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

                                   Form 10-K

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

                  For the FISCAL YEAR ENDED December 31, 1997

                         Commission File Number 0-22404


                       ALLIED Life Financial Corporation
             (Exact name of registrant as specified in its charter)

                                      Iowa
         (State or other jurisdiction of incorporation or organization)

                                   42-1406716
                      (I.R.S. Employer Identification No.)

                       701 Fifth Avenue, Des Moines, Iowa
                    (Address of principal executive offices)

                                   50391-2003
                                   (Zip Code)

                                  515-280-4211
              (Registrant's telephone number, including area code)

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

                                      None
                                (Title of Class)

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

                           Common Stock, no par value
                                (Title of Class)

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 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. [ ]

As of March 5, 1998 the  number of  Registrant's  Common  Stock,  no par  value,
outstanding was 4,411,310.  The aggregate  market value of the Common Stock of
the Registrant  (based on the  average  bid and asked  prices  at  closing)  
held by nonaffiliates at March 5, 1998 was $63,044,756.

                      Documents Incorporated By Reference

TheRegistrant's definitive proxy statement (1998 Proxy Statement), which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997, is incorporated by reference under Part III.

                  The index to the exhibits is located on page 77.

                      This document contains 97 pages.

<PAGE>

                                TABLE OF CONTENTS

Part I

Item 1.    Business...........................................................1
Item 2.    Properties........................................................17
Item 3.    Legal Proceedings.................................................18
Item 4.    Submission of Matters to a Vote of Security Holders...............18


Part II

Item 5.    Market for Registrant's Common Equity and 
               Related Stockholders Matters..................................19
Item 6.    Selected Financial Data.................... ......................20
Item 7.    Management's Discussion and Analysis of 
               Financial Condition and Results of Operations.................21
Item 8.    Financial Statements and Supplementary Data.......................33
Item 9.    Changes in and Disagreements with Accountants
                on Accounting and Financial Disclosure.......................61


Part III

Item 10.   Directors and Executive Officers of the Registrant................61
Item 11.   Executive Compensation............................................61
Item 12.   Security Ownership of Certain Beneficial Owners and Management....61
Item 13.   Certain Relationships and Related Transactions....................61


Part IV

Item 14.   Exhibits, Financial Statement Schedules, 
               and Reports on Form 8-K.......................................62
Index to Financial Statement Schedules.......................................62
Signatures ..................................................................76
Index to Exhibits............................................................77

<PAGE>


                                     PART I

Item 1.  Business

     ALLIED Life Financial  Corporation  (the Company) is a holding company that
through its principal  subsidiary  ALLIED Life Insurance  Company  (ALLIED Life)
underwrites,  markets,  and distributes a select portfolio of life insurance and
annuity  products to individuals  who live primarily in rural and suburban areas
of the  United  States.  The  Company  was  organized  in 1993 by ALLIED  Mutual
Insurance  Company  (ALLIED  Mutual).  ALLIED  Mutual  has been  engaged  in the
property-casualty business since 1929. The financial information included herein
consists  of the  accounts of the  Company  and its  wholly-owned  subsidiaries:
ALLIED Life,  ALLIED Life  Brokerage  Agency  (ALBA),  and ALLIED Group Merchant
Banking Corporation (AGMB).

     At December 31, 1997,  ALLIED  Mutual owned 56% of the  outstanding  voting
stock of the Company and the ALLIED Life Employee  Stock  Ownership  Trust owned
2%. The remainder was owned by public stockholders.

     The Company's  long-term growth strategy is to: (1) provide its independent
agents with well-designed  products that are easy to understand,  meet the needs
of their  customers and reward  persistency  over time,  and (2)  strengthen its
distribution  systems,  which  include  marketing  life  insurance  and  annuity
products  through  the  independent   property-casualty   agencies  (the  ALLIED
Agencies)  representing  ALLIED  Mutual  and  the  property-casualty   insurance
subsidiaries  of ALLIED Group,  Inc., and through the  traditional  distribution
system,   which  includes   independent   marketing   organizations,   financial
institutions, and independent life agencies. ALLIED Group, Inc.
is an 18.2% owned subsidiary of ALLIED Mutual.

     There are approximately 2,300 independent ALLIED Agencies which provide the
Company  with access to numerous  agency  customers  in addition to over 600,000
households  having one or more  ALLIED  Property-casualty  policies.  Management
believes  that demand by these  agencies for the  Company's  life  insurance and
annuity products is a result of several factors: (1) the Company's well-designed
life  products,  coupled with a  demonstrated  commitment to service and support
from a known insurance company, provide each agency with a competitive advantage
in its local market;  (2) sales of life insurance products enhance the agencies'
relationships  with their  policyholders  creating the  potential  for increased
persistency  of both life and  property-casualty  insurance  policies;  (3) life
insurance sales,  particularly given their high first-year  commissions relative
to property-casualty  business,  can provide substantial additional income to an
agency; and (4) an annual ALLIED  property-casualty/life sales incentive trip is
available  to  qualifying   agencies  that  achieve  minimum   property-casualty
production  targets as well as  specified  minimum  life  insurance  and annuity
production targets.

     The  Company's  products are designed to meet  traditional  needs,  such as
family income protection,  supplemental retirement savings, mortgage protection,
and college savings. The products are also designed to appeal to a wide array of
consumers in the middle income and small  business  owner  markets.  The Company
provides the independent  ALLIED Agencies with many  opportunities to cross-sell
life  insurance  and  deferred  annuities  to their  existing  property-casualty
customers.  Life insurance  protection is sold as important  elements of a total
personal lines insurance  package which may include auto  insurance,  homeowners
insurance,  personal  liability,  and  inland  marine  coverage.  The  Company's
annuities  are  marketed  primarily  as  tax-deferred  accumulation  vehicles to
individuals in anticipation of their retirement.

See "Forward-looking  Information" on page 21 for an outline of factors that may
affect actual results.


                                       1
<PAGE>


Marketing and Distribution

General

   ALLIED  Life's  products  are sold  through  two  distribution  systems:  the
independent ALLIED Agencies and a traditional life insurance distribution system
which includes financial institutions and a number of independent life insurance
marketing organizations. In 1997, the Company sold 68% of its new life insurance
face amount and 41% of its collected annuity premium through the ALLIED Agencies
and the  remainder of its products  were sold through  traditional  distribution
channels. Each distribution system is headed by a marketing vice president.

     Property-Casualty Distribution System

     The property-casualty  distribution system encompasses  approximately 2,300
independent ALLIED Agencies. The Company's relationship with the ALLIED Agencies
is supported through a joint marketing  arrangement  between ALLIED Life and the
ALLIED property-casualty affiliates (p-c affiliates) which provides for: (1) the
promotion  of ALLIED Life  products  through the p-c  affiliates,  in return for
financial  incentives  related to successful new sales efforts;  (2) shared data
processing  and client  database  resources;  and (3)  combined  billing for all
insurance products involving personal lines coverages, including life insurance,
annuities, auto, homeowners, excess liability, and other types of insurance.

     The  distribution  system is led by a marketing vice  president,  who works
with the following personnel.

     Regional  Directors/Life  Marketing Directors.  The 12 ALLIED Life Regional
Directors  and 7 Life  Marketing  Directors  are  the  Company's  primary  field
marketing  representatives to the ALLIED Agencies and are primarily  responsible
for the annual growth in life  insurance  and annuity sales in their  respective
geographic territories.

     Regional Directors,  who are independent  contractors and are not employees
of the Company, implement the Company's sales strategies in the ALLIED Agencies,
including  packaging  life  insurance  effectively  with  other  personal  lines
coverages,  promoting combined billing convenience,  and expanding annuity sales
and business  life  insurance  planning for small  commercial  property-casualty
accounts.  Most of the Regional  Directors are responsible for approximately 150
ALLIED  Agencies.  Regional  Directors  also  recruit  and train life  insurance
specialists (see Independent  Property-Casualty  Agencies on page 3) for certain
ALLIED Agencies,  as appropriate.  Although  substantially all of their life and
annuity  production  is  derived  from sales by the  ALLIED  Agencies,  Regional
Directors also generate life and annuity  production from  non-property-casualty
agencies.

     Regional  Directors  are  compensated  solely on an override and  incentive
basis. Regional Directors' incentive  compensation is based upon the achievement
of an  annual  production  goal and the  persistency  of the  book of  business.
Regional  Directors who achieve certain levels of production may qualify for the
annual   ALLIED    property-casualty/life    incentive    trip.    (See   ALLIED
Property-Casualty/Life Incentive Trip on page 3).

     Life  Marketing  Directors  have  responsibilities  similar to those of the
Regional  Directors.  The Life Marketing  Directors are employees of the Company
and are compensated on a salary and production incentive basis.

     Property-Casualty   Marketing  Representatives.   ALLIED  property-casualty
marketing  representatives  are  employees of ALLIED Group,  Inc.  Their primary
responsibility  is to  promote  the sale of  property-casualty  products  by the
independent ALLIED Agencies. The field marketing  representatives,  however, are
also responsible for promoting the relationship  between the ALLIED Agencies and
ALLIED  Life in  order  to  enhance  the sale of life  insurance  products.  The
compensation of the marketing representatives includes bonuses based on the sale
of ALLIED Life products by the ALLIED Agencies.  In addition,  their eligibility
for the annual  incentive trip could depend on the level of life insurance sales
achieved by the ALLIED Agencies under their supervision.

                                       2
<PAGE>

     Independent  Property-Casualty  Agencies.  The ALLIED  Agencies either sell
life  insurance  and  annuity  products  themselves,  with the  support of their
Regional Director/Life Marketing Director and the systems capabilities of ALLIED
Life,  or  they  work in  conjunction  with  life  insurance  specialists.  Life
insurance  specialists are independent  life insurance agents either employed by
an  ALLIED  Agency or  working  with an ALLIED  Agency on a joint  basis.  Their
primary  activity is to market life  insurance and annuities to existing  ALLIED
Agency clients. Life insurance specialists may be recruited and introduced to an
ALLIED Agency by its Regional  Director/Life  Marketing Director when the agency
becomes  large  enough to justify a full-time  life  insurance  agent or when an
agency would prefer one  specialist to handle all of its life  insurance  sales.
The  compensation of the life specialist is usually directly related to life and
annuity  production,  in the form of split  commissions,  draws  against  agency
commissions or salary and incentives from the agency. Life insurance specialists
may sell the products of other life insurance companies.

     ALLIED Property-Casualty/Life Incentive Trip. The ALLIED p-c affiliates and
ALLIED  Life  annually  sponsor  a  joint  incentive  trip  for  both  life  and
property-casualty agents who have met incentive sales objectives.  The incentive
trip is an important  motivating  factor in encouraging  the ALLIED  Agencies to
sell ALLIED Life's  products.  ALLIED  Agencies  qualify for the trip based upon
achieving their property-casualty objectives as well as certain life and annuity
new business objectives.  Failure to achieve the life qualification may preclude
an agency from participation,  even if it meets its property-casualty production
goals.  Those agencies with insufficient  property-casualty  growth and agencies
selling  through the traditional  distribution  system may still qualify for the
incentive  trip by  producing  a  substantial  volume  of new life  and  annuity
premium.


                                       3
<PAGE>


Traditional Life Insurance and Annuity Distribution System

     The  Company  has  traditional  agency   relationships  with  a  number  of
independent life agencies,  independent  marketing  organizations  and financial
institutions.  These  agency  relationships  represent  an  important  source of
business  for the Company and in 1997  produced  approximately  32% of the total
face  amount  of life  insurance  sold  and  59% of the  total  annuity  premium
collected.  A marketing vice president  supervises the operation and performance
of the Company's traditional distribution system and is responsible for its life
insurance and annuity production.

     The   Company  has  agency   relationships   with   independent   marketing
organizations,  most of  which  have  more  licensed  agents  covering  a larger
geographic  area than a traditional  independent  life insurance  agency.  These
organizations have their own insurance  marketing systems and sell the Company's
life insurance and annuity products. Contracted agents associated with marketing
organizations generated over 48% of the Company's total annuity premium and over
17% of the total life  insurance  face amount sold in 1997. The Company hopes to
form  alliances  with more  marketing  organizations.  These  alliances give the
Company access to the  organizations'  licensed  agents in a manner that is more
efficient  than if the  Company  tried to  recruit  these  agents one at a time.
Admission  into 5 states during the year helped align the Company's  territories
more closely to these marketing  organizations.  This brings to 41 the number of
states where the Company is admitted and pursuing business. In 1998, the Company
will apply for admission in 4 more states. Additionally,  the Company has agency
relationships  with traditional  independent life agents which generally cover a
smaller geographic area than the independent marketing organizations.

     The Company markets its annuity  products  through  financial  institutions
(commercial  and  savings  banks),  and  to a  lesser  degree,  through  annuity
marketing agencies.  Institutional annuity marketing is developed through agency
relationships  with  third-party  marketing  agencies  specializing in financial
institutions  as well as directly  through  several  midwestern-based  financial
institutions. Annuity marketing agencies represent a small but growing volume of
annuity business. The Company is developing sales of its universal life and term
life insurance products through both types of annuity marketing systems.


                                       4
<PAGE>


Production by distribution system

     The following tables show production information by distribution system for
ALLIED Life for the years indicated.

<TABLE>
<CAPTION>

                                                   1997                     1996                   1995
                                                                   (dollars in thousands)
<S>                                            <C>                    <C>                     <C>            
Life insurance face amount in force
   Directly produced by agents
     Property-casualty agencies
       Universal Life                          $    2,867,625          $   2,809,270           $   2,627,447
       Term life                                    3,530,113              3,200,793               2,506,890
       Whole Life                                      35,501                 34,521                  34,402


                                                    6,433,239              6,044,584               5,168,739

     Traditional agencies
       Universal life                               1,708,199              1,531,331               1,588,116
       Term life                                    1,081,686                997,711                 908,647
       Whole life                                      15,617                 14,558                  15,778

                                                    2,805,502              2,543,600               2,512,541

                                                    9,238,741              8,588,184               7,681,280
   Other                                              390,899                371,130                 433,236

           Total                               $    9,629,640          $   8,959,314           $   8,114,516


Life insurance face amount sold
   Directly produced by agents
     Property-casualty agencies
       Universal life                          $      311,600          $     282,388           $     384,763
       Term life                                      946,842              1,127,060                 889,624
       Whole life                                       4,888                  3,115                   2,775

                                                    1,263,330              1,412,563               1,277,162

     Traditional agencies
       Universal life                                 263,320                128,247                 224,937
       Term life                                      338,528                348,917                 333,920
       Whole life                                       2,310                  1,124                   1,736

                                                      604,158                478,288                 560,593

   Other                                            1,867,488              1,890,851               1,837,755
       Total                                            8,266                  9,431                  21,549

                                               $    1,875,754          $   1,900,282           $   1,859,304

Annuity Premiums
   Deferred annuities
     Property-casualty agencies                $       30,212          $      30,816           $      30,321
     Traditional agencies                              42,872                 40,188                  45,956

                                                       73,084                 71,004                  76,277

   Immediate annuities                                  1,782                  1,227                   2,362

       Total                                   $       74,866          $      72,231           $      78,639


</TABLE>


                                       5
<PAGE>


     The total face amount of life  insurance in force grew at an average annual
rate of 9.3%  beginning at year end 1995 through year end 1997 and is up 7.5% at
December  31, 1997 as compared to the prior year end.  Annuity  account  balance
grew at an average annual rate of 12.5%  beginning at year end 1995 through year
end 1997 and is up 10.1% at December 31, 1997 compared to the prior year end.

     The face  amount  of new term life  insurance  sold  totaled  $1.3 billion
accounting for 69% of 1997 new insurance production. Term life insurance
provides  protection  during a specified  number of years that  expires  without
policy cash value if an insured  survives the stated period.  The face amount of
new term life insurance sold decreased  12.9% in 1997. The Company  continues to
sell mainly 10- and 20-year  guaranteed rate term life insurance policies within
this product line.  For further  information  on this product line see Term Life
Insurance on page 9.

     The face amount of new universal life insurance sold totaled $574.9 million
representing 31% of 1997 new insurance  production.  Universal life insurance is
flexible  premium life insurance that allows  policyholders  to change the death
benefit  from time to time  (with  satisfactory  evidence  of  insurability  for
increases)  and vary the amount or timing of premium  payments.  Premiums  minus
policyholder  assessments are credited to cash value or accumulative accounts to
which  interest is credited at rates that may change from time to time. The face
amount of universal  life  insurance  sold  increased  40% in 1997.  For further
information on this product line see Universal Life Insurance on page 8.

     During 1997,  first-year  deferred annuity premiums increased 5.1% to $71.5
million. The Company offers two types of deferred annuities,  fixed interest and
equity indexed.  Fixed interest  annuities are  tax-deferred  cash  accumulation
contracts  that pay a fixed  interest rate  established  by the Company.  Equity
indexed  annuities  credit  interest,   which  is  also  tax  deferred,  to  the
policyholders'  account  based  on a  percentage  of the  gain  of the  S&P  500
Index(R).  The Company issues single and flexible  premium  annuities.  Flexible
premium  annuities permit  additional  deposits by  policyholders  after initial
premiums are paid.  Sales of fixed interest  annuities were slowed in the fourth
quarter by a flat interest yield curve,  which allowed banks and other financial
institutions to offer  short-term  certificates  of deposit at more  competitive
interest rates. Sales of equity indexed annuities reached expected levels during
the latter part of the year fueled by more product offerings and expectations of
gains in the equity markets.  For further  information on this product line, see
Annuities on page 10.


                                       6
<PAGE>


     Market Area

     The  following  table shows  direct  life  insurance  premiums  and annuity
considerations for ALLIED Life by state for the years indicated.
<TABLE>
<CAPTION>
 
                                                  1997                                    1996          1995

                         Life
                       Insurance       Annuity                        Percentage       Percentage    Percentage
                       Premiums    Considerations      Total (1)       of Total         of Total      of Total


                                                           (Dollars in thousands)
<S>                   <C>             <C>            <C>                 <C>              <C>             <C>  
Iowa                  $   9,727       $  14,025      $   24,517          19.5  %          21.5%           26.1%
California               11,534           5,408          17,040          13.5             10.8            10.0
Illinois                  1,265          13,496          15,466          12.3             10.6             5.5
Wisconsin                 2,162          12,126          14,334          11.4             11.3             7.0
Utah                      1,469           8,591          10,062           8.0              8.3             5.8
Kansas                    3,967           3,119           7,437           5.9              5.0             5.6
Nebraska                  4,474           1,975           6,911           5.5              6.2             6.2
Missouri                  2,107           1,918           4,214           3.3              3.4             6.6
Colorado                  1,232           2,395           3,668           2.9              1.9             1.7
Minnesota                 2,335             729           3,112           2.5              2.6             4.8
Idaho                     1,264           1,622           2,927           2.3              4.5             1.3

Other (2)                 6,037           9,462          16,285          12.9             13.9            19.4


                      $  47,573       $  74,866      $  125,973         100.0%           100.0%          100.0%
<FN>
(1) Total  includes  accident  and health and other  miscellaneous  premiums not
    separately  shown in the table. 
(2) Includes all other  jurisdictions,  none of which accounted for more than 2%
    in 1997.
</FN>
</TABLE>

     For more information regarding the states where ALLIED Life is admitted for
insurance business by distribution  system, see the 1997 Annual Report,  pages 6
and 8.


Subsidiaries

     ALBA is a general  agency  which uses the ALLIED Life agency  force to sell
complementary  insurance products not developed nor written by ALLIED Life, such
as health insurance,  major medical, and disability  insurance.  ALBA's revenues
amounted to $1,000,000 in 1997,  $681,000 in 1996, and $496,000 in 1995. AGMB is
a registered  broker-dealer  which facilitates  securities  transactions for the
insurance  agents of the Company  and its  affiliates  who are  licensed to sell
securities.  AGMB's revenues for 1997,  1996, and 1995 were $579,000,  $389,000,
and $203,000.

                                       7
<PAGE>


Products

     Universal Life Insurance


     The Company's  universal  life policies  provide  permanent  life insurance
protection  with a  flexible  premium  structure  that  allows the  customer  to
pre-fund  future  insurance  costs and to accumulate  savings on a  tax-deferred
basis.  The  policyholder  may  surrender the policy at any time and receive the
accumulated  account  balance  less a specified  surrender  charge  based on the
duration of the contract and the amount of the coverage.

     The following  table  reflects the account  value,  average face amount and
average  insured age at date of issue for the Company's  universal life products
(excludes riders):
<TABLE>
<CAPTION>

                                                                   Average      Average      Number       Average
                                                                   Account       Face          of          Issue
                                                                    Value       Amount      Policies        Age

         
Policies sold in 1997:
   Policies with a minimum face amount in excess of
     <S>                                                         <C>          <C>                <C>        <C>
     $150,000                                                    $    6,758   $  376,442         499        43
    All other policies                                                1,559       69,564       3,290        39

Total policies in force as of December 31, 1997:
   Policies with a minimum face amount in excess of
     $150,000                                                    $    11,799  $  328,320       5,247        40
   All other policies                                                  3,923      59,107      33,905        36
</TABLE>

     When the  Company  issues a  universal  life  policy it receives an initial
premium  based on the face  amount of  insurance  purchased  and the  premium is
reflected as a deposit to the policyholder's account. Additional premiums may be
deposited by the policyholder up to a specified maximum.  The Company deducts an
expense  allowance from each premium within a contractually  specified range and
credits the remainder to the  policyholder's  account.  Thereafter,  the account
balance is charged monthly for the cost of insurance,  which reflects  mortality
and benefit charges and an administrative  fee, and is credited interest monthly
at current crediting rates. Certain of the Company's universal life policies are
designed to encourage  policyowner  persistency  and larger account  balances by
providing  higher  crediting rates for larger account  balances as well as those
maintained for longer periods.
   Policy liabilities for universal life contracts are comprised of policyholder
account balances. The following table shows changes in account balances for each
year in the five-year period ended December 31, 1997:

<TABLE>
<CAPTION>
                                                                       Benefit
            Account                                                   Payments     Account    Deferred     Average
           Balance,                                                     Plus      Balance,     Policy     Interest
         Beginning of   Premiums   Interest    Cost of     Expense    Surrender    End of    Acquisition  Credited
  Year       Year       Received   Credited   Insurance  Allowances    Charges      Year        Costs       Rate

                                             (dollars in thousands)
<S>        <C>           <C>         <C>       <C>         <C>        <C>          <C>         <C>         <C>

1993       125,650       32,468      9,293     (11,498)   (3,931)     (10,541)     141,441     40,890      7.0%
1994       141,441       29,640      9,229     (13,810)   (3,591)      (7,064)     155,845     46,653      6.2
1995       155,845       30,382      9,530     (15,563)   (4,448)      (7,092)     168,654     51,774      5.9
1996       168,654       32,644      9,490     (16,178)   (4,549)      (7,334)     182,727     56,333      5.4
1997       182,727       34,271      10,127    (17,322)   (4,604)      (8,490)     196,709     60,427      5.3

</TABLE>

                                       8
<PAGE>

     The Company's  universal  life  products are designed to provide  long-term
returns to its policyowners. Most of the Company's products currently being sold
are structured so that the Company's policy  acquisition costs will be recovered
upon the receipt of 5 to 10 years of annual premiums,  depending on the product.
The  Company  imposes   surrender  charges  in  order  to  recover  its  upfront
acquisition  costs  upon  an  early  lapse  or  surrender  by  the  policyowner.
Additionally,    variable    periodic    mortality    and    benefit    charges,
percent-of-premium  loads,  and monthly policy fees cover the costs of insurance
and other benefits,  policy  administration  and taxes,  and provide the Company
with a profit margin.  The products are structured so policyowners  are rewarded
for higher cash values and life insurance face amounts.

