AMERICAN FIDELITY SEPARATE ACCOUNT A, 497, 1999-01-12

AMERICAN FIDELITY SEPARATE ACCOUNT A
497, 1999-01-12

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Filed pursuant to rule 497(e)
Registration No: 002-30771

PROSPECTUS

AMERICAN FIDELITY LOGO
GROUP VARIABLE ANNUITY CONTRACTS

AMERICAN FIDELITY SEPARATE ACCOUNT A

American Fidelity Separate Account A ("Separate Account A") is offering
group variable annuity contracts ("Contracts") issued by American Fidelity
Assurance Company (we or "American Fidelity") to employers and self-employed
individuals for use in qualified retirement plans.

The assets of Separate Account A will be invested solely in American
Fidelity Dual Strategy Fund ("Dual Strategy Fund"). Dual Strategy Fund has as
its primary investment objective long-term growth of capital which it endeavors
to achieve through a diversified investment portfolio consisting primarily of
common stock. A secondary investment objective of Dual Strategy Fund is the
production of income. Any income and realized capital gains will be reinvested
in shares of Dual Strategy Fund. The value of a Contract will vary with the
investment performance of Dual Strategy Fund. There is no assurance that the
investment objectives of Dual Strategy Fund will be met. The Participants in
each Contract bear the entire investment risk for amounts invested under the
Contracts.

This Prospectus sets forth information about the Contracts and Separate
Account A that a prospective investor ought to know before investing. To learn
more about the Contracts and Separate Account A, you may obtain a copy of the
Statement of Additional Information ("SAI") dated January 11, 1999. The SAI has
been filed with the Securities and Exchange Commission ("SEC") and is
incorporated by reference into this Prospectus. The SEC maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated by reference
and other material regarding companies that file electronically with the SEC.
The table of contents of the SAI appears on the last page of this Prospectus.
For a free copy of the SAI, call (800) 654-8489 or write to us at P.O. Box
25523, Oklahoma City, Oklahoma 73125-0523.

INVESTMENT IN A VARIABLE ANNUITY CONTRACT IS SUBJECT TO RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. INTERESTS IN THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL INSTITUTION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------

THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR
FUTURE REFERENCE

January 11, 1999
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Glossary of Terms........................................... 3
Summary..................................................... 4
Fee Table................................................... 5
Condensed Financial Information............................. 6
Performance................................................. 6
American Fidelity, Separate Account A and Dual Strategy
Fund...................................................... 7
American Fidelity......................................... 7
Separate Account A........................................ 7
Dual Strategy Fund........................................ 7
Voting Rights............................................. 8
Substitution.............................................. 8
The Contract................................................ 8
Annuity Provisions.......................................... 9
Annuity Date.............................................. 9
Selection of an Annuity Option............................ 9
Annuity Payments.......................................... 9
Annuity Options........................................... 10
Purchasing Accumulation Units............................... 10
Premium Deposits.......................................... 10
Accumulation Units........................................ 10
Expenses.................................................... 11
Sales Charge.............................................. 11
Insurance Charges......................................... 11
Premium Taxes............................................. 12
Income Taxes.............................................. 12
Dual Strategy Fund Expenses............................... 12
Withdrawals................................................. 12
Death Benefit............................................... 12
Federal Tax Matters......................................... 13
General................................................... 13
Taxes Payable by Participants and Annuitants.............. 13
Section 403(b) Annuities for Employees of Certain
Tax-Exempt Organizations or Public Educational
Institutions........................................... 14
Sections 401(a) and 403(a) Qualified Pension,
Profit-Sharing or Annuity Plans........................ 15
Individual Retirement Annuities (IRAs).................... 15
Diversification........................................... 17
Other Information........................................... 17
Distribution.............................................. 17
Legal Proceedings......................................... 17
Financial Statements...................................... 17
Table of Contents of Statement of Additional Information.... 18
</TABLE>

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GLOSSARY OF TERMS

Some of the terms used in this Prospectus are technical. To help you
understand these terms, we have defined them below and have capitalized them
throughout the Prospectus.

Accumulation Period: The period of time between becoming a Participant and
the commencement of Annuity Payments.

Accumulation Unit: A standard of measurement used to measure the value of
each Participant Account.

Annuitant: The Participant on whose life Annuity Payments will be based and
who will receive Annuity Payments pursuant to a Contract.

