        |  | (753     | )
|(Decrease) increase in payables to subsidiaries      |  | (362     | )
|Other, net                                           |  | 2,718    |  
|                                                     |  |          |  
|Net Cash (Used For) Provided by Operating Activities |  | (2,342   | )
|                                                     |  |          |  
|Cash Flow from Investing Activities:                 | 
|Proceeds from sale of fixed maturity investments     |  | -        |  
|Cost of fixed maturity investments acquired          |  | -        |  
|Net change in short-term and other investments       |  | 279      |  
|Dividends received from subsidiaries                 |  | 2,325    |  
|Capital contributions to subsidiaries                |  | (812     | )
|                                                     |  |          |  
|Net Cash Used For Investing Activities               |  | 1,792    |  
|                                                     |  |          |  
|Cash Flow from Financing Activities:                 | 
|Issuance of note payable                             |  | -        |  
|                                                     |  |          |  
|Net Cash Provided by Financing Activities            |  | -        |  
|                                                     |  |          |  
|Decrease in Cash During the Period                   |  | (550     | )
|Cash at Beginning of Period                          |  | 897      |  
|                                                     |  |          |  
|Cash at End of Period                                |  | $    347 |  
|                                                     |  |          |  

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

# SCHEDULE III

# SUPPLEMENTARY INSURANCE INFORMATION

(in thousands)

|                              |  |                                   |  |                                                          |  |                                          |  |                 | 
|----------------------------- |  | --------------------------------- |  | -------------------------------------------------------- |  | ---------------------------------------- |  | --------------- | 
|                              |  |                                   |  |                                                          |  |                                          |  |                 | 
|Segment                       |  | Deferred Policy Acquisition Costs |  | Future Policy Benefits, Losses, Claims and Loss Expenses |  | Other Policy Claims and Benefits Payable |  | Premium Revenue | 
|                              |  |                                   |  |                                                          |  |                                          |  |                 | 
|Year Ended December 31, 2002: | 
|Total                         |  | $    25,385                       |  | $60,660                                                  |  | $30,899                                  |  | $111,048        | 
|                              |  |                                   |  |                                                          |  |                                          |  |                 | 
|Year Ended December 31, 2001: | 
|Total                         |  | $    25,600                       |  | $61,571                                                  |  | $37,202                                  |  | $125,206        | 
|                              |  |                                   |  |                                                          |  |                                          |  |                 | 
|Year Ended December 31, 2000: | 
|Total                         |  | $    24,711                       |  | $61,306                                                  |  | $42,778                                  |  | $119,908        | 
|                              |  |                                   |  |                                                          |  |                                          |  |                 | 

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



# SCHEDULE IV

# REINSURANCE

(in thousands, except percentages)

|                             |  |              |  |                          | 
|---------------------------- |  | ------------ |  | ------------------------ | 
|                             |  | Gross Amount |  | Ceded to other Companies | 
|                             |  |             
|Year Ended December 31, 2002 | 
|Life insurance in force      |  | $  53,054    |  | $    17,200              | 
|                             |  |              |  |                          | 
|Premiums:                    | 
|Life                         |  | $       587  |  | $         100            | 
|Accident and health          |  | 113,077      |  | 3,854                    | 
|Other                        |  | 325          |  | -                        | 
|                             |  |              |  |                          | 
|Total premiums               |  | $113,989     |  | $      3,954             | 
|                             |  |              |  |                          | 
|Year Ended December 31, 2001 | 
|Life insurance in force      |  | $  53,128    |  | $    16,577              | 
|                             |  |              |  |                          | 
|Premiums:                    | 
|Life                         |  | $       572  |  | $           63           | 
|Accident and health          |  | 125,846      |  | 2,709                    | 
|Other                        |  | 390          |  | -                        | 
|                             |  |              |  |                          | 
|Total premiums               |  | $126,808     |  | $      2,772             | 
|                             |  |              |  |                          | 
|Year Ended December 31, 2000 | 
|Life insurance in force      |  | $  46,744    |  | $  12,553                | 
|                             |  |              |  |                          | 
|Premiums:                    | 
|Life                         |  | $       497  |  | $           12           | 
|Accident and health          |  | 121,601      |  | 3,939                    | 
|Other                        |  | 504          |  | -                        | 
|                             |  |              |  |                          | 
|Total premiums               |  | $122,602     |  | $      3,951             | 
|                             |  |              |  |                          | 