     Term Life Insurance

     A significant amount of the Company's current term life insurance sales are
10- and 20-year  guaranteed rate policies.  Under these  policies,  the customer
purchases basic term insurance protection without the tax-deferred  accumulation
feature available under the Company's  universal life insurance  policies.  Term
life insurance  provides only a death benefit for a specified  period of time to
the policyowner for a lower premium than would be required for a comparable face
amount of universal life insurance. Cash value does not accumulate,  rather, the
premium charged is a function of mortality risk and policy expenses.

     The following  table  reflects the average face amount and average  insured
age at date of issue for the Company's term life products (excludes riders):
<TABLE>
<CAPTION>

                                                                           Number          Average      Average
                                                                             of             Face         Issue
                                                                          Policies         Amount         Age
    
Policies sold in 1997:
<S>                                                                          <C>        <C>                <C>
   Policies with a minimum face amount in excess of $150,000                 2,188      $   377,782        41
   All other policies                                                        4,026           91,648        40

Total policies in force as of December 31, 1997:
   Policies with a minimum face amount in excess of $150,000                 7,988      $   368,168        40
   All other policies                                                       16,823           89,925        39
</TABLE>


     The Company  encourages  the conversion of term life insurance to universal
life  insurance,  and as an  incentive  it credits an amount equal to 50% of the
current  term life premium as an  additional  deposit  into the  universal  life
insurance account of a policyholder upon conversion. The credit is substantially
offset by a  reduction  in the  commission  payable to the agent.  The agent has
incentive to encourage term conversion  because the reduced  commission  payable
upon  conversion  still exceeds the commission  payable on the renewal of a term
life insurance  policy.  This  incentive to convert is promoted  directly to the
term  policyowner at each of the first five policy  renewals.  Term  conversions
represented  5.4% of 1997  universal  life  face  amount  sold.  Universal  life
insurance  face amount sold  resulting  from  conversions  from ALLIED Life term
products were $30.9 million in 1997,  $35 million in 1996,  and $30.5 million in
1995.

     Group Life and Other In Force Life Policies

     As of December  31,  1997,  the Company had $297.9  million  face amount of
group term life insurance in force,  on 2 employee  groups,  one of which is the
ALLIED Group, Inc. employee group.

                                       9
<PAGE>


     As of December 31, 1997, the Company had $51.1 million face amount of other
life insurance products in force consisting of smaller,  non-participating whole
life policies. These are guaranteed premium and cash value contracts.

     Annuities

     The Company offers a variety of deferred annuity products, including single
premium and  flexible  premium  designs,  to  customers  who wish to  accumulate
savings on a tax-deferred  basis.  Annuities  currently  enjoy an advantage over
certain other savings vehicles because the annuity buyer receives a tax-deferred
accrual of interest on his or her  investment  during the  accumulation  period.
Annuities generally are marketed to individuals in anticipation of retirement.

     The following  table reflects the average  account value and average age of
annuitant at date of issue for the Company's deferred annuity products :
<TABLE>
<CAPTION>

                                                                             Number        Average     Average
                                                                               of          Account      Issue
                                                                            Policies        Value        Age

<S>                                                                           <C>        <C>               <C>    
Annuities sold in 1997:                                                        3,384     $  23,722          66
Total policies in force as of December 31, 1997:                              24,027        21,330          65
</TABLE>


     Policy  liabilities  for  annuity  contracts  without  mortality  risk  are
comprised of policyholder account balances. The following table shows changes in
account balances for each year in the five-year period ended December 31, 1997:
<TABLE>
<CAPTION>

                                                             Benefit
            Account                                         Payments           Account      Deferred       Average
           Balance,                                           Plus            Balance,       Policy       Interest
         Beginning of   Considerations     Interest         Surrender          End of      Acquisition    Credited
  Year       Year          Received        Credited          Charges            Year          Costs         Rate


                                                 (dollars in thousands)
<S>        <C>               <C>            <C>             <C>               <C>            <C>            <C>               

1993       221,568           56,427         16,682          (23,292)          271,385        15,114         6.7%
1994       271,385           86,899         17,723          (32,617)          343,390        21,393         5.8
1995       343,390           77,199         22,613          (30,986)          412,216        25,613         5.9
1996       412,216           71,770         24,566          (41,047)          467,505        25,623         5.6
1997       467,505           74,328         25,692          (52,617)          514,908        27,669         5.3
</TABLE>

          The Company's  deferred  annuities are sold as an  alternative to bank
certificates of deposit and other taxable savings vehicles. Annuity premiums are
generally  invested  in  intermediate  term  investment  grade  securities,  the
investment  terms typically  matching the underlying  product  surrender  charge
periods of three to nine years.

     For most fixed interest plans,  the initial interest rate is guaranteed for
one to three years with renewal crediting rates based on portfolio  earnings and
market  conditions.  Several of the  Company's  annuity  plans  provide 1% to 2%
first-year interest bonuses and additional annual interest bonuses for long-term
persistency.  The present  value of the  interest  rate  bonuses  are  generally
deducted from agents compensation, allowing the Company to maintain its targeted
profit margin. Liquidity benefits are provided in the form of no-penalty partial
withdrawal  allowances,  interest  income  payments,  a nursing home  waiver,  a
terminal illness waiver, and bonus annuitization options.

                                       10
<PAGE>

     The  Company's  equity  indexed  annuity  products  guarantee the return of
principal to the customer if held for the whole term and credit  interest  based
on a percentage  of the gain of the S&P 500  Index(R).  A portion of the premium
from each  customer is invested in fixed income  securities to cover the minimum
guaranteed  value  due the  customer  at the end of the term.  A portion  of the
premium is used by the  Company to  purchase  S&P 500 call  options to hedge the
interest  credited  to the  customer  if  there  are  increases  in the  S&P 500
Index(R).  See  Note  3  of  Notes  to  Consolidated  Financial  Statements  for
additional information regarding call options.

     Surrender  charges,  which the  Company  imposes  in the  early  years of a
policy,  reduce the amount payable to a policyholder  upon surrender of a policy
and  generally  permits  the  Company to recover its  acquisition  costs.  These
charges also generally reduce the statutory reserve applicable to the policy.

Insurance Operations

     The Company's  insurance and annuity  operations  achieve  significant cost
efficiencies  through automation of policy issue and administration.  Budgetary,
quality  service,  and  time  service  standards  are  established  and  closely
monitored.  Internal  financial  analysis and reporting are used to focus on the
most profitable elements of the Company's operations and to identify cost saving
and marketing opportunities.

     The Company is headquartered in Des Moines, Iowa, and physically located in
the ALLIED  property-casualty  companies'  home  office.  This  close  proximity
facilitates  marketing  plan  implementation  between ALLIED Life and the ALLIED
property-casualty  affiliates.  It also allows the  Company to lease  automation
systems and support from ALLIED Group,  Inc. on a more cost effective basis. See
"Certain  Transactions  and  Relationships"  in the  1998  Proxy  Statement  for
additional information.

Life Insurance Underwriting

        The  Company had adopted  and  follows  detailed,  uniform  underwriting
standards and procedures designed to properly assess and quantify life insurance
risks before issuing  policies to individuals.  Underwriting  administration  is
automated and management  emphasizes the achievement of quality and time service
objectives.   The  Company's   underwriters   review  each  applicant's  written
application,  which is prepared under the supervision of the Company's agents or
representative,  and any required medical  records.  On larger cases the Company
employs blood and urine testing to provide  additional  information  on nicotine
and drug usage.  Based on the results of these  tests,  the Company  adjusts the
mortality  charge or declines  coverage  completely.  Any nicotine use by a life
applicant  within  the  preceding  one year  results in a  substantially  higher
mortality   charge.   In   accordance   with   industry    practice,    material
misrepresentations on a policy application can result in the cancellation by the
Company of the policy generally within the first 2 years upon the return of any
premiums paid.

     The increasing  incidence of Acquired Immune Deficiency Syndrome (AIDS) has
not thus far adversely affected the Company's mortality experience.  The Company
considers AIDS  information and testing results in its  underwriting and pricing
decisions.   The   Company's   blood  test   includes  a  screening   for  human
immunodeficiency virus (HIV).

Reinsurance

     In keeping with industry  practices,  the Company reinsures portions of its
life  insurance  and  disability  income  exposure with  unaffiliated  insurance
companies under  traditional  indemnity  reinsurance  agreements.  New insurance
sales are reinsured above  prescribed  limits and do not require the reinsurer's
prior approval  within  certain  guidelines.  These  treaties are  automatically
renewed and nonterminable for the first 10 years with regard to cessions already
made and are terminable after 90 days with regard to future  cessions.  After 10
years, the Company has the right to terminate and can generally  discontinue the
reinsurance  on a block of  business.  This is  normally  done to  increase  the
Company's retention on older business to the same level as current cessions.

                                       11
<PAGE>

     Generally,  the Company enters into indemnity  reinsurance  arrangements to
assist in  diversifying  its risk and to limit its  maximum  loss on risks  that
exceed the Company's policy retention  limits,  which are currently  $150,000 or
less per life  ($250,000  or less  per  life for ages 59 and  under).  Indemnity
reinsurance  does not fully  discharge  the  Company's  obligation to pay policy
claims on the reinsured business.  The Company,  as the ceding insurer,  remains
responsible  for policy  claims to the extent  the  reinsurer  fails to pay such
claims.  No  reinsurer  of  business  ceded by the Company has failed to pay any
material policy claims (either individually or in the aggregate) with respect to
such ceded  business.  At December 31, 1997, the Company had ceded to reinsurers
$2.4  billion of insurance in force,  substantially  all of which was  reinsured
with insurance  companies  rated A (excellent) or better by A.M. Best.  There is
currently no reinsurance with affiliated insurance companies and all reinsurance
entered into is in the  ordinary  course of  business.  The Company  continually
monitors  the  financial  strength of its  reinsurers  and the  availability  of
replacement  coverages  in the  reinsurance  market.  If  for  any  reason  such
reinsurance  coverages  would need to be  replaced,  the Company  believes  that
replacement   coverages  from  financially   responsible   reinsurers  would  be
available.

Policy Liabilities

     The policy liabilities  reflected in the consolidated  financial statements
are  calculated in accordance  with  generally  accepted  accounting  principles
(GAAP).  Liabilities  for  universal  life and annuity  policies  consist of the
premiums and considerations  received plus accumulated  credited interest,  less
accumulated  policyholder  assessments and benefits.  For traditional  products,
liabilities for future policy benefits have been provided based on the net level
premium method.  These  liabilities are based upon actuarial tables adjusted for
ALLIED Life's actual mortality and persistency experience and investment income.
GAAP policy  liabilities  differ from those established for statutory  reporting
purposes  due to the  use  of  different  assumptions  regarding  mortality  and
interest rates and the  introduction of lapse  assumptions  into the GAAP policy
liability calculation. Actual mortality experience in a particular period may be
greater than expected  mortality  experience and,  consequently,  may materially
affect the Company's  operating results for such period.  See Note 1 of the 1997
Notes to Consolidated  Financial Statements for additional information regarding
policy liability assumptions under GAAP.

Interest Crediting Policy

     On a monthly basis, or more frequently if required, the Company reviews and
establishes  current period  interest rates based upon existing and  anticipated
investment  opportunities.  This  applies  to both new sales as well as in force
universal  life  insurance  and annuity  products  after any initial  guaranteed
period.  The  Company  attempts  to match the  duration  of the  asset-liability
characteristics  of the various  universal life  insurance and annuity  products
with the underlying investment opportunities available.  Interest rates are then
established  based  on  each  product's  required  interest  spread  and  market
conditions  at the  time.  Interest  rates are  reviewed  and,  if  appropriate,
adjusted  for  money  received  in the  Company's  home  office  on or after the
effective date of the interest rate change.


Investments

     The  investment  policy  for  ALLIED  Life  requires  at  least  95% of the
portfolio consist of investment grade  securities.  At December 31, 1997, 84% of
the Company's fixed maturity investments were rated "A" or higher, and less than
1% were rated less than investment grade.

     Effective May 13, 1997, the Company  transferred  its remaining  securities
classified as held to maturity ($196 million) to available for sale and recorded
an increase to stockholders' equity of $1.2 million in accordance with Statement
of Financial Accounting Standards (SFAS) 115. The Company now carries all of its
securities  at fair value and has more  flexibility  in managing its  investment
portfolio.  The Company has no intent to classify future purchases of securities
as held to maturity.


                                       12
<PAGE>



The table below shows the composition of the Company's investments:
<TABLE>
<CAPTION>

                                                                   Estimated                    1997       1996
                                                                     Fair        Carrying      Percent    Percent
                Investment Category                                  Value         Value      Of Total   Of Total


                                                                               (dollars in thousands)
<S>                                                              <C>           <C>           <C>           <C>          

Fixed maturities:
   U.S. Treasury obligations (1)                                 $   26,462     $  26,462       3.4         4.8%
   Foreign governments                                                5,408         5,408       0.7         1.5
   Public utilities                                                 106,924       106,924      13.6        12.5
   Asset-backed securities (other than first lien mortgages)         49,990        49,990       6.3         3.1
   Mortgage-backed securities:
     Pools                                                          112,135       112,135      14.2        16.8
     Collateralized mortgage obligations                             55,426        55,426       7.0        12.8

       Total mortgage-backed securities                             167,561       167,561      21.2        29.6


   Corporate debt securities:
     Investment grade (BBB - or greater) (2)                        409,433       409,433      52.0        45.3
     Non-investment grade (BB + or below) (2)                           250           250     -----       -----


       Total corporate debt securities                              409,683       409,683      52.0        45.3


       Total fixed maturities                                       766,028       766,028      97.2        96.8


Equity securities                                                     3,201         3,201       0.4         0.9
Mortgage loans on real estate (3)                                       984           984       0.1         0.2
Policy loans                                                         11,164        11,164       1.4         1.4
Other invested assets (4)                                             3,014         3,014       0.4         0.5
Short-term investments                                                3,594         3,594       0.5         0.2


       Total investments                                         $  787,985     $ 787,985     100.0%      100.0%


<FN>
(1) All such  securities  are  backed by the full faith and credit of the United
    States government.
(2) Ratings are assigned primarily by Standard & Poor's or a
    recognized  equivalent.
(3) Consists of single family residential mortgages and farm mortgages.
(4) Consists of instruments purchased for hedging purposes.
</FN>
</TABLE>


                                       13
<PAGE>



     The following table sets forth the  composition of the Company's  portfolio
of fixed maturity investments by rating at December 31, 1997:
<TABLE>
<CAPTION>

                                                                   Estimated                    1997       1996
                                                                     Fair        Carrying      Percent    Percent
                    Rating (1)                                       Value         Value      Of Total   Of Total


                                                                                 (dollars in thousands)
<S>                                                              <C>           <C>              <C>          <C>        

AAA ..........................................                   $238,937      $238,937         31.2%        38.3%
AA ...........................................                    103,664       103,664         13.5         11.7
A ............................................                    302,368       302,368         39.5         39.0
BBB ..........................................                    119,546       119,546         15.6         10.7



       Total investment grade fixed maturities                    764,515       764,515         99.8         99.7

Non investment grade                                                1,513         1,513          0.2          0.3


       Total fixed maturities ................                   $766,028      $766,028        100.0%       100.0%


<FN>
(1)  Ratings  are  assigned  primarily  by  Standard  & Poor's  or a  recognized
equivalent.
</FN>
</TABLE>


     The following  table sets forth expected  maturities in the Company's fixed
maturity  portfolio at December 31, 1997.  Expected  maturities  at December 31,
1997 are shorter  than  contractual  maturities  because of mortgage  backed and
call-option securities in the portfolio. Borrowers may have the right to call or
prepay  obligations  with or  without  call or  prepayment  penalties.  Expected
maturities  are  based on the same  prepayment  assumptions  used in  amortizing
premiums and  discounts  on these  securities.  For  additional  information  on
contractual  maturities,  see Note 2 of the 1997 Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>

                                                                                             1997         1996
                                                                              Amortized     Percent      Percent
                                                                                Cost       Of Total     Of Total

                                                                                             (dollars in thousands)
         <S>                                                                <C>              <C>          <C>    

         One year or less                                                   $    36,460       5.0%          5.6%
         Over 1 year through 5 years                                            192,151      26.2          24.8
         Over 5 years through 10 years                                          334,636      45.6          49.7
         Over 10 years through 20 years                                         111,493      15.2          14.9
         Over 20 years                                                           59,023       8.0           5.0

         Total                                                              $   733,763     100.0%        100.0%
</TABLE>


                                       14
<PAGE>


     Investment  results of the Company for each year in the three years ended  
December  31, 1997 are shown on the following table.

<TABLE>
<CAPTION>

                                                                    1997               1996              1995

                                                                            (dollars in thousands)
         <S>                                                    <C>                <C>               <C>          
         Average invested assets, net (1)                       $   719,053        $   653,908       $   584,223
         Investment income (2)                                       52,197             48,182            45,411
         Average annual yield on total investments                      7.3%               7.4%              7.8%
         Realized investment gains (losses)                     $     2,354        $       122       $      (722)

<FN>
(1)  Total invested  assets,  at cost, less balance  outstanding on Federal Home
     Loan Bank note payable (see (2) below), on an average quarterly basis.
(2)  Investment  income is net of interest and investment  expenses and does not
     include realized investment gains or losses or provision for income taxes.
</FN>
</TABLE>

     Mortgage-backed  securities (including  collateralized mortgage obligations
[CMOs])  comprise  21.9% of the  Company's  total fixed  maturity  portfolio  at
December 31, 1997. The mortgage-backed  securities are backed primarily by first
lien single family residential  mortgages.  The majority of the  mortgage-backed
securities are investment grade.

     The  Company's  investments  in CMOs consist of pools of mortgages  divided
into sections or "tranches" which provide sequential  retirement of bonds. As of
December 31, 1997,  ALLIED Life held CMO investments  with a fair value of $55.4
million.  As of December 31, 1997,  88.3% (86.8% in 1996) of the  Company's  CMO
investments  were in planned  amortization  classes  (PACs) and  sequential  pay
bonds. The Company invests primarily in PACs to provide call protection and more
stable average lives.  This provides more  predictable cash flows within a range
of prepayment speeds by shifting the prepayment risks to support  tranches.  All
of the  Company's  CMO  investments  are rated "AAA",  have an active  secondary
market,  and  accordingly  are not  expected to affect the  Company's  liquidity
differently than other fixed maturity investments.

     The following  table shows the December 31, 1997  estimated  fair value and
carrying value of the CMO portfolio by type:
<TABLE>
<CAPTION>

                                                                   Estimated                    1997       1996
                                                                     Fair        Carrying      Percent    Percent
Type of CMO                                                          Value         Value      Of Total   Of Total


                                                                                 (dollars in thousands)
<S>                                                              <C>            <C>            <C>           <C>        <C>
Planned amortization class                                       $   37,147     $  37,147      67.0%         60.2%
Sequential pay                                                       11,810        11,810      21.3          26.6
Other                                                                 6,469         6,469      11.7          13.2


       Total investments in CMOs                                 $   55,426     $  55,426     100.0%        100.0%

</TABLE>

                                       15
<PAGE>

Hedging Activities

     In 1996, the Company began interest rate hedging  programs  whereby certain
derivative financial instruments including cash settle put swaptions (swaptions)
and interest rate floors (floors) were purchased.  Swaptions are being purchased
to reduce the negative effect of increased  withdrawal  activity  related to the
Company's annuity liabilities that may result from extreme increases in interest
rates.  They  entitle  the  Company to receive  payments  from the  instrument's
counter  parties on future reset dates if the  interest  rate (which is directly
tied to the 5-year constant maturity swap curve) on any expiration date is above
a  specified  fixed  rate  (8.8% to 10.5%  for  instruments  entered  into as of
December 31, 1997).

     Floors are being  purchased to reduce the  negative  effect that may result
from  extreme  decreases  in  interest  rates to a level  below  the  guaranteed
interest  rates provided for in the universal  life  insurance  contracts.  They
entitle the Company to receive payments from the instrument's counter parties on
future reset dates if the interest  rate (which is tied  directly to the 10-year
constant  maturity  treasury  curve) on the expiration date is below a specified
fixed rate (5.0% for instruments entered into as of December 31, 1997).

     The costs of the  interest  rate hedging  programs  have not had a material
impact on the interest rate margin.  For both swaptions and floors,  the Company
pays only the original premium and is not at risk of further payments regardless
of market conditions.

     The Company is exposed to the risk of losses in the event of nonperformance
of the counter parties of the above swaptions and floors. Losses recorded in the
Company's financial  statements in the event of non-performance  will be limited
to the unamortized  premium paid to enter into the instruments.  Economic losses
will be measured by the net  replacement  cost of such  instruments  or by their
fair value if the net fair value is in the Company's  favor.  The Company limits
its exposure to such losses by  diversification  among reputable counter parties
with appropriate credit ratings.

     For  further  information  on  swaptions  and floors see Note 3 of Notes to
Consolidated Financial Statements.

Competition

     The Company operates in a highly competitive  industry.  In connection with
the development  and sale of its products,  the Company  encounters  significant
competition  from  other  insurance  companies,  many  of  whom  have  financial
resources substantially greater than those of the Company, as well as from other
investment  alternatives  available to its customers.  The operating  results of
companies  in  the  insurance   industry  have   historically  been  subject  to
significant  fluctuations  due to  competition,  economic  conditions,  interest
rates,  investment  performance,  maintenance  of insurance  ratings,  and other
factors.  Management  believes that the Company's  ability to compete with other
insurance  companies  is  dependent  upon,  among other  things,  its ability to
attract  and retain  agents to market its  insurance  products,  its  ability to
develop competitive and profitable products, and its maintenance of high ratings
from A.M. Best  (currently  "A"  [excellent])  and Duff and Phelps Credit Rating
Company (upgraded to "A+" during 1997).

     The  Company  competes  on  the  basis  of  its  distribution  system,  its
innovative  product  development,   its  strong  financial  condition,  and  its
high-quality  agent  services and  marketing  support.  Growth in the  Company's
distribution  channels is based on  providing a  competitive  product  portfolio
combined  with the  value of its  marketing,  underwriting,  and  administrative
support services to agents.

Regulation

     The  Company's  insurance  subsidiary  is  subject  to  varying  degrees of
regulation  and  supervision  by the states in which it is  admitted to transact
business.   State  insurance  laws  establish  regulatory  agencies  with  broad
administrative  and supervisory powers related to granting and revoking licenses
to transact business, establishing guaranty fund associations, licensing agents,
approving  policy  forms,  regulating  premium rates for some lines of business,
establishing reserve requirements,  prescribing the form and content of required
financial statements and reports, determining the reasonableness and adequacy of
statutory capital and surplus, and regulating the type and amount of investments
permitted.   ALLIED  Life  must  file  guaranteed  rates  for  the  policies  it
underwrites  with  the  insurance  departments  of  certain  states  in which it
operates;  reinsurance  generally is not subject to rate  regulation.  Insurance
departments  also examine the affairs of  insurance  companies,  which  includes
periodic market conduct examinations by the regulatory authorities and review of
annual and other reports prepared on a statutory accounting basis required to be
filed on the  financial  condition of insurers or for other  purposes.  Further,
state insurance  statutes typically place limitations on the amount of dividends
or other distributions  payable by insurance companies in order to protect their
solvency.  The Iowa statute requires that insurance companies pay dividends only
out of  earned  profits  (unassigned  surplus)  and  requires  prior  regulatory
approval for the payment of any dividend which exceeds the greater of either (I)
10% of statutory  policyholders  surplus (total capital stock and surplus) as of
December 31 of the preceding year or (ii) the statutory net gain from operations
of the insurer for the 12-month  period  ending the December 31 of the preceding
year.

