UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                   Form 10-K

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


    The registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form  10-K  and is  therefore  filing  this  Form  with  the  reduced
disclosure format.

For fiscal year ended December 31, 1997       Commission file number 33-47245
                      -----------------                              --------
                                                                     33-65355
                                                                     --------


                  Allstate Life Insurance Company of New York
            (Exact name of registrant as specified in its charter)


       New York                                        36-2608394
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                      Identification No.)


                              One Allstate Drive
                                 P.O. Box 9095
                         Farmingville, New York  11738
              (Address of Principal executive offices)(Zip Code)

                                 516/451-5300
             (Registrant's telephone number, including area code)


       Securities registered pursuant to Section 12(b) of the Act: None
       Securities registered pursuant to Section 12(g) of the Act: None

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

              Yes         X                  No
                     ------------                  -----------

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in 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]

    As of December  31, 1997 there were 80,000  shares of common  capital  stock
outstanding, par value $25 per share all of which shares are held by ALIC.

<PAGE>

               ALLSTATE  LIFE  INSURANCE  COMPANY  OF NEW YORK
        (A wholly owned subsidiary of Allstate Life Insurance Company)

                  Annual Report for 1997 On Form 10-K

                          TABLE OF CONTENTS


                                                                PAGE
                                                                ----

PART I

ITEM 1.    Business**........................................... 3
ITEM 2.    Properties**......................................... 4
ITEM 3.    Legal Proceedings.................................... 4
ITEM 4.    Submission of Matters to a Vote of Security Holders*.N/A

PART II

ITEM 5.    Market for Registrant's Common Equity and
           Related Stockholder Matters.......................... 5
ITEM 6.    Selected Financial Data*.............................N/A
ITEM 7.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations.................. 6
ITEM 7A.   Quantitiative and Qualitative Disclosures About
           Market Risk..........................................15
ITEM 8.    Financial Statements and Supplementary Data..........15
ITEM 9.    Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure..................N/A

PART III

ITEM 10.   Directors and Executive Officers of the Registrant*..N/A
ITEM 11.   Executive Compensation*..............................N/A
ITEM 12.   Security Ownership of Certain Beneficial Owners and
           Management*..........................................N/A
ITEM 13.   Certain Relationships and Related Transactions*......N/A

PART IV

ITEM 14.  Exhibits, Financial Statement Schedules, and
          Reports on Form 8-K...................................F-24

Index to Financial Statement Schedules..........................15
Signatures......................................................16


* Omitted pursuant to General Instruction I(2) of Form 10-K.
**Item prepared in accordance with General Instruction I(2) of Form 10-K.



<PAGE>

                               PART I

ITEM 1.  BUSINESS

        Allstate Life Insurance Company of New York (hereinafter  "Allstate Life
of New  York"  or the  "Company")  was  incorporated  in 1967  as a  stock  life
insurance  company  under  the laws of the  State  of New York and was  known as
"Financial  Life  Insurance  Company" from 1967 to 1978.  From 1978 to 1984, the
Company was known as "PM Life  Insurance  Company."  Since 1984, the Company has
done business as "Allstate Life Insurance Company of New York." Allstate Life of
New York's products, individual annuities and life insurance, have been approved
by the State of New York.

        Allstate Life of New York is a wholly owned  subsidiary of Allstate Life
Insurance Company ("ALIC"),  a stock life insurance company  incorporated  under
the laws of Illinois.  ALIC is a wholly owned  subsidiary of Allstate  Insurance
Company ("AIC"), a stock property-liability insurance company incorporated under
the laws of Illinois. With the exception of directors' qualifying shares, all of
the  outstanding  capital  stock  of AIC is owned  by The  Allstate  Corporation
("Corporation").  On June 30, 1995, Sears, Roebuck and Co. ("Sears") distributed
its 80.3%  ownership in the Corporation to Sears common  shareholders  through a
tax-free dividend.

        Allstate Life of New York's  operations  consist of one business segment
which is the sale of life insurance and annuity products.

        Allstate Life of New York's and ALIC's  general  account  assets must be
invested in accordance with applicable  state laws. These laws govern the nature
and quality of investments that may be made by life insurance  companies and the
percentage  of their  assets that may be  committed  to any  particular  type of
investment.

        Allstate  Life of New  York is  engaged  in a  business  that is  highly
competitive  because  of the large  number of stock and  mutual  life  insurance
companies and other  entities  competing in the sale of insurance and annuities.
There are  approximately  1,700  stock,  mutual and other  types of  insurers in
business in the United States.  A.M. Best Company  assigns  Allstate Life of New
York the rating of A+(g). Under Best's rating policy and procedure,  the Company
is  assigned  the  Best's  rating  of its  parent  company,  and is based on the
consolidated  performance  of the parent and its  subsidiary.  Standard & Poor's
Insurance  Rating  Services  assigns an AA+  (Excellent) to the Company's  claim
paying ability.  Moody's Investors Service assigns an Aa2 (Excellent)  financial
strength  rating to the  Company.  The  Company  shares the same  ratings of its
parent, ALIC.

        Although the federal government generally does not directly regulate the
business of insurance,  federal initiatives often have an impact on the business
in a variety of ways.  Current and  proposed  measures  which may  significantly
affect the  Company's  insurance  business  relate to the  taxation of insurance
companies  and the tax  treatment  of  insurance  products  and the  removal  of
barriers  preventing  banks  from  engaging  in  the  securities  and  insurance
business.


                                       3
<PAGE>

        Allstate  Life of New York is regulated by the  Securities  and Exchange
Commission ("SEC") as an issuer of registered  products.  The SEC also regulates
certain  Allstate Life of New York  Separate  Accounts  which  together with the
Company issue variable annuity contracts.

ITEM 2.  PROPERTIES

        Allstate Life of New York occupies office space in Farmingville, New
York and Northbrook, Illinois.

ITEM 3.  LEGAL PROCEEDINGS

        The  Company  and its  Board  of  Directors  know of no  material  legal
proceedings  pending to which the Company is a party or which  would  materially
affect the Company. The Company is involved in pending and threatened litigation
in the normal  course of its business in which  claims for monetary  damages are
asserted. Management, after consultation with legal counsel, does not anticipate
the ultimate  liability  arising from such pending or  threatened  litigation to
have a material effect on the financial condition of the Company.





                                       4
<PAGE>



                                    PART II


ITEM 5.  MARKET FOR REGISTRANTS'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        All of  the  Company's  outstanding  shares  are  owned  by its  parent,
ALIC. Allstate Life's outstanding shares are owned by AIC. With the exception of
director's  qualifying shares, all of the outstanding  capital stock of Allstate
is owned by the  Corporation.  On June 30,  1995,  Sears  distributed  its 80.3%
ownership in the  Corporation  to Sears common  shareholders  through a tax-free
dividend.



                                       5
<PAGE>


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

                  Allstate Life Insurance Company of New York
                     Management's Discussion and Analysis
               of Financial Condition and Results of Operations

       The  following  discussion  highlights  significant  factors  influencing
results of  operations  and  changes in  financial  position  of  Allstate  Life
Insurance Company of New York (the "Company").  It should be read in conjunction
with the financial statements and related notes.

       The  Company,  which is  wholly  owned by a wholly  owned  subsidiary  of
Allstate  Insurance Company ("AIC"),  an affiliate of The Allstate  Corporation,
markets a broad line of life insurance and annuity  products in the State of New
York. Life insurance includes  traditional  products such as whole life and term
life  insurance,  as well as universal  life and other  interest-sensitive  life
products.  Annuities include deferred annuities,  such as variable annuities and
fixed rate single and flexible premium annuities,  and immediate  annuities such
as structured settlement annuities. The Company distributes its products using a
combination  of  Allstate   agents  which  include  life   specialists,   banks,
independent agents, brokers and direct response marketing.


FINANCIAL HIGHLIGHTS
($ in thousands)
<TABLE>
<CAPTION>
                                                                     1997               1996              1995
                                                                     ----               ----              ----
<S>                                                           <C>                <C>               <C>
Statutory premiums and deposits                               $       208,090    $       235,634   $       216,361
                                                              ===============    ===============   ===============
Investments                                                   $     1,907,997    $     1,636,654   $     1,541,329

Separate Account assets                                               308,595            260,668           220,141
                                                              ---------------    ---------------   ---------------

Investments, including Separate Account assets                $     2,216,592    $     1,897,322   $     1,761,470
                                                              ===============    ===============   ===============
Premiums and contract charges                                 $       118,963    $       117,106   $       148,316

Net investment income                                                 124,887            112,862           104,384

Life and annuity contract benefits                                    179,872            172,772           198,055

Operating costs and expenses                                           28,667             23,386            23,366
                                                              ---------------    ---------------   ---------------

Income from operations                                                 35,311             33,810            31,279

Income tax expense on operations                                       13,051             12,221            10,557
                                                              ---------------    ---------------   ---------------

Operating income                                                       22,260             21,589            20,722

Realized capital gains and losses, after-tax                              456             (1,028)           (1,200)
                                                              ---------------    ----------------  ----------------

Net income                                                    $        22,716    $        20,561   $        19,522
                                                              ===============    ================  ================

</TABLE>



                                       6
<PAGE>


Premiums, deposits, contract charges and contract benefits

       Statutory  premiums  and deposits  include  premiums and deposits for all
products.  Total statutory  premiums and deposits  decreased  $27.5 million,  or
11.7%, in 1997 from 1996. Increased sales of variable annuities,  life insurance
policies  and fixed  annuities  were more than offset by a reduction in premiums
relating  to  funding  agreements.  Funding  agreements,  a type  of  investment
contract  first  sold by the  Company  in 1996,  are  entered  into based on the
Company's assessment of market opportunities.  In 1996, total statutory premiums
and deposits  increased  $19.3 million,  or 8.9%,  compared to 1995 levels.  The
increase was largely the result of the sale of a funding  agreement,  as well as
higher sales of variable annuities and life insurance policies, partially offset
by lower sales of structured settlement annuities.

       Premiums  and  contract  charges  under  generally  accepted   accounting
principles  ("GAAP")  increased  slightly in 1997 and  decreased  21.0% in 1996.
Under GAAP,  revenues exclude deposits on most annuity contracts and premiums on
universal life insurance  policies,  and will vary with the mix of business sold
during the period.  In 1997, an increase in contract  charges on universal  life
policies and variable  annuity  contracts was partially  offset by a decrease in
sales of life-contingent  structured settlement annuities.  The decrease in 1996
arose  primarily  from a  fluctuation  in  the  level  of  sales  of  structured
settlement  annuities  sold  with  life  contingencies.  Provision  for life and
annuity  contract  benefits  increased $7.1 million,  or 4.1%,  during 1997, and
decreased $25.3 million, or 12.8%, during 1996. These changes resulted primarily
from fluctuations in the level of sales of structured  settlement annuities with
life contingencies.

