GAINSCO INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934

For the fiscal year ended Commission file number 1-9828
December 31, 2002

GAINSCO, INC.
(Exact name of registrant as specified in its charter)

TEXAS 75-1617013
(State of Incorporation) (IRS Employer
Identification No.)
1445 Ross Ave., Suite 5300
Dallas, Texas 75202
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (214) 647-0415

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Common Stock ($.10 par value) OTC Bulletin Board

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 herein, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

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

Yes [ ] No [X]

The aggregate market value of the registrant's Common Stock ($.10 par value),
the registrant's only class of voting or non-voting common equity stock, held by
non-affiliates of the registrant (19,179,131 shares) as of the close of the
business on February 28, 2003 was $3,835,826 (based on the closing sale price of
$0.20 per share on that date on the OTC Bulletin Board).

As of February 28, 2003, there were 21,169,736 shares of the registrant's Common
Stock ($.10 par value) outstanding.

INCORPORATION BY REFERENCE

Portions of the Company's Proxy Statement for its Annual Meeting of Shareholders
to be held on May 19, 2003 are incorporated by reference herein in response to
Items 10, 11, 12 and 13 of Part III of Form 10-K.

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PART I

ITEM 1. BUSINESS

GENERAL DESCRIPTION

GAINSCO, INC. ("GNAC") is a holding company that provides administrative and
financial services for its wholly owned subsidiaries. The term "Company" as used
in this document includes GNAC and its subsidiaries unless the context otherwise
requires. GNAC was incorporated in Texas on October 11, 1978. It completed its
initial public offering on November 14, 1986.

The Company is a property and casualty insurance company concentrating its
efforts on the nonstandard personal automobile market in Florida as it
concurrently exits its commercial insurance business. The Company's insurance
operations for most of 2002 were conducted through four insurance companies:
General Agents Insurance Company of America, Inc. ("General Agents"), an
Oklahoma corporation; MGA Insurance Company, Inc. ("MGAI"), a Texas corporation;
GAINSCO County Mutual Insurance Company ("GCM"), a Texas chartered company; and
Midwest Casualty Insurance Company ("MCIC"), a North Dakota insurance
corporation acquired January 7, 2000. See "Recent Developments", for information
regarding the Company's actions to reduce its involvement in the insurance
business, including the Company's decision to cease writing its primary line of
business, commercial insurance, and its sale of the management contract
controlling GCM. On March 31, 2003, MCIC is to be liquidated and all of its
assets, liabilities and equity are to be transferred to General Agents.

During 2002 the Company was approved to write insurance in 47 states and the
District of Columbia on a non-admitted basis and in 44 states and the District
of Columbia on an admitted basis. The Company currently markets its personal
lines of insurance through over 550 non-affiliated retail agencies and
previously marketed its commercial lines of insurance through 200 non-affiliated
general agency offices. Approximately 70% of the Company's gross premiums
written during 2002 resulted from risks located in Florida.

The Company's lines of insurance are written on certain classes and types of
risks which are not generally insured by many of the standard companies,
although such companies have been competing in this market more frequently in
recent years. The strategy of the Company is to identify various types of risks
where it can price its coverages profitably and competitively. For a description
of the product lines presently written by the Company, see "Recent Developments"
and "Product Lines." The Company sets its policy premiums by applying its own
judgment after consideration of the risks involved and the competition. Part of
its analysis includes the review of historical premium rate and loss cost
information as compiled and reported by independent rating bureaus.

RECENT DEVELOPMENTS

In March 2003, the Financial Accounting Standards Board announced it
expects to issue the proposed limited-scope statement "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity," in
the second quarter of 2003. This statement would require redeemable preferred
stock to be classified as a liability and any related accretion of discount and
accrued dividends to be charged to the results of operations. If this statement
is adopted as proposed, the Company would record all series of preferred stock
as liabilities and would record the related accretion of discount and accrued
dividends as charges to Results of Operations. For 2002 the accretion of
discount on redeemable preferred stock was $2,657,000 and the dividends accrued
were $670,774. Under this proposed statement these amounts would be recorded as
charges to Results of Operations, and we anticipate an increase in the deferred
tax valuation allowance equal to the related deferred tax benefit.

Discontinuance of Commercial Lines. On February 7, 2002, the Company
announced its decision to cease writing its primary line of business, commercial
insurance, due to continued adverse claims development and unprofitable results.
Approximately 68.5 million of unprofitable commercial lines premiums were
subject to this exit decision. The Company notified all of its commercial lines
agents of its intent to cancel their agency contracts and notified all states,
where required by statute, of its intent to cease writing commercial lines of
insurance in their state. The discontinuance of writing commercial lines will
likely result in the Company ceasing to be approved to write insurance in a
number of states.

By December 31, 2002, the Company had non-renewed 86% of its in-force
policies. The remaining 14%, amounting to approximately $12 million in premiums,
are scheduled to be non-renewed in the first half of 2003 as the applicable
policies expire. Concurrently, the Company continued to settle and reduce its
inventory of commercial lines claims. At year-end 2002, there were 1,062 claims
associated with the runoff book outstanding, compared to 1,720 a year earlier.

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Due to the long tail nature of these claims, the Company anticipates it will
take a substantial number of years to complete an orderly adjustment and
settlement process with regard to existing claims and any additional claims it
receives in the future from its past business writings. The Company's
cost-structure is being reduced with the reduction of premium and claims
inventory.

Changes in Personal Lines. On August 12, 2002, the Company announced its
decision to put itself in a position to exit its remaining active insurance
business, personal auto, in as orderly and productive a fashion as possible. In
June 2002, the Company entered into a letter of intent to sell its Miami,
Florida based operation, the Lalande Group, to an unaffiliated party. In
September 2002 negotiations in respect of the possible transaction were
terminated. In conjunction with this process, the Company evaluated the related
goodwill and recorded an impairment of approximately $2.9 million during the
second quarter 2002. The remaining goodwill as of December 31, 2002 is $609,000
and is related to the 1998 acquisition of the Lalande Group. Operationally, the
Company implemented rate increases and other measures to enhance the profit
potential of this business in 2003 and its future strategic direction, which
could include the expansion, contraction or disposition of the business.

Redeployment of Capital. The Company anticipates a lengthy period of
transition as it lessens its exposure to the insurance industry. During the
transition process, the Company may consider the sale of additional subsidiaries
associated with that business. The Company intends to redeploy capital no longer
required by its insurance business, once it becomes available, to pursue other
opportunities in the future that offer a better prospect for profitability. The
Company believes that suitable capital redeployment opportunities should be
available after the capital no longer required by its insurance business becomes
available, but cannot predict the amount of capital that will ultimately be
available for redeployment, the timing or the nature of the opportunities that
may be available at the time capital becomes available. The opportunities may be
outside of the insurance business and could be in the financial services
business.

Fronting Agreements. The Company had fronting agreements with three
non-affiliated insurance companies. The business written under these agreements
was ceded 100% to reinsurers rated "A (Excellent)" or better by A.M. Best
Company ("Best's"), and 100% of the liabilities were collateralized with pledged
investment grade securities or letters of credit or the reinsurer had fully
indemnified the Company against business, credit and insurance risk. Two of
these fronting agreements were through GCM. See "Recent Developments -- Sale of
GAINSCO County Mutual." The remaining fronting agreement was terminated in the
second quarter of 2002 and is currently in run-off.

Sale of GAINSCO County Mutual. On December 2, 2002, the Company completed
the sale and transfer of the management contract controlling GCM to an affiliate
of Liberty Mutual Insurance Company ("Liberty"), for a purchase price of up to
$10 million, of which $1 million was paid at closing and the balance is payable
in contingent payments through September 2009. The $9 million total of future
payments would be payable $3 million in September 2003 and $1 million each year
thereafter through September 2009. Each payment is contingent on there being no
material adverse change in the regulatory treatment of GCM specifically, or
county mutuals generally, from legislative or regulatory administrative actions
prior to the applicable payment date. Legislation has been introduced in the
current session of the Texas Legislature ending June 2, 2003 which, depending
upon whether or in what form it is ultimately adopted, could prejudice the
rights of the Company to receive some or all of the future payments from
Liberty. Following the closing, the surplus of GCM, which was approximately
$3,182,000, remained as a part of the combined statutory policyholders' surplus
of the Company. Pursuant to a 100% quota share reinsurance agreement (the
"General Agents Reinsurance Agreement") entered into at closing among GCM and
GAINSCO's subsidiaries, General Agents and MGA Agency, Inc., and certain other
arrangements, the Company retained all assets and liabilities associated with
GCM's past, present and runoff commercial insurance business. The Company made a
number of representations, warranties and covenants in the acquisition agreement
and generally indemnifies Liberty for any losses incurred resulting from (i)
breaches of representations, warranties or covenants of the Company; (ii)
employee benefit plan obligations of GCM relating to pre-closing periods; (iii)
tax obligations of GCM relating to pre-closing periods; (iv) all liabilities of
GCM, to the extent that they result from conditions or circumstances arising or
events occurring before the Closing, subject to certain exceptions; (v) all
insurance claims, liabilities and obligations of GCM that are not reinsured
pursuant to the General Agents Reinsurance Agreement or certain insurance
fronting programs between GCM and Metropolitan Property & Casualty Insurance
Company and Omni Insurance Company, respectively; and

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(vi) any and all insurance claims, liabilities and obligations of General Agents
under the General Agents Reinsurance Agreement. GCM did not have any employees
or employee benefit plans. The Company made a $500,000 prepayment of outstanding
bank debt from the closing proceeds of the transaction.

Sale of Office Building; New Office Leases. The Company sold the office
building at 500 Commerce Street in Fort Worth, Texas, where the Company's
principal executive offices and commercial insurance operations were located, to
an unaffiliated third party for $5 million on August 30, 2002. The Company
recorded a gain of $455,056 from this transaction. As a result, the Company
leased new office space to house its principal executive offices and commercial
insurance operations.

In August 2002, the Company entered into an office lease for approximately
8,352 square feet of space in Fountain Place, 1445 Ross Avenue, Suite 5300,
Dallas, Texas, to house the Company's executive offices. This address is the
Company's new registered address. The lease is for a term of four years,
although the Company has the right to terminate the lease at its option at the
end of 2005 upon payment of a termination fee of approximately $29,000. The
annual rental expense is approximately $175,500. The lessor is Crescent Real
Estate Funding X, L.P., an affiliate of Crescent Real Estate Equities Company, a
Texas real estate investment trust f/k/a Crescent Real Estate Equities, Inc.
("Crescent"). Robert W. Stallings, GAINSCO's Chairman of the Board, became a
member of the Board of Trust Managers of Crescent in May 2002, and John C. Goff,
a member of GAINSCO's board of directors (the "Board"), is the Chief Executive
Officer and Vice Chairman of the Board of Trust Managers of Crescent. Mr. Goff
is deemed to be the beneficial owner of 3,630,248 common shares of Crescent,
comprising 3.4% of the beneficial ownership of such shares. Mr. Stallings is
deemed to be the beneficial owner of 22,000 common shares of Crescent,
comprising less than 1% of the beneficial ownership of such shares. The
management of the Company believes that the terms of the Company's lease with
Crescent are no less favorable to GAINSCO than those offered to other tenants by
Crescent or than GAINSCO could obtain for comparable space from unaffiliated
parties.

In July 2002 the Company also entered an office lease with an unaffiliated
third party for 10,577 square feet of space at 5400 Airport Freeway, Suite A,
Fort Worth, Texas, to house the Company's commercial insurance operations. The
lease is for a term of five years, although the Company may terminate the lease
at its option after the expiration of three years. The annual base rental
expense is $105,770.

Separation Agreement. In December 2002, McRae B. Johnston, the President -
Personal Lines Division of the Company, resigned his employment with the Company
and each of its subsidiaries other than MGAI, where Mr. Johnston remained
employed until March 1, 2003. The Company and Mr. Johnston entered into
separation agreements and releases (the "Release Agreements") pursuant to which
the Company and Mr. Johnston each mutually released the other from obligations
under the stock purchase agreement and employment contract between the Company
and Mr. Johnston and generally from any and all other claims that each otherwise
may have had against the other. The Company paid Mr. Johnston an aggregate of
$400,000 pursuant to the Release Agreements. Mr. Johnston also entered into a
one-year Consulting Agreement with MGAI effective after the conclusion of his
employment with MGAI on March 1, 2003 pursuant to which MGAI will pay Mr.
Johnston an aggregate of $200,000 to be made in four equal payments of $50,000
each in March, June, September and December of 2003.

Tri-State Acquisition and Sale. On January 7, 2000, the Company expanded its
personal lines business conducted through the Lalande Group through the
acquisition of Tri-State, Ltd. ("Tri-State"), an insurance operation
specializing in underwriting, servicing and claims handling of nonstandard
personal auto insurance in Minnesota, North Dakota and South Dakota. Tri-State
owned and operated a managing general agency, a motor vehicle driving records
service

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company and an insurance subsidiary, MCIC that had policyholders' surplus of
approximately $3,034,000. The purchase price consideration consisted of
$6,000,000 in cash at closing plus additional cash payments of $1,200,000 and
$1,600,000 paid in July 2000 and January 2001, respectively. On August 31, 2001,
the Company sold all of the stock of Tri-State to Herbert A. Hill for a cash
price of $935,000. Mr. Hill is the President and a former owner of Tri-State.
The Company retained MCIC, which had policyholders' surplus of approximately
$2,965,000 at December 31, 2002 and $3,078,000 at December 31, 2001. MCIC is to
be liquidated on March 31, 2003 and all of its assets, liabilities and equity
are to be transferred to General Agents.

Transactions with Goff Moore Strategic Partners, L.P.

1999 GMSP Transaction. On October 4, 1999, the Company sold to GMSP, for an
aggregate purchase price of $31,620,000, (i) 31,620 shares of Series A Preferred
Stock, which are convertible into 6,200,000 shares of Common Stock at a
conversion price of $5.10 per share (subject to adjustment for certain events),
(ii) the Series A Warrant to purchase an aggregate of 1,550,000 shares of Common
Stock at an exercise price of $6.375 per share and expiring October 4, 2004 and
(iii) the Series B Warrant to purchase an aggregate of 1,550,000 shares of
Common Stock at an exercise of $8.50 per share and expiring October 4, 2006. At
closing the Company and its insurance company subsidiaries entered into
Investment Management Agreements with GMSP, pursuant to which GMSP manages their
respective investment portfolios. Completion of these transactions (the "1999
GMSP Transaction") concluded the strategic alternatives review process that the
Company initiated in 1998. Proceeds from the 1999 GMSP Transaction were
available for acquisitions, investments and other corporate purposes.

2001 GMSP Transaction. On March 23, 2001, the Company consummated a
transaction with GMSP (the "2001 GMSP Transaction") pursuant to which, among
other things, the Company issued shares of its newly created Series C Preferred
Stock to GMSP in exchange for an aggregate purchase price of $3 million in cash.

The annual dividend rate on the Series C Preferred Stock is 10% until March
23, 2004 and 20% thereafter. Unpaid dividends are cumulative and compounded. The
Series C Preferred Stock is redeemable at the Company's option after March 23,
2006 and at the option of the majority holders after March 23, 2007 at a price
of $1,000 per share plus accrued and unpaid dividends. The Series C Preferred
Stock is not convertible into Common Stock.

The agreement with GMSP in connection with the 2001 GMSP Transaction was
conditioned upon the following changes in the securities currently held by GMSP.
The exercise prices of the Series A Warrant and the Series B Warrant held by
GMSP were amended to $2.25 per share and $2.5875 per share, respectively. Each
of these warrants provides for the purchase of 1,550,000 million shares of
Common Stock, subject to adjustment. Further, the Company is required to redeem
the outstanding shares of its Series A Preferred Stock on January 1, 2006,
subject to certain conditions, at a price of $1,000 per share plus accrued and
unpaid dividends. Any Series A Preferred Stock unredeemed for any reason after
that date would accrue interest, payable quarterly at a rate equal to eight
percent per year with any unpaid interest compounded annually. The Series A
Preferred Stock is convertible into 6,200,000 shares of Common Stock at a
conversion price of $5.10 per share and, should the Company pay dividends on
its Common Stock, the Series A Preferred Stock would be entitled to dividends as
if converted into Common Stock.

The agreement with GMSP provided an opportunity to convert the Company's
illiquid investments with a cost of $4.2 million to cash as of November 30,
2002, as follows: the Company could at its option require GMSP to purchase the
illiquid investments for $2.1 million, less any future cash received prior to
November 30, 2002 from the investments. GMSP could at its option require the
Company to sell the illiquid investments to GMSP for $4.2 million, less any
future cash received prior to November 30, 2002 from the investments. During the
second quarter of 2001, the Company recognized a permanent impairment of these
investments and wrote down the carrying value to the amount recoverable from
GMSP under the put option. In February 2002, GMSP consented to the early
exercise of the Company's option, and the Company exercised its option to
require GMSP to purchase the illiquid investments for approximately $2.1
million.

Amendment to Investment Management Agreements. In August 2002, the Company
entered into an amendment to its Investment Management Agreements with Goff
Moore Strategic Partners, L.P. ("GMSP"). See "Transactions with Goff Moore
Strategic Partners, L.P. -- 1999 GMSP Transaction". The amendment reduces,
effective as of October 1, 2002, the minimum aggregate monthly payment owed by
the Company to GMSP from $75,000 to $63,195 (with respect to each calendar
month from October 2002 through September 2003), $53,750 (with respect to each
calendar month from October 2003 through September 2004), and $45,417 (with
respect to each calendar month after September 2004). The amendment also changes
the date upon which either party to each of the investment management agreements
can terminate such agreements at its sole option from October 4, 2002 to
September 30, 2005.

Transactions with Robert W. Stallings. On March 23, 2001, the Company
consummated a transaction with Mr. Stallings (the "Stallings Transaction")
pursuant to which, among other things, the Company issued shares of its newly
created Series B Preferred Stock and a warrant to purchase an aggregate of
1,050,000 shares of Common Stock at

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$2.25 per share and expiring March 23, 2006 in exchange for an aggregate
purchase price of $3.0 million in cash. The annual dividend provisions and the
redemption provisions of the Series B Preferred Stock are the same as those for
the Series C Preferred Stock. The Series B Preferred Stock is convertible into
Common Stock at $2.25 per share. Subject to adjustment for certain events, the
Series B Preferred Stock is convertible into a maximum of 1,333,333 shares of
Common Stock. Mr. Stallings also entered into a Consulting Agreement pursuant to
which he provides consulting services (including strategic planning advice,
analysis of the subsidiaries' performance in various sectors of their respective
business and recommendations for growth strategies and opportunities for new
markets and products) to the Company's insurance subsidiaries for a period of
five (5) years ending on March 22, 2006 for $300,000 per annum. Mr. Stallings
was elected non-executive Vice Chairman of the Board and a director of the
Company on March 30, 2001 and on September 6, 2001, he was elected non-executive
Chairman of the Board.

PRODUCT LINES

The Company's principal products previously served certain nonstandard
markets within the commercial lines and personal lines. On February 7, 2002, the
Company announced its decision to discontinue writing commercial lines insurance
business due to continued adverse claims development and unprofitable results.
The Company continues to serve the nonstandard personal auto market. The
following table sets forth, for each product line, gross premiums written
(before ceding any amounts to reinsurers), percentage of gross premiums written
for the periods indicated and the number of policies in force at the end of each
period.

Commercial Lines The Company announced on February 7, 2002 its decision to
discontinue writing commercial lines insurance business due to continued adverse
claims development and unprofitable results. The commercial lines of insurance
previously written by the Company include:

Commercial Auto The commercial auto coverage underwritten by the Company
included risks associated with local haulers of specialized freight,
tradespersons' vehicles and trucking companies.

Garage The Company's garage product line included garage liability, garage
keepers' legal liability and dealers' open lot coverages. The Company targeted
its coverage to used car dealers, recreational vehicle dealers, automobile
repair shops and wrecker/towing risks.

General Liability The Company underwrote general liability insurance for
businesses such as car washes, janitorial services, small contractors, apartment
buildings, rental dwellings and retail stores.

Property The Company underwrote commercial property coverages that included
fire, extended coverage and vandalism on commercial establishments packaged with
its liability product or on a monoline basis.

Specialty Lines The Company underwrote and managed programs in professional
liability for lawyers, real estate agents, educators and other general
professions, as well as directors and officers liability.

Personal Lines The personal lines of insurance currently written by the Company
is in the nonstandard personal auto market in Florida only and is primarily
written with minimum liability limits. The personal lines of insurance
previously written by the Company also included:

Umbrella The Company wrote personal umbrella risks which did not have access
to the preferred markets.

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Property The Company wrote nonstandard dwelling fire risks.

REINSURANCE

The Company may purchase reinsurance in order to reduce its liability on
individual risks and to protect against catastrophe claims. A reinsurance
transaction takes place when an insurance company transfers, or "cedes," to
another insurer a portion or all of its exposure. The reinsurer assumes the
exposure in return for a portion or the entire premium. The ceding of insurance
does not legally discharge the insurer from its primary liability for the full
amount of the policies, and the ceding company is required to pay the claim if
the reinsurer fails to meet its obligations under the reinsurance agreement.

Commercial Lines

Prior to 1999 and again beginning in 2001, the Company wrote commercial
casualty policy limits up to $1,000,000. For policies with an effective date
occurring from 1995 through 1998 and policies with an effective date occurring
during 2001 or 2002, the Company has first excess casualty reinsurance for 100%
of casualty claims exceeding $500,000 up to the $1,000,000 limits, resulting in
a maximum net claim retention per risk of $500,000 for such policies. During
1999 and 2000, the Company wrote commercial casualty policy limits up to
$5,000,000. For policies with an effective date occurring in 1999 or 2000, the
Company has first excess casualty reinsurance for 100% of casualty claims
exceeding $500,000 up to $1,000,000 and second excess casualty reinsurance for
100% of casualty claims exceeding $1,000,000 up to the $5,000,000 limits,
resulting in a maximum net claim retention per risk of $500,000. The Company has
facultative reinsurance for policy limits written in excess of the limits
reinsured under the excess casualty agreements.

Effective December 31, 2000, the Company entered into a quota share
reinsurance agreement whereby the Company ceded 100% of its commercial auto
liability unearned premiums and 50% of all other commercial business unearned
premiums at December 31, 2000 to a non-affiliated reinsurer. For policies with
an effective date of January 1, 2001 through December 31, 2001, the Company
entered into a quota share reinsurance agreement whereby the Company ceded 20%
of its commercial business to a non-affiliated reinsurer. Also effective
December 31, 2000, the Company entered into a reserve reinsurance cover
agreement with a non-affiliated reinsurer. This agreement reinsures the
Company's ultimate net aggregate liability in excess of $32,500,000 up to an
aggregate limit of $89,650,000 for net commercial auto liability losses and loss
adjustment expense incurred but unpaid as of December 31, 2000. The Company
established a reinsurance balance receivable and a liability for funds held
under reinsurance agreements for the reserves transferred at December 31, 2000.
Also in connection with this agreement, the Company was required to maintain
assets in a trust fund with a fair value at least equal to the funds held
liability. The trust fund was established during the third quarter of 2001 and
at December 31, 2001 the assets in the trust had a fair value of $49,553,698.
Because the Company's statutory policyholders' surplus fell below certain levels
specified in the agreement, the reinsurer had the option to direct the trustee
to transfer the assets of the trust to the reinsurer. On March 29, 2002, the
reinsurer exercised this option and the trust assets were transferred to the
reinsurer. As a result, investments and funds held under reinsurance agreements
were reduced by approximately $44,000,000. The Company recorded a realized gain
of approximately $486,000 as a result of the transfer. The reinsurer continues
to be responsible for reimbursing the Company for claim payments covered under
this agreement.

Prior to 2001, the Company has property excess per risk reinsurance that
covers property claims exceeding $100,000 up to $5,000,000 net loss each risk.
The Company has facultative reinsurance for limits written on individual risks
in excess of $5,000,000. Beginning in 2001, the Company has property excess per
risk reinsurance that covers property claims exceeding $150,000 up to $1,500,000
net loss each risk. The Company has facultative reinsurance for limits written
on individual risks in excess of $1,500,000.

For 1998 through 2001, the Company also has excess casualty clash
reinsurance for $5,000,000 in ultimate net losses on any one accident in excess
of $1,000,000 in ultimate net losses arising out of the accident. For 2002, the

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Company has excess casualty clash reinsurance for 35% of $5,000,000 in ultimate
net losses on any one accident in excess of $1,000,000 in ultimate net losses
arising out of the accident.

The Company is operating under excess casualty reinsurance agreements with
two reinsurance companies for its commercial lines business, each of which
reinsures a given percentage of ceded risks. The Company's excess reinsurance is
provided in varying amounts by these reinsurers who are rated "A+ (Superior)" or
better by Best's.

See "Rating." The following table identifies each such reinsurer and sets
forth the percentage of the coverage assumed by each of them:

For its lawyers professional liability coverages with policy effective dates
occurring during 2001 or prior, the Company has quota share reinsurance for 50%
of the first $1,000,000 of professional liability claims and excess casualty
reinsurance for 100% of professional liability claims exceeding $1,000,000 up to
$5,000,000 policy limits resulting in a maximum net claim retention per risk of
$500,000.

For its real estate agents professional liability coverages with policy
effective dates prior to August 1, 2001, the Company has quota share reinsurance
for 25% of the first $1,000,000 of professional liability claims resulting in a
maximum net claim retention per risk of $750,000. For policies with an effective
date occurring on August 1, 2001 through April 15, 2002, the Company has quota
share reinsurance for 50% of the first $1,000,000 of professional liability
claims resulting in a maximum net claim retention per risk of $500,000.

For its educators professional liability coverages with policy effective
dates occurring during 2001 or prior, the Company has quota share reinsurance
for 60% of the first $1,000,000 of professional liability claims and excess
casualty reinsurance for 100% of professional liability claims exceeding
$1,000,000 up to $5,000,000 policy limits resulting in a maximum net claim
retention per risk of $400,000.

