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


                                    FORM 10-Q
                      ------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1998

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to


                        Commission File Number 333-42425

                   AMERICAN FOUNDATION LIFE INSURANCE COMPANY
             (Exact name of registrant as specified in its charter)

           ALABAMA                                63-0761690
(State or other jurisdiction of     (IRS Employer Identification Number)
 incorporation or organization)

                             2801 HIGHWAY 280 SOUTH
                            BIRMINGHAM, ALABAMA 35223
              (Address of principal executive offices and zip code)

                                 (205) 879-9230
              (Registrant's telephone number, including area code)

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 [ ]

Number of shares of Common Stock, $10.00 par value, outstanding as of 
November 6, 1998:  250,000 shares.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND
(B) OF FORM 10-Q AND IS THEREFORE  FILING THIS FORM WITH THE REDUCED  DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).


<PAGE>





                   AMERICAN FOUNDATION LIFE INSURANCE COMPANY



                                      INDEX



                                                                         
PART I.   FINANCIAL INFORMATION:
   Item 1.   Financial Statements:
        Report of Independent Accountants......................................
        Condensed Statements of Income for the Three and Nine  Months
          ended September 30, 1998 and 1997 (unaudited)........................
        Condensed Balance Sheets as of September 30, 1998
          (unaudited) and December 31, 1997....................................
        Condensed Statements of Cash Flows for the
          Nine Months ended September 30, 1998 and 1997 (unaudited)............
        Notes to Condensed Financial Statements (unaudited)....................

   Item 2.   Management's Narrative Analysis of the Results of Operations......

PART II.  OTHER INFORMATION:
   Item 6. Exhibits and Reports on Form 8-K....................................

Signature......................................................................



<PAGE>





                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Directors and Stockholders
American Foundation Life Insurance Company
Birmingham, Alabama


We have reviewed the accompanying condensed balance sheet of American Foundation
Life  Insurance  Company as of  September  30, 1998,  and the related  condensed
statements of income for the three-month and nine-month  periods ended September
30, 1998 and 1997 and  condensed  statements  of cash flows for the  nine-months
ended  September  30,  1998  and  1997.  These  financial   statements  are  the
responsibility of the Company's management.

We conducted our review in accordance with standards established by the American
Institute  of  Certified  Public  Accountants.  A review  of  interim  financial
information consists principally of applying analytical  procedures to financial
data and making  inquiries of persons  responsible  for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with  generally  accepted  auditing  standards,  the  objective  of which is the
expression of an opinion  regarding the financial  statements  taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material  modifications that should
be made to the condensed  financial  statements referred to above for them to be
in conformity with generally accepted accounting principles.

We have  previously  audited,  in accordance  with generally  accepted  auditing
standards, the balance sheet as of December 31, 1997, and the related statements
of  income,  stockholders'  equity,  and cash flows for the year then ended (not
presented  herein);  and in our report dated  February 11, 1998, we expressed an
unqualified  opinion  on  those  financial  statements.   In  our  opinion,  the
information set forth in the accompanying condensed balance sheet as of December
31, 1997, is fairly  stated in all material  respects in relation to the balance
sheet from which it has been derived.




                                                 PricewaterhouseCoopers LLP

Birmingham, Alabama
October 27, 1998

                                        2

<PAGE>
<TABLE>
<CAPTION>




                   AMERICAN FOUNDATION LIFE INSURANCE COMPANY
                         CONDENSED STATEMENTS OF INCOME
                                   (Unaudited)


                                                                             THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                               SEPTEMBER 30                    SEPTEMBER 30
                                                                           -----------------------------------------------------
                                                                           1998          1997               1998         1997
                                                                           ----          ----               ----         ----

<S>                                                                   <C>            <C>                 <C>            <C>
REVENUES
     Premiums and policy fees (net of reinsurance ceded:
        three months: 1998 - $423,045; 1997 - $881,068
        nine months: 1998 - $1,208,624; 1997 - $2,187,739)             $1,826,997     $2,147,726        $4,929,264    $ 6,823,120
     Net investment income                                              2,047,860      1,628,030         4,893,543      4,800,502
     Realized investment gains (losses)                                                                   (500,000)
     Other income                                                                                                           8,718
                                                                       ----------     ----------         ---------     ----------
                                                                        3,874,857      3,775,756         9,322,807     11,632,340
                                                                       ----------     ----------         ---------     ----------
BENEFITS AND EXPENSES
     Benefits and settlement expenses (net of reinsurance ceded:
        three months: 1998 - $1,206,396; 1997 - $563,730
        nine months: 1998 - $2,817,986; 1997 - $2,381,786               2,686,038      2,117,545         5,967,483      6,832,283
     Amortization of deferred policy acquisition costs                    106,783         85,703           311,379        261,108
     Other operating expenses (net of reinsurance ceded:
        three months: 1998 - $213,656; 1997 - $1,619
        nine months: 1998 - $205,582; 1997 - $42,013)                     222,514        595,451         1,137,529      1,827,291
                                                                       ----------      ---------         ---------      ---------
                                                                        3,015,335      2,798,699         7,416,391      8,920,682
                                                                       ----------      ---------         ---------      ---------
INCOME BEFORE INCOME TAX                                                  859,522        977,057         1,906,416      2,711,658