# SCHEDULE V

# VALUATION AND
QUALIFYING ACCOUNTS

(in thousands)

|                                 |  |                                |  |                                                    
|-------------------------------- |  | ------------------------------ |  | ---------------------------------------------------
|                                 |  | Balance at Beginning of Period |  | Additions(Reductions) Charged to Costs and Expenses
|                                 |  |                                |  |                                                    
|Year Ended December 31, 2002:    | 
|Allowance for doubtful agents'   | 
|receivables                      |  | $      4,013                   |  | $          617                                     
|                                 |  |                                |  |                                                    
|Deferred tax valuation allowance |  | $     17,841                   |  | $         (667                                     
|                                 |  |                                |  |                                                    
|Year Ended December 31, 2001:    | 
|Allowance for doubtful agents'   | 
|receivables                      |  | $      3,711                   |  | $          824                                     
|                                 |  |                                |  |                                                    
|Deferred tax valuation allowance |  | $     18,263                   |  | $          776                                     
|                                 |  |                                |  |                                                    
|Year Ended December 31, 2000:    | 
|Allowance for doubtful agents'   | 
|receivables                      |  | $      6,060                   |  | $        (722                                      
|                                 |  |                                |  |                                                    
|Deferred tax valuation allowance |  | $     16,949                   |  | $        1,314                                     
|                                 |  |                                |  |                                                    

# 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.



---

# PART III

# ITEM 10  DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to directors and
executive officers is incorporated herein by reference to Election of
Directors and Certain Information Regarding the Executive Officers from
the Companys definitive proxy statement for the 2003 Annual Meeting of Stockholders,
which will be filed on or before April 30, 2003.

# ITEM 11  EXECUTIVE
COMPENSATION

Executive compensation is
incorporated herein by reference to Election of Directors  Executive
Compensation from the Companys definitive proxy statement for the 2003 Annual
Meeting of Stockholders, which will be filed on or before April 30, 2003.

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

Information pertaining to security
ownership of certain beneficial owners and management is incorporated herein by reference
to Principal Stockholders and Election of Directors  Security
Ownership of Management from the Companys definitive proxy statement for the
2003 Annual Meeting of Stockholders, which will be filed on or before April 30, 2003.

The following table provides information for the Companys
stock option plan as of December 31, 2002:

| |                                                            |  |                                                                           
| | ---------------------------------------------------------- |  | --------------------------------------------------------------------------
| | Plan Category                                              |  | Number of Securities to be Issued Upon Exercise of Outstanding Options (a)
| |                                                            |  |                                                                           
| | Equity compensation plans approved by security holders     |  | 1,014,650                                                                 
| | Equity compensation plans not approved by security holders |  | -                                                                         
| |                                                            |  |                                                                           
| | Total                                                      |  | 1,014,650                                                                 
| |                                                            |  |                                                                           

# ITEM 13  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

Information pertaining to certain
relationships and related transactions is incorporated herein by reference to
Principal Stockholders and Election of Directors from the
Companys definitive proxy statement for the 2003 Annual Meeting of Stockholders,
which will be filed on or before April 30, 2003.

# ITEM 14  CONTROLS
AND PROCEDURES

Based on their evaluation, as of a
date within 90 days of the filing date of this Form 10-K, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures (as
defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) are effective. There have been no significant changes in internal controls or, in
other factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant deficiencies
and material weaknesses.