For its directors and officers liability coverages with policy effective
dates occurring prior to 2001, the Company has quota share reinsurance for 90%
of the first $5,000,000 of professional liability claims resulting in a maximum
net claim retention per risk of $500,000. For policies with an effective date
occurring during 2001, the Company has quota share reinsurance for 85% of the
first $5,000,000 of professional liability claims resulting in a maximum net
claim retention per risk of $750,000.

For its miscellaneous professional liability coverages with policy effective
dates occurring during 2001 or prior, the Company has quota share reinsurance
for 50% of the first $1,000,000 of professional liability claims resulting in a
maximum net claim retention per risk of $500,000.

Personal Lines

The Company's personal auto business is produced by National Specialty
Lines, Inc. ("NSL") and, prior to August 1, 2001, Tri-State or written on a
direct basis through MCIC. For business produced by NSL with an effective date
of April 1, 2000 through December 31, 2000, the Company has excess of loss
reinsurance for 100% of claims in excess of $25,000 up to the $100,000 policy
limits and quota share reinsurance for 20% of the first $25,000 of claims
resulting in a maximum net claim retention per risk of $20,000. For business
produced by NSL with an effective date of January 1, 2001 through December 31,
2001, the Company has excess of loss reinsurance for 100% of claims in excess of
$25,000 up to the $100,000 policy limits and quota share reinsurance for 50% of
the first $25,000 of claims resulting in a maximum net claim retention per risk
of $12,500. Effective December 31, 2001, the Company's

8

personal lines excess of loss and quota share reinsurance treaties expired and
were not replaced as satisfactory treaties could not be arranged. Under the
terms of these treaties, the reinsurer remains liable for claims with regard to
policies in force at the date of expiration. Beginning in 2002 the Company no
longer writes nonstandard personal auto limits in excess of $25,000.

For business produced by Tri-State or written on a direct basis with MCIC
with an effective date prior to August 1, 2001, the Company has excess of loss
reinsurance for 100% of claims in excess of $25,000 up to the $100,000 policy
limits and quota share reinsurance for 50% of the first $25,000 of claims
resulting in a maximum net claim retention per risk of $12,500.

For its umbrella coverages for 1999 through 2001, the Company has excess
casualty reinsurance for 100% of umbrella claims exceeding $1,000,000 up to
$10,000,000 policy limits. For policies with an effective date occurring prior
to February 1, 2001, the Company also has quota share reinsurance for 75% of the
first $1,000,000 of umbrella claims resulting in a maximum net claim retention
per risk of $250,000. For policies with an effective date occurring on February
1, 2001 through December 31, 2001, the Company has quota share reinsurance for
77.5% of the first $1,000,000 of umbrella claims resulting in a maximum net
claim retention per risk of $225,000.

For its personal auto coverages for 1998 through 2001, the Company has
excess casualty clash reinsurance for $5,000,000 in ultimate net losses on any
one accident in excess of $1,000,000 in ultimate net losses arising out of the
accident. In 2002, the Company has excess casualty clash reinsurance for 35% of
$5,000,000 in ultimate net losses on any one accident in excess of $1,000,000 in
ultimate net losses arising out of the accident.

Commercial and Personal Lines

Certain reinsurance carried by the Company includes "extra-contractual
obligations" coverage. This coverage protects the Company against claims arising
out of certain legal liability theories not directly based on the terms and
conditions of the Company's policies of insurance. Extra-contractual obligation
claims are covered 90% under the quota share, excess casualty and excess
casualty clash reinsurance treaties up to their respective limits.

Prior to 2001, the Company carried catastrophe property reinsurance to
protect it against catastrophe occurrences for 95% of the property claims that
exceed $500,000 but do not exceed $17,500,000 for a single catastrophe. In 2001,
the Company carried catastrophe property reinsurance to protect it against
catastrophe occurrences for 95% of the property claims that exceed $1,500,000
but do not exceed $13,000,000 for a single catastrophe as well as second event
catastrophe property reinsurance for 100% of $1,000,000 excess of $500,000 on a
second catastrophic event. In 2002, the Company carried catastrophe property
reinsurance to protect it against catastrophe occurrences for property claims
that exceed $500,000 but do not exceed $7,000,000. The Company does not have
catastrophe reinsurance for business written in 2003 because of the exit from
commercial lines and because the cost for coverage for the remaining personal
lines was determined to be excessive in relation to the evaluation of risks to
be retained.

The Company has signed contracts in force for its reinsurance agreements for
all years through 2002.

MARKETING AND DISTRIBUTION

Certain coverages, such as auto liability, may only be written in some
states by companies with the authority to write insurance on an admitted basis
in such states. The Company currently is approved to write insurance on a
non-admitted basis in 47 states and the District of Columbia and on an admitted
basis in 44 states and the District of Columbia.

Commercial Lines

The Company previously marketed its commercial lines insurance products
through approximately 200 non-

9

affiliated general agency offices that were compensated on a commission basis
that varied by line of business. These general agents each represented several
insurance companies, some of which may have been competitors of the Company. The
general agents solicited business from independent local agents or brokers,
commonly referred to as retail agents, who are in direct contact with insurance
buyers.

The Company elected to utilize general agents to market its insurance
products in order to avoid the fixed costs of a branch office system. The
Company required that its general agents have a specified level of errors and
omissions insurance coverage, which indirectly protected the Company against
certain negligence on the part of general agents. The Company reviewed its
appointed agencies for financial solvency and liquidity levels.

The Company had developed underwriting manuals to be used by its general
agents. The general agents were authorized to bind the Company to provide
insurance if the risks and terms involved in the particular coverage are within
the underwriting guidelines set forth in the Company's underwriting manuals. The
manuals stipulated minimum rates to be charged for the various classes of
coverage offered.

Personal Lines

The Company markets its nonstandard personal auto insurance through over 550
non-affiliated retail agencies that are compensated on a commission basis. The
retail agents may represent several insurance companies, some of which may
compete with the Company.

The Company utilizes the retail agency market because they are in direct
contact with the insurance buyers. The Company requires that its retail agents
have a specified level of errors and omissions insurance coverage.

The Company has developed underwriting manuals to be used by its retail
agents. The retail agents are authorized to bind the Company to provide
insurance if the risks and terms involved in the particular coverage are within
the underwriting guidelines set forth in the Company's underwriting manuals.

UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES

The Company maintains reserves for the payment of claims and claim
adjustment expenses for both reported and unreported claims. Claims reserves are
estimates, at a given point in time, of amounts that the Company expects to pay
on incurred claims based on facts and circumstances then known. The amount of
claim reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of claim involved, the circumstances surrounding the
claim, and the policy provisions relating to the type of claim. The amount of
claims reserves for unreported claims and case reserve development is determined
on the basis of historical information and anticipated future conditions by
lines of insurance and actuarial review. Reserves for claim adjustment expenses
are intended to cover the ultimate costs of settling claims, including
investigation and defense of lawsuits resulting from such claims. Inflation is
implicitly reflected in the reserving process through analysis of cost trends
and review of historical reserve results.

The process of establishing claims reserves is an imprecise science and
reflects significant judgmental factors. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured claim and the settlement of the claim. Some judicial
decisions and legislative actions, even after coverage is written and reserves
are initially set, broaden liability and policy definitions and increase the
severity of claim payments. As a result of this and other societal and economic
developments, the uncertainties inherent in estimating ultimate claim costs on
the basis of past experience have increased significantly, further complicating
the already difficult claim reserving process.

Ultimate liability may be greater or lower than current reserves. Reserves
are monitored by the Company using new information on reported claims and a
variety of statistical techniques. The reserves are reviewed annually by an
outside actuarial firm. The Company does not discount to present value that
portion of its claim reserves expected to be paid in future periods. Beginning
in the third quarter of 2002 and for each quarter thereafter, the Company set
reserves equal to the selected reserve estimate as established by an outside
actuarial firm. Formerly management set reserves based upon its actuarial
analysis.

10

The following table sets forth the changes in unpaid claims and claim
adjustment expenses, net of reinsurance cessions, as shown in the Company's
consolidated financial statements for the periods indicated:

The decrease in the unpaid claims and claim adjustment expenses during 2002
is primarily attributable to the exiting of commercial lines and the orderly
run-off of the remaining commercial lines claims. For 2002 the development in
claims and claim adjustment expenses incurred was primarily the result of
unanticipated development of commercial auto claims for the 2001 and 2000
accident years and commercial general liability claims for the 2001, 2000, 1999,
1997 and 1993 accident years. For 2001 the development in claims and claim
adjustment expenses incurred was primarily the result of unanticipated
development of commercial auto and commercial general liability claims for the
2000, 1999 and 1998 accident years. At December 31, 2002 the Company believes
that the unpaid claims and claim adjustment expenses and the reinsurance
agreements currently in force are sufficient to support the future emergence of
prior year claim and claim adjustment expenses.

11

The following table sets forth, as of December 31, 2002, 2001 and 2000,
differences between the amount of net unpaid claims and claim adjustment
expenses reported in the Company's statements, prepared in accordance with
statutory accounting principles ("SAP"), and filed with the various state
insurance departments, and those reported in the consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America ("U.S. GAAP"):

In January 2000 the Company elected to take estimated salvage and
subrogation into account when determining ultimate incurred losses and unpaid
losses for financial statements prepared in accordance with SAP. The effect on
prior periods was reflected in the Company's statutory financial statements as
an adjustment to policyholders' surplus.

The following table represents the development of U.S. GAAP balance sheet
reserves for the years ended December 31, 1992 through 2002. The top line of the
table shows the reserves for unpaid claims and claim adjustment expenses for the
current and all prior years as recorded at the balance sheet date for each of
the indicated years. The reserves represent the estimated amount of claims and
claim adjustment expenses for claims arising in the current and all prior years
that are unpaid at the balance sheet date, including claims that have been
incurred but not yet reported to the Company.

The second portion of the following table shows the net cumulative amount
paid with respect to the previously recorded liability as of the end of each
succeeding year. The third portion of the table shows the reestimated amount of
the previously recorded net unpaid claims and claim adjustment expenses based on
experience as of the end of each succeeding year, including net cumulative
payments made since the end of the respective year. For example, the 1994
liability for net claims and claim adjustment expenses reestimated eight years
later (as of December 31, 2002) was $69,425,000 of which $69,180,000 has been
paid, leaving a net reserve of $245,000 for claims and claim adjustment expenses
in 1994 and prior years remaining unpaid as of December 31, 2002.

12

"Net cumulative deficiency" represents the change in the estimate from the
original balance sheet date to the date of the current estimate. For example,
the 1994 net unpaid claims and claim adjustment expenses indicates a $8,669,000
net deficiency from December 31, 1994 to December 31, 2002 (eight years later).
Conditions and trends that have affected development of liability in the past
may or may not necessarily occur in the future. Accordingly, it may or may not
be appropriate to extrapolate future redundancies or deficiencies based on this
table.

For the year ended December 31, 2002 the net cumulative deficiency reported
was $5.896 million. Excluding the effect of quota share reinsurance, the gross
cumulative deficiency amount equated to $8.187 million. Of this deficiency
amount, $7.720 million was attributable to commercial lines and $467,000 was
attributable to personal auto lines. The deficiencies principally resulted from
increased projections of ultimate claims severity due to unanticipated factual
developments and discoveries, settlement negotiations and jury verdicts during
2002. Changes in claims frequency estimated did not materially impact the net
cumulative deficiency in 2002.

Of the deficiency reported for commercial lines, $4.741 million was
attributable to commercial auto, of which $3.563 million was attributable to
adverse claim development in 2002 for claims incurred in accident year 2000.
This adverse claim development was primarily due to a 7.1% deterioration in the
projected average claim severity for that particular year (the average claims
severity increased from $14,989 per claim to $16,059 per claim), and an
additional $907,000 deficiency was attributable to adverse claim development in
2002 for claims incurred in accident year 2001, also resulting from an increase
in projected average claim severity of 4.7% for that year (the average claims
severity was increased from $17,609 per claim to $18,431 per claim).

13

Also in the commercial lines, there was a $3.656 million deficiency in
general liability. This was made up of a $6.209 million deficiency in
non-professional liability offset by favorable development of $2.553 million in
professional liability. The $6.209 million deficiency in non-professional
general liability was primarily attributable to adverse claim development in
2002 for the following accident years: $2.574 million for accident year 2001;
$1.170 million for accident year 2000; $1.023 million for accident year 1999;
$491,000 for accident year 1993; and $269,000 for accident year 1997. During the
year 2002, the Company experienced increases in projected average claim severity
for non-professional general liability for these respective accident years as
follows: 18.5% for 2001 (average claim increased from $20,966 per claim to
$24,852); 6.6% for 2000 (average claim increased from $21,000 per claim to
$22,485); 13.8% for 1999 (average claim increased from $18,969 per claim to
$21,595); 8.6% for 1993 (average claim increased from $6,381 per claim to
$6,928); and 5.3% for 1997 (average claim increased from $12,518 per claim to
$13,175). The remaining $677,000 of favorable development is related to all
other commercial lines. In February 2002, the Company announced its plan to exit
its commercial insurance business as a result of this continuing adverse claim
experience.

The $467,000 deficiency in personal auto was primarily attributable to
adverse claim development in 2002 for the following accident years: $145,000 for
accident year 1999; $601,000 for accident year 2000; offset by a $279,000
redundancy for accident year 2001. The deficiency in the 1999 and 2000 accident
years was primarily related to increases in projected average claim severity for
the bodily injury, property damage and personal injury protection coverage
lines.

The Company completes a full analysis of unpaid claims and claim
adjustment expenses on a quarterly basis for each of its coverage lines. Based
upon this analysis and the new information that became available during the
quarter, reserves are reset each quarter. The deficiencies noted above were
recognized throughout the year 2002 consistent with this quarterly analysis.

Net unpaid claims and claim adjustment expenses at December 31, 2002 were
approximately $96,469,000, which the Company believes is adequate; they are set
equal to the selected reserve estimate determined by an outside actuarial firm.
See item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.

INSURANCE RATIOS

CLAIMS, EXPENSE AND COMBINED RATIOS: Claims and expense ratios are
traditionally used to interpret the underwriting experience of property and
casualty insurance companies.

Statutory Accounting Principles (SAP) Basis - Claims and claim adjustment
expenses are stated as a percentage of premiums earned because claims may occur
over the life of a particular insurance policy. Underwriting expenses on a SAP
basis are stated as a percentage of net premiums written rather than premiums
earned because most underwriting expenses are incurred when policies are written
and are not spread over the policy period. Underwriting profit margin is
achieved when the combined ratio is less than 100%.

The Company's claims, expense and combined ratios and the property and
casualty industry's claims, expense and combined ratios, both on a SAP basis,
are shown in the following table:

(1) The Company ratios for 2001 have been adjusted to reflect the $3,000,000
in reserves recorded subsequent to the issuance of the SAP financial
statements.

(2) The property and casualty industry as a whole, not companies with
comparable lines of coverage, was used in the calculation of these
ratios. The Insurance Services Office is the source for 2002 (estimated)
and 2001. Best's is the source for 2000, 1999 and 1998.

The unfavorable variance to the industry for 2002 with regard to the claims
ratio is primarily the result of unanticipated development of commercial auto
claims for the 2000 accident year and commercial general liability claims for
the 2001, 2000 and 1999 accident years. The unfavorable variance to the industry
in 2002 for the expense ratio is primarily related to the exiting of commercial
lines and the expense reductions lagging the decline in premium writings.

14

The unfavorable variance to the industry for 2001 with regard to the claims
ratio is primarily the result of unanticipated development of commercial auto
and commercial general liability claims for the 2000, 1999 and 1998 accident
years. For 2001 the unfavorable expense ratio in relation to the industry
expense ratio is primarily the result of decreases in premiums written due to
the commercial quota share reinsurance agreements and the decision to cease
writing commercial trucking business. The unfavorable variance to the industry
for 2000 with regard to the claims ratio is primarily the result of
unanticipated development of commercial auto claims for the 1999, 1997 and 1996
accident years. The favorable variance to the industry for 1999 with regard to
the claims ratio is primarily the result of writing shorter duration business
than the industry as a whole. The unfavorable variance to the industry with
regard to the claims ratio in 1998 is largely related to unanticipated
unfavorable claim development recorded in 1998 on the 1997, 1996 and 1995
accident years for the commercial auto liability line. For 1998, the increase in
the unfavorable variance to the industry with regard to the expense ratio is
largely because of downward adjustments in reinsurance commission income as a
result of the unanticipated unfavorable claim development in 1998. For 1999 and
prior years, the unfavorable variance to the industry with regard to the expense
ratios is a function of the specific lines that the Company writes.

The Company ratios in the table above relate only to insurance operations.
GNAC as a holding company provides administrative and financial services for its
wholly owned subsidiaries. The allocation of GNAC's expenses solely to its
insurance companies would have an impact on their results of operations and
would also affect the ratios presented. As such, expenses related to GNAC's
strategic alternatives review process conducted in 1999 and 1998 are not
included in these ratios.

Accounting Principles Generally Accepted in the United States of America
(U.S. GAAP) Basis - Claims and claim adjustment expenses are stated as a
percentage of premiums earned as they are on a SAP basis. However, earned
premiums include policy fees earned net of the related commission expense
whereas on a SAP basis policy fees earned are recorded gross of the related
commission expense. The U.S. GAAP expense ratio is based on premiums earned and
includes the change in policy acquisition costs and underwriting expenses. Other
differences include the treatment of the allowance for doubtful accounts.

The following table presents the Company's claims, expense and combined
ratios on a U.S. GAAP basis:

The Company ratios in the table above relate only to insurance operations.
The holding company provides administrative and financial services for its
wholly owned subsidiaries. The allocation of the holding company's expenses
solely to its insurance companies would have an impact on their results of
operations and would also affect the ratios presented.

15

PREMIUM TO SURPLUS RATIO: The following table shows, for the periods
indicated, the Company's statutory ratios of statutory net premiums written to
statutory policyholders' surplus. While there is no statutory requirement which
establishes a permissible net premiums written to surplus ratio, guidelines
established by the National Association of Insurance Commissioners ("NAIC")
provide that this ratio should not be greater than 3 to 1.

(1) Policyholders' surplus for 2001 has been adjusted to reflect the
reserves recorded subsequent to the issuance of the SAP financial
statements.

INVESTMENT PORTFOLIO HISTORICAL RESULTS AND COMPOSITION

The following table sets forth, for the periods indicated, the Company's
investment results before income tax effects:

- ----------

(1) Average investments is the average of beginning and ending investments
at amortized cost, computed on an annual basis.

(2) Includes taxable and tax-exempt securities.

(3) Includes net unrealized gains (losses) for total investments.

16

The following table sets forth the composition of the investment portfolio
of the Company.

At December 31, 2002 the Standard & Poor's ratings on the Company's bonds
available for sale were in the following categories: 45% AAA, 4% AA, 15% A, 23%
BBB, 5% BB and 8% B. No securities were rated below B. The Company does not have
any securities for which a fair value cannot be obtained by reference to public
markets.

The maturity distribution of the Company's investments in fixed maturities is as
follows:

As of December 31, 2000, the Company did not have any non-performing fixed
maturity securities. In 2001 the Company recognized an other than temporary
impairment on a non-rated security by recording a charge to earnings of
$489,554, net of deferred income taxes of $252,195 (see Note (1c) of Notes to
Consolidated Financial Statements). In March 2002, the Company reduced the
carrying value of this non-rated security to $0 resulting in a write down of
approximately $2,010,000 as a result of a significant increase in the default
rate in January and February of 2002 in the underlying collateral, which has
disrupted the cash flow stream sufficiently to virtually eliminate future cash
flows (see Note 1(c) of Notes to Consolidated Financial Statements).

17

INVESTMENT STRATEGY

Commencing with the closing of the 1999 GMSP Transaction on October 4, 1999,
the investment portfolios of GNAC and its insurance company subsidiaries are
managed by GMSP pursuant to its Investment Management Agreements with the
respective companies. The investment policies are subject to the oversight and
direction of the Investment Committees of the Boards of Directors of the
respective companies. The respective Investment Committees consist entirely of
directors not affiliated with GMSP.

The investment policies of the insurance subsidiaries, which are also
subject to the respective insurance company legal investment laws of the states
in which they are organized, are to maximize after-tax yield while maintaining
safety of capital together with adequate liquidity for insurance operations. See
"Item 7A. Quantitative and Qualitative Disclosures About Market Risk." The
insurance company portfolios may also be invested in equity securities within
limits prescribed by applicable legal investment laws.

RATING

Best's has assigned the Company a pooled rating of "B-" (Fair), with a
stable outlook. Best's ratings are based on an analysis of the financial
condition and operation of an insurance company as they relate to the industry
in general.

GOVERNMENT REGULATION

The Company's insurance companies are subject to varied governmental
regulation in the states in which they conduct business. Such regulation is
vested in state agencies having broad administrative power dealing with all
aspects of the Company's business and is concerned primarily with the protection
of policyholders rather than shareholders. The Company's statutory capital
exceeds the benchmark capital level under the Risk Based Capital formula for
its insurance companies that are subject to Risk Based Capital requirements.

The Company is also subject to statutes governing insurance holding company
systems in the states of Oklahoma and Texas. These statutes require the Company
to file periodic information with the state regulatory authorities, including
information concerning its capital structure, ownership, financial condition and
general business operation. These statutes also limit certain transactions
between the Company and its insurance companies, including the amount of
dividends that may be declared and paid by the insurance companies (see Note (7)
of Notes to Consolidated Financial Statements). Additionally, the Oklahoma and
Texas statutes restrict the ability of any one person to acquire 10% or more of
the Company's voting securities without prior regulatory approval.

COMPETITION

The property and casualty insurance industry is highly competitive. The
Company underwrites lines of insurance on risks not generally insured by many of
the large standard property and casualty insurers, although such companies have
been competing in this market more frequently in recent years. However, few
barriers exist to prevent property and casualty insurance companies from
entering into the Company's segments of the industry. To the extent this occurs,
the Company can be at a competitive disadvantage because many of these companies
have substantially greater financial and other resources and can offer a broader
variety of specialty risk coverages.

EMPLOYEES

As of December 31, 2002, the Company employed 136 persons, of whom 12 were
officers, 121 were staff and administrative personnel, and 3 were part-time
employees. The Company is not a party to any collective bargaining agreement.

18

EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning the executive officers of the Company as of March 28,
2003 is set forth below:

Glenn W. Anderson has served as President, Chief Executive Officer and
Director of the Company since April 1998. From 1996 to April 1998, Mr. Anderson
served as Executive Vice President of USF&G. From 1993 to 1996, Mr. Anderson
held the position of Senior Vice President with USF&G. Mr. Anderson has been
engaged in the property and casualty insurance business since 1975.

Richard M. Buxton has served as Vice President of the Company since December
of 1996. In 1999, Mr. Buxton was promoted to Senior Vice President.

Daniel J. Coots has served as Vice President and Chief Financial Officer of
the Company since 1987. In 1991 Mr. Coots was promoted to Senior Vice President.
Mr. Coots has been engaged in the property and casualty insurance business since
1983.

Michael S. Johnston joined the Company in October 1998 when the Company
acquired Lalande Group and since that time has served as Vice President of
National Specialty Lines, Inc., a subsidiary of the Company. Mr. Johnston was
promoted to President in March 2003. Mr. Johnston has been engaged in the
property and casualty insurance business since 1993.

Carolyn E. Ray has served as Senior Vice President of the Company since
1998. From 1986 to 1998, Ms. Ray served as Vice President of the Company. From
1984 to 1985, Ms. Ray served as Assistant Vice President of the Company. Ms. Ray
has been engaged in the property and casualty business since 1976.

Marcia L. Buehler has served as Vice President and Controller of the Company
since July 2002. Ms. Buehler has been engaged in the property and casualty
insurance business since 1989.

Betty J. Graham has served as Vice President of the Company since March
2003. From January 1997 to March 2003 Ms. Graham served as Second Vice
President. Ms. Graham has been engaged in the property and casualty insurance
business since 1978.

19

Jackiben N. Wisdom has served as Vice President of the Company since January
2002. Mr. Wisdom has been engaged in the property and casualty insurance
business since 1970.

Sam Rosen has served as the Secretary and a Director of the Company since
1983. Mr. Rosen is a partner with the law firm of Shannon, Gracey, Ratliff &
Miller, L.L.P. He has been a partner in that firm or its predecessors since
1966. That firm, or its predecessors, has provided significant legal services
for the Company since 1979.

ITEM 2. PROPERTIES

The Company owns a 3.28 acre tract of land in Fort Worth, Texas and all
improvements located thereon, including two office buildings with approximately
12,500 square feet of combined space. The Company currently has this property
available for sale or lease.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of its operations, the Company has been named as
defendant in various legal actions seeking payments for claims denied by the
Company and other monetary damages. In the opinion of the Company's management
the ultimate liability, if any, resulting from the disposition of these claims
will not have a material adverse effect on the Company's consolidated financial
position or results of operations. The Company's management believes that unpaid
claims and claim adjustment expenses are adequate to cover liabilities from
claims that arise in the normal course of its insurance business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

20

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

The Company's Common Stock is listed on the OTC Bulletin Board (Symbol:
GNAC). The following table sets forth for the fiscal periods indicated the high
and low closing sales prices per share of the Common Stock as reported by the
NYSE for the period first quarter 2000 to April 14, 2002 and reported by the OTC
Bulletin Board for the period April 15, 2002 through the fourth quarter of 2002.
The prices reported reflect actual sales transactions.

Cash dividends of $.0175 per share were paid to shareholders of record on
March 31, June 30, September 30 and December 31, 2000. In February 2001, the
Company discontinued quarterly dividends on the Common Stock.

As of February 28, 2003, there were 249 shareholders of record of the
Company's Common Stock.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented in the following tables
for, and as of the end of each of the years ended December 31, have been derived
from the consolidated financial statements of the Company which have been
audited by KPMG LLP, independent certified public accountants. The consolidated
balance sheets as of December 31, 2002 and 2001, and the consolidated statements
of operations, shareholders' equity and comprehensive loss and cash flows for
each of the years in the three-year period ended December 31, 2002, and the
independent auditors report thereon are included elsewhere in this document. The
information presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
consolidated financial statements and the notes thereto, and the other financial
information included herein.