Income tax expense                                                        240,666        332,200           533,796        921,964
                                                                       ----------      ---------         ---------      ---------
NET INCOME                                                             $  618,856     $  644,857        $1,372,620    $ 1,789,694
                                                                       ==========     ==========        ==========      =========
</TABLE>



















See notes to condensed financial statements

                                        3

<PAGE>
<TABLE>
<CAPTION>


                   AMERICAN FOUNDATION LIFE INSURANCE COMPANY
                            CONDENSED BALANCE SHEETS


                                                                                   SEPTEMBER 30        DECEMBER 31
                                                                                       1998               1997
                                                                                   ------------        ------------
                                                                                    (Unaudited)
<S>                                                                                <C>              <C>
ASSETS
  Investments
    Fixed maturities                                                              $ 74,743,852       $  68,201,559
    Mortgage loans on real estate                                                    8,400,177          10,902,986
    Investment in real estate, net                                                     398,087             407,624
    Policy loans                                                                     9,797,777          11,635,376
    Short-term investments                                                           2,000,000             873,844
                                                                                   ------------        ------------
     Total investments                                                              95,339,893          92,021,389
  Cash                                                                                 945,224           2,218,201
  Accrued investment income                                                          1,260,811           1,230,529
  Accounts and premiums receivable, net                                                977,516           1,233,659
  Reinsurance receivables                                                            7,436,070           7,680,586
  Deferred policy acquisition costs                                                  1,973,956           1,692,285
  Other assets                                                                          52,401              70,809
  Assets held in separate accounts                                                      21,717
                                                                                  -------------       ------------
                                                                                  $108,007,588        $106,147,458
                                                                                  =============       ============

LIABILITIES
  Policy liabilities and accruals                                                 $ 55,757,160        $ 56,717,914
  Annuity deposits                                                                   1,009,679             929,124
  Other policyholders' funds                                                        11,883,412          12,080,458
  Other liabilities                                                                  6,486,298           8,964,653
  Accrued income taxes                                                                  11,978
  Deferred income taxes                                                              2,281,655           2,005,168
  Liabilities held in separate accounts                                                 21,717
                                                                                  ------------         -----------
                                                                                    77,451,899          80,697,317
                                                                                  ------------         -----------


COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B

STOCKHOLDERS' EQUITY
  Preferred Stock, $1.00 par value, shares authorized, issued, and
    outstanding: 2,000                                                                   2,000               2,000
  Common Stock, $10 par value
    Shares authorized, issued, and outstanding:
     1998 - 250,000: 1997 - 200,000                                                  2,500,000           2,000,000
  Additional paid-in capital                                                         8,200,000           6,200,000
  Retained earnings                                                                 17,361,575          16,538,954
  Accumulated other comprehensive income
    Net unrealized  gains on investments (net of income
     tax: 1998 -$969,156; 1997 - $381,870)                                           2,492,114             709,187
                                                                                  ------------        ------------
                                                                                    30,555,689          25,450,141
                                                                                  ------------        ------------
                                                                                  $108,007,588        $106,147,458
                                                                                  ============        ============

</TABLE>







See notes to condensed financial statements

                                        4

<PAGE>
<TABLE>
<CAPTION>




                   AMERICAN FOUNDATION LIFE INSURANCE COMPANY
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)


                                                                                            Nine Months Ended
                                                                                               September 30
                                                                                           1998            1997
                                                                                           ----            ----