Operating income

       Pretax net investment  income  increased  10.7% in 1997 and 8.1% in 1996.
The increases are due  primarily to higher  investment  balances in each period.
Investments,  excluding  Separate  Account assets and unrealized  gains on fixed
income  securities,  grew  9.8% and 13.3% in 1997 and  1996,  respectively.  The
increases  in net  investment  income were  partially  offset by slightly  lower
portfolio  yields. In low interest rate environments as have existed in 1997 and
1996,  funds from maturing  investments may be invested at  substantially  lower
interest  rates than which  prevailed when the funds were  previously  invested,
thereby reducing the average portfolio yield.

       Operating costs and expenses  increased $5.3 million,  or 22.6%,  for the
year ended  December 31, 1997. The increase is related to growth in business and
the recognition of costs related to the relocation of the policy  administration
function,  offset by a reduction in amortization of deferred  acquisition  costs
due to the revised estimates of future gross profits on interest-sensitive  life
products.

       In 1997,  the  Company  received  approval  from the  State of New York
Insurance  Department  to  relocate  its policy  administration  function  to an
affiliate's  facility in Illinois.  The move is scheduled for the second quarter
of 1998. The Company  recognized an after-tax charge of $1.9 million in 1997 for
certain costs relating to the consolidation of these operations.

       Operating income increased 3.1% in 1997 and 4.2% in 1996. The increase in
1997 is  primarily  due to  favorable  mortality  experience  on the  structured
settlement  annuity  business and higher  investment  margins due to  additional
sales of structured settlement annuities.  The increase in 1996 is the result of
growth in investments partially offset by less favorable mortality experience on
life-contingent structured settlement annuities.

Realized capital gains and losses

       The Company had realized capital gains of $456 thousand after tax in 1997
compared  with  realized  capital  losses of $1.0 million  after tax in 1996. In
1997,  increased  gains on fixed income  securities  and reduced losses on other
investments  were partially  offset by increased  writedowns on mortgage  loans.
Realized  capital  losses in 1996 were 14.3% lower than those  reported in 1995.
Reduced  mortgage losses were partially offset by losses incurred on the sale of
fixed income  securities to reposition a portion of the investment  portfolio to
improve overall yield in 1996.



                                       7
<PAGE>


INVESTMENTS

       The  composition  of the  investment  portfolio  at December  31, 1997 is
presented in the table below (see Notes 2 and 4 to the financial  statements for
investment accounting policies and additional information).

                                                                   Percent
($ in thousands)                                                   to total

Fixed income securities (1)       $        1,756,257                   92.0%
Mortgage loans                               114,627                    6.0
Policy loans                                  27,600                    1.5
Short-term                                     9,513                    0.5
                                  ------------------                 ------

    Total                         $        1,907,997                  100.0%
                                  ==================                 ======



(1) Fixed income securities are carried at fair value.  Amortized cost for these
securities was $1,510,110 at December 31, 1997.

       Total  investments  increased to $1.91  billion at December 31, 1997 from
$1.64 billion at December 31, 1996.  The increase in the  Company's  investments
was primarily  due to increased  unrealized  capital gains of $123.5  million on
fixed income  securities and amounts invested from positive cash flows generated
from operations.

Fixed income securities

       The   Company's   fixed   income   securities   portfolio   consists   of
privately-placed  securities,  U.S. government bonds,  publicly traded corporate
bonds,  mortgage-backed  securities,   asset-backed  securities  and  tax-exempt
municipal bonds. The Company generally holds its fixed income securities for the
long term, but has  classified all of these  securities as available for sale to
allow  maximum  flexibility  in  portfolio  management.  At December  31,  1997,
unrealized  net capital  gains on the fixed  income  securities  portfolio  were
$246.1 million  compared to $122.6 million as of December 31, 1996. The increase
in the  unrealized  gain position is primarily  attributable  to lower  interest
rates.

       At the end of  1997,  substantially  all of the  Company's  fixed  income
securities  portfolio is rated investment grade, which is defined by the Company
as a security having a National Association of Insurance  Commissioners ("NAIC")
rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company
internal rating.

       As of December 31, 1997, the fixed income securities  portfolio contained
$540.9 million of privately-placed  corporate obligations,  compared with $492.8
million at December 31, 1996.  The benefits of  privately-placed  securities  as
compared to public  securities are generally  higher yields,  improved cash flow
predictability  through  pro-rata sinking funds on many bonds, and a combination
of covenant and call protection  features  designed to better protect the holder
against  losses  resulting  from  credit  deterioration,  reinvestment  risk and
fluctuations  in interest  rates. A relative  disadvantage  of  privately-placed
securities  as compared to public  securities is reduced  liquidity.  All of the
privately-placed  securities are rated as investment grade by either the NAIC or
the  Company's  internal  ratings.  The  Company  determines  the fair  value of
privately-placed  fixed income  securities  based on discounted cash flows using
current interest rates for similar securities.

       At  December  31,  1997 and 1996,  $228.7  million  and  $194.2  million,
respectively,  of  the  fixed  income  securities  portfolio  were  invested  in
mortgage-backed  securities  ("MBS").  At December 31, 1997, all of the MBS were
investment  grade  and  approximately  96% have  underlying  collateral  that is
guaranteed by U.S. government entities, thus credit risk was minimal.




                                       8
<PAGE>


       MBS,  however,  are subject to  interest  rate risk as the  duration  and
ultimate  realized yield are affected by the rate of repayment of the underlying
mortgages.  The Company  attempts to limit  interest rate risk by purchasing MBS
whose  cost  does  not  significantly  exceed  par  value,  and  with  repayment
protection  to provide a more certain cash flow to the Company.  At December 31,
1997,  the  amortized  cost of the MBS  portfolio  was  below  par value by $7.4
million and over 40% of the MBS portfolio  was invested in planned  amortization
class  bonds.  This type of MBS is purchased  to provide  additional  protection
against rising interest rates.

       The fixed income securities portfolio contained $39.7 million and $31.5
million of  asset-backed  securities  ("ABS")  at  December  31,  1997 and 1996,
respectively.  ABS are subject to some of the same risks as MBS, but to a lesser
degree because of the nature of the underlying  assets.  The Company attempts to
mitigate these risks by primarily  investing in  highly-rated,  publicly-traded,
intermediate term ABS at or below par value. At December 31, 1997, the amortized
cost of the ABS portfolio was below par value by $233 thousand.  Over 43% of the
Company's ABS are invested in securitized credit card receivables. The remainder
of the portfolio is backed primarily by securitized  manufactured  housing, home
equity and recreational vehicles.



                                       9
<PAGE>


       The Company closely  monitors its fixed income  securities  portfolio for
declines  in value  that are other  than  temporary.  Securities  are  placed on
non-accrual  status  when they are in  default or when the  receipt of  interest
payments is in doubt.

Mortgage loans

       The Company's $114.6 million investment in mortgage loans at December 31,
1997 is  comprised  primarily of loans  secured by first  mortgages on developed
commercial real estate.  Property type  diversification  is a key  consideration
used to manage the Company's mortgage loan risk.

       The Company closely monitors its commercial  mortgage loan portfolio on a
loan-by-loan basis. Loans with an estimated  collateral value less than the loan
balance, as well as loans with other  characteristics  indicative of higher than
normal credit risk, are reviewed by financial and investment management at least
quarterly for purposes of establishing valuation allowances and placing loans on
non-accrual  status. The underlying  collateral values are based upon discounted
property cash flow  projections,  which are updated as  conditions  change or at
least annually.

Short-term investments

       The Company's short-term  investment portfolio was $9.5 million and $25.9
million  at  December  31,  1997 and 1996,  respectively.  The  Company  invests
available cash balances in taxable short-term securities having a final maturity
date or redemption date of one year or less.


SEPARATE ACCOUNTS

       Separate  Account  assets and  liabilities  increased  18.4% from  $260.7
million  at  December  31,  1996 to $308.6  million  at  December  31,  1997 due
primarily to favorable investment performance of the Separate Account investment
portfolios and sales of flexible  premium deferred  variable annuity  contracts,
partially offset by variable annuity contract surrenders and withdrawals.


MARKET RISK

       Market  risk is the risk that the  Company  will  incur  losses  due to
adverse  changes in market rates and prices.  The Company's  primary market risk
exposure is to changes in interest rates.

       The  active  management  of  market  risk is  integral  to the  Company's
operations.  The Company may use the following approaches to manage its exposure
to market risk within defined  tolerance ranges: 1) rebalance its existing asset
or liability portfolios, 2) change the character of future investments purchased
or 3) use derivative  instruments to modify the market risk  characteristics  of
existing assets and  liabilities or assets expected to be purchased.  See Note 5
to the financial statements for a more detailed discussion of these instruments.





                                       10
<PAGE>

Corporate oversight

       AIC  administers  and  oversees  investment  risk  management   processes
primarily through three oversight bodies: the Boards of Directors and Investment
Committees of its  operating  subsidiaries,  and the Credit and Risk  Management
Committee  ("CRMC").  The Boards of Directors and Investment  Committees provide
executive  oversight of investment  activities.  The CRMC is a senior management
committee  consisting  of the Chief  Investment  Officer,  the  Investment  Risk
Manager,  and other  investment  officers who are responsible for the day-to-day
management of market risk.  The CRMC meets at least monthly to provide  detailed
oversight of investment risk, including market risk.

       AIC has  investment  guidelines  that  define the overall  framework  for
managing market and other investment risks,  including the  accountabilities and
controls  over  these  activities.  In  addition,  AIC has  specific  investment
policies for each of its affiliates,  including the Company,  that delineate the
investment  limits and  strategies  that are  appropriate  given  each  entity's
liquidity, surplus, product and regulatory requirements.

       AIC manages its exposure to market risk through asset allocation  limits,
duration limits, value-at-risk limits, and, as appropriate,  stress tests. Asset
allocation  limits place  restrictions  on the aggregate fair value which may be
invested  within  an asset  class.  Duration  limits  on the  life  and  annuity
investment  portfolios,  and, as appropriate,  on individual components of these
portfolios (such as those of the Company),  place  restrictions on the amount of
interest rate risk which may be taken. Value-at-risk measures the potential loss
in fair value  that could  arise from  adverse  movements  in the fixed  income,
equity,  and  currency  markets  over  a  time  interval,  based  on  historical
volatilities and correlations between market risk factors.  Stress tests measure
downside risk to fair value and earnings over longer time  intervals  and/or for
adverse market scenarios.

       The day-to-day  management of market risk within defined tolerance ranges
occurs as portfolio  managers buy and sell within their respective markets based
upon the acceptable  boundaries  established by asset  allocation,  duration and
other limits, including but not limited to credit and liquidity.

Interest rate risk

       Interest  rate  risk is the risk that the  Company  will  incur  economic
losses due to adverse  changes in  interest  rates.  This risk  arises  from the
Company's  primary  activities,  as the  Company  invests  substantial  funds in
interest-sensitive assets and also has certain interest-sensitive liabilities.