                                       16
<PAGE>

     The Company is also subject to statutes governing insurance holding company
systems.  Typically,  such  statutes  require the Company to  periodically  file
information with the state insurance regulatory authority, including information
concerning its capital structure,  ownership,  financial condition,  and general
business operations. Under the terms of applicable state statutes, any person or
entity  desiring to acquire more than a specified  percentage  (commonly 10%) of
the Company's outstanding voting securities is required first to obtain approval
of the  applicable  state  insurance  regulators.  Chapter 521A of the Iowa Code
relating  to  holding  companies,  to which the  Company  is  subject,  requires
disclosure of transactions  between the Company and its insurance  subsidiary or
between  an insurer  and  another  subsidiary,  that such  transactions  satisfy
certain standards,  including that they be fair,  equitable and reasonable,  and
that the Insurance  Commissioner  be given an opportunity to disapprove  certain
material transactions. Further, prior approval by the Iowa Insurance Division is
required for  affiliated  sales,  purchases,  exchanges,  loans or extensions of
credit,  guarantees  or  investments  which  involve 5% or more of the insurer's
admitted assets as of the preceding December 31st.

     Under  insolvency  or  guaranty  fund laws in states in which  ALLIED  Life
operates, insurers can be assessed, up to prescribed limits, for losses incurred
by policyholders as a result of the insolvency of other insurance companies. The
amounts and timing of such assessments are beyond the control of the Company and
generally  have an  adverse  impact  on the  Company's  earnings.  A  number  of
insurance  companies are under  supervision  resulting in  assessments  to cover
losses to policyholders of such companies. The Company cannot predict the amount
of any future assessments.

     Recently,   the  insurance  regulatory  framework  has  been  placed  under
increased scrutiny by various states, the federal  government,  and the National
Association of Insurance  Commissioners  (NAIC). The NAIC has recommended to the
states for adoption and implementation several regulatory  initiatives,  none of
which are expected to have a material impact on ALLIED Life.


Employees

     At December 31, 1997, ALLIED Life employed 126 persons. ALLIED Life employs
all persons serving the Company and its subsidiaries.  None of the employees are
members of a collective bargaining unit. Management believes that relations with
its employees are good.

Item 2.    Properties

     The  Company  does  not  own  any  real  estate.  The  Company's  principal
operations  are  conducted  from  leased  office  space  pursuant  to a  leasing
arrangement with ALLIED Mutual. See "Certain  Transactions and Relationships" in
the 1998 Proxy Statement for additional  information.  Management  considers the
leased space to be adequate for its needs.


                                       17
<PAGE>


Item 3.    Legal Proceedings

     For a description of certain lawsuits pending against the Company, see Item
7  "Management's  Discussion and Analysis of Financial  Condition and Results of
Operations" of this report which is incorporated herein by reference.


Item 4.     Submission of Matters to a Vote of Securities Holders

     No matters were  submitted  during the fourth  quarter of 1997 to a vote of
holders of ALLIED Life Financial Corporation stock.


                                       18
<PAGE>



                                     PART II


Item  5.  Market for Registrant's Common Equity and Related Stockholder Matters

     The  Company's  common  stock  trades on The Nasdaq  Stock Market under the
symbol ALFC. As of December 31, 1997, there were 122 stockholders of record. The
following  table  shows the high and low market  prices and  dividends  paid per
share for each calendar quarter for the two most recent years.
<TABLE>
<CAPTION>

                                               High             Low             Last          Dividends
<S>                                         <C>              <C>             <C>               <C>        
1997
   First qtr.                               $  19           $ 17             $  17             $ .06
   Second qtr.                                 20             15 3/4            19 3/4           .06
   Third qtr.                                  23 3/4         18 3/4            23 3/4           .06
   Fourth qtr.                                 24             19 3/4            21               .07

1996
   First qtr.                               $  18 1/4       $ 16 1/2         $  17             $ .05
   Second qtr.                                 21 1/2         15                20               .05
   Third qtr.                                  20             15 1/4            15 3/4           .05
   Fourth qtr.                                 18 3/4         15 3/4            17 1/2           .06
</TABLE>

     There are  certain  regulatory  restrictions  relating  to the  payment  of
dividends (see Note 10 of the 1997 Notes to Consolidated  Financial Statements).
It is the present  intention of the Board of Directors to declare quarterly cash
dividends.


                                       19
<PAGE>


Item 6.    Selected Financial Data

<TABLE>
<CAPTION>

                                                        At or for the year ended December 31,
                                             1997          1996            1995             1994            1993

Income Statement Data                                (Dollars in thousands, except per share data)
<S>                                     <C>           <C>              <C>             <C>              <C> 
Revenues
     Total insurance revenues           $     34,142  $     31,350     $     29,934    $     25,393     $     20,822
     Investment income                        52,197        48,182           45,411          38,136           33,243
     Realized investment gains
       (losses)                                2,354           122             (722)           (724)           2,154
     Other income                              1,559         1,056              688             648              277

     Total revenues                           90,252        80,710           75,311          63,453           56,496

Benefits and expenses
     Policyholder benefits                    51,392        47,988           46,063          37,359           32,870
     Amortization of deferred policy
       acquisition costs (1)                  11,097        10,595            5,941           5,136            5,347
     Commissions                               4,232         3,316            2,725           2,627            2,390
     Operating expenses                        7,832         6,801            6,313           5,715            4,966


     Total benefits and expenses              74,553        68,700           61,042          50,837           45,573


     Income before income taxes               15,699        12,010           14,269          12,616           10,923

Income taxes                                   5,226         3,937            4,557           4,059            3,739


     Net income (1)                     $     10,473  $      8,073     $      9,712    $      8,557     $      7,184



Net income applicable to
     common stock (1)                   $      8,862  $      6,567     $      8,304    $      7,239     $      5,930
Diluted earnings per share (1)                  1.94          1.39             1.75            1.57             1.67
Dividends paid per common share         $       0.25  $       0.21     $       0.17    $       0.13     $       0.03
Weighted average number of
     shares outstanding
     (in thousands)                            4,572         4,712            4,732           4,612            3,546

Balance Sheet Data
Investments at cost                     $    755,615  $    714,483     $    637,245    $    554,889     $    451,982
Assets                                       904,457       835,600          759,947         643,340          532,588
Preferred stock                               26,336        24,586           22,871          21,341           19,028
Stockholders' equity                    $    114,157  $     99,942     $    101,682    $     76,027     $     74,368
Preferred shares outstanding
     (in thousands)                            2,393         2,238            2,087           1,948            1,754
Common shares outstanding
     (in thousands)                            4,398         4,497            4,633           4,586            4,572

Other Data
Death benefits per share                $       0.91  $       0.81     $       0.81    $       0.68     $       0.72
Book value per share                           17.84         16.16            15.01           13.42            11.98
Statutory capital and surplus                 51,275        46,544           45,504          47,413           42,403
Life insurance in force                    9,629,640     8,959,314        8,114,516       7,242,737        5,915,558
Annuity account balances                $    514,908  $    467,505     $    412,216    $    343,390     $    271,385


<FN>
(1) The 1996 amounts  include an additional  $2.8 million ($1.9 million or $0.40
per share net of income  taxes)  charge  relating to  unlocking  adjustments  to
deferred policy acquisitions costs.
</FN>
</TABLE>


                                       20
<PAGE>


Item 7.    Management's Discussion and Analysis of Financial Condition and 
           Results of Operations

Forward-looking Information


       The  Private  Securities  Litigation  Reform Act of 1995  provides a safe
harbor to encourage companies to provide  prospective  information so long as it
is identified as  forward-looking  and is accompanied  by meaningful  cautionary
statements  identifying  important  factors that could cause  actual  results to
differ materially from those discussed. Forward-looking statements relate to the
plans and  objectives  of  management  for future  operations,  future  economic
performance,  or projections of revenues,  income,  earnings per share,  capital
expenditures,  dividends,  capital  structure,  or other financial items. In the
following discussion and elsewhere in this report,  statements  containing words
such as expect,  anticipate,  believe,  goal,  objective,  or similar  words are
intended  to  identify   forward-looking   statements.   ALLIED  Life  Financial
Corporation  (ALFC or the  Company)  undertakes  no  obligation  to update  such
forward-looking  statements,  and it wishes to identify  important  factors that
could cause  actual  results to differ  materially  from those  projected in the
forward-looking  statements  contained in the following discussion and elsewhere
in this report.

       The risks and uncertainties that may affect the operations,  performance,
development,  and results of the Company's business include, but are not limited
to, the following:  (1) heightened competition,  particularly  intensified price
competition,  the entry of new competitors  from the financial  services sector,
and the creation of new products by  competitors;  (2) adverse state and federal
legislation and regulations,  including federal tax laws affecting  individuals,
changes in the taxation of insurance companies, federal legislation allowing the
entry of new competitors from the financial  services sector, and the regulation
of product design and the marketing of those  products;  (3) changes in interest
rates  causing a  reduction  of  investment  income;  (4) general  economic  and
business  conditions  that are less favorable than expected;  (5)  unanticipated
changes in industry  trends;  (6)  inaccuracies in assumptions  regarding future
morbidity,  persistency,  mortality,  and  interest  rates;  and (7) other risks
detailed herein and from time to time in the Company's other reports.

Overview

     The  following  analysis  of the  consolidated  results of  operations  and
financial  condition of the Company should be read in conjunction  with Selected
Financial Data and Financial Statements and related footnotes included elsewhere
herein.

     ALLIED Life Financial  Corporation is an insurance holding company with 56%
of its outstanding voting stock owned by ALLIED Mutual Insurance Company (ALLIED
Mutual).  The financial statements include the accounts of ALLIED Life Insurance
Company (ALLIED Life),  ALLIED Life Brokerage  Agency,  Inc. (ALBA),  and ALLIED
Group   Merchant   Banking   Corporation   (AGMB).   ALLIED  Life  accounts  for
substantially all of the Company's operations and sells primarily life insurance
and annuity products.

     ALLIED Life's  universal  life  insurance  products  provide life insurance
coverages  with  flexible  premium  payments  determined  by  policyholders  and
accumulate  cash value over the  policy  term.  Premiums  received  less  policy
assessments  for  administration  expenses and  mortality  costs are credited to
policyholder  account balances,  to which  tax-deferred  interest is credited at
rates adjusted  periodically by ALLIED Life.  Surrender  charges may be deducted
from the account balances if policies are surrendered  within a specified period
after their effective dates.

     Term life  insurance  policies  provide life  insurance  protection  over a
specified  number of  years.  Policyholders  remit  premiums  for the  insurance
protection but accumulate no cash value.

     Annuity  contracts are products that provide for fixed or variable periodic
benefit  payments that commence  according to contract terms and permit interest
income  to  accumulate  on  a  tax-deferred   basis.   Considerations   paid  by
policyholders  are  credited  to  their  accounts  and  earn  interest  at rates
determined by ALLIED Life. To encourage policy  persistency,  surrender  charges
are imposed against account balances for early termination of annuity contracts.

                                       21
<PAGE>

     In  accordance  with  Generally  Accepted  Accounting   Principles  (GAAP),
universal life insurance premiums received are shown as increases in liabilities
for  policyholder  account balances and not as revenues.  Revenues  reported for
universal  life  products   consist  of  fee  income  from  mortality   charges,
administration  expenses,  and surrender  charges  assessed  against the account
balances.  Surrender benefits paid are reflected as decreases in liabilities for
these  account  balances  and not as  expenses.  Interest  credited  to  account
balances is reported as benefit expenses in the financial statements.

     Premium revenues  reported for term life insurance  products are recognized
as revenues when due.  Benefits  relating to these products are associated  with
earned premiums. They are reported as benefit expenses by means of the change in
the liabilities  for future policy benefits so as to recognize  profits over the
premium-paying periods of the policies.

     Annuity  considerations  received and surrender  benefits paid are shown as
increases and decreases to liabilities for policyholder account balances and are
not shown as revenues  or  expenses.  Revenues  reported  for  annuity  products
consist of surrender  charges  deducted  from  policyholder  accounts.  Expenses
consist of interest credited to account balances.

     A significant source of revenue for ALLIED Life is investment income earned
from  the  funds   deposited   to  accounts  by   universal   life  and  annuity
policyholders,  a portion of which is passed through to these  policyholders  in
the form of interest credited.

     The costs  related to  acquiring  new business  (principally  commissions),
certain costs of issuing  policies,  and certain other variable selling expenses
(defined as deferred  policy  acquisition  costs) are  capitalized and amortized
into expense  primarily in  proportion  to the present  value of expected  gross
profits.  This  amortization is adjusted when ALLIED Life revises its current or
estimated future gross profits.  For example,  deferred policy acquisition costs
are amortized  earlier than originally  estimated when policy  terminations  are
higher  than  expected  and when  investments  are sold at a gain prior to their
anticipated maturity.

     Estimated  future profits and  amortization of costs are reviewed  annually
for  universal  life  insurance  and annuity  products and may be reviewed  more
frequently if  circumstances  dictate.  GAAP requires that the estimated  future
profits and future  amortization  be recomputed  based on actual  experience and
updated expectations of future experience (unlocking). This unlocking may result
in  adjustments  related  to prior  amortization  as well as  changes to ongoing
amortizations rates.

     Death and other  policyholder  benefits  reflect ALLIED Life's  exposure to
mortality risk.  They fluctuate from period to period  according to the level of
claims incurred under ALLIED Life's insurance retention limit.

     Profitability  is primarily  affected by  investment  spread (the excess of
investment  income earned over the amounts  credited as interest to policyholder
accounts),  mortality  experience  (difference between actual and expected death
and other policyholder benefits),  and the ability to control policy acquisition
costs and other operating  expenses.  Because of ALLIED Life's  relatively small
size, its operating results may be affected  significantly by the level of death
and other policyholder benefits incurred in any one reporting period.

     The following  table  reflects  ALLIED Life's  production  information  and
pretax  operating  results  excluding  realized  investment  gains  (losses) and
related  amortization  of  deferred  policy  acquisition  costs  for  the  years
indicated.

     Life insurance operations included in the following analysis should be read
with reference to the table on page 23.

                                       22
<PAGE>


Results of Operations


1997 Compared with 1996

      Consolidated  revenues  for the year ended  December  31,  1997 were $90.3
million,  an 11.8%  increase  over the $80.7  million  reported  for 1996.  Life
insurance premiums and other insurance income net of reinsurance  premiums ceded
rose 12.6% to $9.5 million  from $8.4  million.  Investment  income grew 8.3% to
$52.2  million from $48.2  million.  In 1997 the Company had  realized  gains on
investments of $2.4 million as compared with realized gains of $122,000 in 1996.

<TABLE>
<CAPTION>
                                             Life Insurance Operations

                                                                          Year Ended December 31,

                                                              1997                1996               1995

                                                                         (Dollars in thousands)

Production information
     Life insurance
        <S>                                               <C>                <C>                <C>    
         Life insurance face amount in force
         directly produced by agents
           Universal Life                                 $  4,575,824       $  4,340,601       $  4,215,564
           Term life                                         4,611,799          4,198,504          3,415,536
           Whole life                                           51,118             49,079             50,180

                                                             9,238,741          8,588,184          7,681,280
         Other                                                 390,899            371,130            433,236

                                                          $  9,629,640       $  8,959,314       $  8,114,516


       Face amount of new life insurance sold
         directly produced by agents
           Universal Life                                 $    574,920       $    410,635       $    609,700
           Term life                                         1,285,370          1,475,977          1,223,544
           Whole life                                            7,198              4,239              4,511

                                                             1,867,488          1,890,851          1,837,755
         Other                                                   8,266              9,431             21,549


                                                          $  1,875,754       $  1,900,282         $1,859,304


       Life insurance termination rate
           Universal Life                                          7.1%               6.1%               6.7%
           Term life                                              19.7%              18.2%              18.9%


     Annuities

       Account balance                                    $    514,908       $    467,505       $    412,216

       First-year annuity premiums                        $     71,509       $     68,063       $     75,944


</TABLE>

                                       23
<PAGE>


                                       Life Insurance Operations (continued)

<TABLE>
<CAPTION>


                                                                          Year Ended December 31,
                                                              1997                1996               1995
                                                                  (Dollars in thousands)
<S>                                                      <C>                <C>                 <C>            

Profitability
     Investment income                                    $     52,131       $     48,145       $     45,215

     Interest credited on
       Annuities                                                26,452             24,732             22,613
       Universal life                                           10,126              9,490              9,530
       Other                                                       479                464                324

         Total interest expense                                 37,057             34,686             32,467

         Investment spread                                      15,074             13,459             12,748

     Fee income
       Universal life charges                                   23,898             22,410             21,586
       Annuity surrender charges                                   739                495                662


         Total fee income                                       24,637             22,905             22,248

     Other insurance income                                      9,505              8,445              7,686

       Adjusted insurance revenues                              49,216             44,809             42,682

     Other expenses
       Amortization of deferred policy
         acquisition costs (1)                                   9,578             10,730              6,036
       Renewal commissions                                       3,258              2,675              2,437
       Other insurance operating expenses                        4,875              4,505              3,973
       Premium and other taxes                                   1,830              1,343              1,528
       Administrative fees                                         520                508                309

         Total acquisition and operating expenses               20,061             19,761             14,283

       Death benefits, net                                       8,192              6,945              6,894
       Other policyholder benefits, net                          6,141              6,357              6,702

         Total other expenses                                   34,394             33,063             27,879

     Insurance operating income before income
       taxes and realized investment gains (losses)       $     14,822       $     11,746       $     14,803




<FN>
(1) Amounts exclude  amortization of deferred policy acquisition costs resulting
from net realized investment gains  (losses).  In 1996,  amortization  includes
an additional  charge of $2.8 million relating to unlocking of deferred policy
acquisition costs.
</FN>
</TABLE>

     Operating income before taxes (which excludes realized investment gains and
losses net of related  amortization  of deferred policy  acquisition  costs) was
$14.9 million for 1997 compared with $11.8 million in 1996.  Operating  earnings
per share were $1.82  compared  with $1.35.  Net income  totaled  $10.5  million
($1.94 per share) compared with $8.1 million ($1.39 per share). Operating income
before taxes for 1996  included an  adjustment  to deferred  policy  acquisition
costs of $2.8 million  reflecting changes in assumptions used to estimate future
gross  profits  on  certain  blocks  of  annuity  business.  The  effect  of the
adjustment was to decrease operating earnings per share by $0.40.


                                       24
<PAGE>



Life Insurance Operations

       Total life  insurance in force grew 7.5% to $9.6  billion at December 31,
1997 from $9 billion at December 31, 1996. Growth was slowed by lower term life
insurance sales.

       The face  amount of new life  insurance  sold  directly by agents in 1997
remained even at $1.9 billion.  The face amount of new universal  life insurance
sold increased 40% to $574.9 million from $410.6 million. Universal life account
balances  increased  7.7% at  year-end  1997  from  year-end  1996.  Fee  income
increased 7.6% in 1997 to $24.6 million from $22.9 million in 1996.

       The face  amount  of new term  life  insurance  sold  directly  by agents
decreased 12.9% to $1.3 billion from $1.5 billion. ALLIED Life continues to sell
mainly 10- and 20-year  guaranteed  rate term life policies  within this product
line.

       First-year  annuity  premiums  increased 5.1% to $71.5 million from $68.1
million in 1996.  Sales of fixed  interest  annuities  were slowed in the fourth
quarter by a flat interest yield curve,  which allowed banks and other financial
institutions to offer  short-term  certificates  of deposit at more  competitive
interest  rates.  The total annuity  account  balance  increased 10.1% to $514.9
million at year-end 1997 from $467.5 million at year-end 1996.

       Adjusted  insurance revenues increased 9.5% to $49.2 million in 1997 from
$44.9  million in 1996.  The increase was  primarily  attributable  to increased
investment spread, which grew 11% to $15.1 million from $13.6 million.  Invested
assets at cost increased 5.8% to $755.6 million at December 31, 1997 from $714.1
million at December 31, 1996; in 1997,  investment income increased 8.3%. ALLIED
Life's return on invested assets decreased to 7.3% in 1997 from 7.4% in 1996.

       Annual  average  interest-credited  rates  on  universal  life  contracts
decreased  to 5.3% from 5.4% and on annuities  decreased to 5.4% from 5.6%.  The
ratio of investment  spread to investment  income  increased to 28.9% from 28.2%
despite the  volatile  interest  rate  environment  during  1997.  This ratio is
evidence of ALLIED Life's ability to adjust  interest  credited to  policyholder
accounts to reflect trends in investment earnings.

       Death benefits net of reinsurance increased 18% to $8.2 million from $6.9
million.  Other  policyholder  benefits decreased 3.4% to $6.1 million from $6.4
million. Other insurance operating expenses increased 9% to $4.4 million from $4
million.

       Amortization of deferred policy  acquisition costs (DPAC) decreased 10.7%
in 1997 to $9.6 million from $10.7 million in 1996.  Included in the 1996 amount
was an  adjustment  of $2.8  million  taken by the  Company as the result of its
annual DPAC study that suggested  refinements in assumptions  concerning  future
annuity policy persistency and interest rate spreads were necessary.

       While the Company continues to re-evaluate the DPAC assumptions,  it does
not anticipate  making  additional  material  adjustments  to DPAC  amortization
schedules in the foreseeable future. Further adjustments would be necessary only
if actual  experience should differ  significantly  from the assumptions used in
the DPAC study models.

     Primarily due to the DPAC adjustment taken in 1996, ALLIED Life's operating
income in 1997 grew 26.2% to $14.8 million from $11.7 million.

                                       25
<PAGE>

Results of Operations

1996 Compared with 1995

     Consolidated  revenues  for the year  ended  December  31,  1996 were $80.7
million,  a 7.2% increase over the $75.3 million  reported in 1995. The increase
was  attributable to life insurance  premiums and other insurance  income net of
reinsurance  premiums  ceded that rose 9.9% due to increased  sales of term life
insurance. Investment income increased 6.1% to $48.2 million from $45.4 million.
In 1996 the Company had  realized  investment  gains of $122,000  compared  with
realized losses of $722,000 in 1995.

     Operating income before taxes (which excludes realized investment gains and
losses net of related amortization of deferred policy acquisition costs) for the
year included an adjustment to deferred policy acquisition costs of $2.8 million
reflecting  changes in  assumptions  used to estimate  future  gross  profits on
certain  blocks of annuity  business.  Including the adjustment of $2.8 million,
operating  income  before taxes was $11.8  million  compared  with $14.9 million
reported in 1995. Operating earnings per share including the adjustment of $0.40
per share were $1.35 compared with $1.85. Net income totaled $8.1 million ($1.39
per share) in 1996 and was $9.7 million ($1.75 per share) in 1995.

 Life Insurance Operations


     Total life insurance in force grew 10.4% to $9 billion at December 31, 1996
from $8.1 billion at December 31, 1995. The increase was due to policy retention
and new term life insurance sales.

     The face  amount  of new life  insurance  sold  directly  by agents in 1996
increased 2.9% to $1.9 billion from $1.8 billion in 1995. The face amount of new
universal  life  insurance  sold  decreased  32.6% to $410.6 million from $609.7
million.  Universal life account  balances  increased 8.3% at year-end 1996 from
year-end  1995.  Fee income  increased 3% to $22.9 million from $22.2 million in
1995.

     The  face  amount  of new term  life  insurance  sold  directly  by  agents
increased 20.6% to $1.5 billion in 1996 from $1.2 billion in 1995. Sales of term
insurance with 10- and 20-year guaranteed rates were strong during 1996.

     First-year  annuity  premiums  decreased  10.4% to $68.1 million from $75.9
million in 1995.  The lower sales were caused by a flat  interest  yield  curve,
which  allowed  banks  and  other  financial  institutions  to offer  short-term
certificates of deposit at more  competitive  interest rates.  The total annuity
account  balance  increased 13.4% to $467.5 million at year-end 1996 from $412.2
million at year-end 1995.