<S>                                                                                     <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                       $   1,372,620    $  1,789,694
    Adjustments to reconcile net income to net cash used in operating activities:
       Amortization of deferred policy acquisition costs                                   311,379         261,108
       Capitalization of deferred policy acquisition costs                                (593,050)
       Deferred income tax                                                                (566,340)        375,228
       Accrued income tax                                                                   11,978
       Interest credited to universal life and investment products                         811,436         839,159
       Policy fees assessed on universal life and investment products                     (751,805)       (791,050)
       Change in accrued investment income and other receivables                           470,377       1,447,487
       Change in policy liabilities and other policyholders'
          funds of traditional life and health products                                   (194,536)     (3,245,213)
       Change in other liabilities                                                      (2,478,355)        276,712
       Other (net)                                                                          18,408          19,820
                                                                                        -----------     ----------
    Net cash used in operating (provided by) activities                                 (1,587,888)        972,945
                                                                                        -----------     ----------
CASH FLOWS FROM INVESTING ACTIVITIES
    Maturities and principal reductions of investments
       Investments available for sale                                                   12,857,145      82,591,759
       Other                                                                             2,515,965         246,103
    Sale of investments
       Investments available for sale                                                                      275,980
    Cost of investments acquired
       Investments available for sale                                                  (16,546,471)    (85,103,098)
                                                                                       ------------    ------------
    Net cash used in investing activities                                               (1,173,361)     (1,989,256)
                                                                                       ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES
    Dividends to stockholders                                                              (50,000)        (50,000)
    Change in universal life deposits                                                     (461,728)        (25,982)
    Capital contributions                                                                2,000,000               0
                                                                                       ------------     -----------
    Net cash provided by (used in) financing activities                                  1,488,272         (75,982)
                                                                                       -----------      -----------
INCREASE (DECREASE) IN CASH                                                             (1,272,977)     (1,092,293)
CASH AT BEGINNING OF PERIOD                                                              2,218,201       1,574,181
                                                                                        
                                                                                       -----------     -----------
CASH AT END OF PERIOD                                                                $     945,224   $     481,888
                                                                                       ===========       =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
    Cash paid during the period:
       Income taxes                                                                    $   350,000      $  675,000

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
 FINANCING ACTIVITIES
    Issuance of common stock dividend                                                  $   500,000



</TABLE>


See notes to condensed financial statements

                                        5

<PAGE>



                   AMERICAN FOUNDATION LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)


NOTE A - BASIS OF PRESENTATION

         The accompanying  unaudited condensed financial  statements of American
Foundation  Life  Insurance  Company  ("the  Company")  have  been  prepared  in
accordance with generally accepted  accounting  principles for interim financial
information and with the  instructions to Form 10-Q and Rule 10-01 of Regulation
S-X.  Accordingly,  they  do not  include  all of the  disclosures  required  by
generally accepted accounting principles for complete financial  statements.  In
the opinion of  management,  all  adjustments  (consisting  of normal  recurring
accruals)  necessary  for a fair  presentation  have  been  included.  Operating
results for the nine month period ended  September 30, 1998, are not necessarily
indicative of the results that may be expected for the year ending  December 31,
1998.  The  year-end  condensed  balance  sheet data was  derived  from  audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. For further information,  refer to the financial
statements  and notes thereto  included in the Company's Form S-1 filed on April
16, 1998.

         All  outstanding  shares  of the  Company's  common  stock are owned by
Protective  Life  Insurance  Company  ("Protective"),  which  is  the  principal
operating  subsidiary  of  Protective  Life  Corporation  ("PLC"),  an insurance
holding company  domiciled in the state of Delaware.  All outstanding  shares of
the Company's  preferred  stock are owned by PLC.  Protective is a  wholly-owned
subsidiary of PLC.


NOTE B - COMMITMENTS AND CONTINGENT LIABILITIES

         Under insurance guaranty fund laws in most states,  insurance companies
doing business therein can be assessed up to prescribed  limits for policyholder
losses  incurred  by  insolvent  companies.  The Company  does not believe  such
assessments  will be materially  different from amounts already  provided for in
the  financial  statements.  Most of these  laws do  provide,  however,  that an
assessment  may be excused or deferred if it would  threaten  an  insurer's  own
financial strength.

         A number of civil jury verdicts have been returned  against insurers in
the  jurisdictions  in which the Company does  business  involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise agents,
and other  matters.  Increasingly  these  lawsuits have resulted in the award of
substantial  judgments  against the insurers  that are  disproportionate  to the
actual damages,  including material amounts of punitive damages. In addition, in
some class  action  and other  lawsuits  involving  insurers'  sales  practices,
insurers  have made  material  settlement  payments.  In some states  (including
Alabama),  juries have substantial discretion in awarding punitive damages which
creates the potential for unpredictable  material adverse judgments in any given
punitive damages suit. The Company and its affiliates,  like other insurers,  in
the ordinary course of business,  are involved in such litigation.  Although the
outcome of any such litigation  cannot be predicted with certainty,  the Company
believes that at the present time

                                        6

<PAGE>



there are no pending or threatened lawsuits that are reasonably likely to have a
material  adverse effect on the financial  position,  results of operations,  or
liquidity of the Company.