       The  Company  manages  the  interest  rate risk  inherent  in its  assets
relative  to the  interest  rate risk  inherent in its  liabilities.  One of the
measures  the Company  uses to quantify  this  exposure  is  duration.  Duration
measures the  sensitivity of the fair value of assets and liabilities to changes
in interest rates. For example, if interest rates increase 1%, the fair value of
an  asset  with a  duration  of 5 years  is  expected  to  decrease  in value by
approximately  5%. At December 31, 1997,  the  difference  between the Company's
liability  and asset  duration was  approximately  2.8 years.  This duration gap
indicates that the fair value of the Company's  liabilities is more sensitive to
interest rate movements than the fair value of its assets.

       The Company  seeks to invest  premiums  and  deposits on  universal  life
policies and  investment  contracts  to create  future cash flows that will fund
future  claims,  benefits and expenses,  and earn stable  margins  across a wide
variety of  interest  rate and  economic  scenarios.  In order to  achieve  this
objective and limit its exposure to interest rate risk, the Company adheres to a
philosophy of managing the duration of assets and related liabilities,  and uses
financial  futures  to hedge the  interest  rate risk  related  to  anticipatory
purchases and sales of investments and product sales to customers.





                                       11
<PAGE>

       To calculate  duration,  the Company  projects  asset and liability  cash
flows,  and discounts them to a net present value basis using a risk-free market
rate  adjusted  for  credit  quality,  sector  attributes,  liquidity  and other
specific  risks.  Duration is  calculated  by  revaluing  these cash flows at an
alternative  level of interest rates,  and determining the percentage  change in
fair  value from the base case.  The cash  flows used in the model  reflect  the
expected  maturity and repricing  characteristics  of the  Company's  derivative
financial  instruments,  all  other  financial  instruments  (see  Note 5 to the
financial   statements),   and  certain   non-financial   instruments  including
interest-sensitive  annuity  liabilities.  The projections  include  assumptions
(based upon historical  market and Company specific  experience)  reflecting the
impact of changing  interest rates on the  prepayment,  lapse,  leverage  and/or
option  features of  instruments,  where  applicable.  Such  assumptions  relate
primarily to mortgage-backed  securities,  collateralized  mortgage obligations,
municipal bonds, municipal and corporate obligations,  and fixed rate single and
flexible premium deferred annuities.

       Based  upon the  information  and  assumptions  the  Company  uses in its
duration  calculation and in effect at December 31, 1997,  management  estimates
that a 100 basis point  immediate,  parallel  increase in interest  rates ("rate
shock")  would  decrease  the net  fair  value  of its  assets  and  liabilities
identified  above by approximately  $16.8 million.  The selection of a 100 basis
point  immediate  rate shock  should not be  construed  as a  prediction  by the
Company's  management of future market  events;  but rather,  to illustrate  the
potential impact of such an event.

       To the extent that actual results differ from the  assumptions  utilized,
the Company's duration and rate shock measures could be significantly  impacted.
Additionally,  the Company's  calculation assumes that the current  relationship
between  short-term and long-term interest rates (the term structure of interest
rates) will remain constant over time. As a result,  these  calculations may not
fully  capture  the  impact of  non-parallel  changes in the term  structure  of
interest rates and/or large changes in interest rates.


LIQUIDITY AND CAPITAL RESOURCES

Capital resources

       The  NAIC  has  a  standard  for  assessing  the  solvency  of  insurance
companies,  which is referred to as risk-based capital ("RBC").  The requirement
consists  of a  formula  for  determining  each  insurer's  RBC and a model  law
specifying  regulatory actions if an insurer's RBC falls below specified levels.
The RBC formula for life insurance companies  establishes  capital  requirements
relating to insurance,  business, asset and interest rate risks. At December 31,
1997,  RBC for the Company was  significantly  above a level that would  require
regulatory action.

Financial ratings and strength

       Claims-paying  ability  ratings at  December  31,  1997  assigned  to the
Company  include  AA+,  A+(g)  and Aa2 from  Standard  & Poor's,  A.M.  Best and
Moody's, respectively.




                                       12
<PAGE>


Liquidity

       The Company's principal sources of funds are collections of principal and
interest from the investment portfolio and the receipt of premiums and deposits.
The primary uses of these funds are to purchase investments and pay policyholder
claims, benefits, contract maturities and surrenders, and operating costs.

       The maturity  structure of the Company's fixed income  securities,  which
represent  92.0% of the  Company's  total  investments,  is  managed to meet the
anticipated cash flow requirements of the underlying  liabilities.  A portion of
the Company's product portfolio,  primarily fixed deferred annuity and universal
life insurance products, is subject to discretionary surrender and withdrawal by
contractholders.  Management believes its assets are sufficiently liquid to meet
future  obligations  to its  life  and  annuity  contractholders  under  various
interest rate scenarios.

OTHER DEVELOPMENTS

       Final  approval  of  the  NAIC's  proposed   "Comprehensive  Guide"  on
statutory accounting principles is expected in early 1998.  Implementation could
be as early as January 1, 1999. The requirements of the Comprehensive  Guide are
not expected to have a material impact on statutory surplus.


YEAR 2000

       The Company is heavily  dependent upon complex computer systems for all
phases of its operations, including customer service, risk management and policy
and contract administration. Since many of the Company's older computer software
programs  recognize  only the  last two  digits  of the year in any  date,  some
software may fail to operate properly in or after the year 1999, if the software
is not reprogrammed or replaced,  ("Year 2000 Issue"). The Company believes that
many of its  counterparties and suppliers also have Year 2000 Issues which could
affect the Company.  In 1995,  AIC commenced a plan intended to mitigate  and/or
prevent the adverse effects of Year 2000 Issues. These strategies include normal
development and enhancement of new and existing  systems,  upgrades to operating
systems already covered by maintenance  agreements and modifications to existing
systems to make them Year 2000  compliant.  The plan also  includes  the Company
actively working with its major external  counterparties and suppliers to assess
their  compliance  efforts  and the  Company's  exposure  to them.  The  Company
presently  believes that it will resolve the Year 2000 Issue in a timely manner,
and the financial  impact will not materially  affect its results of operations,
liquidity  or  financial  position.  Year 2000 costs are and will be expensed as
incurred.


PENDING ACCOUNTING STANDARDS

      In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income"
and SFAS No. 131  "Disclosures  About  Segments  of an  Enterprise  and  Related
Information." SFAS No. 130 requires the presentation of comprehensive  income in
the financial  statements.  Comprehensive income is a measurement of all changes
in equity that result from  transactions  and other  economic  events other than
transactions  with  stockholders.  The  requirements  of this  statement will be
adopted effective January 1, 1998.

      SFAS No. 131 redefines how segments are determined and requires additional
segment  disclosures  for  both  annual  and  quarterly  reporting.  Under  this
statement, segments are determined using the "management approach" for financial
statement  reporting.  The management approach is based on the way an enterprise
makes  operating  decisions  and assesses  performance  of its  businesses.  The
Company is  currently  reviewing  the  requirements  of this SFAS and has yet to
determine its impact on its current reporting segments. The requirements of this
statement will be adopted effective December 31, 1998.

      In December  1997,  the Accounting  Standards  Executive  Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position  ("SOP")  97-3,  "Accounting  by Insurance  and Other  Enterprises  for
Insurance-Related  Assessments."  The SOP provides  guidance  concerning when to
recognize  a  liability  for   insurance-related   assessments   and  how  those
liabilities  should be  measured.  Specifically,  insurance-related  assessments
should be recognized as liabilities when all of the following criteria have been
met: a) an assessment has been imposed or it is probable that an assessment will
be imposed,  b) the event obligating an entity to pay an assessment has occurred
and  c)  the  amount  of  the  assessment  can  be  reasonably  estimated.   The
requirements  of this  standard  will be adopted in 1999 and are not expected to
have a material  impact on the results of  operations,  cash flows or  financial
position of the Company. The SOP is expected to be adopted in 1999.



                                       13
<PAGE>
      In March 1998, the Accounting  Standards  Executive Committee of the AICPA
issued SOP 98-1,  "Accounting  for the Costs of Computer  Software  Developed or
Obtained for  Internal  Use." The SOP provides  guidance on  accounting  for the
costs of computer software developed or obtained for internal use. Specifically,
certain external, payroll and payroll related costs should be capitalized during
the application development state of a project and depreciated over the computer
software's useful life. The Company  currently  expenses these costs as incurred
and is  evaluating  the  effects of this SOP on its  accounting  for  internally
developed software. The SOP is expected to be adopted in 1998.


FORWARD-LOOKING STATEMENTS

      The statements  contained in this Management's  Discussion and Analysis
that are not historical  information  are  forward-looking  statements  that are
based on  management's  estimates,  assumptions  and  projections.  The  Private
Securities  Litigation  Reform  Act of 1995  provides  a safe  harbor  under The
Securities   Act  of  1933  and  The   Securities   Exchange  Act  of  1934  for
forward-looking statements.





                                       14
<PAGE>





ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The pertinent  provisions of  Management's  Discussion and Analysis of Financial
Condition and Results of Operations are herein incorporated by reference.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                             Financial Statements

                                     Index
                                     -----

                                                                            Page
                                                                            ----

Independent Auditors' Report...............................................F-1

Financial Statements:

           Statements of Financial Position,
                  December 31, 1997 and 1996...............................F-2


           Statements of Operations for the Years Ended
                  December 31, 1997, 1996 and 1995.........................F-3

           Statements of Shareholder's Equity for the Years Ended
                  December 31, 1997, 1996 and 1995.........................F-4

           Statements of Cash Flows for the Years Ended
                  December 31, 1997, 1996 and 1995.........................F-5

           Notes to Financial Statements...................................F-6

           Schedule IV - Reinsurance for the Years Ended
                  December 31, 1997, 1996 and 1995.........................F-22

           Schedule V - Valuation and Qualifying Accounts
                  December 31, 1997, 1996 and 1995.........................F-23





                                       15
<PAGE>



INDEPENDENT AUDITORS' REPORT


TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF ALLSTATE LIFE INSURANCE  COMPANY OF
NEW YORK:

We have audited the  accompanying  Statements of Financial  Position of Allstate
Life Insurance  Company of New York (the  "Company") as of December 31, 1997 and
1996, and the related  Statements of Operations,  Shareholder's  Equity and Cash
Flows for each of the three years in the period ended  December  31,  1997.  Our
audits also included  Schedule IV -  Reinsurance  and Schedule V - Valuation and
Qualifying   Accounts.   These  financial  statements  and  financial  statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial  statements and financial  statement
schedules based on our audits.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the  financial  position of the  Company as of December  31, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the  period  ended  December  31,  1997 in  conformity  with  generally
accepted accounting principles.  Also, in our opinion, Schedule IV - Reinsurance
and Schedule V - Valuation and Qualifying Accounts,  when considered in relation
to the basic  financial  statements  taken as a whole,  present  fairly,  in all
material respects, the information set forth therein.