21

(1) Excludes premiums of $1,727,000 in 2002, $16,627,000 in 2001,
$26,973,000 in 2000, $58,137,000 in 1999, and $47,588,000 in 1998 from
the Company's fronting arrangements, the commercial automobile plans of
Arkansas, California, Louisiana, Mississippi, and Pennsylvania under
which the Company was a servicing carrier and the reinsurance
arrangement in Florida whereby MGAI premiums are ceded to a
non-affiliated reinsurer and assumed by General Agents.

(2) Includes after tax net realized gains (losses) from securities
transactions of $1,352,000, $2,822,000, $(1,258,000), $400,000, and
$457,000 for 2002, 2001, 2000, 1999, and 1998, respectively.

(3) Based on shares of Common Stock outstanding of 28,703,069, 28,703,069,
27,369,736, 27,119,833 and 20,896,563 at the end of 2002, 2001, 2000,
1999 and 1998, respectively. Common Stock outstanding at December 31,
2002, 2001, 2000 and 1999 assumes conversion of the Series A Preferred
stock that was issued in the 1999 GMSP transaction. Common Stock
outstanding at December 31, 2002 and 2001 assumes conversion of the
Series B Preferred Stock that was issued in the transactions with Robert
W. Stallings in 2001. See Note (7) of Notes to Consolidated Financial
Statements.

(4) Based on 21,169,736 shares of Common Stock outstanding at the end of
2002, 2001 and 2000 and 20,919,833 shares at the end of 1999. See Note
(7) of Consolidated Financial Statements.

23

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company's financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP"). The preparation of these
financial statements 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.
Actual results could differ from those estimates under different assumptions or
conditions.

Critical accounting policies are defined as those that are reflective of
significant judgements and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company's
critical accounting policies are described below. For a detailed discussion on
the application of these and other accounting policies see Note (1) of the Notes
to Consolidated Financial Statements.

Investments

Bonds available for sale and other investments are stated at fair value with
changes in fair value recorded as a component of comprehensive income.
Short-term investments are stated at cost. The "specific identification" method
is used to determine costs of investments sold. Provisions for possible losses
are recorded only when the values have experienced impairment considered "other
than temporary" by a charge to realized losses resulting in a new cost basis of
the investment. The Company's policy is to review investments on a regular basis
to evaluate whether or not each investment has experienced an "other than
temporary" impairment.

Deferred Policy Acquisition Costs and Deferred Ceding Commission Income

Policy acquisition costs, principally commissions, premium taxes and certain
marketing and underwriting expenses, are deferred and charged to operations over
periods in which the related premiums are earned. Ceding commission income,
which is realized on a written basis, is deferred and recognized over periods in
which the related premiums are earned. Deferred ceding commission income is
netted against deferred policy acquisition costs. The change in the resulting
deferred asset is charged (credited) to operations. The Company utilizes
investment income when assessing recoverability of deferred policy acquisition
costs. Estimates of recoverability are based upon assumptions as to loss ratios,
investment income and maintenance expenses.

Goodwill

Goodwill represents the excess of purchase price over fair value of net
assets acquired. The Company periodically reviews the recoverability of goodwill
based on an assessment of undiscounted cash flows of future operations to ensure
it is appropriately valued. The recoverability of goodwill is evaluated on a
separate basis for each acquisition.

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("Statement 141") and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("Statement 142"). Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Statement 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated

24

residual values, and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement
121").

The Company adopted the provisions of Statement 141 effective July 1, 2001
and Statement 142 effective January 1, 2002. The adoption of Statement 141 had
no impact on the consolidated financial statements. The adoption of Statement
142 will result in the Company no longer amortizing the remaining goodwill.

The remaining $609,000 of goodwill is associated with the 1998 acquisition
of the Lalande Group and reflects a value no less than the estimated fair
valuation levels of combined agency and claims handling operations of this type
in the personal automobile marketplace.

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses, less related reinsurance, are provided
for as claims are incurred. The provision for unpaid claims and claim adjustment
expenses includes: (1) the accumulation of individual case estimates for claims
and claim adjustment expenses reported prior to the close of the accounting
period; (2) estimates for unreported claims based on past experience modified
for current trends; and (3) estimates of expenses for investigating and
adjusting claims based on past experience.

Liabilities for unpaid claims and claim adjustment expenses are based on
estimates of the ultimate cost of settlement. Changes in claim estimates
resulting from the review process and differences between estimates and ultimate
payments are reflected in expense for the year in which the revision of these
estimates first become known.

The process of establishing claim reserves is an imprecise science and
reflects significant judgmental factors. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured claim and the settlement of the claim. Some judicial
decisions and legislative actions, even after coverage is written and reserves
are initially set, broaden liability and policy definitions and increase the
severity of claim payments. As a result of this and other societal and economic
developments, the uncertainties inherent in estimating ultimate claim costs on
the basis of past experience have increased significantly, further complicating
the already difficult claim reserving process.

Ultimate liability may be greater or lower than current reserves. Reserves
are monitored by the Company using new information on reported claims and a
variety of statistical techniques. The reserves are reviewed annually by an
outside actuarial firm. The Company does not discount to present value that
portion of its claim reserves expected to be paid in future periods. Beginning
in the third quarter of 2002 and for each quarter thereafter, the Company set
reserves equal to the selected reserve estimate as established by an
outside actuarial firm. Formerly management set reserves based upon its
actuarial analysis.

Income Taxes

The Company and its subsidiaries file a consolidated Federal income tax
return. Deferred income tax items are accounted for under the "asset and
liability" method which provides for temporary differences between the reporting
of earnings for financial statement purposes and for tax purposes, primarily
deferred policy acquisition costs, the discount on unpaid claims and claim
adjustment expenses, net operating loss carry forwards and the nondeductible
portion of the change in unearned premiums.

In assessing the realization of its deferred tax assets, management
considers whether it is more likely than not that a portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Based upon
management's consideration of expected reversal of deferred tax liabilities and
projected future taxable income, management believes it is more likely than not
that the Company will not realize the benefits of these deferred tax assets in
the near future.

25

ACCOUNTING PRONOUNCEMENTS

In March 2003, the Financial Accounting Standards Board announced it expects
to issue the proposed limited-scope statement "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", in the second
quarter of 2003. This statement would require redeemable preferred stock to be
classified as a liability and any related accretion of discount and accrued
dividends to be charged to the results of operations. If this statement is
adopted as proposed, the Company would record all series of preferred stock as
liabilities and would record the related accretion of discount and accrued
dividends as charges to Results of Operations. For 2002 the accretion of
discount on redeemable preferred stock was $2,657,000 and the dividends accrued
were $670,774. Under this proposed statement these amounts would be recorded as
charges to Results of Operations, and we anticipate an increase in the deferred
tax valuation allowance equal to the related deferred tax benefit.

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

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for 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 methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to these consolidated financial
statements.

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

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("Statement 146"). The provisions of Statement 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption of
Statement 146 is not expected to have a material effect on the Company's
consolidated financial position or result of operations.

In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
("Statement 144"), establishing financial accounting and reporting for the
impairment or disposal of long-lived assets. Statement 144 is effective for
fiscal years beginning after December 15, 2001. Pursuant to Statement 144 the
discontinuance of commercial lines was not reported as discontinued operations.
The Company believes that the adoption of Statement 144 will have no other
effect on the Company's financial position or results of operation.

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("Statement 133"), as amended. Statement 133 establishes accounting
and reporting standards for derivative instruments and requires that an entity
recognize all derivatives as either assets or liabilities in the financial
statements and measure those instruments at fair value with changes in fair
value recorded through the income statement. The adoption of Statement 133 had
no impact on the consolidated financial statements.

26

BUSINESS OPERATIONS

In 2002 the Company recorded a net loss of $8,761,087, or $0.57 per share
(basic), primarily due to unfavorable claims experience and goodwill impairment.
The Company continues to proceed in an orderly fashion with its exit from
commercial lines. The loss of $75,607,047, or $3.68 per share (basic) recorded
in 2001 was primarily a result of unfavorable claims experience, goodwill
impairment and a valuation allowance for deferred Federal income taxes. On
February 7, 2002, the Company announced its plans to discontinue writing
commercial lines insurance due to continued adverse claims development and
unprofitable results. In 2000 the Company recorded a net loss of $19,551,365, or
$.97 per share (basic), primarily as a result of significant unfavorable claims
experience in the commercial auto liability line of business. The Company
materially increased the ultimate estimated liabilities for the line and entered
into a reinsurance agreement, effective December 31, 2000, that provides
significant additional protection in the event of further adverse reserve
development. Additionally, the Company has reinsured the run-off of this
business in 2001. The Company recorded U.S. GAAP combined ratios of 125.9% in
2002, 172.6% in 2001 and 126.3% in 2000.

Discontinuance of Commercial Lines and Redeployment of Capital

Discontinuance of Commercial Lines. On February 7, 2002, the Company
announced its decision to cease writing its primary line of business, commercial
insurance, due to continued adverse claims development and unprofitable results.
The Company notified all of its commercial lines agents of its intent to cancel
their agency contracts and notified all states, where required by statute, of
its intent to cease writing commercial lines of insurance in their state. The
discontinuance of writing commercial lines will likely result in the Company
ceasing to be approved to write insurance in a number of states.

By December 31, 2002, the Company had non-renewed 86% of its in-force
policies. The remaining 14% are scheduled to be non-renewed in the first half of
2003 as the applicable policies expire. Concurrently, the Company continued to
settle and reduce its inventory of commercial lines claims. At year-end 2002,
there were 1,062 claims associated with our overall runoff book outstanding,
compared to 1,720 a year earlier. As a result, approximately $68.5 million of
unprofitable commercial business premium is being eliminated over the course of
2002 and 2003, with continuing reductions in the cost structure of the Company.
Due to the long tail nature of these claims, the Company anticipates it will
take a substantial number of years to complete an orderly adjustment and
settlement process with regard to existing claims and any additional claims it
receives in the future from its past business writings. The Company's commercial
lines business segment produced approximately $11,992,000 in gross premiums
written in 2002. In the course of reducing its employee count, in the first
quarter of 2003 the Company outsourced certain of its information technology
operations related to the run-off of its commercial lines to an unaffiliated
third party provider with which Richard A. Laabs, a former senior executive of
the Company, and three other former employees of the Company are affiliated.

On August 12, 2002, the Company announced its decision to put itself in a
position to exit its remaining active insurance business, personal auto, in as
orderly and productive a fashion as possible. In June 2002, the Company entered
into a letter of intent to sell its Miami, Florida based operation, the Lalande
Group, to an unaffiliated party. In September 2002 negotiations in respect of
the possible transaction were terminated. In conjunction with this process, the
Company evaluated the related goodwill and recorded an impairment of
approximately $2.9 million during the second quarter 2002. The remaining
goodwill as of December 31, 2002 is $609,000 and is related to the 1998
acquisition of the Lalande Group. Operationally, the Company implemented rate
increases and other measures to enhance the profit potential of this business in
2003 and its future strategic direction, which could include the expansion,
contraction or disposition of the business.

The Company anticipates a lengthy period of transition as it lessens its
exposure to the insurance industry. During the transition process, the Company
may consider the sale of additional subsidiaries associated with that business.
The Company intends to redeploy capital no longer required by its insurance
business, once it becomes available, to pursue other opportunities in the future
that offer a better prospect for profitability. The Company believes that
suitable capital redeployment opportunities should be available after the
capital no longer required by its insurance business becomes available, but
cannot predict the amount of capital that will ultimately be available for
redeployment, the

27

timing or the nature of the opportunities that may be available at the time
capital becomes available. The opportunities may be outside of the insurance
business and could be in the financial services business.

Sale of GAINSCO County Mutual

On December 2, 2002, the Company completed the sale and transfer of the
management contract controlling GAINSCO County Mutual Insurance Company ("GCM")
to an affiliate of Liberty Mutual Insurance Company ("Liberty"), for a purchase
price of up to $10 million, of which $1 million was paid at closing and the
balance is payable in contingent payments through September 2009. The $9 million
total of future payments would be payable $3 million in September 2003 and $1
million each year thereafter through September 2009. Each payment is contingent
on there being no material adverse change in the regulatory treatment of GCM
specifically, or county mutuals generally, from legislative or regulatory
administrative actions prior to the applicable payment date. Legislation has
been introduced in the current session of the Texas Legislature ending June 2,
2003 which, depending upon whether or in what form it is ultimately adopted,
could prejudice the rights of the Company to receive some or all of the future
payments from Liberty. Following the closing, the surplus of GCM, which was
approximately $3,182,000, remained as a part of the combined statutory
policyholders' surplus of the Company. Pursuant to a 100% quota share
reinsurance agreement (the "General Agents Reinsurance Agreement") entered into
at closing among GCM and GAINSCO's subsidiaries, General Agents Insurance
Company of America, Inc. ("General Agents") and MGA Agency, Inc., and certain
other arrangements, the Company retained all assets and liabilities associated
with GCM's past, present and runoff commercial insurance business. The Company
made a number of representations, warranties and covenants in the acquisition
agreement and generally indemnifies Liberty for any losses incurred resulting
from (i) breaches of representations, warranties or covenants of the Company;
(ii) employee benefit plan obligations of GCM relating to pre-closing periods;
(iii) tax obligations of GCM relating to pre-closing periods; (iv) all
liabilities of GCM, to the extent that they result from conditions or
circumstances arising or events occurring before the Closing, subject to certain
exceptions; (v) all insurance claims, liabilities and obligations of GCM that
are not reinsured pursuant to the General Agents Reinsurance Agreement or
certain insurance fronting programs between GCM and Metropolitan Property &
Casualty Insurance Company and Omni Insurance Company, respectively; and (vi)
any and all insurance claims, liabilities and obligations of General Agents
under the General Agents Reinsurance Agreement. GCM did not have any employees
or employee benefit plans. The Company made a $500,000 prepayment of outstanding
bank debt from the closing proceeds of the transaction.

Sale of Office Building; New Office Leases

The Company sold the office building at 500 Commerce Street in Fort Worth,
Texas, where the Company's principal executive offices and commercial insurance
operations were located, to an unaffiliated third party for $5 million on August
30, 2002. The Company recorded a gain of $455,056 from this transaction. As a
result, the Company leased new office space to house its principal executive
offices and commercial insurance operations.

In August 2002, the Company entered into an office lease for approximately
8,352 square feet of space in Fountain Place, 1445 Ross Avenue, Suite 5300,
Dallas, Texas, to house the Company's executive offices. This address is the
Company's new registered address. The lease is for a term of four years,
although the Company has the right to terminate the lease at its option at the
end of 2005 upon payment of a termination fee of approximately $29,000. The
annual rental expense is approximately $175,500. The lessor is Crescent Real
Estate Funding X, L.P., an affiliate of Crescent Real Estate Equities Company, a
Texas real estate investment trust f/k/a Crescent Real Estate Equities, Inc.
("Crescent"). Robert W. Stallings, GAINSCO's Chairman of the Board, became a
member of the Board of Trust Managers of Crescent in May 2002, and John C. Goff,
a member of GAINSCO's board of directors (the "Board"), is the Chief Executive
Officer and Vice Chairman of the Board of Trust Managers of Crescent. Mr. Goff
is deemed to be the beneficial owner of 3,630,248 common shares of Crescent,
comprising 3.4% of the beneficial ownership of such shares. Mr. Stallings is
deemed to be the beneficial owner of 22,000 common shares of Crescent,
comprising less than 1% of the beneficial ownership of such shares. The
management of the Company believes that the terms of the Company's lease with
Crescent are no less favorable to GAINSCO than those offered to other tenants by
Crescent or than GAINSCO could obtain for comparable space from unaffiliated
parties.

28

In July 2002 the Company also entered an office lease with an unaffiliated
third party for 10,577 square feet of space at 5400 Airport Freeway, Suite A,
Fort Worth, Texas, to house the Company's commercial insurance operations. The
lease is for a term of five years, although the Company may terminate the lease
at its option after the expiration of three years. The annual base rental
expense is $105,770.

Executive Severance Agreements

Because of their importance to the Company, in August 2002 the Company
entered into executive severance agreements with two senior executives, Richard
M. Buxton and Daniel J. Coots. The agreements generally provide that the Company
shall pay the executive, upon termination of the employment of the executive by
the Company without cause or by the executive with good reason during the term
of the agreement, a lump sum severance amount equal to the base annual salary of
the executive as of the date that the executive's employment with the Company
ends. The current base annual salaries of Mssrs. Buxton and Coots are $170,000
and $155,000, respectively. The executive severance agreements do not supersede
the change in control agreements or any other severance agreements the employees
may have with the Company. Richard A. Laabs, a former senior executive of the
Company, also entered into an executive severance agreement with the Company in
August 2002, but did not receive any severance payments pursuant to such
agreement when he resigned his employment with the Company in January 2003.

Retention Incentive Agreements

The Company entered into retention incentive agreements with sixteen of its
employees, three of whom are officers of the Company. Each of the retention
incentive agreements generally requires that the Company pay the applicable
employee an amount based upon the employee's annual base salary, less amounts
owed by the Company to the employee pursuant to any change in control or
severance agreements the employee may have with the Company. The Company's
obligation to make payments under each retention incentive agreement is
conditioned upon the employee remaining in the employ of the Company through a
specified date, unless terminated earlier by the Company without cause or by the
employee with good reason. The Company could be obligated to make up to an
aggregate of approximately $793,000 in payments under the retention incentive
agreements. Other than Jackiben N. Wisdom (who was not one of the five most
highly compensated employees of the Company at the time he entered into his
retention incentive agreement), none of the five most highly compensated
employees of the Company are parties to the retention incentive agreements.

Separation Agreement

In December 2002, McRae B. Johnston, the President - Personal Lines Division
of the Company, resigned his employment with the Company and each of its
subsidiaries other than MGA Insurance Company, Inc. ("MGAI"), where Mr. Johnston
remained employed until March 1, 2003. The Company and Mr. Johnston entered into
separation agreements and releases (the "Release Agreements") pursuant to which
the Company and Mr. Johnston each mutually released the other from obligations
under the stock purchase agreement and employment contract between the Company
and Mr. Johnston and generally from any and all other claims that each otherwise
may have had against the other. The Company paid Mr. Johnston an aggregate of
$400,000 pursuant to the Release Agreements. Mr. Johnston also entered into a
one-year Consulting Agreement with MGAI effective after the conclusion of his
employment with MGAI on March 1, 2003 pursuant to which MGAI will pay Mr.
Johnston an aggregate of $200,000 to be made in four equal payments of $50,000
each in March, June, September and December of 2003.

Tri-State Acquisition and Sale

On January 7, 2000, the Company expanded its personal lines business
conducted through the Lalande Group through the acquisition of Tri-State, Ltd.
("Tri-State"), an insurance operation specializing in underwriting, servicing
and claims handling of nonstandard personal auto insurance in Minnesota, North
Dakota and South Dakota. Tri-State owned and operated a managing general agency,
a motor vehicle driving records service company and an insurance subsidiary,
Midwest Casualty Insurance Company ("MCIC") that had policyholders' surplus of
approximately $3,034,000. The purchase price consideration consisted of
$6,000,000 in cash at closing plus additional cash payments of $1,200,000 and
$1,600,000 paid in July 2000 and January 2001, respectively. On August 31, 2001,
the Company sold all of the stock of Tri-State to Herbert A. Hill for a cash
price of $935,000. Mr. Hill is the President and a former owner of Tri-State.
The Company retained MCIC, which had policyholders' surplus of approximately

29

$2,965,000 at December 31, 2002 and $3,078,000 at December 31, 2001. MCIC is to
be liquidated on March 31, 2003 and all of its assets, liabilities and equity
are to be transferred to General Agents.

Transactions with Goff Moore Strategic Partners, L.P.

1999 GMSP Transaction. On October 4, 1999, the Company sold to Goff Moore
Strategic Partners, L.P. ("GMSP"), for an aggregate purchase price of
$31,620,000, (i) 31,620 shares of Series A Preferred Stock, which are
convertible into 6,200,000 shares of Common Stock at a conversion price of $5.10
per share (subject to adjustment for certain events), (ii) the Series A Warrant
to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise
price of $6.375 per share and expiring October 4, 2004 and (iii) the Series B
Warrant to purchase an aggregate of 1,550,000 shares of Common Stock at an
exercise of $8.50 per share and expiring October 4, 2006. At closing the Company
and its insurance company subsidiaries entered into Investment Management
Agreements with GMSP, pursuant to which GMSP manages their respective investment
portfolios. Completion of these transactions (the "1999 GMSP Transaction")
concluded the strategic alternatives review process that the Company initiated
in 1998. Proceeds from the 1999 GMSP Transaction were available for
acquisitions, investments and other corporate purposes.

2001 GMSP Transaction. On March 23, 2001, the Company consummated a
transaction with GMSP (the "2001 GMSP Transaction") pursuant to which, among
other things, the Company issued shares of its newly created Series C Preferred
Stock to GMSP in exchange for an aggregate purchase price of $3.0 million in
cash.

The annual dividend rate on the Series C Preferred Stock is 10% until March
23, 2004 and 20% thereafter. Unpaid dividends are cumulative and compounded. The
Series C Preferred Stock is redeemable at the Company's option after March 23,
2006 and at the option of the majority holders after March 23, 2007 at a price
of $1,000 per share plus accrued and unpaid dividends. The Series C Preferred
Stock is not convertible into Common Stock.

The agreement with GMSP in connection with the 2001 GMSP Transaction was
conditioned upon the following changes in the securities currently held by GMSP.
The exercise prices of the Series A Warrant and the Series B Warrant held by
GMSP were amended to $2.25 per share and $2.5875 per share, respectively. Each
of these warrants provides for the purchase of 1,550,000 million shares of
Common Stock, subject to adjustment. Further, the Company is required to redeem
the outstanding shares of its Series A Preferred Stock on January 1, 2006,
subject to certain conditions, at a price of $1,000 per share plus accrued and
unpaid dividends. Any Series A Preferred Stock unredeemed for any reason after
that date would accrue interest, payable quarterly at a rate equal to eight
percent per year with any unpaid interest compounded annually. The Series A
Preferred Stock is convertible into 6,200,000 shares of Common Stock at a
conversion price of $5.10 per share and, should the Company pay dividends on its
Common Stock, the Series A Preferred Stock would be entitled to dividends as if
converted into Common Stock.

The agreement with GMSP provided an opportunity to convert the Company's
illiquid investments with a cost of $4.2 million to cash as of November 2002, as
follows: the Company could at its option require GMSP to purchase the illiquid
investments for $2.1 million, less any future cash received prior to November
2002 from the investments. GMSP could at its option require the Company to sell
the illiquid investments to GMSP for $4.2 million, less any future cash received
prior to November 2002 from the investments. During the second quarter of 2001,
the Company recognized a permanent impairment of these investments and wrote
down the carrying value to the amount recoverable from GMSP under the put
option. In February 2002, GMSP consented to the early exercise of the Company's
option, and the Company exercised its option to require GMSP purchase the
illiquid investments for approximately $2.1 million.

30

2002 Amendment to Investment Management Agreements. In August 2002, the
Company entered into an amendment to its Investment Management Agreements with
GMSP. See "Transactions with Goff Moore Strategic Partners, L.P. - 1999 GMSP
Transaction." The amendment reduces, effective as of October 1, 2002, the
minimum aggregate monthly payment owed by the Company to GMSP from $75,000 to
$63,195 (with respect to each calendar month from October 2002 through September
2003), $53,750 (with respect to each calendar month from October 2003 through
September 2004), and $45,417 (with respect to each calendar month after
September 2004). The amendment also changes the date upon which either party to
each of the investment management agreements can terminate such agreements at
its sole option from October 4, 2002 to September 30, 2005.

Transactions with Robert W. Stallings

On March 23, 2001, the Company consummated a transaction with Mr. Stallings
(the "Stallings Transaction") pursuant to which, among other things, the Company
issued shares of its newly created Series B Preferred Stock and a warrant to
purchase an aggregate of 1,050,000 shares of Common Stock at $2.25 per share and
expiring March 23, 2006 in exchange for an aggregate purchase price of $3
million in cash. The annual dividend provisions and the redemption provisions of
the Series B Preferred Stock are the same as those for the Series C Preferred
Stock. The Series B Preferred Stock is convertible into Common Stock at $2.25
per share. Subject to adjustment for certain events, the Series B Preferred
Stock is convertible into a maximum of 1,333,333 shares of Common Stock. Mr.
Stallings also entered into a Consulting Agreement pursuant to which he provides
consulting services (including strategic planning advice, analysis of the
subsidiaries' performance in various sectors of their respective business and
recommendations for growth strategies and opportunities for new markets and
products) to the Company's insurance subsidiaries for a period of five (5) years
ending on March 22, 2006 for $300,000 per annum. Mr. Stallings was elected
non-executive Vice Chairman of the Board and a director of the Company, and on
September 6, 2001, he was elected non-executive Chairman of the Board.

Reinsurance Transaction

Effective December 31, 2000, the Company entered into a quota share
reinsurance agreement whereby the Company ceded 100% of its commercial auto
liability unearned premiums and 50% of all other commercial business unearned
premiums at December 31, 2000 to a non-affiliated reinsurer. For policies with
an effective date of January 1, 2001 through December 31, 2001, the Company
entered into a quota share reinsurance agreement whereby the Company ceded 20%
of its commercial business to a non-affiliated reinsurer. Also effective
December 31, 2000, the Company entered into a reserve reinsurance cover
agreement with a non-affiliated reinsurer. This agreement reinsures the
Company's ultimate net aggregate liability in excess of $32,500,000 up to an
aggregate limit of $89,650,000 for net commercial auto liability losses and loss
adjustment expense incurred but unpaid as of December 31, 2000. The Company
established a reinsurance balance receivable and a liability for funds held
under reinsurance agreements for the reserves transferred at December 31, 2001.
Also in connection with this agreement, the Company was required to maintain
assets in a trust fund with a fair value at least equal to the funds held
liability. The trust fund was established during the third quarter of 2001 and
at December 31, 2001 the assets in the trust had a fair value of $49,553,698.
Because the Company's statutory policyholders' surplus fell below certain levels
specified in the agreement, the reinsurer had the option to direct the trustee
to transfer the assets of the trust to the reinsurer. On March 29, 2002, the
reinsurer exercised this option and the trust assets were transferred to the
reinsurer. As a result, investments and funds held under reinsurance agreements
were reduced by approximately $44,000,000. The Company recorded a realized gain
of approximately $486,000 as a result of the transfer. The reinsurer continues
to be responsible for reimbursing the Company for claim payments covered under
this agreement.