NOTE C - OPERATING SEGMENTS

         The following table sets forth operating  segment income and assets for
the periods shown.  Adjustments  represent the inclusion of unallocated realized
investment  gains (losses) and the recognition of income tax expense.  There are
no asset adjustments.
<TABLE>
<CAPTION>


                                                                   OPERATING SEGMENT INCOME FOR THE
                                                                 NINE MONTHS ENDED SEPTEMBER 30, 1998

                                                                               DENTAL AND
                                                                                CONSUMER                FINANCIAL
                                                    ACQUISITIONS                BENEFITS               INSTITUTIONS
                                                    ------------                --------               ------------
<S>                                                  <C>                       <C>                     <C>
Premiums and policy fees                             $2,880,352                $1,520,945               $527,947
Net investment income                                 3,565,457                   518,138
Realized investment gains (losses)
Other income                                          ---------                 ---------                -------
     Total revenues                                   6,445,809                 2,039,083                527,947
                                                      ---------                 ---------                -------
Benefits and settlement expenses                      4,368,904                 1,329,099                268,035
Amortization of deferred policy
 acquisition costs                                      197,597                                          113,782
Other operating expenses                                581,969                   540,851                 36,821
                                                      ---------                 ---------                -------
     Total benefits and expenses                      5,148,470                 1,869,950                418,638
                                                      ---------                 ---------                -------
Income before income tax                              1,297,339                   169,133                109,309


                                                                     CORPORATE
                                                    INVESTMENT         AND
                                                     PRODUCTS         OTHER           ADJUSTMENTS        TOTAL
                                                     --------         -----           -----------        -----
Premiums and policy fees                           $      20                                            $4,929,264
Net investment income                                                 $809,948                           4,893,543
Realized investment gains (losses)                                                    $(500,000)          (500,000)
Other income                                          ------          --------         ---------          ----------
     Total revenues                                       20           809,948         (500,000)         9,322,807
                                                      ------          --------         ---------         ----------
Benefits and settlement expenses                       1,445                                             5,967,483
Amortization of deferred policy
 acquisition costs                                                                                         311,379
Other operating expenses                             (22,112)                                            1,137,529
                                                      ------                                             ---------
     Total benefits and expenses                     (20,667)                                            7,416,391
                                                      ------          --------         --------          ---------
Income before income tax                              20,687           809,948         (500,000)         1,906,416
Income tax expense                                                                      533,796            533,796
                                                                                                         ---------
     Net income                                                                                         $1,372,620
                                                                                                         =========
</TABLE>

                                        7

<PAGE>
<TABLE>
<CAPTION>




                                                                  OPERATING SEGMENT INCOME FOR THE
                                                                 NINE MONTHS ENDED SEPTEMBER 30, 1997

                                                                              DENTAL AND
                                                                               CONSUMER                FINANCIAL
                                                    ACQUISITIONS               BENEFITS               INSTITUTIONS
                                                    ------------               --------               ------------
<S>                                                 <C>                        <C>                    <C>
Premiums and policy fees                            $3,085,680                 $3,737,440
Net investment income                                3,533,140                    786,297
Realized investment gains (losses)
Other income                                             8,718
                                                     ---------                 ----------
     Total revenues                                  6,627,538                  4,523,737
                                                     ---------                 ----------
Benefits and settlement expenses                     4,029,853                  2,802,430
Amortization of deferred policy
 acquisition costs                                     261,108
Other operating expenses                               454,467                  1,188,860
                                                     ---------                  ---------
     Total benefits and expenses                     4,745,428                  3,991,290
                                                     ---------                  ---------
Income before income tax                             1,882,110                    532,447
</TABLE>
<TABLE>
<CAPTION>



                                                                        CORPORATE
                                                    INVESTMENT            AND
                                                     PRODUCTS            OTHER         ADJUSTMENTS       TOTAL
                                                     --------            -----         -----------       -----
<S>                                                  <C>              <C>              <C>               <C>
Premiums and policy fees                                                                               $ 6,823,120
Net investment income                                                   $481,065                         4,800,502
Realized investment gains (losses)
Other income                                                                                                 8,718
                                                                        --------                        ----------
     Total revenues                                                      481,065                        11,632,340
                                                                        --------                        ----------
Benefits and settlement expenses                                                                         6,832,283
Amortization of deferred policy
 acquisition costs                                                                                         261,108
Other operating expenses                                                 183,964                         1,827,291
                                                                         -------                         ---------
     Total benefits and expenses                                         183,964                         8,920,682
                                                                         -------                         ---------
Income before income tax                                                 297,101                         2,711,658
Income tax expense                                                                      $921,964           921,964
                                                                                                         ---------
     Net income                                                                                        $ 1,789,694
                                                                                                         =========
</TABLE>