/s/ Deloitte & Touche LLP

Chicago, Illinois
February 20, 1998

                                       F-1
<PAGE>

                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                        STATEMENTS OF FINANCIAL POSITION

<TABLE>
<CAPTION>

                                                                                         December 31,
                                                                                         ------------
($ in thousands)                                                                   1997                1996
                                                                                   ----                ----
<S>                                                                          <C>                <C>

ASSETS
Investments
  Fixed income securities, at fair value (amortized cost
     $1,510,110 and $1,378,155)                                              $     1,756,257    $     1,500,783
  Mortgage loans                                                                     114,627             84,657
  Policy loans                                                                        27,600             25,359
  Short-term                                                                           9,513             25,855
                                                                             ---------------    ---------------
      Total investments                                                            1,907,997          1,636,654

Deferred acquisition costs                                                            71,946             61,559
Accrued investment income                                                             21,725             20,321
Reinsurance recoverables                                                               1,726              2,566
Cash                                                                                     393              1,027
Other assets                                                                           6,167              7,489
Separate Accounts                                                                    308,595            260,668
                                                                             ---------------    ---------------
        Total assets                                                         $     2,318,549    $     1,990,284
                                                                             ===============    ===============

LIABILITIES
Reserve for life-contingent contract benefits                                $     1,084,409    $       911,457
Contractholder funds                                                                 607,474            572,480
Income taxes payable                                                                   1,419                  -
Deferred income taxes                                                                 16,990              3,692
Other liabilities and accrued expenses                                                10,985              6,405
Net payable to affiliates                                                              5,267              2,515
Separate Accounts                                                                    308,595            260,668
                                                                             ---------------    ---------------
        Total liabilities                                                          2,035,139          1,757,217
                                                                             ---------------        -----------

SHAREHOLDER'S EQUITY
Common stock, $25 par value, 80,000 shares
     authorized, issued and outstanding                                                2,000              2,000
Additional capital paid-in                                                            45,787             45,787
Unrealized net capital gains                                                          64,479             36,852
Retained income                                                                      171,144            148,428
                                                                             ---------------    ---------------
        Total shareholder's equity                                                   283,410            233,067
                                                                             ---------------    ---------------
        Total liabilities and shareholder's equity                           $     2,318,549    $     1,990,284
                                                                             ===============    ===============
</TABLE>


See notes to financial statements.




                                      F-2
<PAGE>

                 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                              -----------------------
($ in thousands)                                                      1997              1996             1995
                                                                      ----              ----             ----
<S>                                                              <C>              <C>               <C>
REVENUES
Premiums (net of reinsurance
    ceded of $3,087, $2,273 and $2,147)                          $      90,366    $      91,825     $     126,713
Contract charges                                                        28,597           25,281            21,603
Net investment income                                                  124,887          112,862           104,384
Realized capital gains and losses                                          701           (1,581)           (1,846)
                                                                 -------------    -------------     -------------
                                                                       244,551          228,387           250,854
                                                                 -------------    -------------     -------------
COSTS AND EXPENSES
Contract benefits (net of reinsurance recoveries
    of $1,985, $2,827 and $1,581)                                      179,872          172,772           198,055
Amortization of deferred acquisition costs                               5,023            6,512             5,502
Operating costs and expenses                                            23,644           16,874            17,864
                                                                 -------------    -------------     -------------
                                                                       208,539          196,158           221,421
                                                                 -------------    -------------     -------------

INCOME FROM OPERATIONS BEFORE
     INCOME TAX EXPENSE                                                 36,012           32,229            29,433
INCOME TAX EXPENSE                                                      13,296           11,668             9,911
                                                                 -------------    -------------     -------------

NET INCOME                                                       $      22,716    $      20,561     $      19,522
                                                                 =============    =============     =============
</TABLE>


See notes to financial statements.





                                      F-3
<PAGE>
                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                       STATEMENTS OF SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                            -----------------------
($ in thousands)                                                    1997              1996             1995
                                                                    ----              ----             ----
<S>                                                            <C>              <C>               <C>
COMMON STOCK                                                   $        2,000   $        2,000    $        2,000
                                                               --------------   --------------    --------------

ADDITIONAL CAPITAL PAID-IN                                             45,787           45,787            45,787
                                                               --------------   --------------    --------------

UNREALIZED NET CAPITAL GAINS
Balance, beginning of year                                             36,852           74,413            (6,891)
Net change                                                             27,627          (37,561)           81,304
                                                               --------------   --------------    --------------
Balance, end of year                                                   64,479           36,852            74,413
                                                               --------------   --------------    --------------

RETAINED INCOME
Balance, beginning of year                                            148,428          127,867           108,345
Net income                                                             22,716           20,561            19,522
                                                               --------------   --------------    --------------
Balance, end of year                                                  171,144          148,428           127,867
                                                               --------------   --------------    --------------
     Total shareholder's equity                                $      283,410   $      233,067    $      250,067
                                                               ==============   ==============    ==============

</TABLE>

See notes to financial statements.





                                      F-4
<PAGE>
                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                            -----------------------
($ in thousands)                                                    1997              1996             1995
                                                                    ----              ----             ----
<S>                                                            <C>              <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                     $       22,716   $       20,561    $       19,522
Adjustments to reconcile net income to net
     cash provided by operating activities
         Depreciation, amortization and other
           non-cash items                                             (31,112)         (26,172)          (22,348)
         Realized capital gains and losses                               (701)           1,581             1,846
         Interest credited to contractholder funds                     31,667           25,817            26,924
         Increase in life-contingent contract
           benefits and contractholder funds                           68,114           75,217           103,513
         Increase in deferred acquisition costs                       (10,781)          (6,859)           (5,537)
         Increase in accrued investment income                         (1,404)          (1,493)           (2,497)
         Change in deferred income taxes                               (1,578)             257            (2,677)
         Changes in other operating assets and
           liabilities                                                 11,369           (4,234)            3,897
                                                               --------------   --------------    --------------
              Net cash provided by operating
                 activities                                            88,290           84,675           122,643
                                                               --------------   --------------    --------------

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed income securities                         15,723           28,454            13,526
Investment collections
        Fixed income securities available for sale                    120,061           72,751            30,871
        Fixed income securities held to maturity                            -                -             3,067
        Mortgage loans                                                  5,365           12,508             6,499
Investment purchases
        Fixed income securities available for sale                   (236,984)        (236,252)         (142,205)
        Fixed income securities held to maturity                            -                -           (32,046)
        Mortgage loans                                                (35,200)         (10,325)           (9,864)
Change in short-term investments, net                                  16,342          (18,598)              (45)
Change in policy loans, net                                            (2,241)          (2,574)             (859)
                                                               --------------   --------------    --------------
              Net cash used in investing activities                  (116,934)        (154,036)         (131,056)
                                                               --------------   --------------    --------------

CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits                                           79,384          115,420            76,534
Contractholder fund withdrawals                                       (51,374)         (46,504)          (68,412)
                                                               --------------   --------------    --------------
              Net cash provided by financing
                 activities                                            28,010           68,916             8,122
                                                               --------------   --------------    --------------

NET DECREASE IN CASH                                                     (634)            (445)             (291)
CASH AT BEGINNING OF YEAR                                               1,027            1,472             1,763
                                                               --------------   --------------    --------------
CASH AT END OF YEAR                                            $          393   $        1,027    $        1,472
                                                               ==============   ==============    ==============
</TABLE>

See notes to financial statements.





                                      F-5
<PAGE>

                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                         NOTES TO FINANCIAL STATEMENTS
                                ($ IN THOUSANDS)

1.    General

Basis of presentation
The  accompanying  financial  statements  include the accounts of Allstate  Life
Insurance Company of New York (the "Company").  The Company is wholly owned by a
wholly owned subsidiary  ("Parent") of Allstate  Insurance  Company  ("AIC"),  a
wholly owned subsidiary of The Allstate Corporation (the "Corporation"). On June
30, 1995, Sears,  Roebuck and Co. ( "Sears")  distributed its 80.3% ownership in
the Corporation to Sears common  shareholders  through a tax-free  dividend (the
"Distribution").  These  financial  statements  have been prepared in conformity
with generally accepted accounting principles.

To conform  with the 1997  presentation,  certain  amounts  in the prior  years'
financial statements and notes have been reclassified.

Nature of operations
The Company  markets a broad line of life insurance and annuity  products in the
State of New York. Life insurance  includes  traditional  products such as whole
life  and  term  life   insurance,   as  well  as   universal   life  and  other
interest-sensitive life products.  Annuities include deferred annuities, such as
variable  annuities and fixed rate single and flexible  premium  annuities,  and
immediate  annuities  such  as  structured  settlement  annuities.  The  Company
distributes  its products using a combination  of Allstate  agents which include
life  specialists,  banks,  independent  agents,  brokers  and  direct  response
marketing.

Structured  settlement  annuity contracts issued by the Company are long-term in
nature and involve fixed guarantees relating to the amount and timing of benefit
payments.  Single and flexible premium deferred annuity  contracts issued by the
Company are subject to  discretionary  withdrawal or surrender by the customers,
subject to applicable  surrender  charges.  In a low interest rate  environment,
funds  from  maturing  investments,   particularly  those  supporting  long-term
structured  settlement annuity  obligations,  may be reinvested at substantially
lower interest rates than those which  prevailed when the funds were  previously
invested.

The Company utilizes  various  modeling  techniques in managing the relationship
between  assets and  liabilities.  The fixed income  securities  supporting  the
Company's  obligations have been selected to meet, to the extent  possible,  the
anticipated  cash flow  requirements  of the  related  liabilities.  The Company
employs  strategies  to  minimize  its  exposure  to  interest  rate risk and to
maintain  investments  which  are  sufficiently  liquid to meet  obligations  to
contractholders in various interest rate scenarios.

The  Company  monitors  economic  and  regulatory  developments  which  have the
potential to impact its business. There continues to be new and proposed federal
and  state   regulation   and   legislation   that  would  allow  banks  greater
participation in the securities and insurance businesses,  which will present an
increased  level of  competition  for sales of the  Company's  life and  annuity
products.  Furthermore, the market for deferred annuities and interest-sensitive
life  insurance is enhanced by the tax incentives  available  under current law.
Any legislative  changes which lessen these  incentives are likely to negatively
impact the demand for these products.

Although the Company currently  benefits from agreements with financial services
entities  who market and  distribute  its  products,  consolidation  within that
industry and specifically,  a change in control of those entities with which the
Company partners, could affect the Company's sales.