---

# 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 Auditors
Report of PricewaterhouseCoopers LLP, Independent Accountants 
Consolidated Balance Sheets at December 31, 2002 and 2001 
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
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 Registrant
Schedule III  Supplementary Insurance InformationSchedule IV  Reinsurance
Schedule 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 Companys Form 8-A filed on March 25, 1999).
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

| | 4.4 |  | Form of Preferred Stock
Certificate (incorporated by reference to Exhibit 4.4 to the Company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 |  | Employment Agreement, dated as of September 15, 1998, by and among the Company, Westbridge
Management Corp. and Mr. Patrick J. Mitchell (incorporated by reference to Exhibit 10.3 to
the Companys Form 8-K filed on September 21, 1998).
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.10 |  | Employment  Agreement dated as of September 15, 1998, by and among the Company,  Westbridge  Management Corp.
         and Mr.  Patrick H. O'Neill  (incorporated  by reference to Exhibit 10.4 to the  Company's  Form 8-K filed on
         September 21, 1998).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 |  | 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).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.12 |  | 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).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.13 |  | Registration Rights Agreement dated as of March 24, 1999 between the Company 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).
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.14 |  | 1999 Stock Option Plan dated as of March 24, 1999 (incorporated by reference to the
Companys Schedule 14A filed with the Commission on April 30, 1999).
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.15 |  | Installment Note Agreement dated July 20, 1999 between Ascent Management, Inc. and LaSalle
Bank National Association (incorporated by reference to Exhibit 10.4 to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 |  | 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 the
Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.17 |  | 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 the
Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.18 |  | 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 the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.19 |  | Extension of Employment Agreement, dated as of September 15, 1998, by and among the
Company, Westbridge Management Corp. and Mr. Patrick J. Mitchell (incorporated by
reference to Exhibit 10.8 to the companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.20 |  | Extension of Employment Agreement, dated as of September 15, 1998, by and among the
Company, Westbridge Management Corp. and Mr. Patrick H. ONeill (incorporated by
reference to Exhibit 10.9 to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000).
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.21 |  | 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
the Companys Quarterly Report on Form 10-Q for the quarter ended September 30,
2000).
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.22 |  | 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 the Companys Annual Report on Form 10-K for the year ended December
31, 2000).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.23 |  | 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 the Companys Annual Report on Form 10-K for the year ended December
31, 2000).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.24 |  | 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 the Companys Annual Report on Form 10-K for the year ended December 31,
2000).
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.25 |  | 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 the Companys Annual Report on Form 10-K for the year ended December
31, 2000).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.26 |  | 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 the
Companys Form 8-K filed April 25, 2001).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.27 |  | 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 the Company's Form 8-K filed April 25, 2001).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.28 |  | 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 the
Companys Form 8-K filed April 25, 2001).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.29 |  | 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 the Companys Form 8-K filed April 25, 2001).
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.30 |  | 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 the
Companys Form 8-K filed April 25, 2001).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.31 |  | Fifth Amendment to Credit  Agreement  dated November 27, 2001 between Ascent  Funding,  Inc. and LaSalle Bank
         National Association.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------

| | 10.32 |  | Employment  Agreement,  dated as of September 16, 2001, by and among the Company,  Ascent  Management,  Inc.,
         and Mr. Patrick J. Mitchell.
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.33 |  | Employment  Agreement,  dated as of September 16, 2001, by and among the Company,  Ascent  Management,  Inc.,
         and Mr. Patrick H. O'Neill.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.34 |  | 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 the
Companys quarterly report on Form 10-Q for the quarter ended June 30, 2002)
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.35* |  | Seventh  Amendment to Credit Agreement dated November 20, 2002 between Ascent Funding,  Inc. and LaSalle Bank
         National Association.
| | ------ |  | --------------------------------------------------------------------------------------------------------------------------------------------

| | 10.36* |  | Employment Agreement dated as of December 18, 2002, by and between the Company,  Ascent Management,  Inc. and
         Mr. Patrick J. Mitchell.
| | ------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------

| | 10.37* |  | Employment  Agreement dated as of December 18, 2002, by and between the Company,  Ascent  Management,  Inc. and
         Mr. Patrick H. O'Neill.
| | ------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.38* |  | Employment  Agreement dated as of January 10, 2003, by and between the Company,  Ascent Management,  Inc. and
         Mr. Konrad H. Kober.
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------