                                        8

<PAGE>
<TABLE>
<CAPTION>



                                                                      OPERATING SEGMENT ASSETS
                                                                         SEPTEMBER 30, 1998

                                                                             DENTAL AND
                                                                              CONSUMER                 FINANCIAL
                                                   ACQUISITIONS               BENEFITS                INSTITUTIONS
                                                   ------------               --------                ------------
<S>                                               <C>                         <C>                       <C>
Investments and other assets                        $72,437,428               $6,944,487                $2,274,484
Deferred policy acquisition costs                     1,408,999                                            564,957
                                                    -----------                ---------                 ---------
     Total assets                                   $73,846,427               $6,944,487                $2,839,441
                                                    ===========                =========                 =========


                                                                               CORPORATE
                                                     INVESTMENT                  AND
                                                      PRODUCTS                  OTHER                  TOTAL

Investments and other assets                          $287,139                $24,090,094             $106,033,632
Deferred policy acquisition costs                                                                        1,973,956
                                                      --------                 ----------              -----------
     Total assets                                     $287,139                $24,090,094             $108,007,588
                                                       =======                 ==========              ===========



                                                                      OPERATING SEGMENT ASSETS
                                                                         DECEMBER 31, 1997

                                                                             DENTAL AND
                                                                              CONSUMER                 FINANCIAL
                                                   ACQUISITIONS               BENEFITS                INSTITUTIONS
                                                   ------------               --------                ------------

Investments and other assets                        $76,644,539               $7,111,880
Deferred policy acquisition costs                     1,692,285
                                                     ----------                ---------
     Total assets                                   $78,336,824               $7,111,880
                                                     ==========                =========

                                                                               CORPORATE
                                                     INVESTMENT                  AND
                                                      PRODUCTS                  OTHER                  TOTAL

Investments and other assets                                                 $20,698,754              $104,455,173
Deferred policy acquisition costs                                                                        1,692,285
                                                                              ----------               -----------
     Total assets                                                            $20,698,754              $106,147,458
                                                                              ==========               ===========



                                        9
</TABLE>

<PAGE>



NOTE D - STATUTORY REPORTING PRACTICES

         Financial  statements  prepared in conformity  with generally  accepted
accounting  principles  (i.e.,  GAAP) differ in some respects from the statutory
accounting   practices   prescribed   or  permitted   by  insurance   regulatory
authorities.  At  September  30, 1998,  and for the nine months then ended,  the
Company had  stockholders'  equity and net income  prepared in  conformity  with
statutory reporting practices of $23.3 million and $1.0 million, respectively.


NOTE E - INVESTMENTS

         As prescribed by Statement of Financial  Accounting  Standards ("SFAS")
No.  115,  certain  investments  are  recorded at their  market  values with the
resulting net  unrealized  gains and losses  reduced by a related  adjustment to
deferred policy acquisition costs, net of income tax, recorded as a component of
stockholders' equity. The market values of fixed maturities increase or decrease
as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115
does not affect the Company's operations, its reported stockholders' equity will
fluctuate significantly as interest rates change.

         The  Company's  balance  sheets at September  30, 1998 and December 31,
1997,  prepared on the basis of reporting  investments  at amortized cost rather
than at market values, are as follows:
<TABLE>
<CAPTION>

                                                           SEPTEMBER 30, 1998             DECEMBER 31, 1997
<S>                                                           <C>                           <C>
Total investments                                             $  71,282,582                 $  90,930,332
All other assets                                                 33,263,736                    14,126,069
                                                               ------------                  ------------ 
                                                               $104,546,318                  $105,056,401
                                                                ===========                   ===========

Deferred income taxes                                        $    1,312,499                 $   1,623,298
All other liabilities                                            75,170,244                    78,692,149
                                                               ------------                  ------------
                                                                 76,482,743                    80,315,447
Stockholders' equity                                             28,063,575                    24,740,954
                                                               ------------                  ------------
                                                               $104,546,318                  $105,056,401
                                                                ===========                   ===========
</TABLE>



                                       10

<PAGE>



NOTE F - COMPREHENSIVE INCOME

         The following table sets forth the Company's  comprehensive  income for
the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>

                                                                                          NINE MONTHS ENDED
                                                                                          -----------------
                                                                                     1998                 1997
                                                                                     ----                 ----
          <S>                                                                     <C>                    <C>
          Net income                                                              $1,372,620            $1,789,694
          Increase in net unrealized gains
              on investments (net of income tax:
              1998 - $553,361; 1997 - $427,835)                                    1,422,927               794,550
          Reclassification adjustment for amounts
              included in net income (net of income
              tax: 1998 - $140,000)                                                  360,000
                                                                                  ----------            ----------
          Comprehensive income                                                    $3,155,547            $2,584,244
                                                                                  ==========            ==========
</TABLE>

NOTE G - ACQUISITION

          On  October  14,  1998,  the  Company  completed  its  acquisition  of
approximately 260,000 policies from Lincoln National  Corporation.  The policies
represent the payroll deduction business originally marketed and underwritten by
Aetna.