Enacted and pending state  legislation to permit mutual  insurance  companies to
convert to a hybrid  structure  known as a mutual  holding  company could have a
number  of  significant  effects  on  the  Company  by (1)  increasing  industry
competition through  consolidation caused by mergers and acquisitions related to
the new  corporate  form of  business;  (2)  increasing  competition  in capital
markets; and (3) reopening  stock/mutual company  disagreements  related to such
issues as taxation disparity between mutual and stock insurance companies.



                                      F-6
<PAGE>

                 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                                ($ IN THOUSANDS)

2.   Summary of Significant Accounting Policies

Investments
Fixed income  securities  include  bonds and  mortgage-backed  and  asset-backed
securities.  All fixed  income  securities  are carried at fair value and may be
sold prior to their contractual  maturity ("available for sale"). The difference
between  amortized cost and fair value,  net of deferred  income taxes,  certain
deferred acquisition costs, and reserves for life-contingent  contract benefits,
is reflected as a component of shareholder's  equity.  Provisions are recognized
for  declines  in the  value of fixed  income  securities  that are  other  than
temporary. Such writedowns are included in realized capital gains and losses.

Mortgage loans are carried at outstanding  principal balance, net of unamortized
premium  or  discount  and  valuation   allowances.   Valuation  allowances  are
established  for impaired loans when it is probable that  contractual  principal
and interest  will not be collected.  Valuation  allowances  for impaired  loans
reduce the  carrying  value to the fair value of the  collateral  or the present
value of the loan's  expected  future  repayment  cash flows  discounted  at the
loan's  original  effective  interest  rate.  Valuation  allowances on loans not
considered  to be  impaired  are  established  based  on  consideration  of  the
underlying collateral,  borrower financial strength, current and expected future
market conditions, and other factors.

Short-term  investments  are carried at amortized cost which  approximates  fair
value. Policy loans are carried at the unpaid principal balances.

Investment  income  consists  primarily of interest,  which is  recognized on an
accrual basis. Interest income on mortgage-backed and asset-backed securities is
determined  on  the  effective  yield  method,   based  on  estimated  principal
repayments.  Accrual of income is  suspended  for fixed  income  securities  and
mortgage  loans that are in default or when the receipt of interest  payments is
in doubt.

Realized  capital gains and losses are  determined on a specific  identification
basis.

Derivative financial instruments
The  Company   utilizes  futures   contracts  which  are  derivative   financial
instruments.  When futures meet  specific  criteria  they may be  designated  as
accounting  hedges and accounted  for on a deferral  basis,  depending  upon the
nature of the hedge strategy and the method used to account for the hedged item.

If,  subsequent  to entering  into a hedge  transaction,  the  futures  contract
becomes  ineffective  (including  if  the  hedged  item  is  sold  or  otherwise
extinguished or the occurrence of a hedged anticipatory transaction is no longer
probable),  the Company terminates the derivative position.  Gains and losses on
these  terminations  are  reported in realized  capital  gains and losses in the
period they occur.  The Company may also  terminate  derivatives  as a result of
other events or circumstances. Gains and losses on these terminations are either
deferred and amortized over the remaining life of either the hedge or the hedged
item, whichever is shorter, or are reported in shareholder's equity,  consistent
with the  accounting  for the hedged  item.  Futures  contracts  must reduce the
primary  market risk exposure on an  enterprise  basis in  conjunction  with the
hedge  strategy;  be designated as a hedge at the inception of the  transaction;
and be highly  correlated  with the fair value of, or interest income or expense
associated with, the hedged item at inception and throughout the hedge period.

Under deferral  accounting,  gains and losses on derivatives are deferred on the
statement of financial  position and recognized in earnings in conjunction  with
earnings on the hedged item.  The Company  accounts  for  interest  rate futures
contracts  as hedges  using  deferral  accounting  for  anticipatory  investment
purchases and sales when the criteria for futures  (discussed above) are met. In
addition,  anticipated  transactions  must be probable of  occurrence  and their
significant terms and characteristics identified.

Changes in fair values of these types of derivatives  are initially  deferred as
other liabilities and accrued expenses. Once the anticipated transaction occurs,
the deferred gains or losses are considered  part of the cost basis of the asset
and reported net of tax in shareholder's  equity or recognized as a gain or loss
from  disposition of the asset,  as  appropriate.  The Company  reports  initial
margin deposits on futures in short-term investments.  Fees and commissions paid
on these derivatives are also deferred as an adjustment to the carrying value of
the hedged item.



                                      F-7
<PAGE>

                 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                                ($ IN THOUSANDS)

Recognition of premium revenues and contract charges
Premiums for  traditional  life  insurance  are  recognized as revenue when due.
Accident and disability  premiums are earned on a pro rata basis over the policy
period.  Revenues on interest-sensitive life insurance policies are comprised of
contract  charges  and  fees,  and are  recognized  when  assessed  against  the
policyholder account balance.  Revenues on most annuities,  which are considered
investment   contracts,   include   contract   charges  and  fees  for  contract
administration and surrenders. These revenues are recognized when levied against
the  contract  balance.  Gross  premium in excess of the net  premium on limited
payment contracts, primarily structured settlement annuities when sold with life
contingencies, are deferred and recognized over the contract period.

Reinsurance
Certain  premiums and  contract  benefits  are ceded and  reflected  net of such
cessions  in the  statements  of  operations.  Reinsurance  recoverable  and the
related reserves for  life-contingent  contract benefits are reported separately
in the statements of financial  position.  The Company continues to have primary
liability as the direct insurer for risks reinsured.

Deferred acquisition costs
Certain  costs of  acquiring  life and  annuity  business,  principally  agents'
remuneration,   premium  taxes,  certain  underwriting  costs  and  direct  mail
solicitation expenses are deferred and amortized to income. For traditional life
insurance,  limited  payment  contracts and accident and  disability  insurance,
these  costs are  amortized  in  proportion  to the  estimated  revenues on such
business.  For universal life-type policies and investment contracts,  the costs
are  amortized in relation to the present  value of estimated  gross  profits on
such business.  Changes in the amount or timing of estimated  gross profits will
result in  adjustments  in the cumulative  amortization  of these costs.  To the
extent that  unrealized  gains or losses on fixed income  securities  carried at
fair value would result in an adjustment of deferred acquisition costs had those
gains or  losses  actually  been  realized,  the  related  unamortized  deferred
acquisition  costs are recorded as a reduction of the unrealized gains or losses
included in shareholder's equity, net of deferred income taxes.

Income taxes
The income tax provision is calculated under the liability method.  Deferred tax
assets  and  liabilities  are  recorded  based  on the  difference  between  the
financial  statement and tax bases of assets and  liabilities at the enacted tax
rates. The principal assets and liabilities  giving rise to such differences are
insurance reserves and deferred  acquisition  costs.  Deferred income taxes also
arise  from  unrealized  capital  gains and  losses on fixed  income  securities
carried at fair value.

Separate Accounts
The Company issues flexible premium deferred  variable  annuity  contracts,  the
assets and  liabilities  of which are legally  segregated  and  reflected in the
accompanying  statements of financial  position as assets and liabilities of the
Separate Accounts (Allstate Life of New York Variable Annuity Account,  Allstate
Life of New York  Variable  Annuity  Account  II and  Allstate  Life of New York
Separate  Account A, unit investment  trusts  registered with the Securities and
Exchange Commission).

The assets of the Separate Accounts are carried at fair value. Investment income
and realized  capital gains and losses of the Separate  Accounts accrue directly
to the  contractholders  and,  therefore,  are  not  included  in the  Company's
statements  of  operations.  Revenues to the Company from the Separate  Accounts
consist of contract  maintenance  fees,  administration  fees and  mortality and
expense risk charges.



                                      F-8
<PAGE>

                 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                                ($ IN THOUSANDS)

Reserves for life-contingent contract benefits
The reserve for life-contingent  contract benefits, which relates to traditional
life insurance,  group annuities and structured  settlement  annuities with life
contingencies,  disability insurance and accident insurance,  is computed on the
basis of  assumptions  as to future  investment  yields,  mortality,  morbidity,
terminations  and  expenses.  These  assumptions,  which  for  traditional  life
insurance are applied using the net level premium method, include provisions for
adverse  deviation  and  generally  vary  by  such  characteristics  as  type of
coverage, year of issue and policy duration.  Reserve interest rates ranged from
4.00% to 11.00% during 1997. To the extent that unrealized gains on fixed income
securities  would result in a premium  deficiency  had those gains actually been
realized,  the related  increase  in reserves is recorded as a reduction  of the
unrealized gains included in shareholder's equity, net of deferred income taxes.

Contractholder funds
Contractholder funds arise from the issuance of individual or group policies and
contracts  that include an investment  component,  including  most annuities and
universal  life  policies.  Payments  received are recorded as  interest-bearing
liabilities.  Contractholder  funds are equal to deposits  received and interest
credited  to the  benefit  of the  contractholder  less  withdrawals,  mortality
charges and administrative  expenses.  Credited interest rates on contractholder
funds ranged from 3.30% to 9.75% for those  contracts  with fixed interest rates
and from 3.25% to 7.75% for those with flexible rates during 1997.

Off-balance-sheet financial instruments
Commitments to extend  mortgage loans have only  off-balance-sheet  risk because
their  contractual  amounts are not  recorded  in the  Company's  statements  of
financial position.

Use of estimates
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.


3.   Related Party Transactions

Reinsurance
The Company  cedes  business to the Parent under  reinsurance  treaties to limit
aggregate  and single  exposures  on large risks.  Premiums and policy  benefits
ceded totaled $2,171 and $327 in 1997, $1,383 and $1,662 in 1996, and $1,259 and
$278 in 1995, respectively.  Included in the reinsurance recoverable at December
31,  1997  and  1996  are  amounts  due  from  the  Parent  of  $342  and  $965,
respectively.


Structured settlement annuities
AIC, through an affiliate,  purchased $12,766, $15,610 and $11,243 of structured
settlement annuities from the Company in 1997, 1996 and 1995,  respectively.  Of
these  amounts,  $3,468,  $8,517  and  $4,164  relate to  structured  settlement
annuities  with life  contingencies  and are included in premium income in 1997,
1996 and 1995,  respectively.  Additionally,  the  reserve  for  life-contingent
contract benefits was increased by approximately 94% of such premium received in
each of these years.

Business operations
The Company  utilizes  services and  business  facilities  owned or leased,  and
operated by AIC in conducting its business  activities.  The Company  reimburses
AIC for the  operating  expenses  incurred by AIC on behalf of the Company.  The
cost to the Company is determined by various allocation methods and is primarily
related to the level of services  provided.  Expenses  allocated  to the Company
were  $27,632,  $23,134  and  $21,288 in 1997,  1996 and 1995,  respectively.  A
portion  of these  expenses  related  to the  acquisition  of life  and  annuity
business is deferred and amortized over the contract period.