     Adjusted  insurance  revenues  increased 5.3% to $44.9 million in 1996 from
$42.7  million in 1995.  The increase was  primarily  attributable  to increased
investment spread and other insurance income (due to term life insurance sales).
The  growth  in life  insurance  in  force  and  policyholder  account  balances
permitted  invested  assets  at cost to  increase  12.2% to  $714.1  million  at
December 31, 1996 from $636.7  million at December 31, 1995.  Investment  income
increased by 6.5%.  ALLIED Life's return on invested assets decreased to 7.4% in
1996 from 7.8% in 1995.

     Investment spread grew to $13.6 million from $12.7 million.  Annual average
interest-credited  rates on universal life contracts decreased to 5.4% from 5.9%
and on annuities  decreased to 5.6% from 5.9%. The ratio of investment spread to
investment income remained even at 28.2%.

                                       26
<PAGE>


     Death  benefits  net  of  reinsurance  remained  at  $6.9  million.   Other
policyholder  benefits  decreased  5.1% to $6.4  million  from $6.7  million  as
decreases in reserves for  supplemental  contracts and single premium  immediate
annuities with life  contingencies  more than offset the increase in reserves on
new term life sales and policyholder  bonus reserves on universal life products.
Other  insurance  operating  expenses  increased  9.1% to $4  million  from $3.7
million.

     Amortization of DPAC was $10.7 million in 1996. Included in that amount was
an  adjustment  taken by the Company of $2.8 million as the result of its annual
DPAC study. DPAC amortization was $6 million in 1995.

     Primarily due to the increase in DPAC amortization, operating income before
taxes decreased to $11.7 million in 1996 from $14.8 million in 1995.

Liquidity and Capital Resources

ALLIED Life Financial Corporation

     As an insurance holding company,  ALFC relies on dividends from ALLIED Life
to make dividend  payments to its preferred  and common  stockholders.  Retained
earnings of ALLIED Life available for  distribution  as dividends to ALLIED Life
Financial  Corporation  are  limited  by law.  Under  the Iowa  Insurance  Code,
dividends may be paid by ALLIED Life only from statutory  earned surplus,  which
as of December 31, 1997 was $21.3 million. In addition,  ALLIED Life may not pay
an  extraordinary  dividend  with-out  prior  notice to and approval of the Iowa
Insurance Commissioner.  An extraordinary dividend is defined as any dividend or
distribution  of cash or other  property  whose fair market value  together with
that of other dividends or distributions made within the preceding twelve months
exceeds the greater of

       (i) 10% of  statutory  policyholders'  surplus as of  December  31 of the
           preceding year

       (ii)the  statutory  net  gain  from  operations  of the  insurer  for the
           twelve-month period ending December 31 of the preceding year.

     During 1998, the maximum amount  available for  distribution to the Company
from ALLIED Life is approximately $9 million. During 1997, the Company paid cash
dividends of $1.2 million to common and preferred stockholders. ALLIED Life paid
to the  Company  dividends  of $1.8  million  primarily  to fund  the  Company's
dividend requirement and its note payments on indebtedness to affiliates.

     Annual  dividends  payable  on  the  currently   outstanding  6.75%  Series
preferred stock are approximately $1.6 million.  In accordance with the terms of
the 6.75%  Series  preferred  stock,  the Company may pay  dividends  thereon by
issuing  additional  shares of such stock for any quarter  ending on or prior to
September 30, 1998. In 1997,  the Company paid  dividends in the form of 148,402
shares of 6.75% Series preferred stock.

     Effective May 13, 1997, the Board of Directors  approved a stock repurchase
program  to acquire  shares of  Company  common  stock on the open  market.  The
Company  completed the program during the second  quarter of 1997,  repurchasing
and cancelling 150,000 shares at an average cost of $16.52 per share.

                                       27
<PAGE>


Consolidated

     Life  insurance  companies  generally  produce  a  positive  cash flow from
operations.  Its adequacy is measured by  liquidity.  There should be sufficient
cash to meet benefit  obligations to policyholders and normal operating expenses
as they are incurred and  sufficient  excess to help meet future policy  benefit
payments and to write new business.  ALLIED Life's liquidity  position continued
to be favorable in 1997,  with cash inflows at levels  sufficient to provide the
funds  necessary  to  meet  obligations.  The  Company's  cash  inflows  consist
primarily of deposits to  policyholder  account  balances;  proceeds from sales,
maturities and calls of investments; and repayments of investment principal. The
Company's  cash  outflows   primarily  are  related  to   policyholder   account
withdrawals,   investment  purchases,  policy  acquisition  costs,  policyholder
benefits, and current operating expenses.  These outflows are typically met from
normal annual premium and net investment cash inflows.

     Company  operations  provided  cash inflows of $9.4 million in 1997,  $16.6
million  in 1996,  and  $11.7  million  in 1995.  Cash  inflows  from  financing
activities  amounted to $32.5 million,  $62.4 million,  and $73.3 million during
1997, 1996, and 1995, respectively. These funds and the excess operating inflows
were  used  primarily  to  increase  the  Company's  fixed  maturity  investment
portfolio.

     Matching the  investment  portfolio  maturities to the cash flow demands of
the  insurance  coverages  being  provided is an  important  consideration.  The
Company  continually  monitors  benefit and claims  statistics to project future
cash requirements.

     As part of this monitoring process,  the Company performs cash-flow testing
of its assets and liabilities  under various  scenarios to evaluate the adequacy
of reserves.  In developing its investment  strategy,  the Company establishes a
level of cash and  securities  that when combined with expected net cash inflows
from operations, maturities of fixed maturity investments, principal payments on
amortizing securities,  and its insurance products is believed to be adequate to
meet   anticipated   short-term  and  long-term   benefit  and  expense  payment
obligations.

     As of December 31, 1997,  97.2% of the Company's  investments were in fixed
maturities.  The  investment  policy  for the  Company  requires  that the fixed
maturity  portfolio  be invested  primarily in debt  obligations  rated "BBB" or
higher when they are acquired.  Of the Company's fixed maturity investments held
at year-end 1997, 84.2% were rated "A" or better;  less than 1% were rated below
investment grade (below "BBB").

     The Company's fixed maturity  portfolio  includes  collateralized  mortgage
obligations  (CMOs).  CMOs consist of pools of mortgages  divided into  tranches
that provide sequential retirement of bonds. To provide call protection and more
stable  average lives,  the Company  invests  primarily in planned  amortization
classes (PACs) and sequential-pay  bonds that generally provide more predictable
cash  flows  within  a  range  of  prepayment  speeds  by  shifting  some of the
prepayment risks to support tranches.

     At  year-end  1997,  all  of  the  Company's  CMOs  were   investment-grade
securities.  They were carried at a fair value of $55.4 million;  88.3% of these
investments  were in PAC and  sequential-pay  bonds.  All of the  Company's  CMO
investments  have  an  active  secondary  market;  therefore,  their  effect  on
liquidity  is not  expected to differ  from the effect of other  fixed  maturity
investments.

     Effective May 13, 1997, the Company  transferred  its remaining  securities
classified  as held to  maturity  ($196  million)  to  available  for  sale.  In
accordance  with  Statement of Financial  Accounting  Standards  (SFAS) 115, the
Company now carries all of its  securities  at fair value;  as a result,  a $1.2
million  increase to  stockholders'  equity was recognized.  The Company now has
more  flexibility  in selling  securities  from its  investment  portfolio.  The
Company has no intent to classify  future  purchases  of  securities  as held to
maturity.

                                       28
<PAGE>

     The Company has a line of credit  agreement with the Federal Home Loan Bank
that provides  additional  liquidity.  The agreement makes $25 million available
through  March 13, 1998.  At December 31, 1997,  the Company had an  outstanding
borrowing  of $6.4  million  under the line of  credit  agreement.  Interest  is
payable at the current rate upon  issuance.  From time to time,  the Company has
borrowed funds from its  affiliates on an  arm's-length  basis.  The Company has
entered various  note-payable  agreements with ALLIED Mutual, an affiliate.  The
outstanding borrowing at December 31, 1997 was $3.6 million.

     Management  anticipates  that funds to meet the  Company's  short-term  and
long-term capital  expenditures,  cash dividends,  and operating cash needs will
come from existing  capital and internally  generated  funds. As of December 31,
1997,  the Company  had no material  commitments  for capital  expenditures.  As
additional  capital needs arise,  the Company will consider taking on additional
debt or issuing equity. Specific methods for meeting such needs will depend upon
financial market conditions at the time.


Effects of Inflation and Interest Rate Changes


     Management  does  not  believe  inflation  has  had a  material  effect  on
consolidated  results  of  operations.  To  reduce  exposure  to  interest  rate
fluctuations,  management  attempts  to  invest  new  funds in  securities  with
expected durations that match related policyholder obligations.

     As a rule,  the  fair  value  of the  Company's  fixed  maturity  portfolio
increases or decreases in inverse  relationship  with  fluctuations  in interest
rates while investment  income moves in direct  relationship  with interest rate
changes.  For example, if interest rates decrease,  the Company's fixed maturity
investments  generally will increase in value.  Investment  income, on the other
hand,  will decrease as fixed  maturity  investments  mature or are sold and the
proceeds are reinvested at the lower interest rates.

     Interest  rate changes and the slope of the yield curve may have  temporary
effects on the sale and profitability of the universal life and annuity products
offered  by  ALLIED  Life.  For  example,  if  interest  rates  rise,  competing
investments  may  become  more  attractive  to  potential  purchasers  until the
interest  rates credited to  policyholder  account  balances are  increased.  If
interest rates fall,  profitability  will be affected  negatively until credited
rates are adjusted to compensate  for the decline in investment  income.  ALLIED
Life sells universal life and annuity  contracts that generally  permit flexible
responses to interest rates, which are monitored frequently.


Hedging Activities

     In June 1996,  the Company  began  interest rate hedging  programs  whereby
certain  derivative  financial  instruments  including cash settle put swaptions
(swaptions)  and interest  rate floors  (floors) were  purchased.  Swaptions are
being purchased to reduce the negative effect of increased  withdrawal  activity
related  to the  Company's  annuity  liabilities  that may result  from  extreme
increases in interest rates.  They entitle the Company to receive  payments from
the  instruments'  counterparties  on future  reset dates if the  interest  rate
(which is  directly  tied to the 5-year  constant  maturity  swap  curve) on any
expiration  date is above a specified  fixed rate (8.8% to 10.5% for instruments
entered into as of December 31, 1997).

     Floors are being  purchased to reduce the  negative  effect that may result
from  extreme  decreases  in  interest  rates to a level  below  the  guaranteed
interest  rates provided for in the universal  life  insurance  contracts.  They
entitle the Company to receive payments from the instruments'  counterparties on
future reset dates if the interest  rate (which is tied  directly to the 10-year
constant  maturity  treasury  curve) on the expiration date is below a specified
fixed rate (5.0% for instruments entered into as of December 31, 1997).

                                       29
<PAGE>

     Premiums paid to purchase these instruments are capitalized and included in
other  invested  assets.  No swaptions or floors were purchased in 1997. For the
year ended  December  31, 1996,  the Company paid $4.1 million in premiums.  All
such premiums are amortized  into income over the term of the  instruments  on a
straight-line  basis.  Gains and losses on these  instruments and related assets
are not recorded in income until realized. For more information on swaptions and
floors see Note 3 of Notes to Consolidated Financial Statements.

     The Company's  equity  indexed  annuity  products  guarantee  customers the
return of principal.  Interest  credited is based on a percentage of the gain of
the S&P 500 Index(R).  A portion of the premium is used to purchase S&P 500 call
options (call options) to hedge the growth in interest  credited to the customer
if there are advances in the S&P 500 Index(R).

     Premiums  paid to purchase  call  options are  capitalized  and included in
other assets.  For the years ended  December 31, 1997 and 1996, the Company paid
$6.4 million and $2.3 million, respectively, in premiums. Premiums are amortized
as an expense over the term of the instruments on a straight-line  basis.  Gains
and losses on these  instruments  and related  liabilities  are not  recorded in
income until realized.  For more information on call options see Note 3 of Notes
to Consolidated Financial Statements.

     The Company is exposed to the risk of extreme  declines in the market value
of its call  options  if there is a sharp and  prolonged  decrease  in the stock
market.  The Company  currently is purchasing puts to reduce the negative effect
of such a decline.  The put agreements  allow the Company to receive payments on
future exercise dates if the S&P 500 Index(R) is below specified levels.

     The costs of the interest rate hedging  programs are not expected to have a
material  impact on the interest  rate margin.  The Company does not  anticipate
making any further  purchases of interest  rate hedges in the near  future.  For
swaptions, floors, call, and puts the Company pays only the original premium and
is not at risk of further payments regardless of market conditions.

     The  Financial   Accounting   Standards  Board  (FASB)  is  evaluating  the
accounting and  disclosure  requirements  for hedging  activities and derivative
financial  instruments.  It is likely the resulting  accounting  standards  will
require  that these  instruments  be carried at fair  value.  The impact of such
standards  on the  Company  is not  expected  to be  material  to its  financial
position or results of operations.

     The Company is exposed to the risk of losses in the event of nonperformance
of the  counter-parties  of the  previously  described  swaptions,  floors,  and
options.  Losses recorded in the Company's financial  statements in the event of
nonperformance  are limited to the  unamortized  premium  paid to  purchase  the
instruments.  Economic  losses will be measured by the net  replacement  cost of
such  instruments  or by  their  fair  value  if the net  fair  value  is in the
Company's   favor.   The  Company   limits  its   exposure  to  such  losses  by
diversification among reputable counterparties with appropriate credit ratings.

Contingencies

     On January 20, 1998,  a complaint  was filed by  Sharlotte  G.  Harbott,  a
policyholder  of ALLIED Life, in Superior  Court of the State of California  for
the County of Los Angeles,  against the Company, ALLIED Life, ALLIED Mutual, and
unnamed  persons.  The  complaint,  an alleged  class action suit,  asserts that
ALLIED  Life  fraudulently  increased  the cost of  insurance  rates  charged to
policyholders  in  breach  of the  terms of its  universal  life  policies,  its
fiduciary obligations, and its obligations of good faith and fair dealing toward
its policyholders and without adequate notice. The plaintiff, an insured under a
universal life policy issued by ALLIED Life,  seeks actual,  consequential,  and
punitive damages in unspecified amounts as well as interest, attorney's fees, an
accounting  for  moneys  allegedly  improperly  charged  to  policyholders,  and
injunctive relief on behalf of herself and all policyholders of ALLIED Life with
similar universal life policies.

                                       30
<PAGE>

     The Company  believes  the  allegations  relate to a claim that ALLIED Life
collected a federal tax, known as the deferred  acquisition  cost tax (DAC tax),
as well as other increased costs of doing business from its  policyholders.  The
Company  believes  the  amount of DAC tax and other  costs  claimed to have been
collected from each  policyholder is minimal,  but the plaintiff in the case has
asked the California court to treat the case as a class action  representing all
ALLIED Life  policyholders  from whom the claimed costs were collected.  Similar
class actions have been filed against other life insurance  companies  since the
federal DAC tax law was enacted in 1990.  The Company  believes  the action will
raise the issue of whether the DAC tax may be included in the cost of  insurance
charged  to  policyholders  under the  terms of the  universal  life  contracts.
Management  believes the increased costs charged to policyholders never violated
the contracts.

   The  Company  believes  that the  increased  costs  complained  of  relate to
universal  life  policies  issued  during and prior to 1991 and that ALLIED Life
charged the increased costs to universal life policyholders primarily during the
1992 through 1995  accounting  periods.  The  Company,  ALLIED Life,  and ALLIED
Mutual do not  expect the  lawsuit  to  materially  affect  their  claims-paying
ratings or daily  business  operations.  The Company,  ALLIED  Life,  and ALLIED
Mutual disagree with the allegations,  believe the claims presented in this case
are without merit, and believe the resolution of this matter will not materially
affect the Company's financial position.

Year 2000 Issue

   The Company is aware of the problems  associated with the programming code in
existing  computer  systems as the millennium (year 2000)  approaches.  The year
2000 problem is pervasive and complex as virtually every computer operation will
be  affected  in some way by the  rollover  of the  two-digit  year value to 00.
Computer  systems must properly  recognize  date-sensitive  information when the
year changes to 2000.  Systems that do not properly  recognize such  information
could generate erroneous data or cause a system to fail.

   The Company has assessed all computer systems as they relate to the year 2000
issue.  The Company  has  formulated  a plan to resolve  the issue.  Appropriate
internal and external  resources  have been  acquired and dedicated to implement
the plan.  The Company  believes  that  testing of the systems will be finalized
before  the year 2000 and will not have a  significant  effect on the  Company's
ability to conduct business in a reasonable fashion. Anticipated expenditures
for year 2000 compliance are not expected to be material to fiscal year 1998
and 1999 operations.

Emerging Regulatory Issues


   The Company's  insurance  subsidiary is subject to regulation and supervision
by the states in which it is admitted to transact business. State insurance laws
generally  establish   supervisory   agencies  with  broad   administrative  and
supervisory  powers  related to  granting  and  revoking  licenses  to  transact
business,  establishing guaranty fund associations,  licensing agents, approving
policy forms, regulating premium rates for some lines of business,  establishing
reserve  requirements,  prescribing  the form and content of required  financial
statements and reports, determining the reasonableness and adequacy of statutory
capital  and  surplus,  and  regulating  the  type  and  amount  of  investments
permitted.

   Recently,  the insurance regulatory framework has received increased scrutiny
from various states,  the federal  government,  and the National  Association of
Insurance  Commissioners  (NAIC).  The NAIC has  recommended  to the  states for
adoption and implementation  several regulatory  initiatives,  none of which are
expected to have a material impact on ALLIED Life.

                                       31
<PAGE>


New Accounting Standards


     In 1997,  the Company  adopted  SFAS 128,  "Earnings  Per Share."  SFAS 128
supersedes  Opinion 15,  "Earnings Per Share," and  specifies  the  computation,
presentation,  and  disclosure  requirements  for earnings  per share (EPS).  It
replaces the  presentation  of primary EPS and fully  diluted EPS with basic EPS
and diluted EPS, respectively. Basic EPS includes the weighted average number of
common  shares  outstanding  and excludes all dilutive  securities.  Diluted EPS
reflects  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common  stocks were  exercised or converted to common  stock.
Prior year amounts have been restated to conform to the new standard.

     In 1997,  the Company  adopted  SFAS 125,  "Accounting  for  Transfers  and
Servicing  of  Financial  Assets  and   Extinguishments  of  Liabilities."  This
statement  provides  consistent   standards  for  distinguishing   transfers  of
financial assets that are sales from transfers that are secured borrowings. This
adoption  had  no  impact  on  the  Company's  financial  position,  results  of
operations, or liquidity.

     In June of  1997,  the  FASB  issued  SFAS  130,  "Reporting  Comprehensive
Income." This statement  establishes  new rules for the reporting and display of
comprehensive  income  and  its  components  in a full  set  of  general-purpose
financial  statements.  The new rules require that all items that are recognized
under accounting  standards as components of comprehensive income be reported in
a  financial  statement  that is  displayed  with the same  prominence  as other
financial  statements.  SFAS 130 is effective for fiscal years  beginning  after
December 15, 1997.  Earlier  application  of this  statement is  permitted.  The
Company  will adopt SFAS 130 on January 1, 1998.  This  statement  will  require
revised  and  additional  disclosures  but will have no effect on the results of
operations or the financial position of the Company.

     In June of 1997, the FASB issued SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information." Under this statement, public companies will
report  financial and descriptive  information  about their operating  segments.
SFAS 131 is  effective  for fiscal  years  beginning  after  December  15, 1997.
Earlier application of this statement is permitted.  The Company will adopt SFAS
131 on January 1, 1998.  This  statement  will  require  revised and  additional
disclosures  but  will  have no  effect  on the  results  of  operations  or the
financial position of the Company.

     In December of 1997, 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."  This statement provides
guidance on when an insurance or other  enterprise  should recognize a liability
for guaranty fund and other  assessments  and on how to measure such  liability.
SOP 97-3 is  effective  for fiscal  years  beginning  after  December  15, 1998.
Earlier  application of this statement is permitted.  The Company will adopt SOP
97-3 on January 1, 1999.  Management  expects that such adoption will not have a
material  impact on the  financial  position  or  results of  operations  of the
Company  since the  majority of guaranty  fund  assessments  are  expected to be
recovered through future premium tax offsets.


                                       32
<PAGE>

Item 8.    Financial Statements and Supplementary Data


Report of Management


     The management of ALLIED Life Financial Corporation and its subsidiaries is
responsible for the accompanying  financial information appearing in this annual
report. The consolidated  financial  statements have been prepared in conformity
with generally accepted  accounting  principles and include amounts based on the
best estimates and judgments of management.

     The Company maintains a system of internal  accounting controls designed to
provide  reasonable  assurance that assets are safeguarded and  transactions are
properly authorized and recorded. Management continually monitors these internal
accounting  controls,  modifying and improving  them as business  conditions and
operations  change. An internal audit department also evaluates the adequacy and
effectiveness  of  internal   accounting  controls  and  measures  adherence  to
established  policies and  procedures.  The  management of ALLIED Life Financial
Corporation  believes  that as of  December  31,  1997 the  Company's  system of
internal accounting controls was adequate to accomplish the objectives discussed
herein.

     The Company's  financial  statements for the years ended December 31, 1997,
1996, and 1995 have been audited by KPMG Peat Marwick LLP, independent certified
public  accountants.  The audits were  conducted in  accordance  with  generally
accepted  auditing  standards  and  included  a  consideration  of the system of
internal  accounting  controls to the extent necessary to express an independent
opinion on the financial statements.

     The audit committee of the Board of Directors,  comprised solely of outside
directors,  meets  regularly  with the  independent  auditors,  management,  and
internal  auditors to review the scope and results of the audit work  performed.
The  internal  auditors  and  independent  auditors  have  access  to the  audit
committee  to discuss  the  results  of the  audit,  the  adequacy  of  internal
accounting controls, and the quality of financial reporting.

/s/Samuel J. Wells
Samuel J. Wells
President


/s/Wendell P.Crosser
Wendell P. Crosser
Treasurer


/s/Donald J. Iverson
Donald J. Iverson
Chief Actuary


                                       33
<PAGE>


Independent Auditors' Report



The Board of Directors and Stockholders

ALLIED Life Financial Corporation


      We have audited the  accompanying  consolidated  balance  sheets of ALLIED
Life Financial Corporation and subsidiaries as of December 31, 1997 and 1996 and
the related consolidated  statements of income,  stockholders'  equity, and cash
flows for each of the years in the  three-year  period ended  December 31, 1995.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based upon 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 consolidated  financial statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present fairly, in all material respects,  the financial position of ALLIED Life
Financial  Corporation and subsidiaries as of December 31, 1997 and 1996 and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.