          In the  transaction,  the Company will assume the $330 million of life
insurance  reserves,  and receive  approximately $30 million of policy loans and
$200 million of cash. In connection with the transaction, Protective contributed
approximately $96.9 million of capital in the form of corporate bonds.


NOTE H - RECLASSIFICATIONS

          Certain  reclassifications  have been made in the previously  reported
financial  statements  and  accompanying  notes to make the prior  year  amounts
comparable to those of the current year. Such reclassifications had no effect on
previously reported net income, total assets, or stockholders' equity.



                                       11

<PAGE>



                 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE
                              RESULTS OF OPERATIONS


         American  Foundation Life Insurance  Company ("the  Company"),  a stock
life  insurance  company,  was founded in 1978.  All  outstanding  shares of the
Company's   common  stock  are  owned  by  Protective  Life  Insurance   Company
("Protective"),  which is the principal operating  subsidiary of Protective Life
Corporation  ("PLC"),  an insurance holding company whose common stock is traded
on the New York Stock Exchange under the symbol "PL". All outstanding  shares of
the  Company's  preferred  stock are owned by PLC. The Company is  authorized to
transact  insurance  business  in  31  states,  including  New  York  and  is an
authorized reinsurer in an additional 13 states.

         In accordance with General  Instruction  H(2)(a),  the Company includes
the following analysis with the reduced disclosure format.

         PLC through its subsidiaries  provides  financial  services through the
production,   distribution,  and  administration  of  insurance  and  investment
products. PLC operates through seven divisions whose principal strategic focuses
can  be  grouped  into  three  general  categories:  life  insurance,  specialty
insurance  products,  and retirement savings and investment  products.  The life
insurance  category includes the  Acquisitions,  Individual Life, and West Coast
Divisions.  The specialty  insurance  products  category includes the Dental and
Consumer  Benefits  ("Dental")  and  Financial   Institutions   Divisions.   The
retirement  savings and  investment  products  category  includes the Guaranteed
Investment Contracts and Investment Products Divisions.

         The  Company,  since it is  licensed  in the State of New York,  is the
entity  through  which PLC  markets,  distributes,  and services  insurance  and
annuity products in New York. As of September 30, 1998, the Company was involved
in the operations of four of PLC's  Divisions:  the  Acquisition  Division,  the
Dental Division, the Financial Institutions Division and the Investment Products
Division.  The Company has an  additional  business  segment  which is described
herein as Corporate and Other.

         Protective  has  entered  into  an  inter-company  guaranty  agreement,
enforceable by the Company or its successors,  whereby Protective has guaranteed
the  Company's  payment  of  claims  made by the  holders  of  Company  policies
according  to the terms of such  policies.  The  guarantee  will remain in force
until the earlier of (a) when the Company achieves a claims-paying  rating equal
to or better than Protective  without the benefit of any inter-company  guaranty
agreement  or (b) 90 days  after the  guaranty  agreement  is revoked by written
instrument;  provided, however, even after any revocation or termination by such
notice,  the guarantee  shall remain  effective as to policies issued during the
existence of the guaranty agreement.

         This  report  includes "forward-looking statements" which express the
Company's current expectations  of future events and/or  results.  The word 
"believe", "expect", "anticipate" and similar expressions identify 
forward-looking statements which are based on future expectations rather than 
on historical facts and are therefore subject to a number of risks and 
uncertainties that could cause actual results to differ materially from those
expressed.  The Company cannot give assurance that such statements will prove
to be correct.  Please refer to Exhibit 99 for more information about factors
which could affect future results.