Annuity: A series of installment payments for the life of the Annuitant, or
for the joint lifetime of the Annuitant and another person and thereafter during
the lifetime of their survivor, with either a minimum number of payments or a
specific sum.

Annuity Date: The date Annuity Payments begin.

Annuity Options: The four alternative methods to receive Annuity Payments
available under the Contract.

Annuity Payments: Payments made after retirement to Annuitants pursuant to
the Contract.

Annuity Period: The period of time between commencement of Annuity Payments
and the payment of the last Annuity Payment due under the Contract.

Annuity Unit: A measure used to calculate the amount of Annuity Payments.

Contract: The master group contract between American Fidelity and a
Contract Owner.

Contract Owner: The entity to which a Contract is issued, which is normally
the employer of Participants or an organization representing such employer.

Participant: A person having an interest in a Contract through Premium
Deposits, but who has not begun to receive Annuity Payments.

Participant Account: The account we maintain for each Participant
reflecting the Accumulation Units credited to the Participant.

Premium Deposit: Money invested by or on behalf of Participants in a
Contract.

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SUMMARY

The following information is a summary of some of the more important
features of your Contract. More detailed information is contained in the
corresponding sections of this Prospectus.

The Contract. The Contract is a group deferred variable annuity policy
issued by American Fidelity. It is a contract between the Contract Owner and
American Fidelity, which is an insurance company. The Contract provides a means
for investing on a tax deferred basis in Dual Strategy Fund. The Contract is
designed for people seeking long-term tax deferred accumulation of assets,
generally for retirement or other long-term purposes. The tax deferred feature
is most attractive to people in high federal and state tax brackets. You should
not become a Participant if you are looking for a short-term investment or if
you cannot accept the risk of getting back less money than you put in.

Like all deferred annuities, the Contract has two phases: the Accumulation
Period and the Annuity Period. During the Accumulation Period, you invest money
in your annuity on a pre-tax basis (subject to limitations explained under
"Federal Tax Matters"), and your earnings accumulate on a tax deferred basis.
Your earnings are based on the investment performance of Dual Strategy Fund. You
can withdraw money from your Participant Account during the Accumulation Period;
federal income tax and penalties may apply if you make withdrawals before age
59 1/2. The Annuity Period occurs when you begin receiving regular payments from
your Participant Account. Among other factors, the amount of the payments you
may receive during the Annuity Period will depend upon the amount of money you
are able to accumulate in your Participant Account during the Accumulation
Period.

Dual Strategy Fund. Premium Deposits are used to purchase, at net asset
value, shares of Dual Strategy Fund. Dual Strategy Fund has investment
objectives and policies that are described in the accompanying prospectus for
Dual Strategy Fund. You can make or lose money on your investment, depending
upon market conditions.

Annuity Provisions. You may receive monthly Annuity Payments from your
Contract under an Annuity Option.

Purchasing Accumulation Units. You may make Premium Deposits at any time
during the Accumulation Period to increase the number of Accumulation Units in
your Participant Account. The minimum initial Premium Deposit is $20 and the
minimum Premium Deposit thereafter is $10. You must complete an application and
make your first Premium Deposit to become a Participant. Accumulation Units are
valued each business day based on the investment performance of Dual Strategy
Fund after deduction of the mortality and expense risk charge.

Expenses. There is a one-time fee of $15 deducted from the initial Premium
Deposit of each Participant, and $.50 is deducted from each Premium Deposit. In
addition, American Fidelity deducts sales, administrative expense and minimum
death benefit expense charges from each Premium Deposit at the time of payment.
These charges, as a percentage of Premium Deposits, are as follows: 3% sales
charge, .25% administrative expense, and .75% minimum death benefit expense. The
annual mortality and expense risk charge deducted from the average daily value
of your Participant Account every year is .96025%.

Some states require the payment of premium taxes on Premium Deposits or
Annuity Payments. Presently, premium taxes range from 0 to 4.0%.

Because Separate Account A purchases shares of Dual Strategy Fund, the net
assets of Separate Account A will reflect the investment advisory fee and
portfolio expenses incurred by Dual Strategy Fund. Dual Strategy Fund pays its
investment adviser, American Fidelity, an annual management and investment
advisory fee of .50% of the value of the average daily net assets of Dual
Strategy Fund.