| | 10.39* |  | Employment  Agreement dated as of January 10, 2003, by and between the Company,  Ascent Management,  Inc. and
         Ms. Cynthia B. Koenig.
| | ------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 10.40* |  | Seventh  Amendment  to Guaranty  Agreement  dated  January 27, 2003 between
Ascent Assurance, Inc. and LaSalle Bank National Association.
| | ------ |  | -----------------------------------------------------------------------------------------------------------------------------------------

| | 10.41* |  | Eighth Amendment to Credit Agreement dated January 27, 2003 between
Ascent Funding, Inc. and LaSalle Bank National Association.
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------

| | 10.42* |  | Second  Amendment to Security  Agreement dated January 27, 2003 between Ascent  Management,  Inc. and LaSalle
         Bank National Association.
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.43* |  | First  Amendment to Pledge  Agreement  dated January 27, 2003 between Ascent  Assurance,  Inc. and LaSalle Bank
         National Association.
| | ------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| | 10.44* |  | Termination Agreement dated January 31, 2003 executed by LaSalle Bank
National Association acknowledging payment in full of Ascent Management, Inc. note payable.
| | ------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.45* |  | First  Amendment to Credit Agreement dated February 26, 2003
between Ascent Assurance, Inc. and Credit Suisse First Boston Management Corporation.
| | ------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 99.1* |  | Press Release dated March
6, 2003 announcing the Companys Fourth Quarter Financial results.
| | ----- |  | --------------------------------------------------------------------------------------------

| | 99.2* |  | Certification of Patrick J. Mitchell, Chairman of the Board 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.
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

(b)    
          Report on Form 8-K.

| | The
Registrant filed a Report on Form 8-K dated October 2, 2002 to report the dismissal of
PricewaterhouseCoopers, LLP as its independent accountant and the engagement of Ernst
& Young, LLP as the accountant for the Company for the fiscal year ended December 31,
2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

___________________________

*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 6th day of March, 2003.

| | ASCENT ASSURANCE, INC.                          
| | ------------------------------------------------
|
| | /s/ Cynthia B. Koenig                           
| | Cynthia B. Koenig                               
| | Senior Vice President and Chief Financial Office
| | (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 |  | Director, Chairman of the Board
|(Patrick J. Mitchell)   |  | and Chief Executive Officer    
|                        |  |                                
|/s/ John H. Gutfreund   |  | Director                       
|(John H. Gutfreund)     | 
|                        |  |                                
|/s/ Richard H. Hershman |  | Director                       
|(Richard H. Hershman)   | 
|                        |  |                                
|/s/ Michael A. Kramer   |  | Director                       
|(Michael A. Kramer)     | 
|                        |  |                                
|/s/ Robert A. Peiser    |  | Director                       
|(Robert A. Peiser)      | 
|                        |  |                                
|/s/ James K. Steen      |  | Director                       
|(James K. Steen)        | 
|                        |  |                                
|/s/ Paul E. Suckow      |  | Director                       
|(Paul E. Suckow)        | 



# Certification of
Principal Executive Officer

I, Patrick J. Mitchell, certify that:

|1. |  | I have reviewed this annual report on Form 10-K of the Company;
|-- |  | ---------------------------------------------------------------