                                       12

<PAGE>



Revenues

         The following table sets forth revenues by source for the period shown,
and the percentage change from the prior period:
<TABLE>
<CAPTION>

                                                                 NINE MONTHS                    PERCENTAGE
                                                                   ENDED                         INCREASE/
                                                                SEPTEMBER 30                     (DECREASE)
                                                           1998               1997
                                                           ----               ----
          <S>                                          <C>                 <C>                    <C>
         Premiums and policy fees                       $4,929,264         $ 6,823,120            (27.8)%
         Net investment income                           4,893,543           4,800,502              1.9
         Realized investment losses                       (500,000)
         Other income                                                            8,718
                                                        ----------         -----------
                                                        $9,322,807         $11,632,340
                                                        ==========         ===========
</TABLE>


         Premiums and policy fees  decreased  $1.9 million or 27.8% in the first
nine months of 1998 over the first nine months of 1997. Premiums and policy fees
from the Acquisitions Division decreased $0.2 million.  Premiums and policy fees
related to the Dental  Division  decreased $2.2 million in the first nine months
of 1998 as compared to the same period in 1997,  primarily  due to the loss of a
large customer at December 31, 1997. The Financial  Institutions  Division began
operations in the Company in 1998 which resulted in $0.5 million of new premiums
and  policy  fees in the first  nine  months of 1998.  The  Investment  Products
Division began marketing  products  through the Company during the third quarter
of 1998 which  produced a small amount (less than $0.1  million) of premiums and
policy fees.

         Net  investment  income in the  first  nine  months  of 1998  increased
slightly as compared to the corresponding period of the preceding year.

         The Company generally purchases its investments with the intent to hold
to  maturity  by  purchasing  investments  that match  future  cash-flow  needs.
However,  the Company may sell any of its  investments  to maintain  approximate
matching of assets and liabilities.  Accordingly, the Company has classified its
fixed maturities and certain other securities as "available for sale." The sales
of  investments  that have  occurred have resulted  principally  from  portfolio
management decisions to maintain approximate matching of assets and liabilities.

         The Company reported a $500,000  realized  investment loss in the first
nine months of 1998 due to the  establishment  of an  allowance  for  investment
defaults.



                                       13

<PAGE>



Income Before Income Tax

         The following table sets forth  operating  income or loss and income or
loss before income tax by business segment for the periods shown:

                  OPERATING INCOME AND INCOME BEFORE INCOME TAX
                         NINE MONTHS ENDED SEPTEMBER 30


<TABLE>
<CAPTION>

                                                                               1998                    1997
                                                                               ----                    ----
<S>                                                                        <C>                      <C>            
Operating Income1
      Acquisitions                                                          $1,297,339              $1,882,110
      Dental and Consumer Benefits                                             169,133                 532,447
      Financial Institutions                                                   109,309
      Investment Products                                                       20,687
      Corporate and Other                                                      809,948                 297,101
                                                                             ---------               ---------
              Total operating income                                         2,406,416               2,711,658

Realized Investment Gains (Losses)
      Unallocated realized investment gains (losses)                          (500,000)
                                                                              ---------
              Total net                                                       (500,000)
                                                                              ---------
Income Before Income Tax
      Acquisitions                                                           1,297,339               1,882,110
      Dental and Consumer Benefits                                             169,133                 532,447
      Financial Institutions                                                   109,309
      Investment Products                                                       20,687
      Corporate and Other                                                      809,948                 297,101
      Unallocated realized investment gains (losses)                          (500,000)
                                                                             ----------             ----------
              Total income before tax                                       $1,906,416              $2,711,658
                                                                             =========              ==========
</TABLE>

1 Income before tax excluding realized investment gains and losses.


         Pretax earnings from the Acquisitions  Division  decreased $0.6 million
in the  first  nine  months  of 1998 as  compared  to the same  period  of 1997.
Earnings from the  Acquisitions  Division are expected to decline over time (due
to the lapsing of policies  resulting from deaths of insureds or terminations of
coverage) unless new acquisitions are made.

         Dental  Division  pretax  earnings were $0.4 million lower in the first
nine months of 1998 as compared to the first nine months of 1997  primarily  due
to the loss of a large customer at December 31, 1997.

         The Financial  Institutions Division began operations in the Company in
1998. The Division had pretax earnings of $0.1 million for the first nine months
of 1998.

         The Investment  Products  Division began marketing in the third quarter
of 1998. The Division had pretax earnings of less than $0.1 million in the first
nine months of 1998.


                                       14

<PAGE>



         The Corporate and Other segment  consists of net investment  income not
identified  with the  preceding  operating  divisions.  Pretax  income from this
segment was $0.8  million in the first nine  months of 1998 and $0.3  million in
the first nine months of 1997.

Income Taxes

         The following  table sets forth the effective tax rates for the periods
shown:

   NINE MONTHS
      ENDED                                            ESTIMATED EFFECTIVE
   SEPTEMBER 30                                          INCOME TAX RATES
   ------------                                        -------------------    
       1997                                                    34  %
       1998                                                    28

         The  effective  income  tax rate for the full  year of 1997 was  34.0%.
Management's estimate of the effective income tax rate for 1998 is 28%.