/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP


Des Moines, Iowa

February 12, 1998


                                     34
<PAGE>

Consolidated Statements of Income
<TABLE>
<CAPTION>

                                                                 Year ended December 31,


                                                     1997                 1996               1995

                                                          (In thousands, except per share data)
<S>                                              <C>                 <C>                <C>            
Revenues
Insurance revenues
   Policyholder assessments on
     universal life contracts                     $     21,926        $     20,727       $     20,011
   Surrender charges                                     2,711               2,177              2,237
   Life insurance premiums                              14,201              13,005             12,568
   Other insurance income                                5,946               3,948              2,878
   Reinsurance premiums ceded                          (10,641)             (8,507)            (7,760)


         Total insurance revenues                       34,143              31,350             29,934

Investment income (notes 2 and 4)                       52,197              48,182             45,411
Realized investment gains (losses) (note 2)              2,354                 122               (722)
Other income                                             1,558               1,056                688

                                                        90,252              80,710             75,311

Benefits and Expenses
Policyholder benefits
   Interest credited to policyholder
     account balances
       Annuity contracts                                26,452              24,732             22,613
       Universal life contracts                         10,127               9,490              9,530
       Other                                               479                 463                324
   Death benefits                                       12,041              10,046             13,035
   Other policyholder benefits                           5,856               7,388              6,702
   Reinsurance recoveries                               (3,563)             (4,131)            (6,141)

         Total policyholder benefits                    51,392              47,988             46,063
Amortization of deferred policy
   acquisition costs                                    11,097              10,595              5,941
Commissions                                              4,232               3,316              2,725
Affiliated operating expenses (note 4)                     640                 839              1,411
Other insurance operating expenses                       7,192               5,962              4,902

                                                        74,553              68,700             61,042

Income before income taxes                              15,699              12,010             14,269

Income Taxes (note 13)
   Current                                               6,206               5,797              4,673
   Deferred                                               (980)             (1,860)              (116)

                                                         5,226               3,937              4,557

Net Income                                          $   10,473        $      8,073       $      9,712

Net income applicable to
common stock (diluted basis)                        $    8,862        $      6,567       $      8,304

Earnings per Share

Basic earnings per share                            $     1.98        $       1.41       $       1.78

Diluted earnings per share                          $     1.94        $       1.39       $       1.75

</TABLE>

           See accompanying Notes to Consolidated Financial Statements

                                       35
<PAGE>

<TABLE>

Consolidated Balance Sheets
<CAPTION>

                                                                            December 31,
                                                                     1997                  1996
                                                                              (In thousands)
<S>                                                              <C>                <C>                
Assets
Investments
   Fixed maturities (notes 2 and 5)
     Held to maturity, at amortized cost                         $         -----     $      199,209
     Available for sale, at fair value                                   766,028            500,289
   Equity securities, at fair value (notes 2 and 5)                        3,201              6,407
   Mortgage loans on real estate                                             984              1,457
   Policy loans                                                           11,164             10,307
   Other invested assets (notes 3 and 5)                                   3,014              3,751
   Short-term investments, at cost (notes 2, 4, and 5)                     3,594                919


         Total investments                                               787,985            722,339

Accrued investment income                                                 10,988              9,738
Accounts receivable                                                          912                608
Reinsurance ceded receivables                                              7,168              5,786
Deferred policy acquisition costs                                         84,188             92,418
Other assets (notes 3 and 5)                                              13,216              4,711


         Total assets                                            $       904,457     $      835,600

</TABLE>

                                       36
<PAGE>

<TABLE>
<CAPTION>

                                                                              December 31,
                                                                         1997              1996

                                                                              (In thousands)

<S>                                                                 <C>               <C>                
Liabilities
Policy liabilities
   Policyholder account balances
      Annuity contracts (note 5)                                     $     514,908    $     467,505
      Universal life contracts (note 5)                                    196,709          182,727
         Other                                                               7,732            8,846
   Future policy benefits                                                   38,124           33,474
   Policy and contract claims                                                4,102            3,735
   Other policyholder funds                                                  1,778            1,576

                                                                           763,353          697,863

Checks drawn in excess of bank balances                                      2,066            3,163
Current income taxes                                                            23              941
Deferred income taxes (note 13)                                             10,552            8,009
Indebtedness to affiliates (note 4)                                          3,638            2,188
Note payable (notes 5 and 12)                                                6,360           20,470
Other liabilities                                                            4,308            3,024


      Total liabilities                                                    790,300          735,658

Stockholders' Equity

Preferred stock, no par value, issuable in series, authorized 7,500 shares (note 7)
      6.75% Series, authorized 2,440 shares, issued and
      outstanding of 2,292 in 1997 and 2,144 in 1996                        24,869           23,259
      ESOP Series, authorized 300 shares, issued and
      outstanding of 101 in 1997 and 94 in 1996                              1,467            1,327
Common stock, no par value, $1 stated value,
   authorized 25,000 shares, issued and outstanding
   of 4,398 in 1997 and 4,497 in 1996 (notes 8 and 9)                        4,398            4,497
Additional paid-in capital                                                  44,964           46,596
Retained earnings (note 10)                                                 29,404           21,751
Unrealized appreciation of investments, net (notes 6 and 14)                 9,055            2,512

      Total stockholders' equity                                           114,157           99,942

Contingent liabilities (notes 6 and 14)

      Total liabilities and stockholders' equity                     $     904,457    $     835,600


</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       37
<PAGE>



Statements of Stockholders' Equity
<TABLE>
<CAPTION>

                                                                  Year ended December 31,
                                                          1997             1996             1995
                                                                        (In thousands)

<S>                                                  <C>              <C>               <C>         
Preferred Stock at beginning of year                 $     24,586     $       22,871    $     21,341
Issuance of shares of 6.75% Series for
   stock dividends (note 7)                                 1,610              1,506           1,408
Issuance of shares of ESOP Series, net of
   redemptions and issuance costs (note 7)                    317                249             194
ESOP Series converted to common stock (note 7)               (177)               (40)            (72)

     Preferred stock at end of year                        26,336             24,586          22,871


Common Stock at beginning of year                           4,497              4,633           4,586
Issuance of shares of common stock
   (notes 7, 8, and 9)                                         51                 14              47
Repurchase of shares of common stock (note 8)                (150)              (150)          -----

     Common stock at end of year                            4,398              4,497           4,633


Additional Paid-in Capital at beginning of year            46,596             48,774          48,159
Issuance of shares of common stock,
   net of issuance costs                                      696                214             615
Repurchase of shares of common stock (note 8)              (2,328)            (2,392)          -----

     Additional paid-in capital at end of year             44,964             46,596          48,774


Retained Earnings at beginning of year                     21,751             16,238           8,804
Net income                                                 10,473              8,073           9,712
Dividends paid on preferred stock (notes 7 and 10)         (1,717)            (1,601)         (1,493)
Dividends paid on common stock (notes 8 and 10)            (1,103)              (959)           (785)

     Retained earnings at end of year                      29,404             21,751          16,238


Unrealized Appreciation (Depreciation)
   of Investments at beginning of year                      2,512              9,166          (6,864)
Unrealized appreciation (depreciation), net (note 1)        6,543             (6,654)         16,030


Unrealized appreciation (depreciation)
   of investments at end of year                            9,055              2,512           9,166

     Total Stockholders' Equity                      $    114,157     $       99,942    $    101,682

</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                       38
<PAGE>



Conslidated Statements of Cash Flows
<TABLE>
                                                                   Year ended December 31,
<CAPTION>

                                                           1997            1996              1995



                                                                 (Dollars in thousands)
<S>                                                  <C>               <C>              <C>    
Cash Flows from Operating Activities
   Net income                                             $ 10,473           $ 8,073          $ 9,712
Adjustments to reconcile net income to
     net cash provided by operating activities
       Policyholder assessments on
         universal life contracts                          (21,926)          (20,727)         (20,011)
       Surrender charges                                    (2,711)           (2,177)          (2,238)
       Interest credited to policyholder
         account balances                                   37,058            34,686           32,467
       Realized investment (gains) losses                   (2,354)             (122)             722
       Change in
         Accrued investment income                          (1,250)           (1,040)          (1,070)
         Reinsurance ceded receivables                      (1,382)            1,840           (1,904)
         Deferred policy acquisition costs                  (6,216)           (7,115)         (11,298)
         Liabilities for future policy benefits              4,650             5,324            5,228
         Policy and contract claims and other
           policyholder funds                                  568              (383)             (87)
         Current income taxes                                 (919)            1,810              509
       Deferred income taxes                                  (980)           (1,860)            (116)
       Other, net                                           (5,646)           (1,695)            (194)


         Net cash provided by operating activities           9,365            16,614            11,720


Cash Flows from Investing Activities
     Purchase of fixed maturities held to maturity          (7,594)          (22,174)         (15,582)
     Maturities, calls, and principal reductions of
       fixed maturities held to maturity                     8,022            42,276           32,832
     Purchase of fixed maturities available for sale      (224,767)         (140,828)        (188,898)
     Proceeds from sale of fixed maturities available
       for sale                                            144,951            38,649           79,185
     Maturities, calls, and principal reductions
       of fixed maturities available for sale               38,535            10,847            6,964
     Purchase of equity securities                          (4,763)           (1,908)          (2,165)
     Proceeds from sale of equity securities                 9,384                21              457
     Proceeds from repayment and sale of mortgage loans        473               372              248
     Purchase of other invested assets                       -----            (4,145)           -----
     Change in policy loans, net                              (857)             (780)            (616)
     Purchase of property, plant, and equipment             (2,622)           (1,156)            (178)


              Net cash used in investing activities        (39,238)          (78,826)         (87,753)


Cash Flows from Financing Activities
     Change in checks drawn in excess of bank balances      (1,097)            1,126              (67)
     Deposits to policyholder account balances             114,847           111,878          116,886
     Withdrawals from policyholder account balances        (66,236)          (52,921)         (44,048)
     Change in note payable, net                           (14,110)            3,865              605
     Changes in notes payable to affiliate                   1,946             1,617            -----
     Proceeds from issuance of common stock, net               569               188              589
     Proceeds from issuance of preferred stock, net            317               249              194
     Repurchase of common stock                             (2,478)           (2,541)           -----
     Dividends paid to stockholders                         (1,210)           (1,052)            (869)


              Net cash provided by financing activities     32,548            62,409           73,290


Net Increase (Decrease) in Cash and
   Short-term Investments                                    2,675               197           (2,743)
Cash and short-term investments at beginning of year           919               722            3,465


Cash and short-term investments at end of year            $  3,594           $   919          $   722

</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                       39
<PAGE>


Notes to Consolidated Financial Statements


(1) Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation


     The accompanying  consolidated financial statements include the accounts of
ALLIED Life Financial  Corporation (the Company),  an insurance holding company,
and its wholly owned  subsidiaries,  which as of December 31, 1997  consisted of
ALLIED Life Insurance Company (ALLIED Life),  ALLIED Life Brokerage Agency, Inc.
(ALBA),  and ALLIED Group Merchant Banking  Corporation  (AGMB). At December 31,
1997,  ALLIED  Mutual  Insurance  Company  (ALLIED  Mutual)  owned  56%  of  the
outstanding  voting  stock of the  Company and The ALLIED  Life  Employee  Stock
Ownership  Trust  (ESOP  Trust)  owned  2%.  The  remainder  was owned by public
stockholders.

     The consolidated financial statements have been prepared in conformity with
generally accepted accounting  principles (GAAP),  which differ in some respects
from  those  followed  in  reports  to  insurance  regulatory  authorities.  All
significant  intercompany  balances and transactions  have been eliminated.  The
preparation of financial  statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

Nature of Operations

     The Company's  operations consist primarily of those of ALLIED Life. ALLIED
Life  underwrites,  markets,  and  distributes a portfolio of life insurance and
annuity  products to individuals  who live primarily in rural and suburban areas
of the United States.  ALLIED Life's products are sold through two  distribution
systems:  the independent  agencies  representing  affiliated  property-casualty
insurance   companies   (ALLIED  Agencies)  and  a  traditional  life  insurance
distribution  system  that  includes  financial  institutions  and a  number  of
independent life insurance marketing organizations.  In 1997 the ALLIED Agencies
generated  68% of life  insurance  face amount sold and 41% of annuity  premiums
collected.

Investments

     Investments in fixed  maturities that may be sold prior to maturity and are
not bought and held  principally for the purpose of selling in the near term are
segregated  into an available for sale  portfolio and are carried at fair value.
Unrealized  appreciation  and  depreciation of available for sale securities are
excluded  from income and  reported  as a separate  component  of  stockholders'
equity net of a provision  for related  deferred  policy  acquisition  costs and
deferred income taxes.

     Effective May 13, 1997, the Company  transferred  its remaining  securities
classified as held to maturity ($196 million) to available for sale and recorded
an increase to stockholders' equity of $1.2 million in accordance with Statement
of Financial Accounting Standards (SFAS) 115. The Company now carries all of its
securities  at fair value and has more  flexibility  in managing its  investment
portfolio.  The Company has no intent to classify future purchases of securities
as held to maturity.

                                       40
<PAGE>

     Equity   securities  are  carried  at  fair  value  with  their  unrealized
appreciation or depreciation,  net of taxes, reported in a separate component of
stockholders'  equity.  Mortgage  loans on real  estate  and  policy  loans  are
recorded at the unpaid principal balance of such loans,  which approximated fair
value as of December  31, 1997 and 1996.  A majority of the  Company's  mortgage
loans are on residential real estate located in Iowa. All short-term investments
are recorded at cost, which approximates fair value.

     Cash settle put swaptions (swaptions),  interest rate floors (floors), call
options, and puts the Company uses for hedging purposes are carried at cost that
is amortized over the term of the instruments on a straight-line basis (see note
3 for a discussion of hedging activities).  Swaptions and floors are included in
other invested assets;  call options and puts are included in other assets.  The
amortization  of  the  swaptions  and  floors  is  included  as a  reduction  of
investment  income;  the  amortization  of the call options and puts is included
with  annuity  interest  credited.  Gains and  losses on these  instruments  and
related assets and  liabilities  will not be recorded as income until  realized.
The Financial Accounting Standards Board (FASB) is evaluating the accounting and
disclosure requirements for these instruments, and, as a result, this accounting
treatment  will  change in the  future.  It is likely the  resulting  accounting
standards  will require  that these  instruments  be carried at fair value.  The
impact of such  standards  on the Company is not  expected to be material to its
financial position or results of operation.

     The carrying  values of all the  Company's  investments  are reviewed on an
ongoing basis for credit  deterioration;  if this review  indicates a decline in
fair value below cost that is other than temporary, the Company's carrying value
in the  investment is reduced to its estimated  realizable  value and a specific
write-down  is taken.  Such  reductions  in  carrying  value are  recognized  as
realized losses and charged to income.  Realized gains and losses on investments
sold are recognized on a specific identification basis.

Deferred Policy Acquisition Costs

         The costs of acquiring new business (principally commissions),  certain
costs of issuing policies (such as medical examinations and inspection reports),
and certain  other  selling  expenses,  all of which vary with and are primarily
related to the production of new business,  have been deferred.  These costs for
universal  life and annuity  contracts  are amortized in relation to the present
value  of  expected  gross  profits  using  the  assumed  crediting  rate.  This
amortization is adjusted  retrospectively when the Company revises its estimates
of current or future  gross  profits to be  realized  from a group of  policies.
These  costs  for  term  life   insurance   policies  are  amortized   over  the
premium-paying  periods in proportion to the ratio of annual premium revenues to
total anticipated  premium revenues.  Anticipated premium revenues are estimated
using the same assumptions employed for computing  liabilities for future policy
benefits.

     Deferred  policy  acquisition  costs  are  reviewed  at least  annually  to
determine that the unamortized portion of such costs does not exceed recoverable
amounts after  anticipated  investment  income is taken into  account.  Expected
gross profits used in determining the recoverability and amortization pattern of
deferred  policy  acquisition  costs are based on  historical  gross profits and
management's  estimates and assumptions  regarding  future  investment  spreads,
maintenance expenses, and persistency of blocks of business. The accuracy of the
estimates and  assumptions  is affected by several  factors,  including  factors
outside the  control of  management  such as  movements  in  interest  rates and
competition from other investment  alternatives.  It is reasonably possible that
conditions  affecting the estimates  and  assumptions  will change and that such
changes will result in future adjustments to deferred policy acquisition costs.

                                       41
<PAGE>

     Costs deferred were $17.3 million, $17.7 million, and $17.2 million for the
years ended December 31, 1997,  1996, and 1995,  respectively.  Amortization  of
deferred  policy  acquisition  costs net of interest  accretion  included in the
consolidated  statements of income were $11.1 million,  $10.6 million,  and $5.9
million for the years ended December 31, 1997, 1996, and 1995, respectively.  In
1996 the amortization  included an adjustment of approximately  $2.8 million the
Company  recorded as a result of its annual  deferred policy  acquisition  costs
study. The study suggested  refinements in certain  assumptions used to estimate
future gross profits to be realized from blocks of annuity business. The Company
will continue to re-evaluate all applicable  assumptions but does not anticipate
making further material  adjustments in the foreseeable  future. At December 31,
1997,   unamortized   deferred  policy   acquisition  costs  were  decreased  by
approximately  $18.4 million (by $4 million in 1996 and $9.6 million in 1995) to
recognize the impact of unrealized  appreciation of investments on such deferred
costs.  The decreases net of deferred income taxes were charged to stockholders'
equity.

Policy Liabilities

     Policyholder  account  balances for  universal  life and annuity  contracts
consist of deposits received plus accumulated credited interest less withdrawals
and accumulated  policy-holder  assessments.  Interest  credited to policyholder
account  balances for universal life contracts  averaged 5.3%, 5.4%, and 5.9% in
1997, 1996, and 1995,  respectively.  Interest credited to policyholder  account
balances for annuity contracts  averaged 5.4%, 5.6%, and 5.9% in 1997, 1996, and
1995,  respectively.  Rates  used to credit  interest  to  policyholder  account
balances are subject to periodic adjustment.  Certain universal life and annuity
contracts  offer  persistency  bonuses,  which are  accrued in the  accompanying
financial  statements  based on assumptions of investment  yields,  withdrawals,
mortality, and other factors. For term life insurance policies,  liabilities for
future policy  benefits are provided  according to the net level premium  method
based  on  estimated  investment  yields,  withdrawals,   mortality,  and  other
assumptions that were appropriate at the time the policies were issued.

Recognition of Revenues, Benefits, and Expenses

     Revenues  from   universal   life   contracts   include   policy  fees  for
administration  expenses,  mortality  charges,  and surrender  charges  assessed
against policyholder  account balances during the period;  revenues from annuity
contracts  include only  surrender  charges.  Benefits and expenses  relating to
these contracts include interest credited as well as benefits incurred in excess
of policyholder account balances during the period.  Premiums and considerations
received and surrender benefits paid on these contracts are reported as deposits
to and withdrawals from policyholder account balances.

     Term life insurance premium revenues are recognized over the premium-paying
period.  Benefits  and  expenses,  which take into  account the  provisions  for
liabilities for future policy  benefits and the  amortization of deferred policy
acquisition  costs,  are  associated  with  earned  premiums  that result in the
recognition of profits over the life of the policy contracts.

     The Company has no participating business.

                                       42
<PAGE>


Ceded Reinsurance

     The Company reports reinsurance  activity on a gross basis. Amounts paid or
deemed to have been paid that are recoverable  under  reinsurance  contracts are
recorded as reinsurance ceded  receivables.  The cost of reinsurance  related to
long-duration  contracts  is  accounted  for  over  the  life of the  underlying
reinsured  policies using assumptions  consistent with those used to account for
the underlying policies.

Stock-based Compensation

     The Company  accounts  for its stock option  plans in  accordance  with the
provisions of Accounting  Principles  Board (APB)  Opinion 25,  "Accounting  for
Stock Issued to Employees," and related interpretations. Under these provisions,
compensation expense is recorded on the date of grant only if the current market
price of the underlying  stock exceeds the exercise  price.  On January 1, 1996,
the Company adopted SFAS 123,  "Accounting for Stock-Based  Compensation," which
permits  entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant.  Alternatively,  SFAS 123 allows
entities to continue  applying the  provisions  of APB Opinion 25 and to provide
pro forma net income and pro forma earnings per share  disclosures  for employee
stock option  grants made in 1995 and future years as if the  fair-value  method
defined in SFAS 123 had been applied.  The Company elected to continue  applying
the  provisions  of APB Opinion 25 and to comply  with the pro forma  disclosure
provisions of SFAS 123.

Postretirement Benefits Other Than Pensions

     The  Company  participates  in a medical  plan (the Plan)  sponsored  by an
affiliate,  ALLIED Group, Inc., which presently provides  postretirement medical
benefits.  The Plan is subject to termination or  modification  by ALLIED Group,
Inc. The Plan is contributory, with retiree contributions adjusted annually, and
contains other cost-sharing features such as deductibles and coinsurance. ALLIED
Group,  Inc.  collects a fee from the Company that  represents  its share of the
Plan's  current  net  periodic  postretirement  benefit  cost.  The  accumulated
postretirement  benefit  obligation and plan assets for the Company are combined
with those of the ALLIED Group, Inc. plan covering other  affiliates'  employees
and are not readily determinable on a separate basis.

Income Taxes

     The Company  computes  deferred  income taxes under the asset and liability
method,  which requires  deferred tax  liabilities and assets at the end of each
reporting  period be determined using the tax rate expected to be in effect when
taxes are actually paid or recovered. Accordingly, income tax expense provisions
increase  or  decrease  in the same  period  in which a change  in tax  rates is
enacted.  Deferred  income  taxes  reflect the impact of  temporary  differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities for tax reporting.

Earnings per Common Share

     In 1997,  the Company  adopted  SFAS 128,  "Earnings  Per Share."  SFAS 128
supersedes APB Opinion 15,  "Earnings Per Share," and specifies the computation,
presentation,  and disclosure  requirements for earnings per common share (EPS).
It replaces the presentation of primary EPS and fully diluted EPS with basic EPS
and diluted EPS, respectively. Basic EPS includes the weighted average number of
common  shares  outstanding  and excludes all dilutive  securities.  Diluted EPS
reflects the dilution that could occur if securities or other contracts to issue
common  stocks were  exercised or converted  into common  stock.  Diluted EPS is
computed similarly to fully diluted EPS under APB 15. All prior periods have
been restated to conform to the new standard.

                                       43
<PAGE>

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share:
<TABLE>
<CAPTION>

                                                        1997              1996                1995

                                                          (In thousands, except per share data)
<S>                                                <C>                <C>                <C>            
Numerator
   Net income                                           $ 10,473           $  8,073           $   9,712

   Preferred stock dividends                              (1,717)            (1,601)             (1,493)


   Numerator for basic earnings per
     share-income available to
     common stockholders                                   8,756              6,472               8,219

Effect of diluted securities
   Convertible preferred stock dividends                     107                 95                  85

     Numerator for diluted earnings per
       share-income available to common
       stockholders after assumed conversions           $  8,863           $  6,567           $   8,304


Denominator
   Denominator for basic earnings per
     share-weighted average shares                         4,430              4,580               4,613


Effect of dilutive securities
   Stock options                                              35                 36                  34
   Convertible preferred stock                               107                 96                  85


Dilutive potential common shares                             142                132                 119


   Denominator for diluted earnings
     per share-adjusted weighted average
     shares and assumed conversions                        4,572              4,712               4,732


Basic earnings per share                                $   1.98           $   1.41           $    1.78


Diluted earnings per share                              $   1.94           $   1.39           $    1.75

</TABLE>

Cash Flows

     For  purposes of  reporting  cash flows,  all  short-term  investments  are
considered  equivalent  to cash since  they have  original  maturities  of three
months or less.

                                       44
<PAGE>


(2) Investments

The  following  is a schedule  of  amortized  cost and  estimated  fair value of
investments in fixed  maturities  and equity  securities as of December 31, 1997
and 1996. The estimated fair value of fixed maturities and equity  securities is
based on  quoted  market  prices  where  available  or on values  obtained  from
independent pricing services.