RESULTS OF OPERATIONS

The discussion below primarily relates to the Company's insurance
operations, although the selected consolidated financial data appearing
elsewhere is on a consolidated basis. The expense Item "Underwriting and
operating expenses" includes the operating expenses of GNAC.

Gross premiums written in the 2002 year were 62% below 2001 and the 2001
year was 30% below 2000 year. The Company's decision in the first quarter of
2002 to discontinue writing commercial lines is primarily the reason for the
decrease in 2002. The Company's decision in the fourth quarter of 2000 to cease
writing certain identified non-profitable commercial trucking business is the
primary reason for the decrease in 2001. The following table compares the major
product lines between the years for gross premiums written:

31

COMMERCIAL LINES decreased 82% in 2002 and 40% in 2001. The Company's
decision to discontinue writing commercial lines insurance due to continued
adverse claims development and unprofitable results in the first quarter of 2002
is the reason for the decrease in 2002. In 2001 commercial auto contributed 30
points to the decrease for the reason mentioned previously and general liability
line contributed 6 points to the decrease.

PERSONAL LINES decreased 34% in 2002 and 11% in 2001. The decrease in 2002
was primarily related to the Company's decision to discontinue writing
nonstandard personal auto outside of Florida and to discontinue writing personal
umbrella. Also contributing was the fact that most nonstandard personal auto
policies written in 2002 were six month policies, whereas in 2001 a significant
amount were twelve month policies, see below. The decrease in 2001 from 2000 was
primarily a result of the Florida nonstandard personal auto business. The
Company began a transition during 2001 to write a majority of the nonstandard
personal auto business on six month policies instead of twelve month policies as
had been done in the past. This accounts for a significant portion of the
decrease in writings in 2001. This decision gives the Company greater
flexibility in managing the business.

For 2002 gross premiums written percentages by significant product line are
as follows: personal auto (72%), commercial auto (16%) and general liability
(10%) with no other product line comprising 5% or more. Net premiums earned
decreased 12% primarily as a result of the decision to discontinue writing
commercial lines. The decrease was less than the decrease in written premiums
primarily due to the absence of commercial and personal quota share reinsurance
in 2002. Net premiums earned decreased 55% in 2001 primarily as a result of the
commercial quota share reinsurance agreements and exiting certain commercial
trucking business.

Net investment income decreased 47% and 43% in 2002 and 2001, respectively.
The decrease in 2002 was primarily attributed to the decline in investments,
short-term investments comprising a significantly greater portion of investments
and the decline in interest rates. For 2001, the Company entered into a reserve
reinsurance cover agreement with a non-affiliated reinsurer. This agreement
required the Company to maintain a funds held liability and to increase this
liability at an annual interest rate of 7.5%. This resulted in a charge to
investment income of $3,650,417 during 2001.

The Company recorded net realized capital gains of $2,048,848 and $4,275,192
in 2002 and 2001, respectively, versus net realized capital losses of $1,906,911
in 2000. During 2002, the Company reduced the carrying value of a non-rated
commercial mortgage backed security to $0 resulting in a write down of
$2,010,670 (recorded as a realized loss in the statement of operations) as a
result of a significant increase in the default rate in the underlying
commercial mortgage portfolio, which has disrupted the cash flow stream
sufficiently to make future cash flows unpredictable. This write-down was offset
by net realized gains of $3,604,462 recorded from the sale of various bond
securities and other investments in 2002 and the gain of $455,056 recognized
from the sale of the home office building. The losses recorded in 2000 were the
result of restructuring the portfolio into higher taxable equivalent yields.

Insurance services revenues increased $3,957,583 in 2002 over 2001,
primarily as a result of amortization of deferred reinsurance recoveries from
claim payments under the reserve reinsurance cover agreement mentioned
previously. For 2002, $4,082,469 was recorded which represents the reserve
development under the reserve reinsurance cover agreement. In 2001 $1,112,469
was recognized under the reserve reinsurance agreement. Amortization is based
upon claims recovered from the reinsurer in relation to the amount of the
reinsured layer under the reserve

32

reinsurance cover agreement. Insurance service revenues decreased $727,443 in
2001 from 2000. The decrease was primarily a result of the decrease in service
revenues in the Lalande Group.

Claims and claim adjustment expenses ("C & CAE") decreased $31,012,337 in
2002 from 2001 and decreased $56,013,096 in 2001 from 2000. The C & CAE ratio
was 93.6% in 2002, 127.2% in 2001 and 94.7% in 2000. The decrease in the C & CAE
ratio in 2002 is primarily due to smaller increases in estimated ultimate
liabilities recorded in 2002 for commercial lines than was recorded in 2001. The
C & CAE ratio in 2001 was above the 2000 level primarily because of continued
adverse development in commercial lines. The Company began to cease writing new
policies in the trucking portion of this line of business in the fourth quarter
of 2000. Reinsurance agreements were in place effective December 31, 2000 that
are expected to minimize future adverse results from this line of business.
Under the reserve reinsurance cover agreement approximately $3,855,000 of C &
CAE as of December 31, 2002 will ultimately be amortized as a deferred gain on
reinsurance arrangements in future periods. In accordance with U.S. GAAP, the
reinsurance recoveries from these reserve increases are recorded as deferred
revenue and not immediately recognized as reductions to C & CAE. Recognition of
this deferred revenue item occurs through insurance service revenues in the
future based upon claims recovered from the reinsurer in relation to the total
amount of the reinsured layer under the reserve reinsurance cover agreement.
With regard to environmental and product liability claims, the Company has an
immaterial amount of exposure. The Company does not provide environmental
impairment coverage and excludes pollution and asbestos related coverages in its
policies. The Company's premium writings for product liability coverages are
immaterial. Inflation impacts the Company by causing higher claim settlements
than may have originally been estimated. Inflation is implicitly reflected in
the reserving process through analysis of cost trends and review of historical
reserve results.

The ratio of commissions and the change in deferred policy acquisition costs
and deferred ceding commission income to net premiums earned is 18% in 2002, 21%
in 2001 and 22% in 2000. The progressive decrease in this ratio is primarily due
to the shift in the mix of business to nonstandard personal auto which has lower
acquisition expenses than commercial lines.

Commissions are comprised of commission expenses (which vary with gross
premiums written), offset by commission income, (which varies with ceded premium
written). Commission expenses are paid to agents to produce the business for the
Company. Commission income is received by the Company from reinsurers as
compensation to the Company for business the Company cedes to the reinsurers.
Commissions decreased in 2002 and in 2001 as a result of the decrease in gross
premiums written discussed previously.

Change in deferred policy acquisition costs ("DPAC") and deferred ceding
commission income ("DCCI") represents the change during the period in the asset
"Deferred policy acquisition cost". This asset item is comprised of commission
expenses, premium taxes and certain marketing and underwriting expenses which
are deferred, offset by commission income received from reinsurers, which is
also deferred. This net asset DPAC is amortized into the results of operations
through "Change in deferred policy acquisition costs and deferred ceding
commission income", as the underlying gross premiums written and ceded premiums
written are earned. Change in DPAC and DCCI resulted in a charge in 2002 of
$1,513,880, a credit in 2001 of $886,282 and a charge in 2000 of $12,638,482.
The charge in 2002 is primarily attributable to the amortization of previous
DPAC and DCCI exceeding DPAC and DCCI incurred for 2002 as a result of the
decision to discontinue writing commercial lines in 2002. The credit in 2001 is
primarily the result of the DPAC and DCCI incurred in 2001 exceeding the
amortization of previous DPAC and DCCI. The amortization of previous DPAC and
DCCI included a significant amount of DCCI from the 2000 year (see below). The
charge in 2000 is primarily the result of a significant amount of DCCI received
in 2000 from a quota share reinsurance agreement whereby the Company ceded 100%
of its commercial auto liability unearned premiums and 50% of all other
commercial business unearned premiums.

33

Interest expense from the note payable decreased in 2002 and 2001 as a
result of principal payments on the note and lower interest rates. The Company
paid principal amounts of $7,100,000, $5,200,000 and $2,000,000 in 2002, 2001
and 2000, respectively.

There is no amortization expense in 2002 due to the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(see Note 1(h) of Notes to Consolidated Financial Statements). Amortization of
goodwill decreased in 2001 as a result of the sale of Tri-State and the second
quarter 2001 write-off of its goodwill.

Underwriting and operating expenses were down 45% in 2002 but were up 12% in
2001. The decrease for 2002 was primarily due to expense reductions implemented
as a result of the decision to discontinue writing commercial lines. The
increase for 2001 was the result of the Company recording a provision for
potentially uncollectible reinsurance balances receivable of $2,653,597. Without
this provision underwriting and operating expenses were down 4% primarily as a
result of a decrease in personnel costs.

Goodwill impairment in 2002 is a result of the Company positioning itself
for an exit from the personal auto business in the second quarter of 2002 and
the consideration of a sale of the Lalande Group. A re-evaluation of goodwill
for the Lalande Group was made during this period and an additional impairment
of $2,859,507 was recorded. This re-evaluation was based upon market indications
of value contained in a proposal from a potential acquiror and upon the
uncertainty of achieving value levels. Goodwill impairment in 2001 was a result
of the Company's decision to no longer pursue a long-term geographic expansion
strategy in personal automobile beyond that of its core operation in Florida and
to sell its Tri-State agency subsidiary. See "BUSINESS OPERATIONS - Tri-State
Acquisition and Sale". Tri-State was acquired by the Company in the first
quarter of 2000 and failed to achieve profitability during the Company's
ownership. Because of the profitability issues surrounding the Lalande Group,
(see below), it was decided in the second quarter of 2001 to sell Tri-State to
its former owner so the Company could focus all of the personal auto efforts
solely on the Lalande Group. As a result the remaining goodwill associated with
the Tri-State acquisition was written off in the second quarter of 2001. In
December 2001 the Company recorded an impairment of $13,360,603 on the goodwill
associated with the 1998 acquisition of the Lalande Group. The Lalande Group was
acquired by the Company in the fourth quarter of 1998, it produced a small
profit in 1999, but in 2000 it produced a loss. At the end of 2000 the Company
was expecting a significant improvement and profitability from the Lalande Group
in 2001. During 2001 the Company continued to implement actions throughout the
year to return this business to profitability. While results in 2001 showed
improvement, they remained unprofitable. In the fourth quarter of 2001 the
Company concluded that the value of this operation was significantly below what
the Company had paid and accordingly recorded the impairment against goodwill
based upon then current estimated market valuation levels of agencies in the
personal auto marketplace.

The Company recognized a current tax benefit of $2,607,796 during the third
quarter of 2002 as a result of a carry back of alternative minimum tax losses. A
change in the tax law during 2002 extended the carry back period for losses to
offset income in earlier periods. As a result, the Company was entitled to a tax
refund which it received in October 2002. The Company recorded deferred tax
expense during the first quarter of 2002 due to an increase in the deferred tax
asset valuation allowance, as a result of excluding the effects of unrealized
gains in the deferred tax asset. The Federal income tax expense for 2001 is a
result of the Company recording a valuation allowance of $31,534,712 against its
deferred Federal income tax asset offset by the income tax benefit generated by
the net loss from operations. Establishing the valuation allowance was necessary
because of the uncertainty of future profitability levels. The Company does not
lose the right to utilization of its net operating loss carry forwards for
Federal income tax purposes in the future. For 2000 the Company generated a
current tax benefit, with an effective tax benefit rate of 37%, as a result of a
net loss from operations. While the Company produced a loss in 2000, at the end
of 2000 the Company projected earnings in 2001 with subsequent increases each
year thereafter. During 2001 the Company continued to implement actions to
return to profitability, both in commercial lines and the personal lines.
However, earnings in 2001 did not materialize and in the first quarter of 2002
the Company announced it was discontinuing the writing of its largest line of
business, commercial lines, due to continued adverse claims development and
unprofitable results. At that time the prospects for significant profits in
personal lines, its only remaining line of business, were unclear. Because the
Company had no near-term expectation of profitable results, it was necessary to
fully reserve the deferred

34

tax asset due to uncertainty of future profitable results which could utilize
this asset. In 2002 the Company continued to record unprofitable results and has
no expectation of significant profits at this time. A reconciliation between
income taxes computed at the Federal statutory rates and the provision for
income taxes is included in Note (6) of Notes to Consolidated Financial
Statements.

The cumulative effect of change in accounting principle recorded in 2001 was
a result of EITF 99-20, which became effective April 1, 2001. This amount
represents the write down of an investment that was considered temporarily
impaired and was written down in the first quarter of 2001 through accumulated
other comprehensive income. EITF 99-20 changed the definition of impairment
which resulted in this asset being reclassified as an impairment other than
temporary which requires recognition through the statement of operations.

LIQUIDITY AND CAPITAL RESOURCES

Parent Company

GAINSCO, INC. ("GNAC") is a holding company that provides administrative and
financial services for its wholly owned subsidiaries. GNAC needs cash for: (1)
principal and interest on its bank note payable, (2) administrative expenses,
and (3) investments. The primary sources of cash to meet these obligations are
statutory permitted payments from its insurance subsidiaries, including (1)
dividend payments, (2) surplus debenture interest payments, and (3) tax sharing
payments. Statutes in Oklahoma and North Dakota restrict the payment of
dividends by the insurance company subsidiaries to the available surplus funds.
The maximum amount of cash dividends that each subsidiary may declare without
regulatory approval in any 12-month period is the greater of net income for the
12-month period ended the

35

previous December 31 or ten percent (10%) of policyholders' surplus as of the
previous December 31. In December 2002 MCIC (the North Dakota subsidiary)
declared and paid dividends to GNAC of $300,000. On March 20, 2003, General
Agents (the Oklahoma subsidiary) paid dividends to GNAC of $3,878,000, based on
its surplus amounts at December 31, 2002. GNAC believes the cash dividends from
its insurance subsidiaries should be sufficient to meet its expected obligations
for 2003.

The Company had Federal income tax net operating loss carry forward tax
benefits at December 31, 2002 of $23,017,524 that could be applied against any
future tax expense of the Company, subject to certain limitations. Thus, the
Company does not currently require funds to satisfy Federal income tax
obligations.

GNAC entered into an amendment dated as of February 27, 2002 to its bank
credit agreement which cured GNAC's covenant breaches and provided for
additional principal prepayments. Pursuant to the amendment, GNAC prepaid
$6,100,000 of the indebtedness outstanding under the credit agreement. Several
covenants in the existing credit agreement were eliminated or modified by the
amendment and the interest rate was changed to a base rate (which approximates
prime) plus 175 basis points. The major financial covenant of the amended credit
agreement requires the statutory surplus of General Agents to be at a minimum of
three times the unpaid principal balance after December 31, 2002. General
Agents' statutory surplus at December 31, 2002 was approximately $38,780,000.
GNAC paid $500,000 of the indebtedness outstanding under the credit agreement in
December 2002 as a result of the sale of GCM. The credit agreement requires a
note prepayment equal to 50% of any dividends from General Agents. On March 24,
2003, GNAC paid $1,939,000 of the indebtedness outstanding under the credit
agreement in conjunction with the receipt of $3,878,000 in dividends from
General Agents. The remaining $1,761,000 principal balance under the credit
agreement is payable in 2003 which GNAC intends to fund with proceeds from short
term investments. The credit agreement, among other things, precludes payment of
dividends on common or preferred stock and restricts the kinds of investments
that GNAC may make.

Subject to bank credit agreement restrictions, GNAC may also obtain cash
through the sale of subsidiaries or assets and through the issuance of common or
preferred stock. The bank credit agreement generally requires a note prepayment
in the event of the sale of GNAC of any subsidiary or assets (except certain
ordinary course of business sales), or any issuance of stock (subject to certain
exceptions), equal to 50% of the proceeds received.

The Company will be in a lengthy period of transition as it lessens its
exposure to the insurance industry. During the transition process, the Company
may consider the sale of additional subsidiaries associated with that business.
See "BUSINESS OPERATIONS - Discontinuance of Commercial Lines and Redeployment
of Capital."

Subsidiaries, Principally Insurance Operations

The primary sources of the insurance subsidiaries' liquidity are funds
generated from insurance premiums, net investment income and maturing
investments. The short-term investments and cash are intended to provide
adequate funds to pay claims without selling fixed maturity investments. At
December 31, 2002, the insurance subsidiaries held short-term investments and
cash that the insurance subsidiaries believe are adequate liquidity for the
payment of claims and other short-term commitments.

With regard to long term liquidity, the average duration of the investment
portfolio is approximately 1.4 years. The fair value of the fixed maturity
portfolio at December 31, 2002 was $3,637,456 above amortized cost, before
taxes. With regard to the availability of funds to the holding company, see Note
(7) of Notes to Consolidated Financial Statements for restrictions on the
payment of dividends by the insurance companies. Various insurance departments
of states in which the Company operates require the deposit of funds to protect
policyholders within those states. At December 31, 2002 and 2001, the balance on
deposit for the benefit of such policyholders totaled $13,731,408 and
$15,398,298, respectively.

Effective December 31, 2000, the Company entered into a quota share
reinsurance agreement whereby the Company ceded 100% of its commercial auto
liability unearned premiums and 50% of all other commercial business unearned

36

premiums at December 31, 2000 to a non-affiliated reinsurer. For policies with
an effective date of January 1, 2001 through December 31, 2001, the Company
entered into a quota share reinsurance agreement whereby the Company ceded 20%
of its commercial business to a non-affiliated reinsurer. Also effective
December 31, 2000, the Company entered into a reserve reinsurance cover
agreement with a non-affiliated reinsurer. This agreement reinsures the
Company's ultimate net aggregate liability in excess of $32,500,000 up to an
aggregate limit of $89,650,000 for net commercial auto liability losses and loss
adjustment expense incurred but unpaid as of December 31, 2000. The Company
established a reinsurance balance receivable and a liability for funds held
under reinsurance agreements for the reserves transferred at December 31, 2001.
Also in connection with this agreement, the Company was required to maintain
assets in a trust fund with a fair value at least equal to the funds held
liability. The trust fund was established during the third quarter of 2001 and
at December 31, 2001 the assets in the trust had a fair value of $49,553,698.
Because the Company's statutory policyholders' surplus fell below certain levels
specified in the agreement, the reinsurer had the option to direct the trustee
to transfer the assets of the trust to the reinsurer. On March 29, 2002, the
reinsurer exercised this option and the trust assets were transferred to the
reinsurer. The reinsurer continues to be responsible for reimbursing the Company
for claim payments covered under this agreement.

Net cash used for operating activities was $62,050,686 for 2002 versus
$61,384,654 in 2001. The significant usage in 2001 was primarily related to the
decrease in premium writings and the ongoing payment of claims and claim
adjustment expense.

Investments decreased primarily due to a nonaffiliated reinsurer exercising
its option, during the first quarter of 2002, to take possession of
approximately $44,000,000 in investments, mentioned previously. The remaining
decrease is attributable to principal payments on the note payable of $7,100,000
and negative cash flows from operations. At December 31, 2002, 92% of the
Company's investments were investment grade with an average duration of
approximately 1.4 years, including approximately 45% that were held in
short-term investments. On a taxable equivalent basis the return on average
investments was 3.9% in 2002, 4.3% in 2001, and 6.5% in 2000. The Company
classifies its bond securities as available for sale. In February 2002 GMSP
purchased the equity investments and the note receivable, classified as "Other
investments", for approximately $2,087,000 which was their carrying value at
December 31, 2001. In March 2002, the Company reduced the carrying value of a
non-rated security to $0 resulting in a write down of $2,010,670 as a result of
a significant increase in the default rate in January and February of 2002 in
the underlying collateral, which had disrupted the cash flow stream sufficiently
to virtually eliminate future cash flows. The unrealized gain associated with
the investment portfolio was $2,400,722 (net of tax effects) at December 31,
2002. The duration of the bonds available for sale approximates the average
expected payout of claims.

Premiums receivable decreased primarily as a result of the decrease in
writings caused primarily by the decision to discontinue writing commercial
lines during 2002 and the decision to net deferred payables on policies not yet
written against deferred receivables on these same policies. This balance is
comprised primarily of premiums due from insureds for nonstandard personal auto.
The nonstandard personal auto premiums are written with a down payment of 34%
and monthly payment terms of up to four months. The Company has recorded an
allowance for doubtful accounts of $275,000 which it considers adequate at the
present time.

Reinsurance balances receivable decreased primarily as a result of C & CAE
claims paid under the reserve reinsurance cover agreement and the quota share
reinsurance agreements for both commercial lines and personal lines business
written in 2001. This balance is primarily comprised of ceded unpaid claims and
claims adjustment expenses under the reserve reinsurance cover agreement and
claims and claim adjustment expenses paid by the Company and due from reinsurers
under the Company's various reinsurance agreements. The Company recorded an
allowance for doubtful accounts of $1,001,461 in 2002 and of $2,653,597 in 2001
as a result of concern regarding the collectibility of amounts due from specific
reinsurers. The decrease in the allowance for doubtful accounts was primarily
due to the successful recovery of an amount that had been included in the
allowance in 2001. Balances written off in previous years have been immaterial.
The Company considers the allowance adequate at the present time.

Ceded unpaid claims and claim adjustment expenses decreased as a result of
the decrease in unpaid claims and claim adjustment expenses and the decrease in
cessions under the quota share reinsurance agreements. This balance

37

represents unpaid claims and claim adjustment expenses which have been ceded to
reinsurers under the Company's various reinsurance agreements, other than the
reserve reinsurance cover agreement. These amounts are not currently due from
the reinsurers but are expected to become due in the future when the Company
pays the claim and requests reimbursement from the reinsurers.

Ceded unearned premiums decreased primarily as a result of the decision to
discontinue writing commercial lines in 2002. This balance represents the
portion of premiums ceded to reinsurers which are applicable to the unexpired
terms of policies in force under the applicable reinsurance agreement. In the
event the Company cancels policies, the reinsurer is required to return the
premium to the Company. This type of action, on a material scale, is not
expected to occur.

Deferred policy acquisition costs decreased primarily as a result of the
decision to discontinue writing commercial lines. This balance represents
commissions, premium taxes and certain marketing and underwriting expenses which
are deferred and charged to operations over periods in which the related
premiums are earned. Ceding commission income, which is realized on a written
basis, is deferred and recognized over periods in which the related premiums are
earned. Deferred ceding commission income is netted against deferred policy
acquisition costs. The change in the resulting deferred asset is charged
(credited) to operations. The Company recorded impairments on its deferred
policy acquisition costs at December 31, 2002 of $28,386 and at December 31,
2001 of $2,487,009 related to the property and commercial auto lines of
business.

Property and equipment decreased primarily as a result of the sale of the
former home office building during the third quarter of 2002. A gain of $455,056
was recorded on this sale. The Company adjusted accumulated depreciation to
reflect fully depreciated property and equipment that has been disposed. This
balance is comprised primarily of computer hardware, computer software,
furniture and an office building the Company previously occupied which is under
lease until May 2003, and which the Company has listed as available for sale or
lease.

Current Federal income taxes were received in January 2003. Deferred Federal
income taxes have a valuation allowance for its full amount recorded against the
asset. This asset is primarily a tax benefit from net operating loss carry
forwards which can be used to offset tax expense on future operating earnings or
capital gains. See earlier discussion under "RESULTS OF OPERATIONS." A change in
ownership of the Company's stock greater than 50% (as specified under Internal
Revenue Code Section 382) could severely limit the Company's ability to recover
this asset in future periods.

The management contract controlling GCM was sold on December 2, 2002 to an
unaffiliated third party. See "BUSINESS OPERATIONS - Sale of GAINSCO County
Mutual."

Other assets increased primarily as a result of funds placed on deposit with
a reinsurer in the second quarter of 2002 to collateralize commissions payable
balances due the reinsurer. Other assets are comprised primarily of funds held
by reinsurers as collateral for the reinsurers and prepaid expenses.

Goodwill decreased as a result of the $2,859,507 impairment recorded in the
second quarter of 2002 related to the October 1998 Lalande Group acquisition.
The remaining goodwill of $609,000 reflects estimated fair valuation of agencies
in the personal automobile marketplace. See "RESULTS OF OPERATIONS." Effective
in 2002, goodwill will no longer be amortized but will be subject to an
impairment test based on its estimated fair value. Therefore, additional
impairment losses could be recorded in future periods.

Unpaid claims and claim adjustment expenses decreased primarily as a result
of the run-off of commercial lines. As of December 31, 2002, the Company had
$96.469 million in unpaid claims and claim adjustment expenses. This amount
represents management's best estimate, as derived from the actuarial analysis
and was set equal to the selected reserve estimate as established by our outside
actuary. The reserve estimates considered by our outside actuaries ranged from
$83.1 million to $104.1 million. The actuary's range of reserves was developed
by applying various methods considered appropriate for each line of coverage
written. The actuary selected an estimate for each line of coverage written by
accident year based on the results of the various methods applied, along with
judgement. Management has reviewed and discussed the results of the actuarial
analysis with the actuary and believes the reserve estimate selected by the
actuary to be the best estimate of reserves at this time.