Withdrawals. You may make a withdrawal at any time during the Accumulation
Period. There are no fees charged upon withdrawals. Under federal tax laws,
there are limits to the amount you can withdraw, and you may also have to pay
income tax and a tax penalty on any money you take out. If a withdrawal causes a
Participant Account to have a remaining value of less than $1,000, we may redeem
all your Accumulation

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Units and cancel your Participant Account. After a complete withdrawal, you may
not establish a new Participant Account without our consent.

Although the Contract has no "free-look" provision, you do have the right
to withdraw all or part of the value of your Participant Account at any time
without paying a withdrawal fee.

Death Benefit. If you die during the Accumulation Period, the person you
have selected as your beneficiary will receive a death benefit. In most cases,
when you die, your beneficiary will receive the death benefit without going
through probate.

Federal Tax Matters. Generally, the Premium Deposits you make are
excludable from your gross income, and earnings are not taxed until you make
withdrawals. In most cases, if you take money out, earnings come out first and
are taxed as income. If you are younger than 59 1/2 when you take money out, you
may be charged a federal tax penalty on the taxable amounts withdrawn, which in
most cases is 10% on the taxable amounts. All payments during the Annuity Period
are taxable.

Inquiries. If you have any questions about your Contract or need more
information, please contact us at:

American Fidelity Assurance Company
Annuity Services Department
P.O. Box 25523
Oklahoma City, OK 73125-0523
(800) 654-8489

FEE TABLE

<TABLE>
<S> <C>
Contract Owner Transaction Expenses (as a percentage of
purchase payments)
Sales Charges............................................. 3.00%
Administrative Expense.................................... 0.25%
Minimum Death Benefit Expense............................. 0.75%
Deferred Sales Load....................................... None
Surrender Fees............................................ None
Exchange Fee.............................................. None
Per Payment Charge.......................................... $ 0.50
One-time Contract Certificate Fee........................... $15.00
Separate Account A Annual Expenses (as a percentage of
average account value)
Mortality and Expense Risk Fees........................... .96025%
Dual Strategy Fund Annual Expenses (as a percentage of its
average net assets)
Management Fee............................................ .50000%
</TABLE>

The purpose of the fee table is to show you the various costs and expenses
that you will bear directly or indirectly. The table reflects the expenses of
both Separate Account A and Dual Strategy Fund. For a more complete explanation
of each of the expense components, see "Expenses" in this Prospectus as well as
the description of expenses of Dual Strategy Fund in the accompanying
prospectus. Premium taxes are not shown in the fee table, but may be charged by
some states on purchase payments or amounts annuitized. Presently, premium taxes
range from 0 to 4.0%.

EXAMPLE

If you surrender your Contract or if you annuitize at the end of the
applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$69 $99 $131 $221
</TABLE>

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This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown above.
Similarly, the 5% annual rate of return assumed in the example is not an
estimate or guarantee of future performance. Under federal income tax laws, a
penalty tax may be assessed upon withdrawal of amounts accumulated under a
Contract prior to commencement of Annuity Payments.

CONDENSED FINANCIAL INFORMATION

The following table shows Accumulation Unit values and the number of
Accumulation Units outstanding for Separate Account A's predecessor, American
Fidelity Variable Annuity Fund A, as of the dates indicated. The information is
derived from the financial statements of American Fidelity Variable Annuity Fund
A. Beginning January 1, 1999, Accumulation Unit information for Separate Account
A will reflect its operations as a unit investment trust investing in Dual
Strategy Fund.

<TABLE>
<CAPTION>
1997 1996 1995(A) 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit value:
Beginning of year........ $15.339 $12.199 $ 9.094 $9.709 $9.108 $8.866 $6.924 $6.514 $5.110 $4.601
End of year.............. $19.463 $15.339 $12.199 $9.094 $9.709 $9.108 $8.866 $6.924 $6.514 $5.110
Number of Accumulation
Units outstanding at end
of year (in 000's)....... 7,044 6,443 5,997 5,616 5,114 4,644 4,268 4,041 3,806 3,840
</TABLE>

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

(a) Investment management by the present sub-advisors commenced October 2, 1995.

The Accumulation Unit values at the beginning of 1998 and at June 30, 1998 were
$19.463 and $22.694, respectively, with 7,393,375 Accumulation Units outstanding
at the end of the period.