<TABLE>
<CAPTION>
                                                               Gross           Gross        Estimated
                                             Amortized      unrealized       unrealized       fair
                                               cost            gains          losses          value

                                                                  (In thousands)
      1997
Fixed Maturities

 Available for Sale

   <S>                                        <C>              <C>           <C>            <C>        
   U.S. Treasury securities and
     obligations of U.S. government
     corporations and agencies                $  25,466        $  1,018      $    (22)       $   26,462

   Foreign governments                            5,144             264         -----             5,408

   Corporate securities and
     public utilities                           543,788          23,915        (1,105)          566,598

   Mortgage-backed securities                   159,365           8,254           (59)          167,560

                                              $ 733,763        $ 33,451      $ (1,186)       $  766,028


Equity Securities                             $   3,094        $    107      $  -----        $    3,201

</TABLE>
<TABLE>
<CAPTION>

      1996

Fixed Maturities
           
 Held to Maturity
  <S>                                         <C>              <C>           <C>             <C>
   U.S. Treasury securities and
     obligations of U.S. government
     corporations and agencies                $   1,007        $     26      $    (64)       $      969

   Foreign governments                            4,482             230         -----             4,712

   Corporate securities and
     public utilities                           128,885           5,220          (502)          133,603

   Mortgage-backed securities                    64,835           1,655          (426)           66,064

                                              $ 199,209        $  7,131      $   (992)       $  205,348


 Available for Sale

   U.S. Treasury securities and
     obligations of U.S. government
     corporations and agencies                $  34,378        $  -----      $   (443)       $   33,935

   Foreign governments                            6,189             226            (8)            6,407

   Corporate securities and
     public utilities                           306,416           8,598        (4,030)          310,984
   
   Mortgage-backed securities                   145,703           3,706          (446)          148,963

                                              $ 492,686        $ 12,530      $ (4,927)       $  500,289


Equity Securities                             $   6,153        $    254      $  -----        $    6,407

</TABLE>

                                       45
<PAGE>

     The table below  presents the amortized  cost and  estimated  fair value of
investments in fixed  maturities at December 31, 1997 by  contractual  maturity.
Expected maturities at December 31, 1997 will differ from contractual maturities
because  borrowers  may have the  right to call or  prepay  obligations  with or
without call or prepayment penalties.

<TABLE>
<CAPTION>

                                                                  Amortized           Estimated
                                                                    Cost             fair value

                                                                         (In thousands)
Available for Sale

<S>                                                               <C>                  <C>        
Due in one year or less                                           $    13,149          $    13,308
Due in one through five years                                         138,590              143,397
Due in five through ten years                                         287,026              298,451
Due after ten years                                                   135,633              143,312
Mortgage-backed securities                                            159,365              167,560


Total fixed maturities                                           $    733,763          $   766,028

</TABLE>



   As of  December  31,  1997 and  1996,  there  were no  investments  that were
non-income producing for the preceding twelve months.

   For the years ended December 31, 1997,  1996, and 1995, the Company  realized
gross gains of $1.7  million,  $237,000,  and $2.1  million and gross  losses of
$971,000, $454,000, and $2.8 million,  respectively,  from the call, prepayment,
or sale of  investments  from the  available for sale  portfolio.  There were no
sales from the held to maturity portfolio in 1997, 1996, and 1995.


                                       46
<PAGE>

     A summary of net  realized  investment  gains  (losses)  and net changes in
unrealized appreciation (depreciation) of invest-ments is as follows:

<TABLE>

                                                             Year ended December 31,
<CAPTION>
                                                    1997               1996                1995
                                                                 (In thousands)
Net realized investment gains (losses)
   <S>                                             <C>               <C>                 <C>            
   Fixed maturities
      Held to maturity                             $    -----        $         3         $       24
      Available for sale                                  792               (217)              (746)
   Equity securities                                    1,562                334              -----
   Other                                                -----                  2              -----

                                                        2,354                122               (722)
Net changes in unrealized (depreciation)
  appreciation of investments
   Fixed maturities
      Held to maturity                                 (6,139)            (6,695)            29,973
      Available for sale                               24,662            (16,003)            31,430
   Equity securities                                     (146)               178                (31)

                                                       18,377            (22,520)            61,372
Net realized investment gains
   (losses) and changes in unrealized
   appreciation (depreciation)
   of investments                                  $   20,731        $   (22,398)        $   60,650

</TABLE>


     A summary of net investment income follows:
<TABLE>

                                                             Year ended December 31,

<CAPTION>

                                                    1997               1996                1995

                                                                 (In thousands)

<S>                                                <C>               <C>                 <C>       
Interest on fixed maturities                       $   53,469        $    48,899         $   45,535
Interest on mortgage loans                                110                160                 88
Interest on policy loans                                  760                713                632
Dividends on equity securities                            343                274                347
Interest on short-term investments                         88                 84                 60
Other, net                                                 27                 17                 31


   Total investment income                             54,797             50,147             46,693

Investment expenses                                       945                872                574
Interest expense                                          919                700                708
Amortization expense, hedges                              736                393              -----

   Net investment income                           $   52,197        $    48,182         $   45,411

</TABLE>


                                       47
<PAGE>


     As required by law, fixed  maturities and  short-term  investments  were on
  deposit  with or on behalf of  various  insurance  regulatory  authorities  at
  December 31, 1997 and 1996,  with carrying values of $754.5 million and $681.1
  million, respectively. As of December 31, 1997 and 1996, bonds with a carrying
  value of $29.1  million  and $30.2  million,  respectively,  were  pledged  as
  collateral for the Company's line of credit with the Federal Home Loan Bank.

   Investments  in any one entity or its  affiliates  (other than U.S.  Treasury
  securities  and  obligations  of U.S.  government  corporations  and agencies)
  exceeding  10%  of  the  Company's  consolidated  stockholders'  equity  as of
  December  31, 1997  consisted  of fixed  maturity  securities  issued by Hydro
  Quebec at a carrying value of $11.5 million.

  (3) Hedging Activities

   In 1996, the Company began  interest rate hedging  programs  whereby  certain
  derivative   financial   instruments   including  swaptions  and  floors  were
  purchased.  The Company also began to purchase  S&P 500 Index(R)  call options
  and S&P 500 Index(R)  puts as a result of the sale of equity  indexed  annuity
  products.

   Swaptions are being  purchased to reduce the negative effect on the Company's
  fixed maturity  investments  and annuity  liabilities of increased  withdrawal
  activity that may result from extreme rises in interest  rates. As of December
  31, 1997,  the Company was party to 44 agreements  that expire  quarterly from
  June 1999 through March 2006.  The  agreements  entitle the Company to receive
  payments  from the  instruments'  counterparties  on future reset dates if the
  interest  rate (which is tied  directly to the 5-year  constant  maturity swap
  curve) on any expiration  date is above a specified  fixed rate (8.8% to 10.5%
  for  instruments  entered  into as of December 31,  1997).  As of December 31,
  1997, the notional  amounts range from $3 million to $9 million (total of $244
  million) and the swaptions  were carried at an amortized cost of $2.1 million.
  Amortized cost was $2.6 million at December 31, 1996.

   Floors are being purchased to reduce the negative effect that may result from
  extreme  decreases in interest rates to a level below the guaranteed  interest
  rates provided for in the Company's universal life insurance contracts. The 28
  agreements for the floors outstanding as of December 31, 1997 expire quarterly
  from June 1999  through  March  2006.  The  agreements  entitle the Company to
  receive payments from the instruments' counterparties on future reset dates if
  the interest  rate (which is tied  directly to the 10-year  constant  maturity
  treasury  curve) on the expiration  date is below a specified fixed rate (5.0%
  for  instruments  entered  into as of December 31,  1997).  As of December 31,
  1997,  the notional  amounts for each quarter ranged from $140 million to $270
  million  and the  floors  were  carried  at an  amortized  cost  of  $945,000.
  Amortized cost was $1.1 million at December 31, 1996.

   The Company offers equity indexed annuity  products that guarantee the return
  of principal to the customer and credits interest based on a percentage of the
  gain in the S&P 500  Index(R).  A portion of the premium from each customer is
  invested in  investment  grade fixed  income  securities  to cover the minimum
  guaranteed  value due the  customer  at the end of the term.  A portion of the
  premium is used to purchase S&P 500 call options  (call  options) to hedge the
  growth in interest credited to the customer as a direct result of increases in
  the S&P 500 Index(R).  The call options provide the Company the opportunity to
  participate  in the increases of the S&P 500 Index(R) if the market  advances.
  As of December  31,  1997,  the Company had  purchased  113 call  options with
  notional amounts ranging from $70,000 to $1.1 million (total of $36.3 million)
  and the call options were carried at an  amortized  cost of $7.9  million.  At
  December 31,  1996,  the Company had 40 call  options  with  notional  amounts
  totaling $11.2 million and amortized cost of $2.2 million.

                                       48
<PAGE>

   The Company is exposed to the risk of extreme declines in the market value of
  its call  options  if there is a sharp  and  prolonged  decrease  in the stock
  market. The Company currently is purchasing puts to reduce the negative effect
  of such a decline. The put agreements allow the Company to receive payments on
  future exercise dates if the S&P 500 Index(R) is below specified index levels.

   The costs of the interest  rate  hedging  programs are not expected to have a
  material impact on the interest rate margin. For swaptions, floors, calls, and
  puts the Company pays only the original  premium and is not at risk of further
  payments regardless of market conditions.

   The  Company is exposed to the risk of losses in the event of  nonperformance
  of the counterparties of the previously described swaptions,  floors, and call
  options. Losses recorded in the Company's financial statements in the event of
  nonperformance  are limited to the  unamortized  premium  paid to purchase the
  instruments. Any economic loss will be measured by the net replacement cost of
  such  instruments or by their fair value if net fair value is in the Company's
  favor.  The  Company  limits its  exposure to  economic  loss by  diversifying
  purchases among reputable counterparties with appropriate credit ratings.

(4) Affiliation and Transactions with Affiliates

   The Company and its subsidiaries  are parties to the  Intercompany  Operating
Agreement (the Agreement) with ALLIED Group,  Inc.,  ALLIED Mutual,  and each of
their respective subsidiaries.  ALLIED Mutual controls 18.2% of the voting stock
of ALLIED Group, Inc. The Agreement  provides for the continued  availability of
office  space,  marketing  services,  agency  forces,  and  computer  and  other
facilities.  The Agreement extends through December 31, 2004, after which it may
be terminated  on two years' notice given after  December 31, 2002 by any party.
Expenses  are charged to the Company  based on specific  identification,  or, if
undeterminable, the expenses are allocated on the basis of cost and time studies
that are updated annually. Rental expense incurred for office space allocated to
the Company by ALLIED Mutual amounted to approximately  $226,000,  $253,000, and
$234,000 for the years ended December 31, 1997,  1996,  and 1995,  respectively.
ALLIED Life receives  certain  services from the Human  Resources  Department of
ALLIED Group, Inc. that include, but are not limited to, maintaining  employment
documents, administering payroll and employee benefits, keeping related records,
placing employees, and providing termination counseling and processing. For such
services,  ALLIED Life pays a fee to ALLIED Group, Inc. based on a percentage of
the  Company's  gross  payroll.  Also  included  in this fee is an  amount  that
represents  the  Company's  share of the  current  net  periodic  postretirement
benefit cost for the ALLIED  Group,  Inc.  medical plan.  Amounts  incurred were
approximately $162,000,  $156,000, and $132,000 for the years ended December 31,
1997, 1996, and 1995, respectively.

   The Company,  ALLIED Life, and other affiliated  companies are parties to the
Management  Information  Services  Agreement (the Services  Agreement) with AMCO
Insurance  Company (AMCO), a subsidiary of ALLIED Group, Inc. Under the terms of
the Services  Agreement,  AMCO provides  certain  computer  services,  printing,
equipment leasing,  and mail and communication  services to ALLIED Life on a fee
basis.  The annual fee is subject to  renegotiation  throughout  the term of the
Services Agreement.  The Services Agreement  terminates on December 31, 2004 and
has an extension  provision similar to the Intercompany  Operating  Agreement's.
Effective  March 1,  1996,  the  Services  Agreement  was  amended  and  certain
personnel previously providing  computer-related services to the Company and its
subsidiaries  were employed by ALLIED Life. As a result,  fees paid for services
provided by such employees  prior to the amendment date are now paid directly by
ALLIED Life.  Expenses incurred under the Services  Agreement were approximately
$645,000,  $863,000,  and $1.4  million for the years ended  December  31, 1997,
1996, and 1995, respectively.

                                       49
<PAGE>

   ALLIED Life, ALLIED Mutual, and the property-casualty  subsidiaries of ALLIED
Group, Inc. are parties to the ALLIED Group Joint Marketing Agreement (JMA). The
JMA requires  ALLIED Mutual and the  property-casualty  affiliates to promote to
their  customers  and agents the sale of the  products of ALLIED  Life.  The JMA
provides for payment by ALLIED Life of an annual  access fee of $100,000 plus an
annual  new-production  incentive  fee. The JMA also  provides for joint systems
development, including joint databases of customers and agents, multiple-account
billing  systems,  marketing plans and promotions.  Development  costs are to be
allocated  on  a  mutually  agreeable  basis  reflecting  projected  and  actual
utilization  of the systems.  The JMA  continues to the year 2008 and  continues
thereafter  subject to termination on two years' notice given by any party.  The
JMA contains noncompete  provisions  applicable during its term and for a period
of ten years thereafter. Fees and expenses incurred under this agreement for the
years ended  December  31, 1997,  1996,  and 1995 were  approximately  $100,000,
$165,000, and $121,000, respectively.

   ALLIED Life received  premium  income from ALLIED  Group,  Inc. for term life
insurance  on its  employee  group in the  amounts  of  approximately  $468,000,
$452,000,  and $418,000 for the years ended  December 31, 1997,  1996, and 1995,
respectively.

   The Company  invests excess cash in a short-term  investment  fund with other
affiliated companies.  AID Finance Services,  Inc., a wholly owned subsidiary of
ALLIED Mutual,  is the  administrator  of the fund. The fund was  established to
concentrate  short-term  cash in a single account to maximize yield. At December
31, 1997 and 1996,  the Company had  approximately  $3.5  million and  $795,000,
respectively, invested in the fund, which is carried as a short-term investment.
Interest  earned from the fund during  1997,  1996,  and 1995 was  approximately
$78,000, $74,000, and $77,000, respectively.

   The Company and its  subsidiaries  have from time to time borrowed funds from
affiliates  as  needed  on  an  arms  length  basis.  The  Company  has  various
notes-payable  agreements  with ALLIED Mutual.  As of December 31, 1997 and 1996
the  outstanding  borrowings were  approximately  $3.6 million and $1.6 million,
respectively.   The  Company   incurred   interest   expense  to  affiliates  of
approximately   $241,000,   $61,000,  and  $51,000  in  1997,  1996,  and  1995,
respectively.

   Management believes the costs incurred by its affiliates and allocated to the
Company would not be materially different than if they had been incurred from an
unrelated third party. The transactions  discussed herein result in intercompany
balances  that are created  during the normal course of business and are settled
on a monthly basis unless otherwise indicated.


                                       50
<PAGE>

(5) Fair Value of Financial Instruments

   The following  table  presents the carrying value and estimated fair value of
the Company's significant financial instruments at December 31, 1997, and 1996:

<TABLE>

<CAPTION>
                                       1997                                    1996
                                                Estimated                             Estimated
                           Carrying               fair             Carrying             fair
                             value                value              value              value

                                                       (In thousands)
<S>                          <C>               <C>                 <C>                 <C>        
Fixed maturity
  investments                $  766,028        $    766,028        $   699,498         $   705,637

Equity securities                 3,201               3,201              6,407               6,407

Cash settle put
  swaptions                       2,070                 638              2,615               2,202

Interest rate floors                945               3,621              1,137               2,075

Short-term
  investments                     3,594               3,594                919                 919

Call options                      7,924              11,641              2,175               2,814

Annuity contracts              (514,908)           (483,208)          (467,505)           (437,623)

Universal life
  contracts                    (196,709)           (143,866)          (182,727)           (132,977)

Note payable                     (6,360)             (6,360)           (20,470)            (20,470)
</TABLE>

   The fair values of certain fixed  maturity  investments,  equity  securities,
cash settle put swaptions,  interest rate floors,  and call options are based on
quoted market prices for those or similar investments.  For unquoted securities,
the reported  value is  estimated  by the Company on the basis of financial  and
other  information.  Fair values of  short-term  investments  approximate  their
carrying  values  due to their  short  maturity.  Fair  values of the  Company's
liabilities  for annuity and universal life  policyholder  account  balances are
estimated using the cash surrender  value of the contracts.  Due to the variable
interest rate and short-term  nature of the note payable,  the carrying value of
the note payable approximates fair value. Fair value approximates carrying value
for other financial instruments primarily due to their short-term nature.

(6)Reinsurance

In the normal  course of  business,  the Company  seeks to limit its exposure to
loss on any single  insured and to recover a portion of benefits  paid by ceding
reinsurance to other insurance  enterprises or reinsurers  under excess coverage
and  coinsurance  contracts.  In  1997,  the  Company  followed  the  policy  of
reinsuring that portion of the risk in excess of $150,000 on each life ($250,000
for  insureds  aged 59 and under).  The  Company's  long-term  care and medicare
supplement insurance coverage is 100% ceded.

   Reinsurance  contracts  do not  relieve  the  Company of its  obligations  to
policyholders.  The Company is  contingently  liable for these amounts and would
become  actually  liable in the event such  reinsurers  were unable to pay their
portion of the claims.  The Company  evaluates  the  financial  condition of its
reinsurers  and  monitors  concentrations  of credit risk  arising  from similar
geographic regions, activities, or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.

                                       51
<PAGE>

   Assumed  premiums  and related  benefits  are not  material to the  Company's
consolidated financial position and results of operations.

(7) Preferred Stock

   The Company is  authorized  to issue 7.5 million  shares of  preferred  stock
without par value.  The  preferred  stock may be issued from time to time by the
Board of Directors in one or more series with such dividend  rights,  conversion
rights, voting rights, redemption provisions, liquidation preferences, and other
rights and restrictions as the Board of Directors may determine.

6.75% Series

     The 6.75% Series  Preferred Stock (6.75% Series) issued to ALLIED Mutual is
perpetual, nonconvertible, voting, and cumulative with respect to dividends. The
annual dividend rate is 6.75% of the  liquidation  preference of $10.85 ($0.7324
per share) and is payable  quarterly.  At its  option,  the  Company may pay the
dividend in additional shares of 6.75% Series for any quarter ending on or prior
to September  30, 1998.  The 6.75%  Series has no  preemptive  rights and is not
registered  or traded.  Upon any  transfer by ALLIED  Mutual,  the 6.75%  Series
becomes nonvoting and is callable under certain conditions.

     The Company paid dividends to ALLIED Mutual on its outstanding 6.75% Series
through the issuance of 148,402,  138,793,  and 129,808  shares of such stock in
1997, 1996, and 1995, respectively.

ESOP Series

     During 1997,  1996,  and 1995 the Company sold 19,143,  14,787,  and 14,650
shares of Series A ESOP  Convertible  Preferred  Stock (ESOP Series) to the ESOP
Trust for $17.50,  $18.13, and $15.00 per share,  respectively.  At December 31,
1997,  a  commercial  bank,  acting on behalf  of the ESOP  participants  as the
trustee for the ESOP, was the holder of 100,732  shares of the ESOP Series.  The
ESOP Trust  purchased an additional  13,163 shares on January 2, 1998 for $21.88
per share funded by a $183,000  employer  contribution from ALLIED Life and ESOP
Series dividends.

     As holder of the  outstanding  ESOP  Series,  the ESOP Trust is entitled to
vote the ESOP  Series on all matters  submitted  to a vote of the holders of the
common stock of the Company,  voting  together  with the holders of common stock
and 6.75%  Series  as one  class.  The ESOP  generally  provides  that each ESOP
participant  is entitled to direct the trustee how to vote (or whether to tender
or  exchange)  the  shares of the ESOP  Series  allocated  to the  participant's
account.  Each share of the ESOP Series is convertible  into one share of common
stock and has one vote, subject to antidilution adjustments.  During 1997, 1996,
and 1995, respectively,  12,393, 2,834, and 5,263 shares of the ESOP Series were
converted to common stock.


                                       52
<PAGE>

     The ESOP  Series  ranks  senior to the  common  stock as to the  payment of
dividends and has a cumulative annual dividend of $1.00 per share,  payable each
June 30 and  December  31. In the event of a  liquidation  of the  Company,  the
trustee as holder of the outstanding  ESOP Series is entitled to receive $15 per
share plus accrued  dividends prior to any distribution to the holders of common
stock.

   The ESOP  Series can be redeemed  at the option of the  Company,  in whole or
part,  at any time  after  three  years  from the date the shares are issued or,
under certain circumstances, in the third year or before. For redemptions in the
year 2004 and beyond,  the  redemption  price is $15 per share plus  accrued and
unpaid  dividends;  in years prior to 2004, there is a premium above the $15 per
share price as set forth in the Certificate of Designations for the ESOP Series.
The Company, at its option, may make payment of the redemption price in cash, in
shares of common stock, or a combination  thereof.  Upon receipt of a redemption
notice from the Company,  the trustee,  acting in its  fiduciary  capacity,  may
elect to  convert  the ESOP  Series  to common  stock  prior to  redemption.  If
necessary to provide for  distributions  to  participants  or for other  special
circumstances,  the trustee may  request  the Company  redeem  shares at $15 per
share. In accordance with the foregoing,  the Company redeemed 438 shares of the
ESOP Series at $15 per share in 1995.

   The ESOP Series has no  preemptive  rights and is not  registered  or traded.
Upon any transfer by the  trustee,  the ESOP Series is  automatically  converted
into shares of the Company's common stock.

(8) Common Stock

   The Company and ALLIED  Mutual have  entered  into a Stock  Rights  Agreement
(Agreement) that expires in 2008. Under the Agreement, ALLIED Mutual is entitled
to nominate  and the  Company is  required to use its best  efforts to cause the
election or retention of a number of members of the Company's Board of Directors
in proportion  to ALLIED  Mutual's  percentage  ownership of the total number of
shares of the Company's voting stock  outstanding at the time of nomination.  In
addition,  the Company is required to elect to its Executive  Committee at least
one Company  director who has been  nominated by ALLIED  Mutual.  The  Agreement
restricts the ability of ALLIED Mutual to grant proxies to other than affiliated
individuals and to solicit other shareholders of the Company. ALLIED Mutual also
is  prohibited  from  initiating  or  accepting a tender offer for shares of the
common stock except under certain  conditions.  The Company has a right of first
refusal with respect to any sale by ALLIED Mutual of the common  stock,  subject
to certain  exceptions.  ALLIED Mutual has  incidental  registration  rights and
three-demand  registration rights with respect to all stock of the Company owned
by ALLIED Mutual.

   The Company has reserved  350,000  shares of common stock for issuance  under
the ALLIED Life Financial  Corporation  Employee Stock Purchase Plan (ESPP). The
Company  receives  85% of the fair market  value of the shares  issued under the
ESPP.  During 1997,  1,571  shares were issued at prices  ranging from $13.82 to
$20.40. During 1996 and 1995, 1,934 and 6,963 shares, respectively,  were issued
at prices  ranging from $13.18 to $17.37 for 1996 and $12.33 to $19.13 for 1995.
At December 31, 1997, 326,959 shares were available for issuance.

   The Company has reserved  350,000  shares of common stock for issuance  under
the ALLIED Life  Financial  Corporation  Outside  Director  Stock  Purchase Plan
(DSPP).  Under the DSPP,  participants  pay 85% of the fair  value of the shares
issued.  The 15% discount is recognized as expense on the date of issue.  During
1997,  2,958 shares were issued at prices ranging from $19.13 to $21.50.  During
1996 and 1995,  2,677 and 4,737 shares were issued at prices ranging from $17.37
to $17.38 and $17.06 to $17.13,  respectively.  At December  31,  1997,  335,213
shares were available for issuance.

   During 1995 the Company  reserved 350,000 shares of common stock for issuance
under the ALLIED Life  Financial  Corporation  Dividend  Reinvestment  and Stock
Purchase  Plan. Any  stockholder of record may  participate in the plan and have
cash dividends reinvested in additional shares of Company common stock. The plan
also allows for optional cash payments.  Shares of common stock  purchased under
the plan may be either original issue shares or open market shares.  The Company
has determined the purchased  shares will be original shares until it determines
otherwise. The number of shares purchased by the plan participants is based upon
fair market value on a predetermined  date.  During 1997, 535 shares were issued
at prices  ranging from $16 to $23.88.  During  1996,  628 shares were issued at
prices ranging from $15.88 to $21; during 1995, 312 shares were issued at prices
ranging  from  $16.81 to $19.13.  At  December  31,  1997,  348,525  shares were
available for issuance.