As of December 31, 2002, in respect of its commercial lines, the Company had
$83.664 million in reserves for unpaid claims and claim adjustment expenses.
Historically, the Company has experienced significant volatility in its reserve
projections for its commercial lines. This volatility has been primarily
attributable to its commercial automobile and general liability product lines.
See Item 1 "BUSINESS--Unpaid Claims and Claim Adjustment Expenses." On February
7, 2002, the Company announced it had decided to discontinue writing commercial
lines insurance due to continued adverse claims development and unprofitable
results. Since February 7, 2002, 86% of the Company's commercial policies have
been non-renewed and the remainder are scheduled for non-renewal over the course
of the first half of 2003. Concurrently, the Company has been settling and
reducing its remaining inventory of commercial claims. See "BUSINESS
OPERATIONS--Discontinuance of Commercial Lines and Redeployment of Capital." As
of December 31, 2002, 1,062 commercial claims remained, compared with 1,720
claims a year earlier. Included in these remaining claims are 82 product
liability claims, 32 construction defect type claims, and 1 environmental claim.
The Company has no asbestos related claims. The average commercial lines claim
at December 31, 2002 was approximately $78,779 per claim.

As of December 31, 2002, in respect of its personal lines, the Company had
$12.805 million in unpaid claims and claim adjustment expenses. These personal
lines claims generally are shorter tailed than the Company's commercial lines
claims. At December 31, 2002, the Company had 1,726 personal auto claims. The
average personal auto claim at December 31, 2002 was approximately $7,276 per
claim.

The Company considers the unpaid claims and claim adjustment expenses to be
adequate; they are set to equal the selected reserve estimate determined by an
outside actuarial firm.

Unearned premiums decreased primarily because of the decrease in writings
from the decision to discontinue writing commercial lines. This balance
represents the portion of premiums written which are applicable to the unexpired
terms of policies in force which will earn in future periods.

38

Accounts payable decreased primarily because of the decision to net deferred
payables on policies not yet written against deferred receivables on these same
policies, as mentioned previously. Reinsurance balance payable decreased
primarily due to settlements made in 2002 on prior years quota share reinsurance
agreements.

Deferred revenues decreased primarily as a result of reinsurance recoveries
under the reserve reinsurance cover agreement. This balance is primarily
comprised of C & CAE recoveries under this agreement which will be recognized as
insurance service revenues in future periods based upon the ratio of actual C &
CAE paid to the total of potential C & CAE payable under this reinsurance
agreement.

Drafts payable decreased primarily as a result of the Company's decision in
the third quarter of 2002 to use checks instead of drafts to pay claims. This
balance will continue to decrease in the future.

Note payable decreased due to principal payments of $7,100,000 made during
2002. In the first quarter of 2002, the Company made a scheduled repayment of
$500,000 and an unscheduled prepayment of $6,100,000. The unscheduled prepayment
was made in conjunction with an amendment to the credit agreement which cured
covenant breaches. The Company made a $500,000 principal payment in December
2002 in conjunction with the sale of GCM. On March 24, 2003 the Company made a
$1,939,000 principal payment in conjunction with the receipt of a $3,878,000
dividend from General Agents. The remaining $1,761,000 principal balance under
the credit agreement is payable in 2003. (see Note (4) of Notes to Consolidated
Financial Statements).

Funds held under reinsurance agreements were eliminated due to the
reinsurers decision to take possession of investments, which reduced the
Company's liability to this reinsurer. See "BUSINESS OPERATIONS - Reinsurance
Transaction."

Deferred Federal income taxes is comprised of the taxes on the unrealized
gains of the bonds available for sale. The unrealized gains have been recorded
net of taxes in "Accumulated other comprehensive income."

As a result of the 2001 GMSP Transaction and the Stallings Transaction, the
Company has three series of redeemable Preferred Stock, which are classified as
mezzanine financing. The Series A Preferred Stock was previously classified in
shareholders' equity because it was not subject to mandatory redemption. The
Company is required to redeem the Series A Preferred Stock on January 1, 2006 at
a price of $31,620,000 plus unpaid dividends, if any. As of December 31, 2002,
there were no accrued but unpaid dividends in respect of the Series A Preferred
Stock. The Series B and Series C Preferred Stock are redeemable at the Company's
option in March 2006 and at the option of the majority holders in March 2007 at
a price of $3,000,000 each plus accrued dividends. The Series B and the Series C
Preferred Stock each include accrued dividends in the amount of $556,059 as of
December 31, 2002.

With the reclassification of the Series A Preferred Stock during the first
quarter of 2001, preferred stock capital was reduced to $0 and additional
paid-in capital was reduced by the discount on the convertible redeemable
preferred stock. Common stock warrants decreased for the discount in value of
the previously issued Series A and Series B Warrants offset by an increase for
the issuance of the warrant in the Stallings Transaction. At December 31, 2002,
$10,394,002 has yet to be charged to Retained deficit related to the accretion
of the discount on the Series A and Series B Preferred Stock.

Accumulated other comprehensive income of $2,400,722 was recorded at
December 31, 2002 as a result of the unrealized gains on bonds available for
sale, net of tax. The increase in Retained deficit of $12,088,861 is
attributable to the net loss of $8,761,087, the accretion of discount on the
Series A and Series B Preferred Stock of $2,657,000 and the accrual of dividends
on the Series B and Series C Preferred Stock of $670,774.

The Company is not aware of any current recommendations by regulatory
authorities, which if implemented, would have a material effect on the Company's
liquidity, capital resources or results of operations. The Company's statutory

39

capital exceeds the benchmark capital level under the Risk Based Capital formula
for its insurance companies that are subject to Risk Based Capital requirements.
Risk Based Capital is a method for establishing the minimum amount of capital
appropriate for an insurance company to support its overall business operations
in consideration of its size and risk profile. The tragic events of September
11, 2001 did not impact the Company's financial results for 2001 and 2002.

OFF-BALANCE SHEET TRANSACTIONS AND RELATED MATTERS

There are no off-balance sheet transactions, arrangements, obligations
(including contingent obligations), or other relationships of the Company with
unconsolidated entities or other persons that have, or may have, a material
effect on financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources of the Company.

SHAREHOLDERS' EQUITY ASSUMING REDEMPTION OF PREFERRED STOCK

At December 31, 2002, total assets less total liabilities of the Company was
$42,605,214 and there were outstanding three series of preferred stock with an
aggregate liquidation value of $38,752,118 ($37,620,000 stated value plus
accrued dividends of $1,132,118). Based on the forgoing, the Shareholders'
Equity assuming the redemption of all series of the Preferred Stock at December
31, 2002, would be $3,853,096 ($0.18 per common share). The amount ultimately
available to the shareholders would vary with changes in the assets and
liabilities of the Company.

FORWARD LOOKING STATEMENTS

Statements made in this report that are not strictly historical may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that important factors,
representing certain risks and uncertainties, could cause actual results to
differ materially from those contained in the forward-looking statements. These
factors include, but are not limited to, (a) the Company's ability to effect the
successful exit from unprofitable lines and businesses that the Company believes
cannot be counted on to produce future profit, (b) heightened competition from
existing competitors and new competitor entrants into the Company's markets, (c)
the extent to which market conditions firm up, the acceptance of higher prices
in the market place and the Company's ability to realize and sustain higher
rates, (d) contraction of the markets for the Company's business, (e)
acceptability of the Company's A.M. Best rating to its end markets, (f) the
Company's ability to meet its obligations under its capital and debt agreements,
(g) the ongoing level of claims and claims-related expenses and the adequacy of
claim reserves, (h) the effectiveness of investment strategies implemented by
the Company's investment manager, (i) continued justification of recoverability
of goodwill in the future, (j) the availability of reinsurance and the ability
to collect reinsurance recoverables, (k) the Company's ability to invest in new
endeavors that are successful, (l) the limitation on the Company's ability to
use net operating loss carryforwards as a result of constraints caused by
ownership changes within the meaning of Internal Revenue Code Section 382, (m)
the ability of the Company to realize contingent acquisition payments in
connection with its sale of the management contract controlling GCM, which in
turn depends upon whether, or in what form, the Texas Legislature passes
legislation that has been introduced in the current session of the Texas
Legislature ending June 2, 2003 which could prejudice the rights of the Company
to receive any of the future payments from Liberty, and (n) general economic
conditions, including fluctuations in interest rates. A forward-looking
statement is relevant as of the date the statement is made. The commencement of
hostilities involving Iraq could produce economic and other reactions that could
adversely affect the Company and its ability to effect changes discussed
elsewhere in this report. The Company undertakes no obligation to update any
forward-looking statements to reflect events or circumstances arising after the
date on which the statements are made.

40

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of economic losses due to adverse changes in the
estimated fair value of a financial instrument as the result of changes in
equity prices, interest rates, foreign exchange rates and commodity prices. The
Company's consolidated balance sheets include assets whose estimated fair values
are subject to market risk. The primary market risk to the Company is interest
rate risk associated with investments in fixed maturities. The Company has no
foreign exchange, commodity or equity risk.

INTEREST RATE RISK

The Company's fixed maturity investments are subject to interest rate risk.
Increases and decreases in interest rates typically result in decreases and
increases in the fair value of these investments.

Most of the Company's investable assets are in the portfolios of the
insurance company subsidiaries and come from premiums paid by policyholders.
These funds are invested predominately in high quality fixed maturities with
relatively short durations and short term investments. The fixed maturity
portfolio had an average duration of 2.6 years at December 31, 2002. The fixed
maturity portfolio is exposed to interest rate fluctuations; as interest rates
rise, fair values decline and as interest rates fall, fair values rise. The
changes in the fair value of the fixed maturity portfolio are presented as a
component of shareholders' equity in accumulated other comprehensive income, net
of taxes.

The effective duration of the fixed maturity portfolio is managed with
consideration given to the estimated duration of the Company's liabilities. The
Company has investment policies that limit the maximum duration and maturity of
the fixed maturity portfolio.

The Company utilizes the modified duration method to estimate the effect of
interest rate risk on the fair values of its fixed maturity portfolio. The
usefulness of this method is to a degree limited, as it is unable to accurately
incorporate the full complexity of market interactions.

41

The table below summarizes the Company's interest rate risk and shows the
effect of a hypothetical change in interest rates as of December 31, 2002. The
selected hypothetical changes do not indicate what could be the potential best
or worst case scenarios (dollars in thousands):

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated Financial Statements are on pages 53 through 95

The following Consolidated Financial Statements Schedules are on pages 96
through 107

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

43

PART III

The information required by this Part III will be supplied by a Schedule 14A
filing or an amendment to this Report.

PART IV

ITEM 14: CONTROLS AND PROCEDURES

Disclosure Controls. The Company maintains a set of disclosure controls and
procedures designed to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Securities Exchange Act of
1934 is recorded processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Within the
90-day period prior to the filing of this annual report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of its disclosure controls and
procedures. Based on that evaluation, Glenn W. Anderson, the President and Chief
Executive Officer of the Company, and Daniel J. Coots, the Senior Vice
President, Chief Financial Officer and Chief Accounting Officer of the Company,
have concluded that the Company's disclosure controls and procedures are
effective.

Changes in Internal Controls. Since the date of the evaluation described above,
there have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect those controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMS 8-K

(a) Documents filed as part of the report:

1. The following financial statements filed under Part II, Item 8:

Independent Auditors' Report

Consolidated Balance Sheets as of December 31, 2002 and 2001

Consolidated Statements of Operations for the Years Ended December
31, 2002, 2001 and 2000

Consolidated Statements of Shareholders' Equity and Comprehensive
Loss 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 Consolidated Financial Statements, December 31, 2002, 2001
and 2000

2. The following Consolidated Financial Statement Schedules are filed under
Part II, Item 8:

44

3. The following Exhibits:

45

*10.1 1990 Stock Option Plan of the Registrant [Exhibit
10.16, Form 10-K dated March 22, 1991].

*10.2 1995 Stock Option Plan of the Registrant [Exhibit
10.31, Form 10-K dated March 28, 1996].

*10.3 1998 Long Term Incentive Plan of the Registrant
[Exhibit 99.8, Form 10-Q dated August 10, 1998].

*10.4 Forms of Change of Control Agreements [Exhibit 10.4,
Form 10-K dated March 29, 2002].

*10.5 Employment Agreement dated April 25, 1998 between Glenn
W. Anderson and the Registrant [Exhibit 99.5, Form
10-Q/A dated June 16, 1998].

*10.6 Change of Control Agreement for Glenn W. Anderson
[Exhibit 99.7, Form 10-Q/A dated June 16, 1998].

*10.7 Replacement Non-Qualified Stock Option Agreement dated
July 24, 1998 between Glenn W. Anderson and the
Registrant [Exhibit 99.6, Form 10-Q dated August 10,
1998].

*10.8 Management Contract between GAINSCO County Mutual
Insurance Company and GAINSCO Service Corp. and related
Surplus Debenture, Amendment to Surplus Debenture,
Certificate of Authority and accompanying
Commissioner's Order granting Certificate Authority,
allowing for charter amendments and extension of
charter [Exhibits 10.23, 10.24 and 10.25, Form 10-K
dated March 29, 1993; Exhibit 10.27, Form 10-K dated
March 25, 1994].

*10.9 Revolving Credit Agreement dated November 13, 1998
among Registrant, GAINSCO Service Corp. and Bank One,
Texas, N.A., First Amendment thereto dated October 4,
1999 and related Promissory Note, Security Agreement
and Pledge Agreement, Amendment No. 2 thereto dated
March 23, 2001, Amendment No.3 thereto dated November
13, 2001, and Amendment No. 4 thereto dated February
27, 2002. [Exhibits 10.50 to 10.53, Form 10-K/A dated
March 30, 1999; Exhibit 99.22, Form 8-K dated October
4, 1999; Exhibit 99.24, Form 8-K/A dated March 30,
2001, Exhibit 10.23, Form 10-Q dated November 13, 2001,
Exhibit 10.9, Form 8-K dated February 27, 2002].

*10.10 Securities Purchase Agreement dated as of June 29, 1999
between Registrant and Goff Moore Strategic Partners,
L.P. ("GMSP") and related Series A Common Stock
Purchase Warrant and Series B Common Stock Purchase
Warrant [Exhibit 2.1, Form 8-K dated June 29, 1999;
Exhibits 99.19 and 99.20, Form 8-K dated October 4,
1999].

*10.11 Investment Management Agreements dated October 4, 1999
between GMSP and each of Registrant, General Agents
Insurance Company of America, Inc., MGA Insurance
Company, Inc. and GAINSCO County Mutual Insurance
Company; and Investment Management Agreement dated
January 6, 2000 between GMSP and Midwest Casualty
Insurance Company. [Exhibit 10.11, Form 10-K dated
March 30, 2000].

46

*10.12 Stock Purchase Agreements dated August 17, 1998 with
Carlos de la Torre, McRae B. Johnston, Michael S.
Johnston and Ralph Mayoral relating to acquisition by
Registrant of Lalande Group and related employment
agreements with them [Exhibits 99.6 to 99.13, Form 8-K
dated August 26, 1998].

*10.13 Asset Purchase Agreement dated March 9, 1999 between
the Registrant, Agents Processing Systems, Inc. and
Insurance Business Solutions Incorporated [Exhibit
10.49, Form 10-K dated March 30, 1999].

*10.14 Stock Purchase Agreement dated as of November 17, 1999
among Registrant, Tri-State, Ltd., Herbert A. Hill and
Alan E. Heidt and related Pledge Agreement dated as of
January 7, 2000 executed by the Registrant in favor of
Bank One, NA and Unlimited Guaranty dated as of January
7, 2000 executed by Tri-State, Ltd. in favor of Bank
One, N.A. [Exhibit 10.14, Form 10-K dated March 30,
2000].

*10.15 Agreement of Limited Partnership of GNA Investments I,
L.P. dated as of November 30, 1999 between Registrant
and GMSP [Exhibit 10.15, Form 10-K dated March 30, 2000].

*10.16 Professional Service Agreement dated as of October 22,
1999 between Registrant and ClientSoft, Inc. [Exhibit
10.16, Form 10-K dated March 30, 2000].

*10.17 First Amendment to Stock Purchase Agreement dated May
16, 2000 among Registrant, Tri-State, Ltd., Herbert A.
Hill and Alan E. Heidt [Exhibit 10.14, Form 10-Q dated
August 11, 2000].

*10.18 GAINSCO, INC. 401(k) Plan and related Adoption
Agreement [Exhibit 99.1 to Registration Statement on
Form S-8, effective April 12, 2000].

*10.19 Securities Purchase Agreement dated as of February 26,
2001 between Registrant and GMSP (including exhibits)
and related First Amendment to Securities Purchase
Agreement, letter regarding redemption of Registrant's
outstanding Series A Convertible Preferred Stock, First
Amendment to Series A Common Stock Purchase Warrant,
and First Amendment to Series B Common Stock Purchase
Warrant [Exhibit 2.1, Form 8-K dated March 2, 2001;
Exhibits 2.2, 2.8, 99.21 and 99.22, Form 8-K/A dated
March 30, 2001].

*10.20 Securities Purchase Agreement dated as of February 26,
2001 between Registrant and Robert W. Stallings
("Stallings") (including exhibits) and related First
Amendment to Securities Purchase Agreement, Assignment
and Assumption Agreement between Stallings and ING
Pilgrim Capital Corporation, LLC, Amendment to
Assignment and Assumption Agreement, letter dated March
23, 2001 from Stallings to Registrant, and Common Stock
Purchase Warrant [Exhibit 2.2, Form 8-K dated March 2,
2001; Exhibits 2.4 to 2.7 and 99.23, Form 8-K/A dated
March 30, 2001].

*10.21 Consulting Agreement dated as of February 26, 2001
between Registrant and Stallings [Exhibit 99.15, Form
8-K dated March 2, 2001].

*10.22 Agreement dated March 23, 2001 among Registrant,
GAINSCO Service Corp., GMSP, Stallings and Bank One,
N.A. [Exhibit 99.25, Form 8-K/A dated March 30, 2001].

47

*10.23 Letter agreement dated February 27, 2002 between the
Registrant and GMSP pursuant to which the Registrant
exercised its right to put certain illiquid investments
to GMSP for $2,087,354.27 pursuant to Section 6.9 of
the Securities Purchase Agreement dated February 26,
2001 between the Registrant and GMSP, as amended
[Exhibit 10.24, Form 8-K/A dated February 27, 2002].

*10.24 Agreement of Sale and Purchase dated March 7, 2002
between General Agents Insurance Company of America,
Inc. and Turonian Corp. [Exhibit 10.24, Form 10-K dated
March 29, 2002].

*10.25 First Amendment to Investment Management Agreements
dated August 9, 2002 among Goff Moore Strategic
Partners, L.P., the Registrant, General Agents
Insurance Company of America, Inc., MGA Insurance
Company, Inc., GAINSCO County Mutual Insurance Company
and Midwest Casualty Insurance Company [Exhibit 10.25,
Form 10-Q dated August 14, 2002].

*10.26 Acquisition Agreement dated August 12, 2002 among the
Registrant, GAINSCO Service Corp., GAINSCO County
Mutual Insurance Company, Berkeley Management
Corporation and Liberty Mutual Insurance Company
[Exhibit 10.26, Form 10-Q dated August 14, 2002].

*10.27 Commercial Lease Agreement dated July 31, 2002 between
JaGee Real Properties, L.P. and General Agents
Insurance Company of America, Inc. [Exhibit 10.27, Form
10-Q dated August 14, 2002].

*10.28 Form of Executive Severance Agreement between GAINSCO
Service Corp. and each of Richard M. Buxton, Richard A.
Laabs and Daniel J. Coots [Exhibit 10.28, Form 10-Q
dated August 14, 2002].

*10.29 Representative Forms of Retention Incentive Agreement
[Exhibit 10.30, Form 10-Q dated August 14, 2002].

*10.30 Acquisition Agreement dated August 12, 2002 among the
Registrant, GAINSCO Service Corp., Berkeley Management
Corporation, Liberty Mutual Insurance Company, and
GAINSCO County Mutual Insurance Company and Amendment
to Acquisition Agreement dated December 2, 2002 among
the Registrant, GAINSCO Service Corp., Berkeley
Management Corporation, Liberty Mutual Insurance
Company, and GAINSCO County Mutual Insurance Company
[Exhibit 10.26, Form 10-Q dated August 14, 2002 and
Exhibit 10.32, Form 8-K filed December 5, 2002].

*10.31 Office Lease dated August 19, 2002 between Crescent
Real Estate Funding X, L.P. and the Registrant
[Exhibit 10.31, Form 10-Q dated November 14, 2002].

*10.32 Separation Agreement and Release dated December 17,
2002 between McRae B. Johnston and MGA Insurance
Company, Inc.; Separation Agreement and Release dated
December 17, 2002 among McRae B. Johnston, Registrant,
National Specialty Lines, Inc., Lalande Financial
Group, Inc., DLT Insurance Adjustors, Inc. and Midwest
Casualty Insurance Company; Consulting Agreement dated
December 17, 2002 between McRae B. Johnston and MGA
Insurance Company, Inc.; and Form of Separation
Agreement and Release entered into as of March 1, 2003
between McRae B. Johnston and MGA Insurance Company,
Inc. [Exhibit 10.33, Form 8-K filed December 17, 2002;
Exhibit 10.34, Form 8-K filed December 17, 2002;
Exhibit 10.35, Form 8-K filed December 17, 2002; and
Exhibit 10.36, Form 8-K filed December 17, 2002].

48

11 Statement regarding Computation of Per Share Earnings
(the required information is included in Note 1(m) of
Notes to Consolidated Financial Statements included in
this Report and no separate statement is, or is
required to be, filed as an exhibit).

+21 Subsidiaries of Registrant.

+23 Consent of KPMG LLP to incorporation by reference.

+24 Form of Power of Attorney.

+99.1 Certificate of Chief Executive Officer

+99.2 Certificate of Chief Financial Officer

- ----------

* Exhibit has previously been filed with the Commission as an exhibit in
the filing designated in brackets and is incorporated herein by this
reference. Registrant's file number for reports filed under the
Securities Exchange Act of 1934 is 1-9828.

+ Filed herewith (see Exhibit Index).

- ----------

(b) Reports on Form 8-K

A Report on Form 8-K was filed December 5, 2002 reporting the
completion of the sale of the management contract controlling GAINSCO
County Mutual Insurance Company. No financial statements were filed
with the Report.

A Report on Form 8-K was filed December 20, 2002 reporting the
resignation of McRae B. Johnston as the President - Personal Lines
Division of the Registrant, payments made to Mr. Johnston in connection
with mutual releases entered into between Mr. Johnston and the
Registrant and a new consulting agreement between Mr. Johnston and the
Registrant. No financial statements were filed with the Report.

(c) Exhibits required by Item 601 of Regulation S-K.

The exhibits listed in Item 14(a) 3 of this Report, and not
incorporated by reference to a separate file, are filed herewith.

49

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.

GAINSCO, INC.
(Registrant)

/s/ Glenn W. Anderson
- ------------------------------------------
By: Glenn W. Anderson, President

Date: March 28, 2003
------------------------------------

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 dates indicated.

*By: /s/ Daniel J. Coots
---------------------------------------
Daniel J. Coots,
Attorney in-fact
under Power of Attorney

50

CERTIFICATION

I, Glenn W. Anderson, certify that:

1. I have reviewed this annual report on Form 10-K of GAINSCO, INC.;

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
registrant as of, and for, the periods presented in this annual report;

4. The registrant'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 registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, 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 registrant'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 registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant'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 registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant'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 registrant's internal
controls; and

6. The registrant'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 28, 2003 Signature: /s/ Glenn W. Anderson
---------------------------
Glenn W. Anderson
President & Chief
Executive Officer

51

CERTIFICATION

I, Daniel J. Coots, certify that:

1. I have reviewed this annual report on Form 10-K of GAINSCO, INC.;

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
registrant as of, and for, the periods presented in this annual report;

4. The registrant'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 registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, 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 registrant'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 registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant'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 registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant'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 registrant's internal
controls; and

6. The registrant'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 28, 2003 Signature: /s/ Daniel J. Coots
--------------------------------
Daniel J. Coots
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer

52

REPORT OF MANAGEMENT

The accompanying consolidated financial statements were prepared by the
Company, which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America and include some amounts that are based
upon the Company's best estimates and judgment. Financial information presented
elsewhere in this report is consistent with the accompanying consolidated
financial statements.

The accounting systems and controls of the Company are designed to
provide reasonable assurance that transactions are executed in accordance with
management's criteria, that the financial records are reliable for preparing
financial statements and maintaining accountability for assets, and that assets
are safeguarded against claims from unauthorized use or disposition.

The Company's consolidated financial statements have been audited by
KPMG LLP, independent auditors. The auditors have full access to each member of
management in conducting their audits.

The Audit Committee of the Board of Directors, comprised solely of
directors from outside of the Company, meets regularly with management and the
independent auditors to review the work and procedures of each. The auditors
have free access to the Audit Committee, without management being present, to
discuss the results of their work as well as the adequacy of the Company's
accounting controls and the quality of the Company's financial reporting. The
Board of Directors, upon recommendation of the Audit Committee, appoints the
independent auditors, subject to shareholder approval.

Date: March 28, 2003
/s/ Glenn W. Anderson
-------------------------------------
Glenn W. Anderson
President and Chief Executive Officer

/s/ Daniel J. Coots
-------------------------------------
Daniel J. Coots
Senior Vice President Chief
Financial Officer, and
Chief Accounting Officer

53

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders GAINSCO, INC.:

We have audited the accompanying consolidated balance sheets of GAINSCO, INC.
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity and comprehensive loss and cash
flows for each of the years in the three-year period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GAINSCO, INC. and
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.

We have also previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheets of
GAINSCO, INC. and subsidiaries as of December 31, 2000, 1999, and 1998, and the
related consolidated statements of operations, shareholders' equity and
comprehensive loss, and cash flows for the years ended December 31, 1999 and
1998 and we expressed unqualified opinions on those consolidated financial
statements.

In our opinion, the information set forth in the selected consolidated financial
data for each of the years in the five-year period ended December 31, 2002,
appearing under Item 6 in the Company's 2002 Form 10-K, is fairly presented, in
all material respects, in relation to the consolidated financial statements from
which it has been derived.

As discussed in 1(h) to the consolidated financial statements, effective January
1, 2002, GAINSCO, INC. and subsidiaries adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
Also, as discussed in note 1(c) to the consolidated financial statements,
GAINSCO, INC. and subsidiaries changed its method of accounting for residual
interests in securitizations in 2001 as a result of the adoption of EITF 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets."