                                      F-9
<PAGE>

                 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                                ($ IN THOUSANDS)

4.   Investments

Fair values
The amortized cost, gross unrealized gains and losses,  and fair value for fixed
income securities are as follows:
<TABLE>
<CAPTION>
                                                                         Gross Unrealized
                                                                         ----------------
                                                   Amortized                                              Fair
                                                      Cost             Gains            Losses            Value
                                                   ---------           -----            ------            -----
<S>                                              <C>              <C>               <C>              <C>
At December 31, 1997
--------------------
    U.S. government and agencies                 $      416,203   $      126,824    $         (212)  $      542,815
    Municipal                                            35,382            2,449               (22)          37,809
    Corporate                                           803,935          103,700              (479)         907,156
    Mortgage-backed securities                          215,465           13,442              (166)         228,741
    Asset-backed securities                              39,125              642               (31)          39,736
                                                 --------------   --------------    --------------   --------------
       Total fixed income securities             $    1,510,110   $      247,057    $         (910)  $    1,756,257
                                                 ==============   ==============    ==============   ==============

At December 31, 1996
--------------------
    U.S. government and agencies                 $      387,806   $       54,349    $       (2,642)  $      439,513
    Municipal                                            36,158            1,883              (406)          37,635
    Corporate                                           734,500           68,022            (4,592)         797,930
    Mortgage-backed securities                          188,480            6,793            (1,106)         194,167
    Asset-backed securities                              31,211              394               (67)          31,538
                                                 --------------   --------------    --------------   --------------
       Total fixed income securities             $    1,378,155   $      131,441    $       (8,813)  $    1,500,783
                                                 ==============   ==============    ==============   ==============
</TABLE>


Scheduled maturities
The scheduled  maturities for fixed income securities are as follows at December
31, 1997:
<TABLE>
<CAPTION>

                                                                          Amortized
                                                                            Cost            Fair Value
                                                                       --------------    ---------------
<S>                                                                    <C>               <C>
Due in one year or less                                                $        18,751   $        18,839
Due after one year through five years                                           74,886            77,931
Due after five years through ten years                                         221,116           237,020
Due after ten years                                                            940,767         1,153,990
                                                                       ---------------   ---------------
                                                                             1,255,520         1,487,780
  Mortgage- and asset-backed securities                                        254,590           268,477
                                                                       ---------------   ---------------
       Total                                                           $     1,510,110   $     1,756,257
                                                                       ===============   ===============
</TABLE>

Actual  maturities may differ from those scheduled as a result of prepayments by
the issuers.



                                      F-10
<PAGE>

                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                                ($ IN THOUSANDS)


<TABLE>
<CAPTION>

Net investment income

Year ended December 31,                                               1997              1996             1995
----------------------                                                ----              ----             ----
<S>                                                           <C>              <C>               <C>

Fixed income securities                                       $     116,763    $     104,583     $      95,212
Mortgage loans                                                        7,896            7,113             7,999
Other                                                                 2,200            2,942             2,744
                                                              -------------    -------------     -------------
    Investment income, before expense                               126,859          114,638           105,955
    Investment expense                                                1,972            1,776             1,571
                                                              -------------    -------------     -------------
    Net investment income                                     $     124,887    $     112,862     $     104,384
                                                              ==============   =============     =============


Realized capital gains and losses


Year ended December 31,                                            1997             1996              1995
-----------------------                                            ----             ----              ----

Fixed income securities                                       $         922   $      (1,522)     $         422
Mortgage loans                                                         (221)            (59)            (2,268)
                                                              -------------   -------------      -------------
      Realized capital gains and losses                                 701          (1,581)            (1,846)
      Income tax expense (benefit)                                      245            (553)              (646)
                                                              -------------   -------------      -------------
      Realized capital gains and losses, after tax            $         456   $      (1,028)     $      (1,200)
                                                              =============   =============      =============
</TABLE>

Excluding calls and  prepayments,  gross gains of $471, $480 and $172 and gross
losses of $105,  $2,308 and $105 were realized on sales of fixed income
securities during 1997, 1996 and 1995, respectively.

Unrealized net capital gains
Unrealized   net  capital   gains  on  fixed  income   securities   included  in
shareholder's equity at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
                                                                 Cost/                           Unrealized
                                                               Amortized          Fair              Net
                                                                 Cost             Value             Gains
                                                            -------------    -------------     -------------
<S>                                                         <C>              <C>               <C>
Fixed income securities                                     $   1,510,110    $   1,756,257     $     246,147
                                                            =============    =============
Reserves for life insurance policy benefits                                                         (145,455)
Deferred income taxes                                                                                (34,720)
Deferred acquisition costs and other                                                                  (1,493)
                                                                                               -------------
Unrealized net capital gains                                                                   $      64,479
                                                                                               =============

Change in unrealized net capital gains

Year ended December 31,                                           1997              1996             1995
-----------------------                                           ----              ----             ----

Fixed income securities                                     $     123,519    $     (82,847)    $     216,975
Reserves for life insurance policy benefits                       (80,155)          24,300           (89,600)
Deferred income taxes                                             (14,876)          20,224           (43,779)
Deferred acquisition costs and other                                 (861)             762            (2,292)
                                                            -------------    -------------     -------------
Increase (decrease)  in unrealized net
      capital gains                                         $      27,627    $     (37,561)    $      81,304
                                                            =============    =============     =============
</TABLE>





                                      F-11
<PAGE>


                 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                                ($ IN THOUSANDS)

Investment loss provisions and valuation allowances
Pretax  provisions for  investment  losses,  principally  relating to other than
temporary declines in value of fixed income securities and valuation  allowances
on  mortgage  loans  were  $261,  $208  and  $2,448  in  1997,  1996  and  1995,
respectively.

Mortgage loan impairment
A mortgage  loan is impaired when it is probable that the Company will be unable
to collect  all  amounts  due  according  to the  contractual  terms of the loan
agreement.

The  Company  had no  impaired  loans at  December  31,  1997 and 1996.  The net
carrying  value of impaired  loans at December 31, 1995 was $9,647,  measured at
the fair value of the  collateral.  The total  investment  in impaired  mortgage
loans  before  valuation  allowance  at  December  31,  1995 was $11,581 and the
related allowance on these impaired loans was $1,934.

Activity in the  valuation  allowance  for all mortgage  loans for the years
ended  December 31, 1997,  1996 and 1995 is  summarized as follows:

<TABLE>
<CAPTION>

                                         1997                  1996                 1995
                                         ----                  ----                 ----
<S>                                 <C>                     <C>                  <C>

Balance at January 1                $       225              $  1,952             $  1,179
    Net additions (reductions)              261                  (296)               1,923
    Direct write-downs                        -                (1,431)              (1,150)
                                    -----------              --------             --------
Balance at December 31              $       486              $    225             $  1,952
                                    ===========              ========             ========
</TABLE>

Interest  income is recognized on a cash basis for impaired loans carried at the
fair value of the  collateral,  beginning at the time of  impairment.  For other
impaired loans,  interest is accrued based on the net carrying value. There were
no impaired loans during 1997. The Company  recognized  interest  income of $281
and $1,398 on impaired loans during 1996 and 1995,  respectively,  of which $281
and $1,194 was received in cash during 1996 and 1995, respectively.  The average
recorded  investment  in  impaired  loans was $5,154 and $8,900  during 1996 and
1995, respectively.




                                      F-12
<PAGE>
                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                                ($ IN THOUSANDS)

Investment  concentration for municipal bond and commercial  mortgage portfolios
and other investment  information
The Company  maintains a diversified  portfolio of municipal  bonds. The largest
concentrations  in the portfolio are presented below.  Except for the following,
holdings in no other state exceeded 5% of the portfolio at December 31, 1997 and
1996:

(% of municipal bond portfolio carrying value)         1997            1996
                                                       ----            ----

         Ohio                                          28.4%           25.9%
         California                                    22.7            24.3
         Illinois                                      19.8            19.0
         Maryland                                       8.0             7.8
         Maine                                          5.6             5.7
         Minnesota                                      5.5             5.3
         New York                                       5.4             5.3

The Company's  mortgage loans are collateralized by a variety of commercial real
estate property types located throughout the United States. Substantially all of
the commercial mortgage loans are non-recourse to the borrower.  The states with
the largest portion of the commercial  mortgage loan portfolio are listed below.
Except for the following,  holdings in no other state exceed 5% of the portfolio
at December 31, 1997 and 1996:

(% of commercial mortgage portfolio carrying value)     1997        1996
                                                        ----        ----

         California                                     47.7%      49.1%
         New York                                       30.5       21.1
         Illinois                                       15.3       21.3

The  types  of  properties  collateralizing  the  commercial  mortgage  loans at
December 31, are as follows:


(% of commercial mortgage portfolio carrying value)       1997         1996
                                                          ----         ----

         Retail                                             38.8%      39.1%
         Warehouse                                          25.4        24.2
         Office buildings                                   15.3        14.3
         Apartment complex                                  14.9        14.6
         Industrial                                          4.9         6.8
         Other                                               0.7         1.0
                                                          ------      ------
                                                           100.0%      100.0%
                                                          ======      ======


The  contractual  maturities of the  commercial  mortgage  loan  portfolio as of
December 31, 1997, for loans that were not in foreclosure are as follows:

                 Number of Loans      Carrying Value                   Percent
                 ---------------      ---------------                  -------
1999                     3            $         5,302                     4.6%
2000                     4                      7,927                     6.9
2001                     5                      7,340                     6.4
2002                     2                      6,385                     5.6
Thereafter              23                     87,673                    76.5
                     -----            ---------------                  ------
     Total              37            $       114,627                   100.0%
                     =====            ===============                  ======

In 1997, $7.3 million of commercial  mortgage loans were  contractually  due. Of
these,  20.9% were paid as due and 79.1% were  refinanced at  prevailing  market
terms.


                                      F-13
<PAGE>
                 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               ($ IN THOUSANDS)

Securities on deposit
At December 31, 1997,  fixed income  securities  with a carrying value of $1,981
were on deposit with regulatory authorities as required by law.


5.   Financial Instruments

In the normal  course of  business,  the  Company  invests in various  financial
assets,   incurs  various  financial  liabilities  and  enters  into  agreements
involving derivative financial instruments and other off-balance-sheet financial
instruments.  The fair value estimates of financial  instruments presented below
are not  necessarily  indicative of the amounts the Company might pay or receive
in actual market transactions.  Potential taxes and other transaction costs have
not been considered in estimating fair value. The disclosures that follow do not
reflect the fair value of the Company as a whole since a number of the Company's
significant  assets  (including  deferred   acquisition  costs  and  reinsurance
recoverables) and liabilities  (including reserve for  life-contingent  contract
benefits and deferred income taxes) are not considered financial instruments and
are not carried at fair value. Other assets and liabilities considered financial
instruments,  accrued  investment  income and cash are generally of a short-term
nature. It is assumed that their carrying value approximates fair value.