|2. |  | Based on my knowledge, this annual report does not contain any untrue statement
               of a material fact or omit to state a material fact necessary to make the
               statements made, in light of the circumstances under which such statements were
               made, not misleading with respect to the period covered by this annual report;
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Based on my knowledge, the financial statements, and other financial information
               included in this annual report, fairly present in all material respects the
               financial condition, results of operations and cash flows of the Company as of,
               and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | The Companys other certifying officers and I are responsible for
               establishing and maintaining disclosure controls and procedures (as defined in
               Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) | designed such disclosure controls and procedures to ensure that material
          information relating to the Company, including its consolidated subsidiaries, is
          made known to us by others within those entities, particularly during the period
          in which this annual report is being prepared;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) | evaluated the effectiveness of the Companys disclosure controls and
          procedures as of a date within 90 days prior to the filing date of this annual
          report (the Evaluation Date); and
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) | presented in this annual report our conclusions about the effectiveness of the
          disclosure controls and procedures based on our evaluation as of the Evaluation
          Date;
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | The Companys other certifying officers and I have disclosed, based on our
               most recent evaluation, to the Companys auditors and the audit committee
               of Companys board of directors (or persons performing the equivalent
               function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) | all significant deficiencies in the design or operation of internal controls
          which could adversely affect the Companys ability to record, process,
          summarize and report financial data and have identified for the Companys
          auditors any material weaknesses in internal controls; and
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) | any fraud, whether or not material, that involves management or other employees
          who have a significant role in the Companys internal controls; and
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. |  | The Companys other certifying officers and I have indicated in this annual
               report whether or not there were significant changes in internal controls or in
               other factors that could significantly affect internal controls subsequent to
               the date of our most recent evaluation, including any corrective actions with
               regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 6, 2003

| | /s/ Patrick J. Mitchell                          
| | -------------------------------------------------
| | Patrick J. Mitchell                              
| | Chairman of the Board and Chief Executive Officer



# Certification of
Principal Financial Officer

I, Cynthia B. Koenig, certify that:

|1. |  | I have reviewed this annual report on Form 10-K of the Company;
|-- |  | ---------------------------------------------------------------

|2. |  | Based on my knowledge, this annual report does not contain any untrue statement
               of a material fact or omit to state a material fact necessary to make the
               statements made, in light of the circumstances under which such statements were
               made, not misleading with respect to the period covered by this annual report;
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Based on my knowledge, the financial statements, and other financial information
               included in this annual report, fairly present in all material respects the
               financial condition, results of operations and cash flows of the Company as of,
               and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | The Companys other certifying officers and myself are responsible for
               establishing and maintaining disclosure controls and procedures (as defined in
               Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) | designed such disclosure controls and procedures to ensure that material
          information relating to the Company, including its consolidated subsidiaries, is
          made known to us by others within those entities, particularly during the period
          in which this annual report is being prepared;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) | evaluated the effectiveness of the Companys disclosure controls and
          procedures as of a date within 90 days prior to the filing date of this annual
          report (the Evaluation Date); and
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) | presented in this annual report our conclusions about the effectiveness of the
          disclosure controls and procedures based on our evaluation as of the Evaluation
          Date;
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | The Companys other certifying officers and I have disclosed, based on our
               most recent evaluation, to the Companys auditors and the audit committee
               of Companys board of directors (or persons performing the equivalent
               function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) | all significant deficiencies in the design or operation of internal controls
          which could adversely affect the Companys ability to record, process,
          summarize and report financial data and have identified for the Companys
          auditors any material weaknesses in internal controls; and
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) | any fraud, whether or not material, that involves management or other employees
          who have a significant role in the Companys internal controls; and
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. |  | The Companys other certifying officers and I have indicated in this annual
               report whether or not there were significant changes in internal controls or in
               other factors that could significantly affect internal controls subsequent to
               the date of our most recent evaluation, including any corrective actions with
               regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 6, 2003

| | /s/ Cynthia B. Koenig                
| | -------------------------------------
| | Cynthia B. Koenig                    
| | Senior Vice President,               
| | Chief Financial Officer and Treasurer



---

# 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%     
|                                                                        
|15.       
          HPI Marketing, Inc. (Delaware)                      | 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 26, 2003, 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, 2002.

/s/ Ernst & Young,
LLP

Ernst & Young, LLPDallas, TexasMarch 6, 2003

# 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 as of December 31, 2001 and for the years ended December
31, 2001 and 2000 which appear in this Form 10-K.

/s/
PricewaterhouseCoopers, LLP

PricewaterhouseCoopers,
LLPDallas, Texas March 4, 2003