/s/ KPMG LLP
----------------------------
KPMG LLP
Dallas, Texas
March 24, 2003

54

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2002 and 2001

(continued)

See accompanying notes to consolidated financial statements

55

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2002 and 2001

See accompanying notes to consolidated financial statements.

56

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2002, 2001 and 2000

(continued)

57

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2002, 2001 and 2000

See accompanying notes to consolidated financial statements

58

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity and Comprehensive Loss

Years ended December 31, 2002, 2001 and 2000

(continued)

59

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity and Comprehensive Loss

Years ended December 31, 2002, 2001 and 2000

See accompanying notes to consolidated financial statements.

60

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2002, 2001 and 2000

(continued)

61

GAINSCO, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2002, 2001 and 2000

See accompanying notes to consolidated financial statements.

62

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

(1) SUMMARY OF ACCOUNTING POLICIES

(a) Basis of Consolidation

The accompanying consolidated financial statements include the
accounts of GAINSCO, INC. ("GNAC") and its wholly-owned
subsidiaries (collectively, the "Company"), General Agents
Insurance Company of America, Inc. ("General Agents"), General
Agents Premium Finance Company, Agents Processing Systems,
Inc., Risk Retention Administrators, Inc., GAINSCO Service
Corp. ("GSC"), Lalande Financial Group, Inc. ("Lalande"),
National Specialty Lines, Inc. ("NSL"), DLT Insurance
Adjusters, Inc. ("DLT") (Lalande, NSL and DLT collectively,
the "Lalande Group") and Midwest Casualty Insurance Company
("MCIC"). On March 31, 2003 MCIC is to be liquidated and all
of its assets, liabilities and equity are to be transferred to
General Agents. General Agents has one wholly owned
subsidiary, MGA Insurance Company, Inc. ("MGAI") which, in
turn, owns 100% of MGA Agency, Inc. GSC has one wholly owned
subsidiary, MGA Premium Finance Company. All significant
intercompany accounts have been eliminated in consolidation.

Prior to December 2, 2002, GSC owned the management contract
controlling GAINSCO County Mutual Insurance Company ("GCM")
and prior to that time its accounts were included in the
accompanying consolidated financial statements. The management
contract of GCM was sold on December 2, 2002 to an
unaffiliated third party.

Previously, while GCM was legally owned by its policyholders,
it was controlled, through a management contract, by GSC.
Inclusion of GCM's accounts in the Company's Consolidated
Financial Statements was in accordance with the criteria under
EITF 97-2. The term of the management contract was 25 years
when the Company acquired it in the fourth quarter of 1992. It
was only terminable by GCM for the Company's failure to comply
with its obligations under the management contract. The
Company had exclusive authority over all decision making
related to all operations of GCM, and the operations were
under the direction of the same officer group that managed the
insurance subsidiaries of the Company. The management contract
was unilaterally salable by the Company (subject to normal
regulatory approvals), which was done on December 2, 2002. The
Company had the right to receive the income of GCM through the
management contract as ongoing fees and the proceeds from the
sale of its interest in the management contract. Additionally,
GCM's insurance business was pooled with all of the other
insurance subsidiaries of the Company through an inter-company
quota share reinsurance agreement.

The accompanying consolidated financial statements are
prepared on the basis of accounting principals generally
accepted in the United States of America ("U.S. GAAP"). The
preparation of financial statements in conformity with U.S.
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. Actual results could
differ from those estimates.

(b) Nature of Operations

On February 7, 2002, the Company announced its decision to
discontinue writing commercial lines insurance business due to
continued adverse claims development and unprofitable results.

During 2001 the Company was predominately a property and
casualty insurance company

63

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

concentrating its efforts on nonstandard markets within the
commercial, personal and specialty insurance lines. Beginning
in 2002 the Company became predominantly a property and
casualty insurance company concentrating its efforts on
nonstandard personal automobile markets. During 2002 the
Company was approved to write insurance in 47 states and the
District of Columbia on a non-admitted basis and in 44 states
and the District of Columbia on an admitted basis. The Company
previously marketed its commercial lines of insurance through
200 non-affiliated general agency offices and currently
markets its nonstandard personal auto line through over 550
non-affiliated retail agencies. Approximately 70% of the
Company's gross premiums written during 2002 resulted from
risks located in Florida.

On August 12, 2002, the Company announced its decision to put
itself in a position to exit its remaining active insurance
business, personal auto, in as orderly and productive a
fashion as possible. In June 2002, the Company entered into a
letter of intent to sell its Miami, Florida based operation,
the Lalande Group, to an unaffiliated party. In September 2002
negotiations in respect of the possible transaction were
terminated. In conjunction with this process, the Company
evaluated the related goodwill and recorded an impairment of
approximately $2.9 million during the second quarter 2002. The
remaining goodwill as of December 31, 2002 is $609,000 and is
related to the 1998 acquisition of the Lalande Group.
Operationally, the Company implemented rate increases and
other measures to enhance the profit potential of this
business in 2003 and its future strategic direction, which
could include the expansion, contraction or disposition of the
business.

The Company anticipates a lengthy period of transition as it
lessens its exposure to the insurance industry. During the
transition process, the Company may consider the sale of
additional subsidiaries associated with that business. The
Company intends to redeploy capital no longer required by its
insurance business, once it becomes available, to pursue other
opportunities in the future that offer a better prospect for
profitability. The Company believes that suitable capital
redeployment opportunities should be available after the
capital no longer required by its insurance business becomes
available, but cannot predict the amount of capital that will
ultimately be available for redeployment, the timing or the
nature of the opportunities that may be available at the time
capital becomes available. The opportunities may be outside of
the insurance business and could be in the financial services
business.

On December 2, 2002, the Company completed the sale and
transfer of the management contract controlling GCM to an
affiliate of Liberty Mutual Insurance Company ("Liberty"), for
a purchase price of up to $10 million, of which $1 million was
paid at closing and the balance is payable in contingent
payments through September 2009. The $9 million total of
future payments would be payable $3 million in September 2003
and $1 million each year thereafter through September 2009 and
each payment is contingent on there being no materially
adverse change in the regulatory treatment of GCM
specifically, or county mutuals generally, from legislative or
regulatory administrative actions prior to the applicable
payment date. Legislation has been introduced in the current
session of the Texas Legislature ending June 2, 2003 which,
depending whether or in what form it is ultimately adopted,
could prejudice the rights of the Company to receive some or
all of the future payments from Liberty. Following the
closing, the surplus of GCM, which was approximately
$3,182,000, remained as a part of the combined statutory
policyholders' surplus of the Company. Pursuant to a 100%
quota share reinsurance agreement (the "General Agents
Reinsurance Agreement") entered into at closing among GCM and
GNAC's subsidiaries, General Agents and MGA Agency, Inc., and
certain other arrangements, the Company retained all assets
and liabilities associated with GCM's past, present and runoff
commercial insurance business. The Company made a number of
representations, warranties and covenants in the acquisition
agreement and generally indemnifies Liberty for any losses
incurred resulting from (i) breaches of representations,
warranties or covenants of the Company; (ii) employee benefit
plan obligations of GCM relating to pre-closing periods; (iii)
tax obligations of GCM relating to pre-closing periods; (iv)
all liabilities of GCM, to the extent that they result from
conditions or circumstances arising or events occurring before
the Closing, subject to certain exceptions; (v) all insurance
claims, liabilities and obligations of GCM that are not
reinsured pursuant to the General Agents Reinsurance Agreement
or certain insurance fronting programs between GCM and
Metropolitan Property & Casualty Insurance Company and Omni
Insurance Company, respectively; and (vi) any and all
insurance claims, liabilities and obligations of General
Agents under the General Agents Reinsurance Agreement. GCM did
not have any employees or employee benefit plans. The Company
has recorded a receivable of approximately $500,000 due from
Liberty, which represents the Company's cost of the management
contract not yet recovered. The Company has a contingent gain
related to the sale of the management contract for the amount
of the sale in excess

64

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

of cost of approximately $8.5 million. Such gain is to be
recognized if and as the related contingencies are satisfied
at each due date of future Liberty payments under the sales
agreement. The Company made a $500,000 prepayment of
outstanding bank debt from the closing proceeds of the
transaction.

The Company sold the office building at 500 Commerce Street in
Fort Worth, Texas, where the Company's principal executive
offices and commercial insurance operations were located, to
an unaffiliated third party for $5 million on August 30, 2002.
The Company recorded a gain of $455,056 from this transaction.
As a result, the Company leased new office space to house its
principal executive offices and commercial insurance
operations.

In August 2002, the Company entered into an office lease for
approximately 8,352 square feet of space in Fountain Place,
1445 Ross Avenue, Suite 5300, Dallas, Texas, to house the
Company's executive offices. This address is the Company's new
registered address. The lease is for a term of four years,
although the Company has the right to terminate the lease at
its option at the end of 2005 upon payment of a termination
fee of approximately $29,000. The annual rental expense is
approximately $175,500. The lessor is Crescent Real Estate
Funding X, L.P., an affiliate of Crescent Real Estate Equities
Company, a Texas real estate investment trust f/k/a Crescent
Real Estate Equities, Inc. ("Crescent"). Robert W. Stallings,
GNAC's Chairman of the Board, became a member of the Board
of Trust Managers of Crescent in May 2002 and John C. Goff, a
member of GNAC's Board, is the Chief Executive Officer and
Vice Chairman of the Board of Trust Managers of Crescent. Mr.
Goff is deemed to be the beneficial owner of 3,630,248 common
shares of Crescent, comprising 3.4% of the beneficial
ownership of such shares. Mr. Stallings is deemed to be the
beneficial owner of 22,000 common shares of Crescent,
comprising less than 1% of the beneficial ownership of such
shares. The management of the Company believes that the terms
of the Company's lease with Crescent are no less favorable to
GNAC than those offered to other tenants by Crescent or
than GNAC could obtain for comparable space from
unaffiliated parties.

In July 2002 the Company also entered an office lease with an
unaffiliated third party for 10,577 square feet of space at
5400 Airport Freeway, Suite A, Fort Worth, Texas, to house the
Company's commercial insurance operations. The lease is for a
term of five years, although the Company may terminate the
lease at its option after the expiration of three years. The
annual base rental expense is $105,770.

GNAC needs cash for principal and interest payments on its
bank note payable and administrative expenses. The primary
source of cash to meet these obligations are statutory
permitted dividends from its insurance subsidiaries. GNAC
believes the cash dividends from its insurance subsidiaries
should be sufficient to meet its expected obligations for
2003.

(c) Investments

Bonds available for sale and other investments are stated at
fair value with changes in fair value recorded as a component
of comprehensive income. Short-term investments are stated at
cost.

65

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

The following schedule summarizes the components of other
investments as of December 31, 2001. There were no other
investments as of December 31, 2002.

The equity investments were predominately private equity
investments that were not traded in public markets and cost
was considered to approximate fair value. Cost was considered
to approximate fair value for the equity investments and the
note receivable because they were carried at the amount
recoverable from Goff Moore Strategic Partners, L.L.P.
("GMSP") under the put option as discussed below. The Company
held an embedded derivative financial instrument in common
stock warrants attached to the note receivable. As of December
31, 2001, the exercise price of the warrants was not
determinable and, therefore, the warrants were not recorded in
the financial statements.

The agreement with GMSP, disclosed in note (8), provided an
opportunity to convert the equity investments and the note
receivable with a cost of $4.2 million to cash as of November
2002, as follows: the Company could at its option require GMSP
to purchase these investments for $2.1 million, less any
future cash received prior to November 2002 from the
investments. GMSP could at its option require the Company to
sell the equity investments and the note receivable to GMSP
for $4.2 million, less any future cash received prior to
November 2002 from the investments. During the second quarter
of 2001, the Company recognized a permanent impairment of
these investments and wrote down the carrying value to the
amount recoverable from GMSP under the put. This write down
amounted to $2,176,231 and was recorded as a realized capital
loss in the Statement of Operations. In February 2002, GMSP
consented to the early exercise of the Company's option, and
the Company exercised its option to require GMSP purchase the
illiquid investments for approximately $2.1 million.

The marketable securities were sold in the first quarter of
2002 for a small gain.

The "specific identification" method is used to determine
costs of investments sold. Provisions for possible losses are
recorded only when the values have experienced impairment
considered "other than temporary" by a charge to realized
losses resulting in a new cost basis of the investment.

66

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

Realized gains and losses on investments for the years ended
December 31, 2002, 2001 and 2000 are presented in the
following table:

During 2002, the Company reduced the carrying value of a
non-rated commercial mortgage backed security to $0 resulting
in a write down of $2,010,670 as a result of a significant
increase in the default rate in January and February of 2002
in the underlying commercial mortgage portfolio, which has
disrupted the cash flow stream sufficiently to make future
cash flows unpredictable. This write down was offset by net
realized gains of $3,604,462 recorded from the sale of various
bond securities.

In August 2002, the Company entered into an amendment to its
Investment Management Agreements with GMSP (See "Transactions
with Goff Moore Strategic Partners, L.P. - 1999 GMSP
Transaction"). The amendment reduces, effective as of October
1, 2002, the minimum aggregate monthly payment owed by the
Company to GMSP from $75,000 to $63,195 (with respect to each
calendar month from October 2002 through September 2003),
$53,750 (with respect to each calendar month from October 2003
through September 2004) and $45,417 (with respect to each
calendar month after September 2004). The amendment also
changes the date upon which either party to each of the
investment management agreements can terminate the agreement
at its sole option from October 4, 2002 to September 30, 2005.
The amendment was approved by each of the required applicable
state insurance departments.

During 2001, approximately $61.2 million in bond securities
were sold for a pre-tax gain of $3,576,530 in order to
generate realized capital gains and offset the Company's
realized capital loss carryforward for Federal income tax
purposes. During 2000, approximately $80.5 million in bond
securities were sold for a pre-tax loss of $1,906,911 and a
large portion of the proceeds were reinvested in bond
securities with an average taxable equivalent yield of more
than 150 basis points over the bond securities that were sold.

Proceeds from the sale of bond securities totaled $92,507,319,
$61,152,815, and $80,469,659 in

67

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

2002, 2001 and 2000, respectively. Proceeds from the sale of
common stocks totaled $6,027,392 in 2001. There were no sales
of common stocks in 2002 or 2000. Proceeds from the sale of
other investments totaled $2,111,712, $382,868, and $690,016
in 2002, 2001 and 2000, respectively

(d) Financial Instruments

For premiums receivable, which include premium finance notes
receivable, and all other accounts (except investments)
defined as financial instruments in Statement of Financial
Accounting Standards No.107, "Disclosures About Fair Values of
Financial Instruments," the carrying amount approximates fair
value due to the short-term nature of these instruments. The
carrying amount of notes payable approximates fair value due
to the variable interest rate on the note. These balances are
disclosed on the face of the balance sheets.

Fair values for investments, disclosed in note 2, were
obtained from independent brokers and published valuation
guides.

(e) Deferred Policy Acquisition Costs and Deferred Ceding
Commission Income

Policy acquisition costs, principally commissions, premium
taxes and certain marketing and underwriting expenses, are
deferred and charged to operations over periods in which the
related premiums are earned. The marketing expenses are
predominately salaries, salary related expenses and travel
expenses of the Company's marketing representatives who
actively solicit business from the independent general agents.
Deferred ceding commission income represents commissions
received from reinsurers for premiums ceded to reinsurers,
which have not been earned by the Company since the related
premiums have not yet been earned. Commission income is paid
to the Company by reinsurers as a recovery of the Company's
acquisition costs. Statement of Financial Accounting Standards
No. 113, paragraphs 18.b and 29, requires this revenue to
reduce applicable unamortized acquisition costs in such a
manner that unamortized acquisition costs are capitalized and
charged to expense in proportion to net revenue recognized.
The change in the resulting deferred asset is charged
(credited) to operations. The Company utilizes investment
income when assessing recoverability of deferred policy
acquisition costs. The Company recorded impairments on its
deferred policy acquisition costs at December 31, 2002 of
$28,386 and at December 31, 2001 of $2,487,009 related to the
property and commercial auto lines of business and at December
31, 2000 of $501,930 related to the property and nonstandard
personal auto lines of business.

68

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

Information relating to these net deferred amounts, as of and
for the years ended December 31, 2002, 2001 and 2000 is
summarized as follows:

The decrease in deferred commissions in 2002 is primarily
attributable to the decrease in premium writings in 2002. The
decrease in deferred ceding commission income in 2002 is
primarily related to the run-off of the quota share treaties
in 2002.

The decrease in deferred commissions in 2001 is primarily
attributable to the decrease in premium writings in 2001. The
decrease in deferred ceding commission income in 2001 is
primarily related to the decrease in the quota share cession
percentages and the decrease in writings in 2001.

(f) Property and Equipment

Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the respective assets (30 years for buildings
and primarily 5 years for furniture and software and 3 years
for equipment).

The following schedule summarizes the components of property
and equipment:

The decrease in land and building is a result of the sale of
the former home office building. The decrease in furniture and
equipment and in software is a result of disposing of obsolete
and fully depreciated items in these categories. The decrease
in accumulated depreciation and amortization is a result of
the disposals in all categories.

69

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

(g) Software Costs

Computer software costs relating to programs for internal use
are recorded in property and equipment and are amortized using
the straight-line method over five years or the estimated
useful life, whichever is shorter. As the Company exits
commercial lines, future write-offs of software and equipment
will likely occur.

(h) Goodwill

Goodwill represents the excess of purchase price over fair
value of net assets acquired. In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 141, "Business
Combinations" ("Statement 141") and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("Statement 142"). Statement 141 requires that the
purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30,
2001. Statement 141 also specifies criteria intangible assets
acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill, noting that
any purchase price allocable to an assembled workforce may not
be accounted for separately. Statement 142 requires that
goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at
least annually in accordance with the provisions of Statement
142. Statement 142 also requires that intangible assets with
definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."

The Company adopted the provisions of Statement 141 effective
July 1, 2001 and Statement 142 effective January 1, 2002. The
adoption of Statement 141 had no impact on the consolidated
financial statements. The adoption of Statement 142 resulted
in the Company no longer amortizing the remaining goodwill. As
of the date of adoption, the Company had unamortized goodwill
in the amount of $3,468,507 that was subject to the transition
provisions of Statements 141 and 142. Had Statement 142 been
adopted in 2001 and 2000, there would have been no change in
net income for the year ended December 31, 2001 and pro forma
net loss for the year ended December 31, 2000 would
approximate $18.9 million ((.94) per common share).

Statement 141 required, upon adoption of Statement 142, that
the Company evaluate its existing intangible assets and
goodwill that were acquired in a prior purchase business
combination, and to make any necessary reclassifications in
order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement
142, the Company was required to reassess the useful lives and
residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization
period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset
is identified as having an indefinite useful life, the Company
was required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the
first interim period. The Company did not record any
impairments as a result of the adoption of Statement 142.

In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("Statement 144"), establishing
financial accounting and reporting for the impairment or
disposal of long-lived assets. Statement 144 is effective for
fiscal years beginning after December 15, 2001. The Company
adopted the provisions of Statement 144 effective January 1,
2002. Pursuant to Statement 144 the

70

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

discontinuance of commercial lines has not been reported as
discontinued operations. The adoption of Statement 144 had no
other effect on the Company's financial position or results of
operation.

On January 7, 2000, the Company completed the acquisition of
Tri-State, an insurance operation specializing primarily in
underwriting, servicing and claims handling of nonstandard
personal auto insurance in Minnesota, North Dakota and South
Dakota. The purchase price was approximately $6,000,000 with
an additional payment of $1,148,454 made in July, 2000 and
additional payments up to approximately $4,350,000 in cash
possible over the next several years based on a conversion
goal and specific profitability targets. The Company paid
$1,566,081 in January of 2001 for the conversion goal.

In 2001, the Company decided to no longer pursue a long-term
geographic expansion strategy in personal automobile beyond
that of its core operation in Florida, and sold Tri-State to
Tri-State's president for $935,000 in cash on August 31, 2001.
The remaining goodwill associated with the Tri-State
acquisition of $5,086,283 was recorded as goodwill impairment
during the second quarter of 2001. The Company recognized a
capital loss for tax purposes of $5,066,423 from this sale
during the second quarter of 2001.

Goodwill impairment in 2001 was a result of the Company's
decision to no longer pursue a long-term geographic expansion
strategy in personal automobile beyond that of its core
operation in Florida and to sell its Tri-State agency
subsidiary. Tri-State was acquired by the Company in the first
quarter of 2000 and failed to achieve profitability during the
Company's ownership. Because of the profitability issues
surrounding the Lalande Group, (see below), it was decided in
the second quarter of 2001 to sell Tri-State to its former
owner so the Company could focus all of the personal auto
efforts solely on the Lalande Group. As a result the remaining
goodwill associated with the Tri-State acquisition was written
off in the second quarter of 2001. In December 2001 the
Company recorded an impairment of $13,360,603 on the goodwill
associated with the 1998 acquisition of the Lalande Group. The
Lalande Group was acquired by the Company in the fourth
quarter of 1998, it produced a small profit in 1999, but in
2000 it produced a loss. At the end of 2000 the Company was
expecting a significant improvement and profitability from the
Lalande Group in 2001. During 2001 the Company continued to
implement actions throughout the year to return this business
to profitability. While results in 2001 showed improvement,
they remained unprofitable. In the fourth quarter of 2001 the
Company concluded that the value of this operation was
significantly below what the Company had paid and accordingly
recorded the impairment against goodwill based upon then
current estimated market valuation levels of agencies in the
personal auto marketplace. Goodwill impairment in 2002 is a
result of the Company positioning itself for an exit from the
personal auto business in the second quarter of 2002 and the
consideration of a sale of the Lalande Group. A re-evaluation
of goodwill for the Lalande Group was made during this period
and an additional impairment of $2,859,507 was recorded. This
re-evaluation was based upon market indications of value
contained in a proposal from a potentially interested
acquiring party and upon the uncertainty of achieving likely
value levels.

The remaining goodwill as of December 31, 2002 is $609,000 and
is related to the 1998 acquisition of the Lalande Group and
reflects a value no less than the estimated fair valuation of
combined agency and claims handling operations of this type in
the personal auto marketplace. Effective in 2002, goodwill is
no longer amortized but will be subject to an impairment test
based on its estimated fair value. Therefore, additional
impairment losses could be recorded in future periods.

71

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

(i) Treasury Stock

The Company records treasury stock in accordance with the
"cost method" described in Accounting Principles Board Opinion
("APB") 6. The Company held 844,094 shares of Common Stock as
treasury stock at December 31, 2002 and 2001 with a cost basis
of $9.12 per share.

(j) Revenue Recognition

Premiums are recognized as earned on a pro rata basis over the
period the Company is at risk under the related policy.
Unearned premiums represent the portion of premiums written
which are applicable to the unexpired terms of policies in
force. NSL's net commission revenues are recognized as earned
on a pro rata basis over the policy period.

(k) Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses, less related
reinsurance, are provided for as claims are incurred. The
provision for unpaid claims and claim adjustment expenses
includes: (1) the accumulation of individual case estimates
for claims and claim adjustment expenses reported prior to the
close of the accounting period; (2) estimates for unreported
claims based on past experience modified for current trends;
and (3) estimates of expenses for investigating and adjusting
claims based on past experience.

Liabilities for unpaid claims and claim adjustment expenses
are based on estimates of the ultimate cost of settlement.
Changes in claim estimates resulting from the review process
and differences between estimates and ultimate payments are
reflected in expense for the year in which the revision of
these estimates first become known.

The process of establishing claim reserves is an imprecise
science and reflects significant judgmental factors. In many
liability cases, significant periods of time, ranging up to
several years or more, may elapse between the occurrence of an
insured claim and the settlement of the claim. Some judicial
decisions and legislative actions, even after coverage is
written and reserves are initially set, broaden liability and
policy definitions and increase the severity of claim
payments. As a result of this and other societal and economic
developments, the uncertainties inherent in estimating
ultimate claim costs on the basis of past experience have
increased significantly, further complicating the already
difficult claim reserving process.

Ultimate liability may be greater or lower than current
reserves. Reserves are monitored by the Company using new
information on reported claims and a variety of statistical
techniques. The reserves are reviewed annually by an outside
actuarial firm. The Company does not discount to present value
that portion of its claim reserves expected to be paid in
future periods. Beginning in third quarter of 2002 and for
each quarter thereafter, the Company set reserves equal to the
selected reserve estimate as established by an outside
actuarial firm. Formerly management set reserves based upon
its actuarial analysis.

The following table sets forth the changes in unpaid claims
and claim adjustment expenses, net of reinsurance cessions, as
shown in the Company's consolidated financial statements for
the periods indicated:

72

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

For 2002 the development in claims and claim adjustment
expense incurred was primarily the result of unanticipated
development of commercial auto claims for the 2000 accident
year and commercial general liability claims for the 2001,
2000 and 1999 accident years. For 2001 the development in
claims and claim adjustment expenses incurred was primarily
the result of unanticipated development of commercial auto and
commercial general liability claims for the 2000, 1999 and
1998 accident years. At December 31, 2002 the Company believes
that the carried reserves and the reinsurance agreements
currently in force are sufficient to support the future
emergence of prior year claim and claim adjustment expenses.

(l) Income Taxes

The Company and its subsidiaries file a consolidated Federal
income tax return. Deferred income tax items are accounted for
under the "asset and liability" method which provides for
temporary differences between the reporting of earnings for
financial statement purposes and for tax purposes, primarily
deferred policy acquisition costs, the discount on unpaid
claims and claim adjustment expenses, net operating loss carry
forwards and the nondeductible portion of the change in
unearned premiums. The Company did not pay income taxes during
2002 and 2001. The Company received Federal income tax refunds
totaling $250,000 and $251,644 during 2001 and 2000. The
Company paid income taxes of $280,000 during 2000.

The Company recognized a current tax benefit of $2,607,796
during 2002 as a result of a carry back of alternative minimum
tax losses. A change in the tax law during 2002 extended the
carry back period for losses to offset income in earlier
periods. As a result, the Company was entitled to a tax refund
which it received in October 2002.