Financial assets
The  carrying  value and fair value of  financial  assets at December 31, are as
follows:

<TABLE>
<CAPTION>

                                                        1997                                 1996
                                                        ----                                 ----
                                            Carrying             Fair           Carrying              Fair
                                              Value              Value           Value                Value
                                            --------             -----          --------              -----
<S>                                     <C>                <C>                <C>              <C>
Fixed income securities                 $    1,756,257     $    1,756,257     $   1,500,783    $     1,500,783
Mortgage loans                                 114,627            120,849            84,657             83,789
Short-term investments                           9,513              9,513            25,855             25,855
Policy loans                                    27,600             27,600            25,359             25,359
Separate Accounts                              308,595            308,595           260,668            260,668

</TABLE>



                                      F-14
<PAGE>
                 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               ($ IN THOUSANDS)

Carrying  value and fair  value  include  the  effects of  derivative  financial
instruments where applicable.

Fair values for fixed income  securities are based on quoted market prices where
available. Non-quoted securities are valued based on discounted cash flows using
current interest rates for similar  securities.  Mortgage loans are valued based
on discounted  contractual cash flows. Discount rates are selected using current
rates  at  which  similar  loans  would  be  made  to  borrowers   with  similar
characteristics,  using similar properties as collateral. Loans that exceed 100%
loan-to-value  are  valued  at  the  estimated  fair  value  of  the  underlying
collateral. Short-term investments are highly liquid investments with maturities
of less than one year whose carrying value approximates fair value.

The  carrying  value of  policy  loans  approximates  its fair  value.  Separate
Accounts  assets are carried in the  statements  of  financial  position at fair
value.

Financial liabilities
The carrying  value and fair value of financial  liabilities at December 31, are
as follows:
<TABLE>
<CAPTION>

                                                     1997                              1996
                                                     ----                              ----
                                         Carrying            Fair          Carrying               Fair
                                          Value              Value          Value                 Value
                                         --------            -----         --------               -----
<S>                                    <C>                  <C>               <C>                 <C>
Contractholder funds on
     investment contracts              $        437,449     $       466,136   $      421,642      $     430,696
Separate Accounts                               308,595             308,595          260,668            260,668

</TABLE>



                                      F-15
<PAGE>
                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               ($ IN THOUSANDS)


The fair value of contractholder  funds on investment  contracts is based on the
terms of the  underlying  contracts.  Reserves on investment  contracts  with no
stated maturities  (single premium and flexible premium deferred  annuities) are
valued  at the  account  balance  less  surrender  charges.  The  fair  value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated  using  discounted  cash flow  calculations  based on  interest  rates
currently  offered for  contracts  with similar  terms and  durations.  Separate
Accounts liabilities are carried at the fair value of the underlying assets.

Derivative financial instruments
The  Company  primarily  uses  derivative  financial  instruments  to reduce its
exposure to market risk,  specifically  interest rate risk, in conjunction  with
asset/liability management. The Company does not hold or issue these instruments
for trading purposes.

The following table summarizes the contract or notional amount, credit exposure,
fair value and carrying value of the Company's derivative financial instruments:
<TABLE>
<CAPTION>


                                           Contract/                                           Carrying Value
                                           Notional           Credit             Fair             Assets/
                                            Amount           Exposure            Value         (Liabilities)
                                           ---------         --------            -----         --------------
At December 31, 1997
--------------------
<S>                                    <C>               <C>               <C>               <C>
Financial futures contracts            $      29,800     $           -     $        (153)    $        (810)

At December 31, 1996
--------------------
Financial futures contracts            $       6,700     $          56     $          56     $         266

</TABLE>


The  contract  or  notional  amounts  are  used to  calculate  the  exchange  of
contractual  payments  under the agreements  and are not  representative  of the
potential for gain or loss on these agreements.

Credit  exposure   represents  the  Company's  potential  loss  if  all  of  the
counterparties  failed to perform under the  contractual  terms of the contracts
and all collateral,  if any, became  worthless.  This exposure is represented by
the fair value of contracts  with a positive  fair value at the  reporting  date
reduced by the effect, if any, of master netting agreements.

The Company  manages  its  exposure to credit  risk by  utilizing  highly  rated
counterparties,  establishing risk control limits, executing legally enforceable
master netting agreements and obtaining  collateral where appropriate.  To date,
the Company has not incurred any losses on derivative financial  instruments due
to counterparty nonperformance.

Fair value is the  estimated  amount that the  Company  would  receive  (pay) to
terminate or assign the contracts at the  reporting  date,  thereby  taking into
account the current  unrealized  gains or losses of open  contracts.  Dealer and
exchange quotes are available for the Company's derivatives.

Financial  futures  are  commitments  to  either  purchase  or  sell  designated
financial  instruments at a future date for a specified price or yield. They may
be  settled  in  cash  or  through  delivery.  As  part  of its  asset/liability
management,  the Company  generally  utilizes  futures  contracts  to manage its
market risk  related to fixed  income  securities  and  anticipatory  investment
purchases and sales. Futures used as hedges of anticipatory transactions pertain
to  identified  transactions  which  are  probable  to occur  and are  generally
completed within ninety days.  Futures contracts have limited  off-balance-sheet
credit risk as they are executed on  organized  exchanges  and require  security
deposits, as well as the daily cash settlement of margins.


                                      F-16
<PAGE>

                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                                ($ IN THOUSANDS)



Market  risk is the risk that the  Company  will  incur  losses  due to  adverse
changes in market rates and prices. Market risk exists for all of the derivative
financial instruments that the Company currently holds, as these instruments may
become less valuable due to adverse  changes in market  conditions.  The Company
mitigates this risk through established risk limits set by senior management. In
addition,  the  change  in the  value  of  the  Company's  derivative  financial
instruments designated as hedges are generally offset by the change in the value
of the related assets and liabilities.

Off-balance-sheet financial instruments
Commitments  to extend  mortgage  loans  are  agreements  to lend to a  borrower
provided there is no violation of any condition established in the contract. The
Company  enters  these  agreements  to  commit  to  future  loan  fundings  at a
predetermined  interest rate.  Commitments generally have fixed expiration dates
or other termination  clauses.  Commitments to extend mortgage loans,  which are
secured by the  underlying  properties,  are valued  based on  estimates of fees
charged by other institutions to make similar  commitments to similar borrowers.
At December  31,  1997 and 1996,  the Company had $18,000 and $6,190 in mortgage
loan commitments which had a fair value of $180 and $62, respectively.


6.   Income Taxes

The Company joins the Corporation and its other eligible  domestic  subsidiaries
in the filing of a consolidated federal income tax return (the "Allstate Group")
and is party to a federal  income tax  allocation  agreement  (the "Tax  Sharing
Agreement").  Under the Tax Sharing  Agreement,  the Company paid to or received
from the Corporation the amount,  if any, by which the Allstate  Group's federal
income tax  liability  was affected by virtue of inclusion of the Company in the
consolidated  federal  income  tax  return.  Effectively,  this  results  in the
Company's annual income tax provision being computed,  with  adjustments,  as if
the Company filed a separate return.

Prior to the  Distribution,  the  Corporation  and all of its eligible  domestic
subsidiaries, including the Company, joined with Sears and its domestic business
units (the "Sears  Group") in the filing of a  consolidated  federal  income tax
return  (the  "Sears  Tax  Group")  and were  parties  to a federal  income  tax
allocation  agreement (the "Sears Tax Sharing  Agreement").  Under the Sears Tax
Sharing  Agreement,  the Company,  through the Corporation,  paid to or received
from the Sears Group the amount,  if any, by which the Sears Tax Group's federal
income tax  liability  was affected by virtue of inclusion of the Company in the
consolidated  federal  income tax  return.  Effectively,  this  resulted  in the
Company's  annual income tax provision  being  computed as if the Allstate Group
filed a separate  consolidated  return,  except that items such as net operating
losses,  capital  losses or similar  items,  which might not be  recognized in a
separate return, were allocated according to the Sears Tax Sharing Agreement.



                                      F-17
<PAGE>

                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                                ($ IN THOUSANDS)

The Allstate Group and Sears Group have entered into an agreement  which governs
their respective rights and obligations with respect to federal income taxes for
all periods prior to the Distribution  ("Consolidated Tax Years"). The agreement
provides  that all  Consolidated  Tax Years will  continue to be governed by the
Sears Tax Sharing  Agreement with respect to the Allstate Group's federal income
tax liability.

The components of the deferred income tax assets and liabilities at December 31,
are as follows:
<TABLE>
<CAPTION>

                                                        1997                  1996
                                                        ----                  ----
Deferred assets
<S>                                                   <C>                <C>
Life-contingent contract reserves and
   contractholder funds                                $ 34,084            $ 27,951
Difference in tax bases of investments                      742                 270
Loss on disposal of discontinued operations                 364                 375
Other postretirement benefits                               352                 524
Other assets                                                255               1,789
                                                      ---------            --------
      Total deferred assets                              35,797              30,909
                                                      ---------            --------

Deferred liabilities
Unrealized net capital gains                            (34,720)            (19,844)
Deferred acquisition costs                              (15,821)            (14,020)
Prepaid commission expense                                 (792)               (717)
Other liabilities                                        (1,454)                (20)
                                                      ---------            --------
      Total deferred liabilities                        (52,787)            (34,601)
                                                      ---------            --------
      Net deferred liability                          $ (16,990)           $ (3,692)
                                                      =========            ========
</TABLE>



The  components  of income tax  expense for the year ended  December  31, are as
follows:
<TABLE>
<CAPTION>

                                          1997                1996               1995
                                          ----                ----               ----

<S>                                        <C>                <C>                 <C>
Current                                    $ 14,874           $ 11,411            $ 12,588
Deferred                                     (1,578)               257              (2,677)
                                           --------           --------            --------
      Total income tax expense             $ 13,296           $ 11,668            $  9,911
                                           ========           ========            ========
</TABLE>


The Company paid income taxes of $13,350,  $11,968 and $12,096 in 1997, 1996 and
1995, respectively.  The Company had an income tax payable of $1,419 at December
31, 1997 and an income tax recoverable of $105 at December 31, 1996.



                                      F-18
<PAGE>

                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                                ($ IN THOUSANDS)

A  reconciliation  of the  statutory  federal  income tax rate to the  effective
income tax rate on income from  operations for the year ended December 31, is as
follows:
<TABLE>
<CAPTION>

                                                    1997        1996        1995
                                                    ----        ----        ----

<S>                                                 <C>         <C>         <C>
Statutory federal income tax rate                   35.0%       35.0%       35.0%
State income tax expense                             2.2         2.4         2.3
Other                                                (.3)       (1.2)       (1.3)
                                                    ----        ----        ----
Effective income tax rate                           36.9%       36.2%       36.0%
                                                    ====        ====        ====
</TABLE>


Prior to January 1, 1984,  the Company was entitled to exclude  certain  amounts
from taxable  income and  accumulate  such amounts in a  "policyholder  surplus"
account.  The balance in this account at December 31, 1997,  approximately $389,
will  result in  federal  income  taxes  payable of $136 if  distributed  by the
Company.  No  provision  for taxes has been made as the  Company  has no plan to
distribute  amounts from this account.  No further  additions to the account are
allowed under the Tax Reform Act of 1984.