PERFORMANCE

Separate Account A may from time to time advertise performance in sales
literature, advertisements and reports to Contract Owners. Performance will be
calculated on the basis of total return and average annual total return for one,
five and ten year periods, assuming an initial investment of $1,000, the
deduction of all sales charges and other expenses from investment results and
the reinvestment of dividends and distributions during the period. Total return
is calculated by subtracting the initial investment from the ending value for a
specified period, dividing the difference by the initial investment and
converting the quotient to a percentage. Average annual total return is
calculated pursuant to a standardized formula and is expressed as a percentage
rate which, if applied on a compounded annual basis to the original investment,
would result in the value of the investment at the end of the period.
Performance calculations do not reflect the deduction of any premium taxes.

Any past performance results are not an indication of future results.
Further information regarding Separate Account A's performance is contained in
the SAI.

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AMERICAN FIDELITY, SEPARATE ACCOUNT A AND DUAL STRATEGY FUND

AMERICAN FIDELITY

American Fidelity Assurance Company is an Oklahoma stock life insurance
company incorporated under the laws of the State of Oklahoma in 1960. Its
principal executive offices are located at 2000 N. Classen Boulevard, Oklahoma
City, Oklahoma 73106, telephone number (405) 523-2000. American Fidelity is
licensed to conduct life, annuity and accident and health insurance business in
49 states and the District of Columbia.

American Fidelity has been a wholly owned subsidiary of American Fidelity
Corporation since 1974. The stock of American Fidelity Corporation is controlled
by a family investment partnership, Cameron Enterprises, A Limited Partnership,
whose managing general partners are William M. Cameron, William E. Durrett,
Edward C. Joullian, III, John W. Rex and Theodore M. Elam. The address of both
American Fidelity Corporation and Cameron Enterprises, A Limited Partnership is
2000 N. Classen Boulevard, Oklahoma City, Oklahoma 73106. American Fidelity
served as the investment adviser to Separate Account A's predecessor, American
Fidelity Variable Annuity Fund A, and is presently the investment adviser to
Dual Strategy Fund.

Like other financial and business organizations and individuals around the
world, Separate Account A and Dual Strategy Fund could be adversely affected if
the computer systems used by American Fidelity and its service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." We have had
a formal project team (including 22 information systems professionals) working
to correct the problem since 1996. In the briefest terms, the correction is to
change all date-related fields in our computer systems to four digits instead of
two digits. At the same time, all relationships with systems outside American
Fidelity must be checked for the same change and all must be tested to determine
that relationships continue to be compatible. Those systems tested on December
31, 1997 and 1998 and went through year-end processing without incident each
time. Even though management of American Fidelity is expending considerable
resources in a concerted effort to meet this technology-related threat, there is
no guarantee that there will be no adverse impact on Separate Account A or Dual
Strategy Fund of some sort as January 1, 2000 passes.

SEPARATE ACCOUNT A

American Fidelity's Board of Directors adopted a resolution on May 7, 1968
to establish Separate Account A as a separate account under Oklahoma insurance
law. Separate Account A operated under the name American Fidelity Variable
Annuity Fund A and was organized as an open-end diversified management
investment company with its own portfolio of securities. On January 1, 1999,
Separate Account A was reorganized to its present form as a unit investment
trust. As part of the reorganization, the assets of the managed account were
transferred intact to Dual Strategy Fund in exchange for shares of Dual Strategy
Fund. Separate Account A is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940. Separate Account A has no
sub-accounts.

The assets of Separate Account A are held in American Fidelity's name on
behalf of Separate Account A and legally belong to American Fidelity. Under
Oklahoma law, however, those assets may not be charged with liabilities arising
out of other business activities of American Fidelity. All income, gains and
losses, realized or unrealized, are credited to or charged against Separate
Account A Contracts without regard to income, gains and losses of American
Fidelity. American Fidelity is obligated to pay all benefits and make all
payments under the Contracts.

DUAL STRATEGY FUND

Separate Account A invests exclusively in American Fidelity Dual Strategy
Fund. As part of the reorganization of Separate Account A into a unit investment
trust, effective January 1, 1999, its securities portfolio was transferred to
Dual Strategy Fund, which is a newly established open-end diversified management
investment company.
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Pursuant to a management and investment advisory agreement and subject to
the authority of Dual Strategy Fund's Board of Directors, American Fidelity
serves as Dual Strategy Fund's investment adviser and conducts the business and
affairs of Dual Strategy Fund. American Fidelity has engaged Lawrence W. Kelly &
Associates, Inc. and Todd Investment Advisors, Inc. as sub-advisers to provide
day-to-day portfolio management for Dual Strategy Fund.