73

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

(m) Earnings Per Share

The following table sets forth the computation of basic and
diluted loss per share:

(1) The effects of common stock equivalents and
convertible preferred stock are antidilutive for the
2002, 2001 and 2000 periods; therefore, diluted loss
per share is reported the same as basic loss per
share.

(n) Stock-Based Compensation

In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). Statement 123 defines a fair
value based method of accounting for an employee stock option
or similar equity instrument. Under Statement 123, the Company
elects to measure compensation costs using the intrinsic value
based method of accounting prescribed by APB 25 "Accounting
for Stock Issued to Employees".

In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148, "Accounting for 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 methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the
disclosure requirements of Statement No. 123 to require
prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002 and
are included in the notes to these consolidated financial
statements.

The Company applies APB 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had
compensation cost been determined consistent with Statement
123 for the options granted, the Company's net income and
earnings per share would have been the pro forma amounts
indicated below:

74

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

There were no options granted during 2002 and 2001. The
Company granted 531,925 options during 2000. The fair value of
the options granted during 2000 were estimated on the dates of
grant using the Black-Scholes option-pricing model with the
following assumptions: expected volatility of 31.81 to 32.00%,
risk free interest rates of 6.31 to 6.66%, expected dividend
yields of 1.23 to 1.27 % and an expected life of 7.5 years.

(o) Accounting Pronouncements

Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities"("Statement
133"), as amended. Statement 133 establishes accounting and
reporting standards for derivative instruments and requires
that an entity recognize all derivatives as either assets or
liabilities in the financial statements and measure those
instruments at fair value with changes in fair value recorded
through the income statement. The adoption of Statement 133
had no impact on the consolidated financial statements.

In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("Statement 144"), establishing
financial accounting and reporting for the impairment or
disposal of long-lived assets. Statement 144 is effective for
fiscal years beginning after December 15, 2001. Pursuant to
Statement 144 the discontinuance of commercial lines will not
be reported as discontinued operations. The Company believes
that the adoption of Statement 144 will have no other effect
on the Company's financial position or results of operation.

In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("Statement 146"). The
provisions of Statement 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The
adoption of Statement 146 is not expected to have a material
effect on the Company's consolidated financial position or
result of operations.

In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an

75

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

interpretation of FASB Statements No. 5, 57 and 107 and a
rescission of FASB Interpretation No. 34." This Interpretation
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies
that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions
of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002 and are not expected to have
a material effect of the Company's financial statements.

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

(2) INVESTMENTS

The following schedule summarizes the components of net investment
income:

The increase in investment expenses in 2001 was primarily due to the
interest charge required under the reserve reinsurance cover agreement
the Company entered into effective December 31, 2000. The Company is
required to maintain a funds held liability and to increase this
liability at an annual interest rate of 7.5%. On March 29, 2002 the
reinsurer exercised its option to transfer the trust assets
collateralizing the funds held liability to itself and the obligation
of the Company to fund the liability at a 7.5% interest rate ceased,
therefore investment expenses decreased in 2002.

In August 2002, the Company entered into an amendment to its Investment
Management Agreements with GMSP. See "Transactions with Goff Moore
Strategic Partners, L.P. - 1999 GMSP Transaction". The amendment
reduces, effective as of October 1, 2002, the minimum aggregate monthly
payment owed by the Company to GMSP from $75,000 to $63,195 (with
respect to each calendar month from October 2002 through September
2003), $53,750 (with respect to each calendar month from October 2003
through September 2004), and $45,417 (with respect to each calendar
month after September 2004). The amendment also changes the date upon
which either party to each of the investment management agreements can
terminate such agreements at its sole option from October 4, 2002 to
September 30, 2005.

76

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

The following schedule summarizes the amortized cost and estimated fair
values of investments in debt securities:

As of December 31, 2002 the Standard and Poor's ratings on the
Company's bonds available for sale were in the following categories:
45% AAA, 4% AA, 15% A, 23% BBB, 5% BB and 8% B. No securities were
rated below B.

The amortized cost and estimated fair value of debt securities at
December 31, 2002 and 2001, by maturity, are shown below.

Investments of $13,731,408 and $15,398,298, at December 31, 2002 and
2001, respectively, were on deposit with various regulatory bodies as
required by law.

77

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

(3) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following schedule presents the components of other comprehensive
(loss) income:

The 2002 reclassification adjustment for amounts included in net income
for realized gains (losses) excludes the realized gain on the sale of
the building and the realized loss due to the impairment of bonds
because these amounts were not a component of accumulated other
comprehensive income as of December 31, 2001. The 2001 reclassification
adjustment for amounts included in net income for realized gains
(losses) excludes the realized gain on the sale of subsidiary and the
realized loss due to the impairment of other investments because these
amounts were not a component of accumulated other comprehensive income
as of December 31, 2000.

(4) NOTE PAYABLE

In November 1998, the Company entered into a credit agreement with a
commercial bank pursuant to which it borrowed $18,000,000. Interest was
due monthly at an interest rate that approximated the 30-day London
Interbank Offered Rate ("LIBOR") plus 175 basis points. Principal
payments of $500,000 were due each quarter with the balance of
$10,500,000 due at maturity of the note on October 1, 2003.

In March 2001, the credit agreement was amended, specific breaches of
covenants were waived, $2,500,000 in principal was prepaid and certain
terms were amended. Interest was due monthly at an interest rate that
approximates the 30-day LIBOR plus 250 basis points with an increase of
25 basis points each quarter beginning October 1, 2001 (4.89375% at
December 31, 2001). Principal payments of $500,000 were due each
quarter and were scheduled to increase to $750,000 beginning April 1,
2002, with the balance of $6,500,000 due at maturity of the note on
November 1, 2003.

On November 13, 2001, the credit agreement was further amended to
change certain covenants and to provide the following revised principal
amortization schedule: $200,000 upon effectiveness of the amendment on
November 13, 2001; $500,000 on January 2, 2002; and $1,000,000 on the
first day of each calendar quarter thereafter. A $50,000 fee was paid
to the bank for this amendment.

On February 27, 2002 the Company entered into an amendment to the
credit agreement which cured covenant breaches and provided for
principal prepayments. The Company prepaid $6,100,000 of the
indebtedness outstanding under the credit agreement on March 4, 2002.
Several covenants in the existing credit agreement were eliminated or
modified by the amendment and the interest rate was changed to a base
rate (which approximates prime) plus 175 basis points (6.00% at
December 31, 2002). The Company paid $500,000 of the indebtedness
outstanding under the credit agreement in December 2002 as a result of
the sale of GCM. On March 24, 2003 the Company paid $1,939,000 of the
indebtedness outstanding under the credit

78

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

agreement, as a result of the dividend received from General Agents of
$3,878,000 (see Note 7). The principal amortization schedule was
amended such that the remaining $1,761,000 principal balance under the
credit agreement is payable in November 2003.

The Company recorded interest expense of $310,095, $842,368 and
$1,409,378 during 2002, 2001 and 2000, respectively. The Company paid
interest of $354,140, $920,227 and $1,286,438 during 2002, 2001 and
2000, respectively. The Company made unscheduled principal prepayments
of $2,500,000, $500,000, $200,000 and $500,000 in the first, third and
fourth quarters of 2001 and December 2002, respectively, and scheduled
principal payments of $500,000 in January, April, July and October of
2001 and in January 2002.

(5) REINSURANCE

On February 7, 2002, the Company announced its decision to cease
writing commercial lines insurance due to continued adverse claims
development and unprofitable underwriting results. Commercial lines
insurance also includes specialty lines.

Ceded

Commercial Lines

Prior to 1999 and again beginning in 2001, the Company wrote commercial
casualty policy limits up to $1,000,000. For policies with an effective
date occurring from 1995 through 1998, and policies with an effective
date occurring during 2001 or 2002, the Company has first excess
casualty reinsurance for 100% of casualty claims exceeding $500,000 up
to the $1,000,000 limits, resulting in a maximum net claim retention
per risk of $500,000 for such policies. During 1999 and 2000, the
Company wrote commercial casualty policy limits up to $5,000,000. For
policies with an effective date occurring in 1999 or 2000, the Company
has first excess casualty reinsurance for 100% of casualty claims
exceeding $500,000 up to $1,000,000 and second excess casualty
reinsurance for 100% of casualty claims exceeding $1,000,000 up to the
$5,000,000 limits, resulting in a maximum net claim retention per risk
of $500,000. The Company has facultative reinsurance for policy limits
written in excess of the limits reinsured under the excess casualty
reinsurance agreements.

Effective December 31, 2000 the Company entered into a quota share
reinsurance agreement whereby the Company ceded 100% of its commercial
auto liability unearned premiums and 50% of all other commercial
business unearned premiums at December 31, 2000 to a non-affiliated
reinsurer. For policies with an effective date of January 1, 2001
through December 31, 2001, the Company entered into a quota share
reinsurance agreement whereby the Company ceded 20% of its commercial
business to a non-affiliated reinsurer. Also effective December 31,
2000, the Company entered into a reserve reinsurance cover agreement
with a non-affiliated reinsurer. This agreement reinsures the Company's
ultimate net aggregate liability in excess of $32,500,000 up to an
aggregate limit of $89,650,000 for net commercial auto liability losses
and loss adjustment expense incurred but unpaid as of December 31,
2000. At December 31, 2002 a deferred reinsurance gain of $3,855,062
has been recorded in deferred revenues and $5,194,938 has been recorded
in insurance services revenues, which represents the reserve
development under the reserve reinsurance cover agreement since its
inception at December 31, 2000. The deferred gain item will be
recognized in income in future periods based upon the ratio of claims
paid in the $57,150,000 layer to the total of the layer. The Company
established a reinsurance balance receivable and a liability for funds
held

79

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

under reinsurance agreements for the reserves transferred at December
31, 2001 and December 31, 2000. Also in connection with this agreement,
the Company was required to maintain assets in a trust fund with a fair
value at least equal to the funds held liability. The trust fund was
established during the third quarter of 2001 and at December 31, 2001
the assets in the trust had a fair value of $49,553,698. Because the
Company's statutory policyholders' surplus fell below certain levels
specified in the agreement, the reinsurer had the option to direct the
trustee to transfer the assets of the trust to the reinsurer. On March
29, 2002, the reinsurer exercised this option and the trust assets were
transferred to the reinsurer. As a result, investments and funds held
under reinsurance agreements were reduced by approximately $44,000,000.
The Company recorded a realized gain of approximately $486,000 as a
result of these transactions. The reinsurer continues to be responsible
for reimbursing the Company for claim payments covered under this
agreement.

For 2000 and 2001, the Company has excess casualty clash reinsurance
for $5,000,000 in ultimate net losses on any one accident in excess of
$1,000,000 in ultimate net losses arising out of each accident. For
2002, the Company has excess casualty clash reinsurance for 35% of
$5,000,000 in ultimate net losses on any one accident in excess of
$1,000,000 in ultimate net losses arising out of each accident.

For its lawyers professional liability coverages with policy effective
dates occurring during 2001 or prior, the Company has quota share
reinsurance for 50% of the first $1,000,000 of professional liability
claims and excess casualty reinsurance for 100% of professional
liability claims exceeding $1,000,000 up to $5,000,000 policy limits
resulting in a maximum net claim retention per risk of $500,000.

For its real estate agents professional liability coverages with policy
effective dates prior to August 1, 2001, the Company has quota share
reinsurance for 25% of the first $1,000,000 of professional liability
claims resulting in a maximum net claim retention per risk of $750,000.
For policies with an effective date occurring on August 1, 2001 through
April 15, 2002, the Company has quota share reinsurance for 50% of the
first $1,000,000 of professional liability claims resulting in a
maximum net claim retention per risk of $500,000.

For its educators professional liability coverages with policy
effective dates occurring during 2001 or prior, the Company has quota
share reinsurance for 60% of the first $1,000,000 of professional
liability claims and excess casualty reinsurance for 100% of
professional liability claims exceeding $1,000,000 up to $5,000,000
policy limits resulting in a maximum net claim retention per risk of
$400,000.

For its directors and officers liability coverages with policy
effective dates occurring prior to 2001, the Company has quota share
reinsurance for 90% of the first $5,000,000 of professional liability
claims resulting in a maximum net claim retention per risk of $500,000.
For policies with an effective date occurring during 2001, the Company
has quota share reinsurance for 85% of the first $5,000,000 of
professional liability claims resulting in a maximum net claim
retention per risk of $750,000.

For its miscellaneous professional liability coverages with policy
effective dates occurring during 2001 or prior, the Company has quota
share reinsurance for 50% of the first $1,000,000 of professional
liability claims resulting in a maximum net claim retention per risk of
$500,000.

Personal Lines

For its umbrella coverages with policy effective dates occurring in
2000 and 2001, the Company has excess casualty reinsurance for 100% of
umbrella claims exceeding $1,000,000 up to $10,000,000 policy limits.
For policies with an effective date occurring prior to February 1,
2001, the Company has quota share

80

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

reinsurance for 75% of the first $1,000,000 of umbrella claims
resulting in a maximum net claim retention per risk of $250,000. For
policies with an effective date occurring February 1, 2001 through
December 31, 2001, the Company has quota share reinsurance for 77.5% of
the first $1,000,000 of umbrella claims resulting in a maximum net
claim retention per risk of $225,000.

Prior to 2002, for its personal auto coverages, the Company has excess
casualty clash reinsurance for $5,000,000 in ultimate net losses on any
one accident in excess of $1,000,000 in ultimate net losses arising out
of each accident. Beginning in 2002, the Company has excess casualty
clash reinsurance for 35% of $5,000,000 in ultimate net losses on any
one accident in excess of $1,000,000 in ultimate net losses arising out
of each accident.

The Company's personal auto business is produced by NSL and, prior to
August 1, 2001, by Tri-State or written on a direct basis through MCIC.
For business produced by NSL with an effective date of April 1, 2000
through December 31, 2000, the Company has excess of loss reinsurance
for 100% of claims in excess of $25,000 up to the $100,000 policy
limits and quota share reinsurance for 20% of the first $25,000 of
claims resulting in a maximum net claim retention per risk of $20,000.
For business produced by NSL with an effective date of January 1, 2001
through December 31, 2001, the Company has excess of loss reinsurance
for 100% of claims in excess of $25,000 up to the $100,000 policy
limits and quota share reinsurance for 50% of the first $25,000 of
claims resulting in a maximum net claim retention per risk of $12,500.
Effective December 31, 2001, the Company's personal lines excess of
loss and quota share reinsurance treaties expired and were not
replaced. Under the terms of these treaties, the reinsurer remains
liable for claims with regard to policies in force at the date of
expiration. Beginning in 2002 the Company no longer writes nonstandard
personal auto limits in excess of $25,000 and therefore has no need for
excess of loss reinsurance.

For business produced by Tri-State or written on a direct basis with
MCIC with an effective date prior to August 1, 2001, the Company has
excess of loss reinsurance for 100% of claims in excess of $25,000 up
to the $100,000 policy limits and quota share reinsurance for 50% of
the first $25,000 of claims resulting in a maximum net claim retention
per risk of $12,500.

For 2001, the Company carried catastrophe property reinsurance to
protect it against catastrophe occurrences for 95% of the property
claims that exceed $1,500,000 but do not exceed $13,000,000 for a
single catastrophe as well as second event catastrophe property
reinsurance for 100% of $1,000,000 excess of $500,000 on a second
catastrophic event. In 2002, the Company carried catastrophe property
reinsurance to protect it against catastrophe occurrences for property
claims that exceed $500,000 but do not exceed $7,000,000. The Company
does not have catastrophe reinsurance for business written in 2003
because of the exit from commercial lines and because the cost for
coverage for the remaining personal lines was determined to be
excessive in relation to the evaluation of risks to be retained.

Effective August 1, 2001, MGAI and MCIC entered into a fronting
arrangement with Tri-State. All business written under this fronting
arrangement was ceded to a non-affiliated reinsurer rated "A+
(Superior)" by Best's. The reinsurer has fully indemnified the Company
against business, credit and insurance risk. This fronting arrangement
was placed in run off during the second quarter of 2002.

MGAI utilized a reinsurance arrangement in Florida whereby premiums
were ceded to a non-affiliated authorized reinsurer and the reinsurer
ceded the premiums to General Agents. This was necessary because
General Agents was not an authorized reinsurer in Florida until the
fourth quarter of 2000. These reinsurance agreements were commuted in
the first quarter of 2003, resulting in MGAI assuming the business from
the non-affiliated reinsurer.

81

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

GCM had entered into fronting arrangements with non-affiliated
insurance companies. GCM retained no portion, as the business written
under these agreements was 100% ceded. Although these cessions were
made to authorized reinsurers rated "A- (Excellent)" or better by
Best's, the agreements required that collateral (in the form of trust
agreements and/or letters of credit) be maintained to assure payment of
the unearned premiums and unpaid claims and claim adjustment expenses
relating to the risks insured under these fronting arrangements. The
balances in such accounts as of December 31, 2001 and 2000 total
$11,548,559 and $24,148,000, respectively. These fronting arrangements
continued with GCM after its sale in December 2002 and the Company is
no longer involved.

The amounts deducted in the consolidated financial statements for
reinsurance ceded as of and for the years ended December 31, 2002, 2001
and 2000 respectively, are set forth in the following table.

Claims ceded to the commercial automobile plans of Arkansas,
California, Louisiana, Mississippi and Pennsylvania are designated as
"plan servicing".

The amounts included in the Consolidated Balance Sheets for reinsurance
ceded under fronting arrangements and reinsurance ceded to the
commercial automobile plans of Arkansas, California, Louisiana,
Mississippi, and Pennsylvania were as follows:

The Company remains directly liable to its policyholders for all policy
obligations and the reinsuring companies are obligated to the Company
to the extent of the reinsured portion of the risks.

Assumed

The Company, from time to time, utilizes reinsurance arrangements with
various non-affiliated admitted insurance companies, whereby the
Company underwrites the coverage and assumes the policies 100% from the
companies. These arrangements require that the Company maintain escrow
accounts to assure payment of the unearned premiums and unpaid claims
and claim adjustment expenses relating to risks insured through such
arrangements and assumed by the Company. As of December 31, 2002, 2001,
and 2000, the balance in such escrow accounts totaled $7,817,264,
$9,578,961 and $15,059,497, respectively. For 2002, 2001 and

82

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

2000 the premiums earned by assumption were $1,738,792, $3,131,323, and
$18,243,710, respectively. The assumed unpaid claims and claim
adjustment expenses were $16,512,219, $1,839,889 and $5,142,488, for
2002, 2001 and 2000, respectively. The large increase in 2002 was due
to the transfer of unpaid claims and claim adjustment expenses to
General Agents in conjunction with the sale of the management contract
of GCM in December 2002.

(6) FEDERAL INCOME TAXES

In the accompanying consolidated statements of operations, the
provisions for Federal income tax as a percent of related pretax income
differ from the Federal statutory income tax rate. A reconciliation of
income tax expense using the Federal statutory rates to actual income
tax expense follows:

Under Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("Statement 109"), the primary objective is to
establish deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at enacted tax rates expected to
be in effect when such amounts are realized or settled. As a
consequence, the portion of the tax expense, which is a result of the
change in the deferred tax asset or liability, may not always be
consistent with the income reported on the statement of operations.

83

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

The following table represents the tax effect of temporary differences
giving rise to the net deferred tax asset established under Statement
109.

In assessing the realization of its deferred tax assets, management
considers whether it is more likely than not that a portion or all of
the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Based upon management's consideration of expected reversal
of deferred tax liabilities and projected future taxable income,
management believes it is more likely than not that the Company will
not realize the benefits of these deferred tax assets in the near
future. In 2001 the Company recorded a valuation allowance against its
Federal income tax asset. While the Company produced a loss in 2000, at
the end of 2000 the Company projected earnings in 2001 with subsequent
increases each year thereafter. During 2001 the Company continued to
implement actions to return to profitability, both in commercial lines
and the personal lines. However, earnings in 2001 did not materialize
and in the first quarter of 2002 the Company announced it was
discontinuing the writing of its largest line of business, commercial
lines, due to continued adverse claims development and unprofitable
results. At that time the prospects for significant profits in personal
lines, its only remaining line of business, were unclear. Because the
Company had no near-term expectation of profitable results, it was
necessary to fully reserve the deferred tax asset due to uncertainty of
future profitable results which could utilize this asset. In 2002 the
Company continued to record unprofitable results and has no expectation
of significant profits at this time.

84

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

The Company recognized a current tax benefit of $2,607,796 during the
third quarter of 2002 as a result of a carry back of alternative
minimum tax losses. A change in the tax law during 2002 extended the
carry back period for losses to offset income in earlier periods. As a
result, the Company was entitled to a tax refund which it received in
October 2002. The Company recorded deferred tax expense during the
first quarter of 2002 due to an increase in the deferred tax asset
valuation allowance, as a result of excluding the effects of unrealized
gains in the deferred tax asset. Gross deferred tax assets and the
valuation allowance were reduced in the amount of $1,022,260 due to the
sale of GCM.

As of December 31, 2002, the Company has net operating loss carry
forwards for tax purposes of approximately $692,719, $23,752,756,
$33,950,174 and $9,302,951 which, if not utilized, will expire in 2018,
2020, 2021 and 2022, respectively.

(7) SHAREHOLDERS' EQUITY

GNAC has 250,000,000 shares of authorized $.10 par value common stock
(the "Common Stock"). Of the authorized shares 22,013,830 were issued
as of December 31, 2002 and 2001, respectively, and 21,169,736 were
outstanding as of December 31, 2002 and 2001, respectively.

On October 4, 1999 GNAC sold to GMSP, for an aggregate purchase price
of $31,620,000 (i) 31,620 shares of Series A Preferred Stock, which are
convertible into 6,200,000 shares of Common Stock at a conversion price
of $5.10 per share and, should the Company pay dividends on its Common
Stock, the Series A Preferred Stock would be entitled to dividends as
if converted into Common Stock, (ii) the Series A Warrant to purchase
an aggregate of 1,550,000 shares of Common Stock at an exercise price
of $6.375 per share with an expiration of October 2004 and (iii) the
Series B Warrant to purchase an aggregate of 1,550,000 shares of Common
Stock at an exercise of $8.50 per share with an expiration date of
October 2006. As a result of the value attributable to the Common Stock
purchase warrants issued with the Series A Preferred Stock, the Series
A Preferred Stock was issued at a discount which is being amortized
over a five year period using the effective interest method. Proceeds
were allocated based upon the relative fair values of the Series A
Preferred Stock, and the Series A Warrants and the Series B Warrants.
The Series A Warrants and the Series B Warrants are anti-dilutive.

On March 23, 2001, GNAC consummated the 2001 GMSP Transaction with GMSP
pursuant to which, among other things, the Company issued shares of its
newly created Series C Preferred Stock to GMSP in exchange for an
aggregate purchase price of $3 million in cash.

The annual dividend rate on the Series C Preferred Stock is 10% until
March 23, 2004 and 20% thereafter. Unpaid dividends are cumulative and
compounded. The Series C Preferred Stock is redeemable at GNAC's option
after March 23, 2006 and at the option of the majority holders after
March 23, 2007 at a price of $1,000 per share ($3,000,000) plus accrued
and unpaid dividends. The Series C Preferred Stock is not convertible
into Common Stock.

The agreement with GMSP was conditioned upon the following changes in
the securities currently held by GMSP. The exercise prices of the
Series A Warrant and the Series B Warrant held by GMSP were amended to
equal $2.25 and $2.5875 per share, respectively. Each of these warrants
provides for the purchase of 1,550,000 million shares of Common Stock,
subject to adjustment. Further, GNAC is required to redeem the
outstanding shares of its Series A Preferred Stock on January 1, 2006,
subject to certain conditions at a price of $1,000 per share
($31,620,000) plus unpaid dividends, if any. Any Series A Preferred
Stock unredeemed for any reason after that date would accrue interest,
payable quarterly at a rate equal to eight percent per year with any
unpaid interest compounded annually.

85

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

On March 23, 2001, GNAC consummated the Stallings Transaction pursuant
to which, among other things, GNAC issued shares of its newly created
Series B Preferred Stock and a Warrant to purchase an aggregate of
1,050,000 shares of Common Stock at $2.25 per share in exchange for an
aggregate purchase price of $3 million in cash. The annual dividend
provisions and the redemption provisions of the Series B Preferred
Stock are the same as those for the Series C Preferred Stock. The
Series B Preferred Stock is convertible into Common Stock at $2.25 per
share. Subject to adjustment for certain events, the Series B Preferred
Stock is convertible into a maximum of 1,333,333 shares of Common
Stock. The Warrant expires in March 2006.

The transaction dated March 23, 2001 results in all preferred stock
being redeemable. The discount on the preferred stock is being
amortized over the period until redemption using the effective interest
method. At December 31, 2002, there was $10,394,000 in unaccreted
discount on the Series A and Series B Preferred Stock and $1,132,118 in
accrued dividends on the Series B and Series C Preferred Stock.

In 2000, GNAC paid quarterly cash dividends of $.0175 per share on its
common stock for every quarter. The Board of Directors discontinued
quarterly dividends on the common stock in February 2001.

The Company's Common Stock commenced trading on the OTC Bulletin Board
on April 15, 2002 under the ticker symbol "GNAC". The OTC Bulletin
Board is a regulated quotation service that displays real-time quotes,
last sale price and volume information in over-the-counter equity
securities.

The following table presents the statutory policyholders' surplus and
statutory net income (loss) as of and for the years ended December 31,
2002, 2001, and 2000:

The 2001 "as adjusted" consolidated statutory policyholders' surplus
and consolidated statutory net loss reflects $3,000,000 in C & CAE
reserve development that was recorded subsequent to the issuance of the
statutory financial statements as filed with the respective state
insurance departments. In addition, in the first quarter of 2002,
General Agents declared and paid a $7,238,000 cash dividend to GNAC and
reduced the carrying value of an investment to $0 resulting in a
write-down of approximately $2,010,000. These actions reduce
consolidated statutory policyholders' surplus on a pro-forma basis to
approximately $40,650,000.