7.   Statutory Financial Information

The following  tables  reconcile net income for the year ended  December 31, and
shareholder's  equity at December  31, as  reported  herein in  conformity  with
generally accepted  accounting  principles with statutory net income and capital
and surplus,  determined  in  accordance  with  statutory  accounting  practices
prescribed or permitted by insurance regulatory authorities:


                                                           Net Income
                                                           ----------
                                                  1997        1996       1995
                                                  ----        ----       ----

Balance per generally accepted accounting
 principles                                    $ 22,716    $ 20,561    $ 19,522
   Deferred acquisition costs                   (10,782)     (6,858)     (5,537)
   Deferred income taxes                         (1,578)        257      (2,677)
   Statutory reserves                             7,749       6,101      11,380
   Other postretirement and postemployment
     benefits                                       (36)        (34)         71
   Other                                            522      (1,882)        441
                                               --------    --------    --------
Balance per statutory accounting practices     $ 18,591    $ 18,145    $ 23,200
                                               ========    ========    ========


                                                          Shareholder's Equity
                                                          --------------------
                                                             1997       1996
                                                             ----       ----

Balance per generally accepted accounting principles     $ 283,410    $ 233,067
    Deferred acquisition costs                             (71,946)     (61,559)
    Deferred income taxes                                   16,990        3,692
    Unrealized gain/loss on fixed income securities       (246,147)    (122,628)
    Non-admitted assets                                     (4,301)      (2,739)
    Statutory reserves                                     207,163      115,725
    Other postretirement and postemployment benefits         1,007        1,074
    Other                                                   (1,556)      (1,613)
                                                         ---------    ---------
Balance per statutory accounting practices               $ 184,620    $ 165,019
                                                         =========    =========




                                      F-19
<PAGE>
                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               ($ IN THOUSANDS)



Permitted statutory accounting practices
The Company  prepares its statutory  financial  statements  in  accordance  with
accounting  principles  and  practices  prescribed  or permitted by the New York
Department of Insurance.  Prescribed  statutory  accounting  practices include a
variety of publications of the National  Association of Insurance  Commissioners
("NAIC"), as well as state laws,  regulations and general  administrative rules.
Permitted statutory  accounting practices encompass all accounting practices not
so prescribed.  The Company does not follow any permitted  statutory  accounting
practices that have a material effect on statutory surplus, statutory net income
or risk-based capital.

Final  approval  of the  NAIC's  proposed  "Comprehensive  Guide"  on  statutory
accounting  principles  is  expected  in early  1998.  The  requirements  may be
effective  as early as January 1, 1999,  and are not expected to have a material
impact on statutory surplus of the Company.

Dividends
The ability of the Company to pay dividends is dependent on business conditions,
income,  cash requirements of the Company and other relevant factors.  Under New
York  Insurance  Law, a notice of intention to  distribute  any dividend must be
filed with the New York  Superintendent of Insurance not less than 30 days prior
to  the   distribution.   Such   proposed   declaration   is   subject   to  the
Superintendent's disapproval.


8.  Benefit Plans

Pension plans
Defined  benefit  pension plans,  sponsored by the  Corporation,  cover domestic
full-time employees and certain part-time employees.  Benefits under the pension
plans  are  based  upon  the  employee's  length  of  service,   average  annual
compensation   and  estimated   social   security   retirement   benefits.   The
Corporation's   funding   policy  for  the  pension  plans  is  to  make  annual
contributions in accordance with accepted  actuarial cost methods.  The costs to
the  Company  included  in net income  were $597,  $490 and $446 for the pension
plans in 1997, 1996 and 1995, respectively.

Postretirement benefits other than pensions
The  Corporation  provides  certain health care and life insurance  benefits for
retired employees. Qualified employees may become eligible for these benefits if
they retire in accordance with the Corporation's  established  retirement policy
and are  continuously  insured  under  the  Corporation's  group  plans or other
approved plans for 10 or more years prior to retirement.  The Corporation shares
the  cost of the  retiree  medical  benefits  with  retirees  based  on years of
service,  with the  Corporation's  share  being  subject to a 5% limit on annual
medical  cost  inflation  after  retirement.  The  Corporation's  postretirement
benefit plans currently are not funded.  The Corporation has the right to modify
or terminate these plans.



                                      F-20
<PAGE>




                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                   NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
                               ($ IN THOUSANDS)






Profit sharing fund
Employees of the Corporation and its domestic  subsidiaries are also eligible to
become  members of The Savings  and Profit  Sharing  Fund of Allstate  Employees
("Allstate   Plan").   The   Corporation's   contributions   are  based  on  the
Corporation's matching obligation and performance. The Allstate Plan includes an
Employee  Stock  Ownership Plan  ("Allstate  ESOP") to pre-fund a portion of the
Corporation's anticipated contribution.  The Allstate Plan and the Allstate ESOP
split from The Savings and Profit Sharing Fund of Sears Employees ("Sears Plan")
on the date of the  Distribution.  In connection with this, the Corporation paid
Sears $327 million,  and in return  received a note from the Allstate ESOP for a
like principal  amount and 50% of the unallocated  shares.  The note has a fixed
interest rate of 7.9% and matures in 2019. The  Corporation  expects to make net
contributions to the Allstate ESOP annually in the amount necessary to allow the
Allstate  ESOP to  fund  interest  and  principal  payments  on the  note  after
considering  the  dividends  paid on ESOP shares,  which are  available for debt
service.

The  Company's  defined  contribution  to the Allstate Plan was $164 and $111 in
1997 and 1996, respectively.


                                      F-21
<PAGE>



                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                            SCHEDULE IV--REINSURANCE
                                ($ IN THOUSANDS)



                                          Gross                         Net
Year Ended December 31, 1997              Amount        Ceded          Amount
----------------------------              ------        -----          ------

Life insurance in force                $11,339,990    $   721,040    $10,618,950
                                       ===========    ===========    ===========

Premiums and contract charges:
    Life and annuities                 $   116,167    $     2,185    $   113,982
    Accident and health                      5,846            864          4,982
                                       -----------    -----------    -----------
                                       $   122,013    $     3,049    $   118,964
                                       ===========    ===========    ===========



                                          Gross                          Net
Year Ended December 31, 1996              Amount         Ceded          Amount
----------------------------              ------         -----          ------

Life insurance in force                $ 9,962,300    $   553,628    $ 9,408,672
                                       ===========    ===========    ===========

Premiums and contract charges:         $   114,296    $     1,398    $   112,898
    Life and annuities                       5,044            834          4,210
    Accident and health                -----------    -----------    -----------
                                       $   119,340    $     2,232    $   117,108
                                       ===========    ===========    ===========




                                          Gross                         Net
Year Ended December 31, 1995              Amount         Ceded         Amount
----------------------------              ------         -----         ------

Life insurance in force                $ 8,513,295    $   398,025    $ 8,115,270
                                       ===========    ===========    ===========

Premiums and contract charges:
    Life and annuities                 $   146,732    $     1,246    $   145,486
    Accident and health                      3,731            901          2,830
                                       -----------    -----------    -----------
                                       $   150,463    $     2,147    $   148,316
                                       ===========    ===========    ===========


                                      F-22
<PAGE>



                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
                 SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
                                ($ IN THOUSANDS)

<TABLE>
<CAPTION>


                                                  Balance at        Charged to                         Balance at
                                                  Beginning         Costs and                            End of
                                                  of Period          Expenses        Deductions          Period
                                                  ----------        ----------       ----------        ----------
Year Ended December 31, 1997

<S>                                             <C>               <C>               <C>              <C>
Allowance for estimated losses
   on mortgage loans                            $        225      $        261      $          -     $        486
                                                ============      ============      ============     ============


Year Ended December 31, 1996

Allowance for estimated losses
   on mortgage loans                            $      1,952      $       (296)     $      1,431     $        225
                                                ============      ============      ============     ============


Year Ended December 31, 1995

Allowance for estimated losses
   on mortgage loans                            $      1,179      $      1,923      $      1,150     $      1,952
                                                ============      ============      ============     ============

</TABLE>

                                      F-23
<PAGE>



                              PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

        (a) The following  documents are filed as part of this Report.  The page
number,  if any,  listed  opposite a document  indicates  the page number in the
sequential numbering system in the manually signed original of this Report where
such document can be found.

            (1) The financial statements filed as part of this Report are listed
                in Item 8.

            (2) Financial Statement Schedules

                Schedule IV - Reinsurance                         page F-22
                Schedule V - Valuation and Qualifying Accounts    page F-23

            (3) Exhibits

                Financial Data Schedule





                                      F-24
<PAGE>



                                  SIGNATURES

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

                  ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

By       /s/ LOUIS G. LOWER, II
         ----------------------
         Louis G. Lower, II
         President and Chairman
         (Principal Executive Officer)

Date     March 30, 1998
         --------------

        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/ LOUIS G. LOWER, II
        ----------------------
        Louis G. Lower, II
        President and Chairman
        (Principal Executive Officer)

Date    March 30, 1998
        --------------

By      /s/ MICHAEL J. VELOTTA
        ----------------------
        Michael J. Velotta
        Vice President, Secretary and General Counsel

Date    March 30, 1998
        --------------

By      */s/ MARLA G. FRIEDMAN
        ----------------------
        Marla G. Friedman
        Vice President and Director

Date    March 26, 1998
        --------------

By      */s/VINCENT A. FUSCO
        ---------------------
        Vincent A. Fusco
        Chief Operations Officer and Director

Date    March 26, 1998
        ---------------

By      */s/ GERARD F. McDERMOTT
        -------------------------
        Gerard F. McDermott
        Director

Date    March 27, 1998
        ----------------
<PAGE>

By      */s/ TIMOTHY H. PLOHG
        ----------------------
        Timothy H. Plohg
        Vice President and Director

Date    March 30, 1998
        -----------------

By      */s/ KEVIN R. SLAWIN
        ----------------------
        Kevin R. Slawin
        Vice President and Director

Date    March 26, 1998
        -----------------

By      */s/ PATRICIA A. WILSON
        -----------------------
        Patricia A. Wilson
        Assistant Vice President and Director

Date    March 31, 1998
        -----------------

By      */s/ KEITH A. HAUSCHILDT
        ------------------------
        Keith A. Hauschildt
        Assistant Vice President and Controller
        (Chief Accounting Officer)

Date    March 25, 1998
        ------------------


*/Pursuant to Power of Attorney filed herewith.