                                       53
<PAGE>

   During  1997,  pursuant to rule 10b-18 under the  Securities  Exchange Act of
1934,  the Company  repurchased  and canceled  150,000  shares of Company common
stock on the open market at an average  cost of $16.52 per share.  During  1996,
the Company  repurchased and canceled  150,000 shares of Company common stock on
the open market at an average cost of $16.94 per share.

  The dividend per common share for 1997,  1996, and 1995 was $0.25,  $0.21, and
$0.17, respectively.

(9) Stock Option Plans

   At December 31, 1997, the Company had four  stock-based  compensation  plans,
two described in note 8 (the ESPP and DSPP) and two described  here:  the ALLIED
Life Financial  Corporation Long-Term Management Incentive Plan (Incentive Plan)
and the ALLIED Life Financial  Corporation  Executive  Stock Option Plan (Option
Plan).  The  Company  applies  APB  Opinion 25 and  related  interpretations  in
accounting for its plans. Accordingly,  no compensation cost has been recognized
for the following stock option plans or for the ESPP. Had compensation  cost for
these items been  determined  consistent with SFAS 123, the Company's net income
and  earnings  per share  would  have  been  reduced  to the pro  forma  amounts
indicated in the table:
<TABLE>
<CAPTION>

                                                    1997              1996             1995
                                                      (In thousands, except per share data)

Net income
      <S>                                       <C>              <C>               <C>        
      As reported                               $    10,473      $     8,073       $     9,712
      Pro forma                                 $    10,384      $     8,018       $     9,688

Diluted earnings per share
      As reported                               $      1.94      $      1.39       $      1.75
      Pro forma                                 $      1.92      $      1.38       $      1.75

</TABLE>

   Pro forma net income  reflects  only options  granted  since January 1, 1995.
Therefore,  the full impact of calculating  compensation  cost for stock options
under SFAS 123 is not  reflected in the pro forma net income  amounts  presented
above because  compensation  cost is reflected over the options'  vesting period
and  compensation  cost for  options  granted  prior to  January  1, 1995 is not
considered.

                                       54
<PAGE>

   The fair value of each stock  option  grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants:  in 1997, 1996, and 1995,  dividend yield of 1.25%,
expected  volatility  of 45%,  and  expected  life of 6 years  and a risk-  free
interest rate of 6% for 1997 and 7% for 1996 and 1995.

   The  Company  reserved  186,800  shares of common  stock for  issuance to key
employees of the Company and its affiliates  under the Incentive Plan. Under the
Incentive  Plan,  shares of common stock are available for grant until  December
31, 2003 as incentive and nonqualified  stock options  (collectively,  Options),
stock appreciation  rights (SARs), and restricted stock. The Options,  SARs, and
restricted  stock were  issued to vest  beginning  two or three  years after the
grant  date at a rate of 25% or 33.3% per year and  expire  ten years  after the
date of grant. Options,  SARs, and restricted stock prices are based on the fair
market  value as of the date of grant.  As of  December  31,  1997,  the  64,467
outstanding  Options and SARs had exercise  prices ranging from $12.88 to $23.13
and had a weighted-average  remaining contractual life of 8.6 years. At December
31, 1997, 108,282 shares were available for award under the Incentive Plan.

   The Company has reserved  213,000  shares of common stock for issuance to key
employees  of the  Company  and its  affiliates  under  the  Option  Plan  until
September 1, 2003. The Option Plan is a nonqualified  stock option plan. Options
are granted  subject to a vesting  schedule  whereby 33.3% vest three years from
the date of grant,  66.7% vest four years from the date of grant,  and 100% vest
five years from the date of grant.  The option price is equal to the fair market
value of the common  stock at the time the option is  granted.  Options  granted
under the Option  Plan  expire ten years from the date of grant.  As of December
31,  1997,  the 124,293  outstanding  options had exercise  prices  ranging from
$12.00 to $17.63 and had a weighted  average  remaining  contractual life of 6.2
years.  At December 31, 1997,  31,167 shares were  available for award under the
Option Plan.

   A summary of the status of the  Company's  stock  options as of December  31,
1997,  1996 and 1995 and  changes  during  the years  ending  on those  dates is
presented below:
<TABLE>
<CAPTION>

                                     1997                      1996                       1995


                                         Weighted                  Weighted                  Weighted
                                          average                   average                   average
                              Shares  exercise price    Shares  exercise price    Shares  exercise price

                                                       (In thousands, except price data)

Outstanding at
<S>                              <C>       <C>             <C>      <C>              <C>      <C>     
beginning of year                205       $  12.99        183      $  12.27         227      $  12.06

Granted                           38          19.35         27         17.63          14         15.30
Exercised                        (33)         12.36         (5)        12.13         (27)        12.00
Cancelled                        (25)         13.03      -----         -----         (31)        12.33



Outstanding at
end of year                      185       $  14.40        205       $ 12.99         183      $  12.27


Options exercisable
at end of year                    69          12.15         54         12.05       -----         -----


Weighted-average fair
value of options granted
during the year                            $   9.54                  $  8.71                  $   7.08


</TABLE>

                                       55
<PAGE>

   The issuance of SARs and  restricted  stock under the Incentive  Plan reduces
the number of options  available for future issuance.  No restricted shares were
awarded in 1997.  During  1996 and 1995,  1,355 and 3,458  shares of  restricted
stock were  awarded at $17.25 and $15.50 per share,  re-spectively.  At December
31, 1997, 3,167 restricted  shares were  outstanding.  The following table shows
SAR activity for the years ended December 31, 1997, 1996 and 1995:
<TABLE>

<CAPTION>
                                      1997                     1996                        1995

                                         Weighted                  Weighted                  Weighted
                              No. of      average       No. of      average       No. of      average
                               SARs   exercise price     SARs   exercise price     SARs   exercise price

Outstanding at
<S>                            <C>        <C>            <C>        <C>            <C>        <C>     
beginning of year              5,182      $   15.49      3,300      $  14.10       2,000      $  12.88

Granted                        -----          -----      2,000         17.63       2,000         15.30
Exercised                       (962)         13.74       (118)        12.88       -----         -----
Cancelled                       (788)         15.78      -----         -----        (700)        14.06

Outstanding at
end of year                    3,432       $  15.91      5,182      $  15.49        3,300     $  14.10


SARs exercisable
at end of year                   155          14.00        383         12.88       -----         -----

</TABLE>

(10) Retained Earnings

   Retained  earnings of ALLIED Life available for  distribution as dividends to
ALLIED Life Financial  Corporation  are limited by law. Under the Iowa Insurance
Code,  dividends may be paid by ALLIED Life only from statutory  earned surplus,
which as of December 31, 1997 was $21.3  million.  In addition,  ALLIED Life may
not pay an  extraordinary  dividend  without prior notice to and approval of the
Iowa  Insurance  Commissioner.  An  extraordinary  dividend  is  defined  as any
dividend or  distribution  of cash or other  property  whose fair  market  value
together with that of other dividends or distributions made within the preceding
twelve months exceeds the greater of (i) 10% of statutory policyholders' surplus
(total  capital stock plus  surplus) as of December 31 of the preceding  year or
(ii) the statutory net gain from operations of the insurer for the  twelve-month
period ending  December 31 of the preceding year.  During 1997,  1996, and 1995,
the Company paid cash dividends on common stock of $1.1 million,  $959,000,  and
$785,000,  respectively.  During  1997,  1996,  and 1995,  the Company paid cash
dividends of $107,000, $95,000, and $85,000,  respectively,  on preferred stock.
ALLIED Life paid to the Company  dividends of $1.8 million,  $1.4  million,  and
$800,000  during  1997,  1996,  and 1995,  respectively,  primarily  to fund the
Company's cash dividend  requirements  and its note payments on  indebtedness to
affiliates.  During 1998, the maximum amount  available for  distribution to the
Company  from  ALLIED Life  without  regulatory  approval of the Iowa  Insurance
Commissioner is $9 million.

   Statutory  capital and  surplus  for ALLIED Life was $51.3  million and $46.5
million at December  31 1997 and 1996,  respectively.  Statutory  net income for
ALLIED Life was $9.7 million, $5.3 million, and $6.7 million for the years ended
December 31, 1997, 1996, and 1995, respectively.

                                       56
<PAGE>


(11)   Employee Retirement Plans

   The ESOP  established by the Company is a nonleveraged  defined  contribution
plan. The ESOP covers all employees who meet eligibility requirements. Shares of
the ESOP Series are allocated  annually to each employee's account pursuant to a
formula  based on  employee  compensation  and years of service  and are held in
trust  until the  employee's  termination,  retirement,  or death.  The  Company
recognized compensation expense for the amount contributed to the ESOP.

   The  Company's  ESOP expense was  $183,000,  $238,000,  and $176,000 in 1997,
1996,  and 1995,  respectively.  During  1997,  1996,  and 1995,  the ESOP Trust
received $106,609,  $95,163,  and $84,826,  respectively,  from dividends on the
ESOP Series, which were used to purchase stock for participants.


(12)   Line of Credit

   The Company has a line of credit agreement with the Federal Home Loan Bank to
make available borrowings of up to $25 million. The line expires March 13, 1998.
Interest is payable at either an adjustable interest rate with the interest rate
set daily on the outstanding advance amount or at a fixed rate with the interest
rate set at issuance.  As of December 31, 1997 and 1996, borrowings on this line
of credit  agreement  were $6.4 million and $20.5 million at an interest rate of
6.3% and 5.7% per annum, respectively.  The Company incurred interest expense to
nonaffiliates  of  $919,000,  $690,000,  and $656,000 in 1997,  1996,  and 1995,
respectively.


(13)  Federal Income Taxes

   Total income taxes for the years ended December 31, 1997, 1996, and 1995 were
allocated as follows:
<TABLE>

<CAPTION>
                                                     1997                1996              1995

                                                                     (In thousands)
<S>                                                  <C>                <C>              <C>      
Net income                                           $   5,226          $   3,937        $   4,557
Unrealized appreciation
    of investments, net                                  3,524             (3,584)           4,476

                                                     $   8,750          $     353        $   9,033

</TABLE>


                                       57
<PAGE>

    The  income  tax  effects  of  temporary   differences  that  gave  rise  to
significant  portions of the deferred  income tax assets and deferred income tax
liabilities at December 31, 1997 and 1996 follow:
<TABLE>

                                                                    December 31,
<CAPTION>
                                                              1997                         1996


                                                                  (In thousands)
Deferred income tax assets
    <S>                                                   <C>                        <C>       
    Policy liabilities                                    $   27,673                 $   24,711
    Deferred policy acquisition costs
    related to unrealized appreciation                         6,454                      1,398
    Other                                                        897                        331

      Total gross deferred income tax assets                  35,024                     26,440

    Less valuation allowance                                   -----                      -----

      Net deferred income tax assets                          35,024                     26,440

Deferred income tax liabilities
    Deferred policy acquisition costs                        (32,260)                   (30,363)
    Unrealized appreciation                                  (11,330)                    (2,750)
    Market discount on bonds                                  (1,230)                      (904)
    Other                                                       (756)                      (432)

      Total gross deferred income tax
        liabilities                                          (45,576)                   (34,449)

      Net deferred income tax liability                   $  (10,552)                 $  (8,009)

</TABLE>


   The valuation  allowance  for deferred  income tax assets at the beginning of
the years ended December 31, 1997 and December 31, 1996 was $0. In assessing the
realizability of deferred tax assets,  management  considers  whether it is more
likely than not that some portion or all of the deferred  income tax assets will
not be realized.  The ultimate  realization  of deferred tax assets is dependent
upon the  generation  of future  taxable  income  during the  period  that those
temporary  differences become  deductible.  Management  considers  primarily the
scheduled reversal of deferred income tax liabilities,  projected future taxable
income, and tax planning strategies in making this assessment and believes it is
more likely than not the Company will  realize the benefits of these  deductible
differences at December 31, 1997.

   For the years ended December 31, 1997,  1996, and 1995, the actual income tax
expense  differed  from the expected  income tax expense  based on the statutory
federal  income tax rate of 35%,  primarily as a result of a reduction of income
taxes related to prior years. The Company paid federal and state income taxes of
$7  million,   $3.9  million,   and  $4.1  million  in  1997,  1996,  and  1995,
respectively.

   Prior to 1984, life insurance companies were permitted to defer from taxation
a portion of statutory income. At December 31, 1983, the Company had accumulated
approximately $3.3 million of this deferred income in what is referred to as its
policyholders'  surplus  account.  This  amount  was  frozen  under the  Deficit
Reduction Act of 1984 and could become  taxable in the future only under certain
conditions that management  considers remote.  The accumulated  amount of income
subject to current  taxation  less certain  adjustments  is set aside in another
special memorandum tax account called a shareholders' surplus account. Dividends
paid by the  Company  in  excess of the  balance  in the  shareholders'  surplus
account  cannot be paid  without a portion of  policyholders'  surplus  becoming
taxable.  The balance of the  shareholders'  surplus  account was  approximately
$57.5 million as of December 31, 1997.

                                       58
<PAGE>


(14)  Contingencies

  On January 20, 1998, a complaint was filed by a  policyholder  of ALLIED Life,
in  Superior  Court of the State of  California  for the County of Los  Angeles,
against the Company,  ALLIED  Life,  ALLIED  Mutual,  and unnamed  persons.  The
complaint,  an alleged class action suit,  asserts that ALLIED Life fraudulently
increased the cost of insurance rates charged to  policyholders in breach of the
terms  of its  universal  life  policies,  its  fiduciary  obligations,  and its
obligations of good faith and fair dealing toward its  policyholders and without
adequate notice. The plaintiff,  an insured under a universal life policy issued
by ALLIED Life seeks actual, consequential,  and punitive damages in unspecified
amounts as well as interest, attorney's fees, an accounting for moneys allegedly
improperly charged to policyholders, and injunctive relief, on behalf of herself
and all policyholders of ALLIED Life with similar universal life policies.

   The  Company  believes  the  allegations  relate to a claim that  ALLIED Life
collected a federal tax, known as the deferred  acquisition  cost tax (DAC tax),
as well as other increased costs of doing business from its  policyholders.  The
Company  believes  the  amount of DAC tax and other  costs  claimed to have been
collected from each  policyholder is minimal,  but the plaintiff in the case has
asked the California court to treat the case as a class action  representing all
ALLIED Life  policyholders  from whom the claimed costs were collected.  Similar
class actions have been filed against other life insurance  companies  since the
federal DAC tax law was enacted in 1990.  The Company  believes  the action will
raise the issue of whether the DAC tax may be included in the cost of  insurance
charged  to  policyholders  under the  terms of the  universal  life  contracts.
Management  believes the increased costs charged to policyholders never violated
the contracts.

   The  Company  believes  that the  increased  costs  complained  of  relate to
universal  life  policies  issued  during and prior to 1991 and that ALLIED Life
charged the increased costs to universal life policyholders primarily during the
1992 through 1995  accounting  periods.  The  Company,  ALLIED Life,  and ALLIED
Mutual do not  expect the  lawsuit  to  materially  affect  their  claims-paying
ratings or daily  business  operations.  The Company,  ALLIED  Life,  and ALLIED
Mutual disagree with the allegations,  believe the claims presented in this case
are without merit, and believe the resolution of this matter will not materially
affect the Company's financial position.

   The  Company is a party to other  lawsuits  arising  in the normal  course of
business.  The Company believes the resolution of these lawsuits will not have a
material adverse effect on its financial position.


                                       59
<PAGE>

(15) Unaudited Interim Financial Information
<TABLE>

                                                            Quarter ended
<CAPTION>

                                       March 31         June 30        September 30     December 31

1997 Operating Summary

    <S>                             <C>             <C>               <C>              <C>         
    Insurance revenues              $      8,175    $      8,587      $      8,526     $      8,854

    Net investment income           $     12,683    $     12,852      $     13,223     $      13,439

    Realized investment
     (losses) gains                 $       (393)   $        140      $        857     $       1,749

    Total revenues                  $     20,788    $     21,918      $     23,086     $      24,460

    Total benefits and expenses     $     17,597    $     17,901      $     18,849     $      20,206

    Net income                      $      2,127    $      2,679      $      2,826     $       2,841

    Earnings per common share       $        .37    $        .50      $        .53     $         .54

</TABLE>
<TABLE>
                                                            Quarter ended
<CAPTION>
                                       March 31         June 30        September 30     December 31

1996 Operating Summary

    <S>                             <C>             <C>               <C>              <C>         
    Insurance revenues              $      7,370    $      7,550      $      8,619     $      7,811

    Net investment income           $     11,750    $     11,937      $     11,827     $     12,668

    Realized investment
     (losses) gains                 $        (84)   $        (60)     $        (49)    $        315

    Total revenues                  $     19,324    $     19,697      $     20,644     $         21

    Total benefits and expenses     $     15,280    $     16,056      $     17,535     $     19,830

    Net income                      $      2,697    $      2,464      $      2,105     $        806

    Earnings per common share       $        .49    $        .44      $        .37     $        .09

</TABLE>


                                       60
<PAGE>

Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure

   None.
                                    Part III



Item 10.    Directors and Executive Officers of the Registrant


   The information under the caption  "Directors and Executive  Officers" in the
1998 Proxy Statement is incorporated herein by reference.


Item 11.    Executive Compensation


   The information under the caption "Compensation of Executive Officers" in the
1998 Proxy Statement is incorporated herein by reference.



Item 12.    Security Ownership of Certain Beneficial Owners and Management



   The  information  under the caption  "Security  Ownership  of  Directors  and
Executive  Officers"  in the 1998  Proxy  Statement  is  incorporated  herein by
reference.


Item 13.    Certain Relationships and Related Transactions


   The information under the caption "Certain Transactions and Relationships" in
the 1998 Proxy Statement is incorporated herein by reference.


                                       61
<PAGE>


                                     Part IV





Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K


Form 10-k
<TABLE>
<CAPTION>

(a)  List of Financial Statements and Schedules.                                                         Page(s)

     1.  Financial Statements.

           <S>                                                                                             <C>
           Independent Auditors' Report.                                                                   34

           Consolidated Statements of Income for the Years ended December 31, 1997, 1996,
           and 1995.                                                                                       35

           Consolidated Balance Sheets as of December 31, 1997 and 1996.                                  36-37

           Statements of Stockholders' Equity for the Years ended December 31, 1997, 1996,
           and 1995.                                                                                       38

           Consolidated Statements of Cash Flows for the Years ended December 31, 1997, 1996,
           and 1995.                                                                                       39

           Notes to Consolidated Financial Statements.                                                   40-60

</TABLE>

2.   Schedules.
<TABLE>
<CAPTION>

     Independent Auditors' Report on Schedules.

    <S>                                                                                                 <C>
     I.    Summary of Investments-Other Than Investments in Related Parties.                               69

     II.   Condensed Financial Information of Registrant.                                                70-73

     III.  Supplementary Insurance Information.                                                            74

     IV.   Reinsurance.                                                                                    75
</TABLE>

     All other  schedules  are omitted  since the  required  information  is not
     present or is not present in amounts  sufficient  to require  submission of
     the  schedule,  or because  the  information  required  is  included in the
     consolidated financial statements and notes thereto.


3.   Executive Compensation Plans and Arrangements.

     Short Term Management Incentive Compensation Plan for 1994 (Incorporated by
     reference to Exhibit 10.4 to the Company's June 30, 1994 Form 10-Q on file
     with the Commission), Exhibit 10.4.

     ALLIED Life Financial Corporation Executive Stock Option Plan (Incorporated
     by reference to the Company's Registration Statement on Form S-8 filed with
     the Commission on November 19, 1993,  Registration No.  33-71906),  Exhibit
     10.5.

     ALLIED Life Financial Corporation Outside Director Stock Purchase Plan
     (Incorporated by reference to the Company's Registration Statement on Form
     S-8 filed with the Commission on November 19, 1993, Registration 
     No. 33-71962), Exhibit 10.6.

     ALLIED Life  Financial  Corporation  Long-Term  Management  Incentive  Plan
     (Incorporated by reference to Exhibit 10.18 to the Company's March 31, 1994
     Form 10-Q on file with the Commission), Exhibit 10.18.

                                       62
<PAGE>

     Short Term Management Incentive Compensation Plan for 1995 (Incorporated by
     reference to Exhibit 10.23 to the Company's  December 31, 1994 Form 10-K on
     file with the Commission), Exhibit 10.23.

     Amendment  dated July 21,  1995,  the  ALLIED  Life  Financial  Corporation
     Executive Stock Option Plan  (Incorporated by reference to Exhibit 10.28 to
     the Company's June 30, 1995 Form 10-Q on file with the Commission), Exhibit
     10.28.

     Short Term Management  Incentive Plan for 1996 (Incorporate by reference to
     Exhibit  10.32 to the  Company's  December  31,  1995 Form 10-K on file 
     with the Commission), Exhibit 10.32.

     Short Term Management  Incentive Plan for 1997 (Incorporate by reference to
     Exhibit 10.35 to the Company's December 31, 1996 Form 10-K on file with the
     Commission), Exhibit 10.35.

     Amendment  dated  December  16, 1996 to ALLIED Life  Financial  Corporation
     Long-Term  Management  Incentive Plan  (Incorporate by reference to Exhibit
     10.36  to the  Company's  December  31,  1996  Form  10-K on file  with the
     Commission), Exhibit 10.36.

     Amendment  dated June 12,  1997 to The ALLIED  Life  Financial  Corporation
     Short Term Management  Incentive Plan  (Incorporate by reference to Exhibit
     10.41  to  the  Company's  June  30,  1997  Form  10-Q  on  file  with  the
     Commission), Exhibit 10.41.

     Short Term Management Incentive Plan for 1998, Exhbit 10.45.

(b) Reports on Form 8-K.

     There were no reports filed on Form 8-K during the fourth quarter ended
     December 31, 1997.


(c)  Exhibits.


     NOTE:  See "Index to Exhibits" on page number 77, which discloses the
            specific page numbers for the  exhibits included in this Form 10-K.

     3. Articles of incorporation and bylaws.



     3.1 Articles of  Incorporation  of ALLIED Life Financial  Corporation as of
         July 20, 1993 (Incorporated by reference to Exhibit 3.1 to the 
         Company's Registration Statement on Form S-1 filed with the Commission
         on September 16, 1993, Registration No. 33-68928).

     3.2  Bylaws  of  ALLIED  Life  Financial  Corporation  as of July  20,  
          1993 and Amendment to the Bylaws dated October 14, 1993, December 14,
          1994,  and  December  18, 1997 (Incorporated  by reference to Exhibit
          3.2 to the Company's  Form 8-K filed with the Commission on January 5,
          1998). 

     3.3 Articles of Amendment for Certificate of  Designations,  defining the
         rights of holders of 6.75% Series Preferred Stock of ALLIED Life
         Financial  Corporation (Incorporated by reference to Exhibit 3.3 to the
         Company's  Registration Statement on Form S-1 filed with the Commission
         on  September  16,  1993, Registration No. 33-68928).

     3.4 Amendment to Articles of Amendment for Certificate of Designations, 
         defining the rights of holders of 6.75% Series Preferred Stock of 
         ALLIED Life Financial Corporation (Incorporated by reference to Exhibit
         3.4 to the Company's Registration  Statement on Form S-1 filed with the
         Commission  on September 16, 1993, Registration No. 33-68928).