Net Income

         The following  table sets forth net income for the periods  shown,  and
the percentage change from the prior period:

                                                  NET INCOME
                                      -------------------------------------
     NINE MONTHS
       ENDED                                                     PERCENTAGE
    SEPTEMBER 30                       TOTAL                      DECREASE
    ------------                       -----                     ----------

       1997                          $1,789,694                    (23.5)%
       1998                           1,372,620                    (23.3)


         Compared  to the same  period in 1997,  net  income  in the first  nine
months of 1998  decreased  $0.4  million,  reflecting  decreases  related to the
Acquisitions,  and Dental  Divisions and realized  investment  losses which were
partially  offset  by  increases  related  to  the  Financial  Institutions  and
Investment Products Divisions and the Corporate and Other segment.

RECENTLY ISSUED ACCOUNTING STANDARDS

      The Financial  Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting  Standards ("SFAS") No. 132, "Employers'  Disclosures About
Pension  and  Other   Postretirement   Benefits"   which  revises  the  footnote
disclosures about pension and other  postretirement  benefit plans. The FASB has
also issued SFAS No. 133,  "Accounting  for Derivative  Instruments  and Hedging
Activities" and SFAS No. 134, "Accounting for MortgageBacked Securities Retained
after the  Securitization  of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." The adoption of these accounting standards is not expected to have
a material effect on the Company's financial condition.


                                       15

<PAGE>



YEAR 2000 DISCLOSURE

      Computer  hardware  and  software  often  denote the year using two digits
rather than four;  for example,  the year 1998 often is denoted by such hardware
and  software as "98." It is  probable  that such  hardware  and  software  will
malfunction when calculations  involving the year 2000 are attempted because the
hardware  and/or  software will  interpret  "00" as  representing  the year 1900
rather  than the year 2000.  This "Year  2000"  issue  potentially  affects  all
individuals  and  companies  (including  the Company,  its  customers,  business
partners,  suppliers,  banks, custodians and administrators) The problem is most
prevalent in older  mainframe  systems,  but personal  computers  and  equipment
containing computer chips could also be affected.

      The Company shares  computer  hardware and software with PLC,  Protective,
and other affiliates of PLC. PLC began work on the Year 2000 problem in 1995 and
has developed and  implemented a Year 2000  transition plan intended to identify
and modify or replace  important  hardware and/or  software  systems on which it
relies  that  have  Year  2000  issues  or to  develop  appropriate  contingency
measures.  PLC is also confirming that its service providers are implementing
plans to identify and modify or replace their systems that have a Year 2000
issue. Substantial  resources are being devoted to this effort; however,  PLC
cannot specifically identify all of the costs to develop and implement these 
plans.  Since 1995, the costs that have been identified as relating to 
addressing the Year 2000 problem total less than $5 million.

      The majority of the modifications necessary for PLC's mainframe systems 
to be able to process  transactions  dated  beyond  1999 have been  completed 
and the remainder are targeted for completion by December 31, 1998. PLC's 
other systems are currently being addressed with most targeted completion dates
being prior to June 30, 1999.  PLC is developing detailed contingency plans for
a large percentage of its remaining Year 2000 issues.  PLC is also using 
research, direct inquiry, and/or testing to attempt to determine the Year 2000
readiness of critical vendors and business partners.  During 1999, PLC will 
future date test its systems in a production environment, and finalize its 
contingency plans.  PLC currrently anticipates that its remaining systems with
Year 2000 issues will be addressed and appropriate action taken before 
December 31, 1999.  

     Due to the fact that PLC does not control all of the factors that could
impact it Year 2000 readiness, there can be no assurances that PLC's efforts
will be successful, that interactions with other service providers with Year 
2000 issues will not impair PLC's operations, or that the Year 2000 issue will
not otherwise adversely affect PLC.

      Should some of PLC's systems not be available  due to Year 2000  problems,
in a  reasonably  likely worst case  scenario,  PLC may  experience  significant
delays in its  ability  to  perform  certain  functions,  but does not expect an
inability to perform critical functions or to otherwise conduct business.



                                       16

<PAGE>



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a)Exhibit 27 - Financial data schedule
         Exhibit 99 - Safe Harbor for Forward-Looking Statements


                                SIGNATURE



          Pursuant to the  requirements of the Securities  Exchange Act of 1934,
the  registrant  has  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                   AMERICAN FOUNDATION LIFE INSURANCE COMPANY




Date:   November 13, 1998                        /s/ Jerry W. DeFoor
                                                 Jerry W. DeFoor
                                                 Vice President and Controller,
                                                 and Chief Accounting Officer
                                                 (Duly authorized officer)


                                       17