The Company's statutory capital exceeds the benchmark capital level
under the Risk Based Capital formula for its insurance companies that
are subject to Risk Based Capital requirements. The Company adopted the
NAIC Accounting Practices and Procedures (Codification of Statutory
Accounting) effective January 1, 2001,

86

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

which resulted in a decrease to consolidated statutory policyholders'
surplus of $1,123,936.

Statutes in Texas and Oklahoma restrict the payment of dividends by the
insurance company subsidiaries to the available surplus funds derived
from their realized net profits. The maximum amount of cash dividends
that each subsidiary ordinarily may declare without regulatory approval
in any 12-month period is the greater of net income for the 12-month
period ended the previous December 31 or ten percent (10%) of
policyholders' surplus as of the previous December 31. On March 20,
2003, General Agents (the Oklahoma subsidiary) paid dividends to GNAC
of $3,878,000, based on its surplus amounts at December 31, 2002.

In 1988, the Board of Directors declared, pursuant to a Rights Plan, a
dividend distribution of one common share purchase right on each
outstanding share of $.10 par value Common Stock. The dividend
distribution was made on March 18, 1988, payable to shareholders of
record on that date. In 1993, the Board of Directors amended the Rights
Plan and extended the expiration date of these rights from March 18,
1998 to May 25, 2003. Each right, as amended during 1993, has an
exercise price of $70. The rights are not exercisable until the
Distribution Date (as defined in the Rights Plan). The Rights Plan
provides, among other things, that if any person or group (other than
the Company, one of its subsidiaries or an employee benefit plan of the
Company or a subsidiary) acquires 20% or more of the Company's Common
Stock (except pursuant to an offer for all outstanding Common Stock
which the Continuing Directors (as defined in the Rights Plan) have
determined to be in the best interests of the Company and its
shareholders), if a 20% holder engages in certain self-dealing
transactions or if a holder of 15% or more of the Company's Common
Stock is declared an Adverse Person (as defined in the Rights Plan) by
the Board of Directors, each holder of a right (other than the 20%
holder or the Adverse Person, whose rights would become null and void)
would have the right to receive, upon exercise of the right, Common
Stock having a market value of two times the exercise price of the
right. The Company is able to redeem rights under certain conditions
set forth in the Rights Plan. If, following a public announcement that
a person has acquired 20% or more of the common stock, the Company is
acquired in a merger (other than a merger which follows an offer
approved by the Continuing Directors as defined in the Rights Plan) or
other business combination transaction or if 50% of the assets or
earning power of the Company is sold, each right (except rights which
have previously become null and void as described above), will entitle
its holder to purchase, at the right's then-current exercise price,
shares of the acquiring Company's common stock having a market value of
two times the exercise price of the right.

(8) BUSINESS TRANSACTIONS

On October 4, 1999 GNAC sold to GMSP, for an aggregate purchase price
of $31,620,000 (i) 31,620 shares of Series A Preferred Stock, which are
convertible into 6,200,000 shares of Common Stock at a conversion price
of $5.10 per share, (ii) the Series A Warrant to purchase an aggregate
of 1,550,000 shares of Common Stock at an exercise price of $6.375 per
share and (iii) the Series B Warrant to purchase an aggregate of
1,550,000 shares of Common Stock at an exercise of $8.50 per share (the
"1999 GMSP Transaction"). At closing GNAC and its insurance company
subsidiaries entered into Investment Management Agreements with GMSP
pursuant to which GMSP manages their respective investment portfolios.
Completion of the 1999 GMSP Transaction concluded the strategic
alternatives review process that the Company initiated in 1998. See
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Business Operations."

On March 23, 2001, the Company consummated a transaction with GMSP
pursuant to which, among other things, the Company issued shares of its
newly created Series C Preferred Stock to GMSP in exchange for

87

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

an aggregate purchase price of $3 million in cash (the "2001 GMSP
Transaction"). In the 2001 GMSP Transaction, the Company and GMSP
changed certain terms of certain of the securities issued to GMSP
pursuant to the 1999 GMSP Transaction and the Company undertook to
redeem the Series A Preferred Stock in 2006, subject to certain
conditions. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Business Operations."

On March 23, 2001, the Company consummated a transaction with Robert W.
Stallings pursuant to which, among other things, the Company issued
shares of its newly created Series B Preferred Stock and a warrant to
purchase an aggregate of 1,050,000 shares of GNAC Common Stock at $2.25
per share in exchange for an aggregate purchase price of $3 million in
cash (the "Stallings Transaction"). See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Business Operations."

On December 2, 2002, the Company completed the sale and transfer of the
management contract controlling GCM to an affiliate of Liberty, for a
purchase price of up to $10 million, of which $1 million was paid at
closing and the balance is payable in contingent payments through
September 2009 (see Note (1)(b) Nature of Operations).

The Company sold the office building at 500 Commerce Street in Fort
Worth, Texas, where the Company's principal executive offices and
commercial insurance operations were located, to an unaffiliated third
party for $5 million on August 30, 2002. The Company recorded a gain of
$455,056 from this transaction. As a result, the Company leased new
office space to house its principal executive offices and commercial
insurance operations (see Note (1)(b) Nature of Operations).

(9) BENEFIT PLANS

At December 31, 2001, the Company had two plans under which options to
purchase shares of GNAC's common stock could be granted: the 1995 Stock
Option Plan ("95 Plan") and the 1998 Long-Term Incentive Plan ("98
Plan"). The 1990 Stock Option Plan and all unexercised options
thereunder expired during 2000. The 95 Plan was approved by the
shareholders on May 10, 1996 and 1,071,000 shares currently are
reserved and available for issuance under this plan. Options granted
under the 95 Plan have a maximum ten year term and are exercisable at
the rate of 20% immediately upon grant and 20% on each of the first
four anniversaries of the grant date. The 98 Plan was approved by the
shareholders on July 17, 1998, and the aggregate number of shares of
common stock that may be issued under the 98 Plan is limited to
1,000,000 and 595,235 shares currently are reserved and available for
issuance under this plan. Under the 98 Plan, stock options (including
incentive stock options and non-qualified stock options), stock
appreciation rights and restricted stock awards may be made. In 2000
options for 531,925 shares were granted to officers, directors and
employees of the Company under the 98 Plan at an average exercise price
of $5.57 per share. In 1998 options for 579,710 shares were granted to
Glenn W. Anderson under an employment agreement at an exercise price of
$5.75 per share. The exercise price of each outstanding option equals
the market price of the GNAC's common stock on the date of grant.

A summary of the status of the Company's outstanding options as of
December 31, 2002, 2001 and 2000, and changes during the years ended
December 31, 2002, 2001 and 2000 is presented below:

88

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

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

The Company has a 401(k) plan for the benefit of its eligible
employees. The Company made quarterly contributions to the plan which
totaled $148,634, $232,663 and $265,836 during 2002, 2001 and 2000,
respectively.

Because of their importance to the Company, in August 2002 the Company
entered into executive severance agreements with two senior executives,
Richard M. Buxton and Daniel J. Coots. The agreements generally provide
that the Company shall pay the executive, upon termination of the
employment of the executive by the Company without cause or by the
executive with good reason during the term of the agreement, a lump sum
severance amount equal to the base annual salary of the executive as of
the date that the executive's employment with the Company ends. The
current base annual salaries of Mssrs. Buxton and Coots are $170,000
and $155,000, respectively. The executive severance agreements do not
supersede the change in control agreements or any other severance
agreements the employees may have with the Company. Richard A. Laabs, a
former senior executive of the Company, also entered into an executive
severance agreement with the Company in August 2002, but did not
receive any severance payments pursuant to such agreement when resigned
his employment with the Company in January 2003.

The Company entered into retention incentive agreements with sixteen
employees, three of whom are officers of the Company.

89

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

Each of the retention incentive agreements generally requires that the
Company pay the applicable employee an amount based upon the employee's
annual base salary, less amounts owed by the Company to the employee
pursuant to any change in control or severance agreements the employee
may have with the Company. The Company's obligation to make payments
under each retention incentive agreement is conditioned upon the
employee remaining in the employ of the Company through a specified
date, unless terminated earlier by the Company without cause or by the
employee with good reason. The Company could be obligated to make up to
an aggregate of approximately $793,000 in payments under the retention
incentive agreements. Other than Jackiben N. Wisdom (who was not one of
the five most highly compensated employees of the Company at the time
he entered into his retention agreement), none of the five most highly
compensated employees of the Company are parties to the retention
incentive agreements.

In December 2002, McRae B. Johnston, the President - Personal Lines
Division of the Company, resigned his employment with the Company and
each of its subsidiaries other than MGAI, where Mr. Johnston remained
employed until March 1, 2003. The Company and Mr. Johnston entered into
separation agreements and releases (the "Release Agreements") pursuant
to which the Company and Mr. Johnston each mutually released the other
from obligations under the stock purchase agreement and employment
contract between the Company and Mr. Johnston and generally from any
and all other claims that each otherwise may have had against the
other. The Company paid Mr. Johnston an aggregate of $400,000 pursuant
to the Release Agreements. Mr. Johnston also entered into a one-year
Consulting Agreement with MGAI effective after the conclusion of his
employment with MGAI on March 1, 2003 pursuant to which MGAI will pay
Mr. Johnston an aggregate of $200,000 to be made in four equal payments
of $50,000 each in March, June, September and December of 2003.

(10) SEGMENT REPORTING

On February 7, 2002, the Company announced its decision to discontinue
writing commercial lines insurance business due to continued adverse
claims development and unprofitable results.

During 2001 the Company made operating decisions and assessed
performance for the commercial lines segment and the personal lines
segment. The commercial lines segment wrote primarily commercial auto,
general liability and other. The personal lines segment writes
primarily nonstandard personal auto coverages. The Company considers
many factors including the nature of the insurance product and
distribution strategies in determining how to aggregate operating
segments.

90

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

The following tables represent a summary of segment data as of and for
the years ended December 31, 2002, 2001 and 2000:

The following table provides additional detail of segment revenue
components by product line.

91

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

The following table provides additional detail of segment revenue
components by product line.

92

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

The following table provides additional detail of segment revenue
components by product line.

93

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

(11) CONTINGENCIES

In the normal course of its operations, the Company has been named as
defendant in various legal actions seeking payments for claims denied
by the Company and other monetary damages. The Company's management
believes that unpaid claims and claim adjustment expenses are adequate
to cover possible liability from lawsuits which arise in the normal
course of its insurance business. In the opinion of the Company's
management the ultimate liability, if any, resulting from the
disposition of all claims will not have a material adverse effect on
the Company's consolidated financial position or results of operations.

The Company does not have any financial instruments where there is
off-balance-sheet-risk of accounting loss due to credit or market risk.
There is credit risk in the premiums receivable and reinsurance
balances receivable of the Company. At December 31, 2002 the Company
had claims receivables that were material with regard to shareholders'
equity from Hartford Fire Insurance Company of approximately $2,819,000
and Motors Insurance Corporation of approximately $1,947,000.

(12) QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table contains selected unaudited consolidated financial
data for each quarter (in thousands, except per share data):

(a) As reported by the New York Stock Exchange for 2001 through April
14, 2002 and reported by the OTC Bulletin Board for April 15, 2002 to
the fourth quarter of 2002.

The net loss of $62,249,000 recorded for the fourth quarter of 2001 is
primarily a result of unfavorable claims experience, goodwill
impairment, a provision for potentially uncollectible receivables and a
valuation allowance for deferred Federal income taxes. The Company
recorded an increase in estimated ultimate claims liabilities of
approximately $20,000,000 in the fourth quarter of 2001. The Company
also recorded a provision for potentially uncollectible receivables of
approximately $2,654,000. In December 2001 the Company recorded an
impairment of approximately $13,361,000 on the goodwill

94

GAINSCO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2002, 2001 and 2000

associated with the 1998 acquisition of the Lalande Group. This action
was taken to reflect estimated fair valuation levels of agencies in the
personal automobile marketplace. Due to the uncertainty of future
profitability levels, the Company recorded a valuation allowance of
approximately $31,535,000 against its deferred Federal income tax
asset.

95

INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION

The Board of Directors and Shareholders
GAINSCO, INC:

Under date of March 24, 2003 we reported on the consolidated balance sheets of
GAINSCO, INC. and subsidiaries as of December 31, 2002 and 2001 and the related
consolidated statements of operations, shareholders' equity and comprehensive
loss and cash flows for each of the years in the three-year period ended
December 31, 2002. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.

In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.

Our report refers to a change in accounting for goodwill and other intangible
assets in 2002 as a result of the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," and to a change in
the method of accounting for residual interests in securitizations in 2001 as a
result of the adoption of EITF 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets."

/s/ KPMG LLP
-------------------------
KPMG LLP
Dallas, Texas
March 24, 2003

96

SCHEDULE I

GAINSCO, INC. AND SUBSIDIARIES
Summary of Investments - Other
Than Investments in Related Parties

(Amounts in thousands)

See accompanying independent auditors' report on supplementary information.

97

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC.
(PARENT COMPANY)

Balance Sheets
December 31, 2002 and 2001

See accompanying notes to condensed financial statements.

See accompanying independent auditors' report on supplementary information.

98

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

GAINSCO, INC.
(PARENT COMPANY)

Statements of Operations
Years ended December 31, 2002, 2001 and 2000

See accompanying notes to condensed financial statements.

See accompanying independent auditors' report on supplementary information.

99

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

GAINSCO, INC.
(PARENT COMPANY)

Statements of Shareholders' Equity and Comprehensive Loss
Years ended December 31, 2002, 2001 and 2000

(continued)

100

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

GAINSCO, INC.
(PARENT COMPANY)

Statements of Shareholders' Equity and Comprehensive Loss
Years ended December 31, 2002, 2001 and 2000

See accompanying notes to condensed financial statements.

See accompanying independent auditors' report on supplementary information.

101

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

GAINSCO, INC.
(PARENT COMPANY)

Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000

(continued)

102

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

GAINSCO, INC.
(PARENT COMPANY)

Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000

See accompanying notes to condensed financial statements.

See accompanying independent auditors' report on supplementary information.

103

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

GAINSCO, INC.
(PARENT COMPANY)

Notes to Condensed Financial Statements
December 31, 2002, 2001 and 2000

(1) GENERAL

The accompanying condensed financial statements should be read in
conjunction with the notes to the consolidated financial statements for
the years ended December 31, 2002, 2001 and 2000 included elsewhere in
this Annual Report.

(2) RELATED PARTIES

The capital contribution made in 2002 was the equity of GCM that was
contributed to General Agents in conjunction with General Agents
assuming the liabilities of GCM in December 2002.

The Company made a cash capital contribution of $2,500,000 to General
Agents in June of 2000. Also during 2000, the Company made capital
contributions to GAINSCO Service Corp by forgiving intercompany debt in
the amount of $2,061,066. Included in the payable to General Agents at
December 31, 2000 was an accrued capital contribution of $8,000,000.
The cash was paid to General Agents in February 2001. The Company
acquired the net assets of Tri-State of $3,732,708 in January 2000
through the purchase of all its outstanding capital stock. The capital
stock was sold in August 2001 to Herbert A. Hill, Tri-State's president
and former owner.

The following table presents the components of the net receivable from
and payable to subsidiaries at December 31, 2002 and 2001:

See accompanying independent auditors' report on supplementary information.

104

SCHEDULE III

GAINSCO, INC. AND SUBSIDIARIES

Supplementary Insurance Information

Years ended December, 2002, 2001 and 2000
(Amounts in thousands)

(1) Net of deferred ceding commission income.

(2) Net of the amortization of deferred ceding commission income.

See accompanying independent auditors' report on supplementary information.

105

SCHEDULE IV

GAINSCO, INC. AND SUBSIDIARIES

Reinsurance

Years ended December 31, 2002, 2001 and 2000
(Amounts in thousands, except percentages)

See accompanying independent auditors' report on supplementary information.

106

SCHEDULE VI
GAINSCO, INC. AND SUBSIDIARIES

Supplemental Information

Years ended December 31, 2002, 2001 and 2000
(Amounts in thousands)

*10.1 1990 Stock Option Plan of the Registrant [Exhibit
10.16, Form 10-K dated March 22, 1991].

*10.2 1995 Stock Option Plan of the Registrant [Exhibit
10.31, Form 10-K dated March 28, 1996].

*10.3 1998 Long Term Incentive Plan of the Registrant
[Exhibit 99.8, Form 10-Q dated August 10, 1998].

*10.4 Forms of Change of Control Agreements [Exhibit 10.4,
Form 10-K dated March 29, 2002].

*10.5 Employment Agreement dated April 25, 1998 between Glenn
W. Anderson and the Registrant [Exhibit 99.5, Form
10-Q/A dated June 16, 1998].

*10.6 Change of Control Agreement for Glenn W. Anderson
[Exhibit 99.7, Form 10-Q/A dated June 16, 1998].

*10.7 Replacement Non-Qualified Stock Option Agreement dated
July 24, 1998 between Glenn W. Anderson and the
Registrant [Exhibit 99.6, Form 10-Q dated August 10,
1998].

*10.8 Management Contract between GAINSCO County Mutual
Insurance Company and GAINSCO Service Corp. and related
Surplus Debenture, Amendment to Surplus Debenture,
Certificate of Authority and accompanying
Commissioner's Order granting Certificate Authority,
allowing for charter amendments and extension of
charter [Exhibits 10.23, 10.24 and 10.25, Form 10-K
dated March 29, 1993; Exhibit 10.27, Form 10-K dated
March 25, 1994].

*10.9 Revolving Credit Agreement dated November 13, 1998
among Registrant, GAINSCO Service Corp. and Bank One,
Texas, N.A., First Amendment thereto dated October 4,
1999 and related Promissory Note, Security Agreement
and Pledge Agreement, Amendment No. 2 thereto dated
March 23, 2001, Amendment No.3 thereto dated November
13, 2001, and Amendment No. 4 thereto dated February
27, 2002. [Exhibits 10.50 to 10.53, Form 10-K/A dated
March 30, 1999; Exhibit 99.22, Form 8-K dated October
4, 1999; Exhibit 99.24, Form 8-K/A dated March 30,
2001, Exhibit 10.23, Form 10-Q dated November 13, 2001,
Exhibit 10.9, Form 8-K dated February 27, 2002].

*10.10 Securities Purchase Agreement dated as of June 29, 1999
between Registrant and Goff Moore Strategic Partners,
L.P. ("GMSP") and related Series A Common Stock
Purchase Warrant and Series B Common Stock Purchase
Warrant [Exhibit 2.1, Form 8-K dated June 29, 1999;
Exhibits 99.19 and 99.20, Form 8-K dated October 4,
1999].

*10.11 Investment Management Agreements dated October 4, 1999
between GMSP and each of Registrant, General Agents
Insurance Company of America, Inc., MGA Insurance
Company, Inc. and GAINSCO County Mutual Insurance
Company; and Investment Management Agreement dated
January 6, 2000 between GMSP and Midwest Casualty
Insurance Company. [Exhibit 10.11, Form 10-K dated
March 30, 2000].

*10.12 Stock Purchase Agreements dated August 17, 1998 with
Carlos de la Torre, McRae B. Johnston, Michael S.
Johnston and Ralph Mayoral relating to acquisition by
Registrant of Lalande Group and related employment
agreements with them [Exhibits 99.6 to 99.13, Form 8-K
dated August 26, 1998].

*10.13 Asset Purchase Agreement dated March 9, 1999 between
the Registrant, Agents Processing Systems, Inc. and
Insurance Business Solutions Incorporated [Exhibit
10.49, Form 10-K dated March 30, 1999].

*10.14 Stock Purchase Agreement dated as of November 17, 1999
among Registrant, Tri-State, Ltd., Herbert A. Hill and
Alan E. Heidt and related Pledge Agreement dated as of
January 7, 2000 executed by the Registrant in favor of
Bank One, NA and Unlimited Guaranty dated as of January
7, 2000 executed by Tri-State, Ltd. in favor of Bank
One, N.A. [Exhibit 10.14, Form 10-K dated March 30,
2000].

*10.15 Agreement of Limited Partnership of GNA Investments I,
L.P. dated as of November 30, 1999 between Registrant
and GMSP, L.P. [Exhibit 10.15, Form 10-K dated March
30, 2000].

*10.16 Professional Service Agreement dated as of October 22,
1999 between Registrant and ClientSoft, Inc. [Exhibit
10.16, Form 10-K dated March 30, 2000].

*10.17 First Amendment to Stock Purchase Agreement dated May
16, 2000 among Registrant, Tri-State, Ltd., Herbert A.
Hill and Alan E. Heidt [Exhibit 10.14, Form 10-Q dated
August 11, 2000].

*10.18 GAINSCO, INC. 401(k) Plan and related Adoption
Agreement [Exhibit 99.1 to Registration Statement on
Form S-8, effective April 12, 2000].

*10.19 Securities Purchase Agreement dated as of February 26,
2001 between Registrant and GMSP (including exhibits)
and related First Amendment to Securities Purchase
Agreement, letter regarding redemption of Registrant's
outstanding Series A Convertible Preferred Stock, First
Amendment to Series A Common Stock Purchase Warrant,
and First Amendment to Series B Common Stock Purchase
Warrant. [Exhibit 2.1, Form 8-K dated March 2, 2001;
Exhibits 2.2, 2.8, 99.21 and 99.22, Form 8-K/A dated
March 30, 2001].

*10.20 Securities Purchase Agreement dated as of February 26,
2001 between Registrant and Robert W. Stallings
("Stallings") (including exhibits) and related First
Amendment to Securities Purchase Agreement, Assignment
and Assumption Agreement between Stallings and ING
Pilgrim Capital Corporation, LLC, Amendment to
Assignment and Assumption Agreement, letter dated March
23, 2001 from Stallings to Registrant, and Common Stock
Purchase Warrant. [Exhibit 2.2, Form 8-K dated March 2,
2001; Exhibits 2.4 to 2.7 and 99.23, Form 8-K/A dated
March 30, 2001].

*10.21 Consulting Agreement dated as of February 26, 2001
between Registrant and Stallings. [Exhibit 99.15, Form
8-K dated March 2, 2001].

*10.22 Agreement dated March 23, 2001 among Registrant,
GAINSCO Service Corp., GMSP, Stallings and Bank One,
N.A. [Exhibit 99.25, Form 8-K/A dated March 30, 2001].

*10.23 Letter agreement dated February 27, 2002 between the
Registrant and GMSP pursuant to which the Registrant
exercised its right to put certain illiquid investments
to GMSP for $2,087,354.27 pursuant to Section 6.9 of
the Securities Purchase Agreement dated February 26,
2001 between the Registrant and GMSP, as amended.
[Exhibit 10.24, Form 8-K/A dated February 27, 2002].

*10.24 Agreement of Sale and Purchase dated March 7, 2002
between General Agents Insurance Company of America,
Inc. and Turonian Corp. [Exhibit 10.24, Form 10-K dated
March 29, 2002].

*10.25 First Amendment to Investment Management Agreements
dated August 9, 2002 among Goff Moore Strategic
Partners, L.P., the Registrant, General Agents
Insurance Company of America, Inc., MGA Insurance
Company, Inc., GAINSCO County Mutual Insurance Company
and Midwest Casualty Insurance Company [Exhibit 10.25,
Form 10-Q dated August 14, 2002].

*10.26 Acquisition Agreement dated August 12, 2002 among the
Registrant, GAINSCO Service Corp., GAINSCO County
Mutual Insurance Company, Berkeley Management
Corporation and Liberty Mutual Insurance Company
[Exhibit 10.26, Form 10-Q dated August 14, 2002].

*10.27 Commercial Lease Agreement dated July 31, 2002 between
JaGee Real Properties, L.P. and General Agents
Insurance Company of America, Inc. [Exhibit 10.27, Form
10-Q dated August 14, 2002].

*10.28 Form of Executive Severance Agreement between GAINSCO
Service Corp. and each of Richard M. Buxton, Richard A.
Laabs and Daniel J. Coots. [Exhibit 10.28, Form 10-Q
dated August 14, 2002].

*10.29 Representative Forms of Retention Incentive Agreement
[Exhibit 10.30, Form 10-Q dated August 14, 2002].

*10.30 Acquisition Agreement dated August 12, 2002 among the
Registrant, GAINSCO Service Corp., Berkeley Management
Corporation, Liberty Mutual Insurance Company, and
GAINSCO County Mutual Insurance Company and Amendment
to Acquisition Agreement dated December 2, 2002 among
the Registrant, GAINSCO Service Corp., Berkeley
Management Corporation, Liberty Mutual Insurance
Company, and GAINSCO County Mutual Insurance Company
[Exhibit 10.26, Form 10-Q dated August 14, 2002 and
Exhibit 10.32, Form 8-K filed December 5, 2002].

*10.31 Office Lease dated August 19, 2002 between Crescent
Real Estate Funding X, L.P. and the Registrant.
[Exhibit 10.31, Form 10-Q dated November 14, 2002].

*10.32 Separation Agreement and Release dated December 17,
2002 between McRae B. Johnston and MGA Insurance
Company, Inc.; Separation Agreement and Release dated
December 17, 2002 among McRae B. Johnston, Registrant,
National Specialty Lines, Inc., Lalande Financial
Group, Inc., DLT Insurance Adjustors, Inc. and Midwest
Casualty Insurance Company; Consulting Agreement dated
December 17, 2002 between McRae B. Johnston and MGA
Insurance Company, Inc.; and Form of Separation
Agreement and Release entered into as of March 1, 2003
between McRae B. Johnston and MGA Insurance Company,
Inc. [Exhibit 10.33, Form 8-K filed December 17, 2002;
Exhibit 10.34, Form 8-K filed December 17, 2002;
Exhibit 10.35, Form 8-K filed December 17, 2002; and
Exhibit 10.36, Form 8-K filed December 17, 2002].

11 Statement regarding Computation of Per Share Earnings
(the required information is included in Note 1(m) of
Notes to Consolidated Financial Statements included in
this Report and no separate statement is, or is
required to be, filed as an exhibit).

+21 Subsidiaries of Registrant.

+23 Consent of KPMG LLP to incorporation by reference.

+24 Form of Power of Attorney.

+99.1 Certificate of Chief Executive Officer

+99.2 Certificate of Chief Financial Officer