Dual Strategy Fund offers its shares to Separate Account A as a funding
vehicle for the Contracts. Dual Strategy Fund does not offer its shares directly
to the general public. In the future, Dual Strategy Fund shares may be offered
to other separate accounts supporting other variable annuity contracts.

Dual Strategy Fund's investment objectives are, first, long-term growth of
capital and, second, the production of income. Dual Strategy Fund invests in a
diversified portfolio consisting primarily of common stock. Meeting investment
objectives depends on various factors, including how well the portfolio managers
anticipate changing economic and market conditions. There is no assurance that
Dual Strategy Fund will achieve its objectives.

Additional information concerning Dual Strategy Fund can be found in the
current prospectus for Dual Strategy Fund which accompanies this Prospectus. You
should read Dual Strategy Fund's prospectus carefully before investing.

VOTING RIGHTS

American Fidelity is the legal owner of the Dual Strategy Fund shares
allocated to Separate Account A. However, we believe that when Dual Strategy
Fund solicits proxies in conjunction with a shareholder vote, we are required to
obtain from Contract Owners (based on instructions they receive from their
respective Participants and Annuitants) instructions as to how to vote those
shares. When we receive the instructions, we will vote all of the shares we own
for the benefit of Separate Account A in proportion to those instructions.
Should we determine that we are no longer required to comply with the above, we
will vote the shares in our own right.

SUBSTITUTION

We cannot guarantee that Dual Strategy Fund will always be available for
our variable annuity products. If it should not be available, we will try to
replace it with a comparable fund. A substitution of shares attributable to the
Contracts will not be made without prior notice to Contract Owners, Participants
and Annuitants and the prior approval of the SEC in conformity with the
Investment Company Act of 1940.

THE CONTRACT

A group annuity is a contract between the Contract Owner, on behalf of its
Participants, and an insurance company (in this case American Fidelity), where
the insurance company promises to pay you (or someone else you choose) an income
in the form of Annuity Payments beginning on a date chosen by you. Until you
decide to begin receiving Annuity Payments, your annuity is in the Accumulation
Period. Once you begin receiving Annuity Payments, your annuity is in the
Annuity Period. If you or the Annuitant dies during the Accumulation Period,
American Fidelity will pay a death benefit to your beneficiary.

The Contract benefits from tax deferral. Tax deferral means that you are
not taxed on earnings or appreciation on the assets in your Contract until you
take money out of your Contract.

The Contract is called a variable annuity because, depending upon market
conditions, you can make or lose money invested in Dual Strategy Fund. The
amount of money you are able to accumulate in your Participant Account during
the Accumulation Period and the Annuity Payments you will be entitled to receive
depend in large part upon the investment performance of Dual Strategy Fund.

The beneficiary is the person(s) or entity you name to receive any death
benefit. The beneficiary is named at the time you become a Participant in the
Contract unless changed at a later date. If the beneficiary

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and the Participant or Annuitant, as applicable, die at the same time, we will
assume that the beneficiary died first for purposes of payment of the death
benefit. You can name any beneficiary to be an irrevocable beneficiary. The
interest of an irrevocable beneficiary cannot be changed without his or her
consent.

You can change the beneficiary at any time during the Annuitant's life. To
do so, you need to send a request to our home office. The request must be on a
form we accept. The change will go into effect when signed, subject to any
payments we make or actions we take before we record the change. A change
cancels all prior beneficiaries, except a change will not cancel any irrevocable
beneficiary without his or her consent. The interest of the beneficiary will be
subject to any Annuity Option in effect at the Annuitant's death.

American Fidelity may change the Contract at any time if required by state
or federal laws. After a Contract has been in force for three years, we may
change any term of the Contract except that benefits already earned by
Participants cannot be decreased and guaranteed monthly life incomes cannot be
decreased. We will notify Contract Owners of any change at least 90 days before
a change will take effect.