                                       63
<PAGE>

     3.5 Certificate of Designations, defining the rights of holders of Series A
         ESOP Convertible Preferred Stock of ALLIED Life Financial Corporation.
         (Incorporated by  reference to Exhibit 3.5 to the Company's June 30,
          1994 Form 10-Q on file with the Commission).


10.  Material contracts.


10.1 Long Term Management Incentive  Compensation Plan for 1991 (Incorporated by
reference to Exhibit 10.7 to the  Company's  Registration  Statement on Form S-1
filed with the Commission on September 16, 1993, Registration No. 33-68928).

10.2 Short Term and Long Term Management  Incentive  Compensation Plans for 1992
(Incorporated  by  reference  to  Exhibit  10.8  to the  Company's  Registration
Statement  on Form  S-1  filed  with  the  Commission  on  September  16,  1993,
Registration No. 33-68928).

10.3 Short Term and Long Term Management Incentive  Compensation Plans for 1993,
(Incorporated  by reference to Exhibit 10.3 to the  Company's  December 31, 1993
Form 10-K on file with the Commission).

10.4 Short Term Management Incentive  Compensation Plan for 1994,  (Incorporated
by reference to Exhibit  10.4 to the  Company's  June 30, 1994 Form 10-Q on file
with the Commission).

10.5 ALLIED Life Financial Corporation Executive Stock Option Plan (Incorporated
by reference to the Company's  Registration Statement on Form S-8 filed with the
Commission on November 19, 1993, Registration No. 33-71906).

10.6 ALLIED Life  Financial  Corporation  Outside  Director  Stock Purchase Plan
(Incorporated by reference to the Company's  Registration  Statement on Form S-8
filed with the Commission on November 19, 1993, Registration No. 33-71962).

10.8 Amended and Restated ALLIED Group Intercompany  Operating Agreement between
ALLIED Life  Insurance  Company and certain of its  affiliated  companies  dated
August 25, 1993  (Incorporated  by reference  to Exhibit  10.3 to the  Company's
Registration  Statement on Form S-1 filed with the  Commission  on September 16,
1993, Registration No.33-68928).

10.9 The ALLIED Group Joint  Marketing  Agreement  between ALLIED Life Insurance
Company and affiliated  property-casualty  insurance  companies dated August 30,
1993  (Incorporated  by reference to Exhibit 10.4 to the Company's  Registration
Statement  on Form  S-1  filed  with  the  Commission  on  September  16,  1993,
Registration No. 33-68928).

10.12 Federal Home Loan Bank Open Line of Credit Application and Terms Agreement
dated  March 13,  1997 with  ALLIED Life  Insurance  Company,  (Incorporated  by
reference  to Exhibit  10.12 to the  Company's  March 31, 1997 Form 10-Q on file
with the Commission).

10.15  First  Amendment  to  Amended  and  Restated  ALLIED  Group  Intercompany
Operating  Agree-Agreement  dated November 1, 1993 (Incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on Form S-1 filed with the
Commission on November 9, 1993, Registration No. 33-68928).

10.16 First  Amendment  to the ALLIED  Group  Joint  Marketing  Agreement  dated
November 1, 1993  (Incorporated  by reference to Exhibit  10.16 to the Company's
Registration  Statement  on Form S-1 filed with the  Commission  on  November 9,
1993, Registration No. 33-68928).

                                       64
<PAGE>

10.17 Stock Rights Agreement  between ALLIED Mutual Insurance Company and ALLIED
Life Financial  Corporation dated August 25, 1993  (Incorporated by reference to
Exhibit 10.1 to the Company's  Registration Statement on Form S-1 filed with the
Commission on September 16, 1993, Registration No. 33-68928).

10.18 ALLIED Life  Financial  Corporation  Long-Term  Management  Incentive Plan
(Incorporated by reference to Exhibit 10.18 to the Company's March 31, 1994 Form
10-Q on file with the Commission).

10.19  Second  Amendment  to Amended  and  Restated  ALLIED  Group  Intercompany
Operating  Agreement dated May 16, 1994,  (Incorporated  by reference to Exhibit
10.19 to the Company's June 30, 1994 Form 10-Q on file with the Commission).

10.21 The ALLIED Life  Financial  Corporation  Employee Stock  Ownership  Trust,
(Incorporated  by reference to Exhibit 10.21 to the Company's June 30, 1994 Form
10-Q on file with the Commission).

10.22 Stock  Purchase  Agreement  dated  October 27, 1994,  between  ALLIED Life
Financial Corporation and State Street Bank and Trust Company,  (Incorporated by
reference to Exhibit 10.22 to the Company's September 30, 1994 Form 10-Q on file
with the Commission).

10.23 Short Term Management  Incentive  Compensation Plan for 1995 (Incorporated
by reference to Exhibit  10.23 to the  Company's  December 31, 1994 Form 10-K on
file with the Commission).

10.24  Third  Amendment  to  Amended  and  Restated  ALLIED  Group  Intercompany
Operating  Agreement  dated  December  15, 1994  (Incorporated  by  reference to
Exhibit  10.24 to the  Company's  December  31,  1994 Form 10-K on file with the
Commission).

10.25 Consulting  Agreement between John E. Evans and ALLIED Group, Inc., ALLIED
Mutual Insurance Company,  and ALLIED Life Financial  Corporation dated December
14, 1994  (Incorporated by reference to Exhibit 10.25 to the Company's  December
31, 1994 Form 10-K on file with the Commission).

10.26  Stock  Purchase  Agreement  dated  January 3, 1995  between  ALLIED  Life
Financial  Corporation and State Street Bank and Trust Company  (Incorporated by
reference to Exhibit 10.26 to the Company's  December 31, 1994 Form 10-K on file
with the Commission).

10.28 First  Amendment to the ALLIED Life Financial  Corporation  Employee Stock
Ownership Plan (Incorporated by reference to Exhibit 10.28 to the Company's June
30, 1995 Form 10-Q on file with the Commission).

10.29  Amendment  dated July 21, 1995 to the ALLIED Life  Financial  Corporation
Executive Stock Option Plan  (Incorporated  by reference to Exhibit 10.29 to the
Company's June 30, 1995 Form 10-Q on file with the Commission).

                                       65
<PAGE>

10.30 Intercompany Cash Concentration Fund Agreement  (Incorporated by reference
to  Exhibit  to the  Company's  June  30,  1995  Form  10-Q  on  file  with  the
Commission).

10.31  Stock  Purchase  Agreement  dated  January 2, 1996  between  ALLIED  Life
Financial  Corporation and State Street Bank and Trust Company  (Incorporated by
reference to Exhibit 10.31 to the  Company's  December 31, 1995 10K on file with
the Commission).

10.32 Short Term Management  Incentive Plan for 1996  (Incorporated by reference
to Exhibit to the Company's December 31, 1995 10K on file with the Commission).

10.33 Amended and Restated Management  Information  Services Agreement Effective
January 1, 1995  (Incorporated  by reference to Exhibit  10.33 to the  Company's
December 31, 1995 10K on file with the Commission).

10.34  Stock  Purchase  Agreement  date  January  2, 1997  between  ALLIED  Life
Financial  Corporation and State Street Bank and Trust Company  (Incorporated by
reference to Exhibit 10.34 to the  Company's  December 31, 1996 10K on file with
the Commission).

10.35 Short Term Management Plan for 1997  (Incorporated by reference to Exhibit
10.35 to the Company's December 31, 1996 10K on file with the Commission).

10.36  Amendment  dated December 16, 1996 to ALLIED Life  Financial  Corporation
Long-Term  Management Incentive Plan (Incorporated by reference to Exhibit 10.36
to the Company's December 31, 1996 10K on file with the Commission).

10.37 Amendment dated December 18, 1996 to Consulting  Agreement between John E.
Evans and ALLIED Group, Inc., ALLIED Mutual Insurance  Company,  and ALLIED Life
Financial  Corporation  (Incorporated  by  reference  to  Exhibit  10.37  to the
Company's December 31, 1996 10K on file with the Commission).

10.38 Tax  Sharing  Agreement,  dated  January  1,  1997,  between  ALLIED  Life
Financial  Corporation,  ALLIED Life  Brokerage  Agency,  Inc., and ALLIED Group
Merchant Banking Corporation  (Incorporated by reference to Exhibit 10.38 to the
Company's December 31, 1996 10K on file with the Commission).

10.39 Amended and Restated Management  Information  Services Agreement Effective
March 1, 1996  (Incorporated  by  reference  to Exhibit  10.39 to the  Company's
December 31, 1996 10K on file with the Commission).

10.40 First Amendment to Amended and Restated  Management  Information  Services
Agreement Effective March 1, 1996 (Incorporated by reference to Exhibit 10.40 to
the Company's December 31, 1996 10K on file with the Commission).

10.41  Amendment  dated June 12, 1997 to The ALLIED Life  Financial  Corporation
Short Term Management  Incentive Plan (Incorporate by reference to Exhibit 10.41
to the Company's June 30, 1997 Form 10-Q on file with the Commission).

10.42 Second Amendment dated May 13, 1997 to Consulting  Agreement  between John
E. Evans and ALLIED Group,  Inc.,  ALLIED Mutual Insurance  Company,  and ALLIED
Life  Financial  Corporation  (Incorporate  by reference to Exhibit 10.42 to the
Company's June 30, 1997 Form 10-Q on file with the Commission).

10.43  Promissory  Note dated October 28, 1997 between  ALLIED Mutual  Insurance
Company and ALLIED Life  Financial  Corporation  (Incorporate  by  reference  to
Exhibit  10.43 to the  Company's  September  30, 1997 Form 10-Q on file with the
Commission).

                                       66
<PAGE>

10.44 1997 Incentive Plan ALLIED Life Vice President  Marketing  (Incorporate by
reference to Exhibit 10.44 to the Company's June 30, 1997 Form 10-Q on file with
the Commission).

10.45 Short Term Management Incentive Plan for 1998

10.46  Stock  Purchase  Agreement  dated  January 2, 1998  between  ALLIED  Life
Financial Corporation and State Street Bank and Trust Company.

11   Statement re Computation of Per Share Earnings.

21 Subsidiaries of the Registrant.

23 Consent of KPMG Peat Marwick LLP.

27 Financial Data Schedule.



(d)  Financial statements required by Regulation S-X which are excluded from the
     Annual Report to Stockholders by Rule 14a-3(b)(1).



     None.


                                       67
<PAGE>




                    INDEPENDENT AUDITORS' REPORT ON SCHEDULES



The Board of Directors and Stockholders

ALLIED Life Financial Corporation



Under date of February 12, 1998, we reported on the consolidated  balance sheets
of ALLIED Life Financial  Corporation  and  subsidiaries as of December 31, 1997
and 1996,  and the  related  consolidated  statements  of income,  stockholders'
equity,  and cash  flows for each of the years in the  three-year  period  ended
December 31, 1997, as contained in the 1997 Annual  Report.  In connection  with
our audits of the aforementioned consolidated financial statements, we also have
audited the related  consolidated  financial  statement schedules listed in Part
IV, Item  14(a)2.  These  consolidated  financial  statement  schedules  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statement schedules based on our audits.

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





                                                       /s/KPMG Peat Marwick LLP
                                                         KPMG Peat Marwick LLP



Des Moines, Iowa

February 12, 1998



                                       68
<PAGE>



               ALLIED Life Financial Corporation and Subsidiaries

                       SCHEDULE I-SUMMARY OF INVESTMENTS-

                    OTHER THAN INVESTMENTS IN RELATED PARTIES

                                December 31, 1997


<TABLE>
<CAPTION>



                    Column A                                 Column B           Column C         Column D


                                                                                                  Amount at
                                                                                                     which
                                                                                                   shown in
                                                             Amortized            Fair            the balance
             Type of Investment                                Cost               value              sheet

                                                                            (In thousands)

Fixed maturities available for sale:
     U.S. Treasury securities and obligations of U.S.
     <S>                                                      <C>               <C>                <C>        
       government corporations and agencies                   $    25,466       $     26,462       $    26,462
     Foreign governments                                            5,144              5,408             5,408
     Corporate securities and public utilities                    543,788            566,598           566,598
     Mortgage-backed securities                                   159,365            167,560           167,560


           Total fixed maturities available for sale              733,763       $    766,028           766,028



Equity Securities                                                   3,094       $      3,201             3,201

Mortgage loans on real estate                                         984                                  984
Policy loans                                                       11,164                               11,164
Other assets                                                        3,014                                3,014
Short-term investments                                              3,594                                3,594

           Total investments                                  $   755,613                          $   787,985


</TABLE>

                                       69
<PAGE>

               ALLIED Life Financial Corporation and Subsidiaries
                                   SCHEDULE II
               ALLIED Life Financial Corporation (Holding Company)
                             CONDENSED BALANCE SHEET
                           December 31, 1997 and 1996

<TABLE>
<CAPTION>



                                                                                   1997                1996

                                                                                       (In thosuands)
Assets

<S>                                                                              <C>                 <C>        
Investments in subsidiaries, at equity                                           $    116,419        $   101,327
Short-term investments, at cost                                                         1,205                203
Accounts receivable                                                                         1                  2
Current income taxes recoverable                                                          135                 43


              Total assets                                                       $    117,760        $   101,575


Liabilities

Note payable to  affiliates (note 2)                                             $      3,564        $     1,617
Other liabilities                                                                          39                 16


                                                                                        3,603              1,633


Stockholders' Equity

Preferred stock, no par value, issuable in series,
   authorized 7,500,000 shares
     6.75% Series, authorized 2,440 shares, issued and
     outstanding of 2,292 in 1997 and 2,144 in 1996                                    24,869             23,259
     ESOP Series, authorized 300 shares, issued and
     outstanding of 101 in 1997 and 94 in 1996                                          1,467              1,327
Common stock, no par value, $1 stated value,
   authorized 25,000 shares, issued and outstanding
   of 4,398 in 1997 and 4,497 in 1996                                                   4,398              4,497
Additional paid-in capital                                                             44,964             46,596
Retained earnings                                                                      29,404             21,751
Unrealized appreciation of investments, net                                             9,055              2,512


       Total stockholders' equity                                                     114,157             99,942


       Total liabilities and stockholders' equity                                $    117,760        $   101,575

</TABLE>


            See accompanying Note to Condensed Financial Statements.


                                       70
<PAGE>

            ALLIED Life Financial Corporation SubsidiariesSCHEDULE II
               ALLIED Life Financial Corporation (Holding Company)
                          CONDENSED STATEMENT OF INCOME
              For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
                                                               1997                1996                1995

                                                                             (In thousands)

<S>                                                       <C>                <C>                 <C>            
Equity in undistributed earnings of subsidiaries          $         8,547    $          6,698    $         8,746

Dividends received from subsidiaries                                2,100               1,475                925

Investment income                                                      44                  25                185

Realized investment gains                                           -----               -----                 65


                                                                   10,691               8,198              9,921


Operating expenses                                                    157                 154                180

Interest expense                                                      181                  44              -----


                                                                      338                 198                180


Income before income taxes                                         10,353               8,000              9,741

Income tax (benefit) expense                                         (120)                (73)                29


       Net income (note 1)                                $        10,473    $          8,073    $         9,712


</TABLE>


            See accompanying Note to Condensed Financial Statements.


                                       71
<PAGE>


               ALLIED Life Financial Corporation and Subsidiaries
                                   SCHEDULE II
               ALLIED Life Financial Corporation (Holding Company)
                        CONDENSED STATEMENT OF CASH FLOWS
              For the years ended December 31, 1997, 1996 and 1995


<TABLE>

<CAPTION>

                                                                 1997                  1996               1995


Cash Flows from Operating Activities
   <S>                                                  <C>                  <C>                  <C>          
   Net income                                                $   10,473           $    8,073           $  9,712
   Adjustments to reconcile net income to net cash
     provided by operating activities
       Equity in undistributed earnings                          (8,547)              (6,698)            (8,746)
       Realized investment gains                                  -----                -----                (65)
       Accrued investment income                                  -----                -----                 21
       Income taxes                                                 (92)                 (42)                (5)
       Other, net                                                    24                   13                (94)


         Net cash provided by operating activities                1,858                1,346                823


Cash Flows from Investing Activities
   Purchase of fixed maturities available for sale                -----                -----             (1,635)
   Proceeds from sale of fixed maturities
     available for sale                                           -----                -----              4,432
   Investments in subsidiaries                                    -----                -----             (3,500)


         Net cash used in investing activities                    -----                -----               (703)


Cash Flows from Financing Activities
   Proceeds from note payable to affiliate, net                   1,946                1,617              -----
   Proceeds from issuance of common stock, net                      569                  189                588
   Proceed from issuance of preferred stock, net                    317                  249                194
   Dividends paid to stockholders                                (1,210)              (1,053)              (870 )
   Repurchase of common stock                                    (2,478)              (2,541)             -----


         Net cash provided by financing activities                 (856)              (1,539)               (88)


Net Increase in Cash and Short-term
   investments                                                    1,002                 (193)                32
Cash and short-term investments at beginning
   of year (period)                                                 203                  396                364


Cash and short-term investments at end of year               $    1,205           $      203           $    396


</TABLE>



            See accompanying Note to Condensed Financial Statements.


                                       72
<PAGE>

               ALLIED Life Financial Corporation and Subsidiaries
                                   SCHEDULE II
               ALLIED Life Financial Corporation (Holding Company)
                     NOTE TO CONDENSED FINANCIAL STATEMENTS


The accompanying  condensed  financial  statements should be read in conjunction
with the  consolidated  financial  statements  and notes  thereto of ALLIED Life
Financial Corporation and its subsidiaries.





(1)  Basis of presentation.



     The accompanying  condensed  financial  statements of ALLIED Life Financial
Corporation  (ALFC) have been prepared in  conformity  with  generally  accepted
accounting principles (GAAP).



(2) Note payable to affiliate



     ALFC has entered into several note payable  agreements  with ALLIED Mutual.
At December 31, 1997 and 1996, the outstanding balance of the note-payables were
approximately  $3.6 million and $1.6  million.  In 1997 and 1996,  ALFC incurred
interest  expense  of  approximately   $181,000  and  $44,000  relating  to  the
note-payables.


                                       73
<PAGE>


               ALLIED Life Financial Corporation and Subsidiaries

               SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>

              For the years ended December 31, 1997, 1996 and 1995
<CAPTION>
Column A                Column B   Column C   Column D  Column E   Column F     Column G     Column H   Column I   Column J Column K

                                                                          (In thousands)
                                      Future
                                      policy              Other
                                     benefits,            policy                           Benefits,  Amortization
                        Deferred      losses,             Claims     Insurance              claims,    of deferred
                       policy      claims and  Unearned    and      premiums and   Net     losses and   policy      Other
                      acquisition     loss     revenue    benefits    other     investment settlement acquisition operating Premiums
 Segment                costs       expenses   reserve   payable considerations   income   expenses    costs      expense   written


Year ended December 31, 1997:
 
          
<S>                      <C>          <C>          <C>         <C>       <C>        <C>        <C>      <C>        <C>       <C>    
 Life insurance         $84,188      $757,473      $-----      $5,879    $34,143    $52,132    $51,392  $11,097    $10,482   $ -----
  Other                   -----         -----       -----       -----      -----         65     -----     -----      1,583     -----

  Consolidated          $84,188      $757,473      $-----      $5,879    $34,143    $52,197    $51,392  $11,097    $12,065   $ -----


Year ended December 31, 1996:

  Life insurance        $92,418      $692,551      $-----      $5,312    $31,350    $48,145    $47,988  $10,595    $ 9,030   $ -----
  Other                  -----         -----        -----       -----      -----         37      -----    -----      1,087     -----

  Consolidated          $92,418      $692,551      $-----      $5,312    $31,350    $48,182    $47,988  $10,595    $10,117   $ -----


Year ended December 31, 1995:

   Life insurance       $79,718      $616,654      $-----      $5,695    $29,934    $45,215     $46,063 $ 5,941    $ 8,246   $ -----
   Other                 -----          -----       -----       -----      -----        196       -----   -----        792     -----

   Consolidated         $79,718      $616,654      $-----      $5,695    $29,934    $45,411     $46,063 $ 5,941    $ 9,038   $ -----


</TABLE>

                                       74
<PAGE>



               ALLIED Life Financial Corporation and Subsidiaries
                            SCHEDULE IV - REINSURANCE
              For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>

     Column A                     Column B          Column C         Column D           Column E     Column F

                                                  (In thousands)
                                                                                                     Percentage
                                                                       Assumed                        of amount
                                                   Ceded to other    from other                      assumed to
                                 Gross amount        companies        companies         Net amount       net

Year ended December 31, 1997:
     <S>                       <C>               <C>               <C>               <C>                  <C> 
     Life insurance in force   $ 9,536,681       $ (2,359,213)     $      92,959     $   7,270,427        1.3%

     Premiums:
       Life insurance premiums:
         and charges (1)       $    35,912       $     (7,003)     $         215     $      29,124        0.7%

         Accident and
         health insurance            3,514             (3,638)             -----              (124)       -----

         Total premiums        $    39,426       $    (10,641)     $         215     $      29,000        0.7%



Year ended December 31, 1996:

     Life insurance in force   $ 8,855,654       $  (2,633,078)    $     103,660      $  6,326,236        1.6%

     Premiums:
       Life insurance premiums:
         and charges (1)       $    33,500       $      (6,275)    $         232      $     27,457        0.8%

         Accident and
         health insurance            2,230              (2,232)           -----                 (2)      -----

         Total premiums        $    35,730       $      (8,507)    $         232      $     27,455        0.8%




Year ended December 31, 1995:

     Life insurance in force   $ 7,995,050       $ (2,538,119)     $     119,466      $  5,576,397        2.1%

     Premiums:
       Life insurance premiums:
         And charges (1)       $    32,350       $     (6,388)     $         228      $     26,190        0.8%

         Accident and
         health insurance            1,376             (1,372)             -----                 4      -----

           Total premiums      $    33,726       $     (7,760)     $         228      $     26,194       0.9%


<FN>
(1) Includes life insurance  premiums and policyholder  assessments on universal
life contracts.
</FN>
</TABLE>


                                       75
<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.


                                              ALLIED Life Financial Corporation
                                                       (Registrant)


Date: March 3, 1998                      By    /s/ Wendell P. Crosser
                                                Wendell P. Crosser
                                                Vice President and Treasurer
                                               (Principal Financial Officer and
                                                Principal Accounting Officer)



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


      Signature             Title                              Date


  /s/ SAMUEL J. WELLS       President (Principal Executive     March 3, 1998
      Samuel J. Wells                     Officer)

  /s/ WENDELL P. CROSSER    Vice President and Treasurer       March 3, 1998
      Wendell P. Crosser

  /s/ JOHN E. EVANS         Chairman of the Board and Director March 3, 1998
      John E. Evans

  /s/ JAMES W. CALLISON     Director                           March 3, 1998
      James W. Callison

  /s/ HAROLD S. EVANS       Director                           March 3, 1998
      Harold S. Evans

  /s/ DENNIS H. KELLY, JR.  Director                           March 3, 1998
      Dennis H. Kelly, Jr.

  /s/ GEORGE D. MILLIGAN    Director                           March 3, 1998
      George D. Milligan
                           

                                       76
<PAGE>



     ALLIED Life Financial Corporation and Subsidiaries

                                                 INDEX TO EXHIBITS
<TABLE>
<CAPTION>

Exhibit
Number                                             Item                                                 Page

<S>                            <C>                                                                      <C>               
10.45                          Short Term Management Incentive Plan for 1998                             78

10.46                          Stock Purchase Agreement dated January 2, 1998
                               between ALLIED Life Financial Corporation
                               and State Street Bank and Trust Company                                   83


11                             Statement re Computation of Per Share Earnings                            94

21                             Subsidiaries of the Registrant                                            95

23                             Consent of KPMG Peat Marwick LLP                                          96

27                             Financial Data Schedule                                                   97

</TABLE>
                                        77