ANNUITY PROVISIONS

ANNUITY DATE

You may receive regular monthly income payments (Annuity Payments) under
your Contract. You may choose the month and year in which those payments begin.
We call that date the Annuity Date. You may select an Annuity Date at any time
during the Accumulation Period. You must notify us of this date at least 30 days
prior to the date you want your Annuity Payments to begin. Prior to the Annuity
Date, you may change the Annuity Date by written request. Any change must be
requested at least 30 days prior to the new Annuity Date. Your Annuity Date must
be the first day of a calendar month. The Annuity Date may not be later than the
earliest to occur of the distribution date required by federal law, the Contract
Owner's tax-qualified plan or, if applicable, state law.

SELECTION OF AN ANNUITY OPTION

If the value of your Participant Account is at least $1,000, you may choose
among income plans. We call those Annuity Options. If your Account is less than
$1,000, we reserve the right to pay you the amount of your Participant Account
in one lump sum. An election to receive Annuity Payments under an Annuity Option
must be made at least 30 days prior to the Annuity Date. If no option is
selected, Option 2 with 120 monthly payments guaranteed will automatically be
applied. Once an Annuity Option has been selected, you may not change to another
Annuity Option. Prior to the Annuity Date, you may change the Annuity Option
selected by written request. Any change must be requested at least 30 days prior
to the Annuity Date. If an option is based on life expectancy, we will require
proof of the payee's date of birth.

ANNUITY PAYMENTS

Annuity Payments are paid in monthly installments, although we have the
right to change the frequency of payments. Should Annuity Payments become less
than $20, we may change the payment interval to result in payments of at least
$20. Annuity Payments may be made on a variable basis (which means they will be
based on the investment performance of Dual Strategy Fund) and/or on a fixed
basis (which means Annuity Payments are fixed as of the Annuity Date applying an
annual rate of interest of 4%). Depending on your election, the value of your
Participant Account (adjusted for any taxes) will be applied to provide the
Annuity Payment. If you choose to have any portion of your Annuity Payments
based on a variable Annuity Option, the dollar amount of your payment will
depend upon three things: (1) the value of your Participant Account on the
Annuity Date, (2) the assumed investment rate used in the annuity table for the
Contract, and (3) the performance of Dual Strategy Fund. The assumed investment
rate will be 4.5%. If the actual performance exceeds the 4.5% assumed rate, your
Annuity Payments will increase. Similarly, if the actual rate is less than 4.5%,
your Annuity Payments will decrease. The amount of the first Annuity Payment
will depend on the Annuity Option elected and the age of the Annuitant at the
time the first payment is due.

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ANNUITY OPTIONS

You may choose one of the following Annuity Options. After Annuity Payments
begin, you cannot change the Annuity Option.

OPTION 1. Life Variable Annuity: We will make monthly payments during the
life of the Annuitant. If this option is elected, payments will stop when the
Annuitant dies.

OPTION 2. Life Variable Annuity with Payments Certain: We will make monthly
payments for the guaranteed period selected during the life of the Annuitant.
When the Annuitant dies, any amounts remaining under the guaranteed period
selected will be distributed to the beneficiary at least as rapidly as they were
being paid as of the date of the Annuitant's death. If the beneficiary dies
before the end of the guaranteed period, the present value of the remaining
payments will be paid to the estate of the beneficiary based on an annual
compound interest rate of 3 1/2%. The guaranteed period may be 10 years, 15
years or 20 years.

OPTION 3. Unit Refund Life Variable Annuity: We will make monthly payments
during the lifetime of the Annuitant. Upon the Annuitant's death, we will make
an additional payment equal to the value at the date of death of the number of
Variable Annuity Units equal to the excess, if any, of (a) the total amount
applied under this option divided by the Variable Annuity Unit value on the
Annuity Date over (b) the Variable Annuity Units represented by each Annuity
Payment multiplied by the number of Annuity Payments paid prior to death.

OPTION 4. Joint and Survivor Annuity: We will make monthly payments during
the joint lifetime of the Annuitant and a joint Annuitant. Payments will
continue during the lifetime of the surviving Annuitant based on 66 2/3% of the
Annuity Payment in effect during the joint lifetime. If the joint Annuitant is
not the Annuitant's spouse, this Annuity Option may not be selected if, as of
the Annuity Date, the present value of the Annuity Payments which would be
payable to the joint Annuitant exceeds 49% of the present value of all payments
payable to the Annuitant and the joint Annuitant.

OTHER OPTIONS. A Participant has the further option to elect forms of fixed
annuities having essentially the same characteristics as Annuity Options 1
through 4 above.

PURCHASING ACCUMULATION UNITS

PREMIUM DEPOSITS

A Premium Deposit is the money you give us to increase the number of
Accumulation Units in your Participant Account. You may make Premium Deposits at
any time during the Accumulation Period. You may increase, decrease or change
the frequency of such payments. The first Premium Deposit must be at least $20,
and after that each Premium Deposit must be at least $10. If in any year a
Participant makes no Premium Deposits, the Contract will not lapse with respect
to the Participant. We reserve the right to reject any application or Premium
Deposit. We may deduct amounts from Premium Deposits for premium taxes, if any.

Once we receive your Premium Deposit and application, we will issue you a
certificate evidencing your participation in the Contract and invest your first
Premium Deposit within two business days. If you do not give us all of the
information we need, we will contact you to get it. If for some reason we are
unable to complete this process within five business days, we will either send
back your money or get your permission to keep it until we get all of the
necessary information. We will credit your subsequent Premium Deposits to your
Participant Account using the Accumulation Unit value next determined after
receipt. If we receive a Premium Deposit by 3:00 p.m., Central Time, we will
apply same-day pricing to determine the number of Accumulation Units to credit
to your account.

ACCUMULATION UNITS

The value of your Participant Account will go up or down depending upon the
investment performance of Dual Strategy Fund. The value of your Participant
Account will also depend on the expenses of Separate

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<PAGE> 11

Account A. In order to keep track of the value of your Participant Account, we
use a measurement called an Accumulation Unit. During the Annuity Period, we
call the unit an Annuity Unit.

Every business day we determine the value of an Accumulation Unit by
multiplying the Accumulation Unit value for the previous period by a factor for
the current period. The factor, which we call the net investment factor, is
determined by:

1. dividing the value of a Dual Strategy Fund share at the end of the
current period, including the value of any dividends or gains per share
for the current period, by the value of a Dual Strategy Fund share for
the previous period, and

2. subtracting from that amount the mortality and expense risk charge.

The value of an Accumulation Unit may go up or down from day to day.

When you make a Premium Deposit, we credit your Participant Account with
Accumulation Units. The number of Accumulation Units credited is determined by
dividing the amount of the net Premium Deposit (after deduction of 4% to cover
sales, administrative and maximum death benefit charges and $.50 per Premium
Deposit) by the value of the Accumulation Unit. A $15 Contract certificate
issuance fee will also be deducted from the first Premium Deposit.

We calculate the value of an Accumulation Unit after the New York Stock
Exchange closes, currently 4:00 p.m., Eastern Time, on each day American
Fidelity is open for business and then credit your Participant Account
accordingly.

EXAMPLE:

On Thursday we receive an additional Premium Deposit of $100 from you. At
3:00 p.m., Central Time, on that Thursday, we determine that the value of
an Accumulation Unit is $20.25. We then divide $95.50 by $20.25 and credit
your Participant Account on Thursday night with 4.72. Accumulation Units.

The value of a Participant's individual account at any time prior to
commencement of Annuity Payments is determined by multiplying the total number
of Accumulation Units credited to his or her account by the current Accumulation
Unit value. Each Participant is advised semiannually of the number of
Accumulation Units credited to his or her account, the current Accumulation Unit
value, and the total value of the account.

EXPENSES

There are charges and other expenses associated with the Contract that will
reduce your investment return. These charges and expenses are explained below.

SALES CHARGE

We deduct 3% from each Premium Deposit received as a sales charge. The
sales charge is intended to recover all distribution expenses associated with
marketing Contracts. In the event the sales charge is not adequate to recover
all distribution expenses, the resulting "shortfall" is borne by American
Fidelity. Any such shortfall amounts paid by us may consist, among other things,
of proceeds derived from mortality and expense risk charges discussed below. The
sales charge for lump sum or periodic payments of $2,000 or greater may be less
than 3%, depending on the actual commission paid.

INSURANCE CHARGES

Administrative Expenses. We deduct 1/4% of each Premium Deposit received
to reimburse us for administrative expenses we incur in administering Contracts,
including salaries, rent, postage, telephone, office equipment, printing,
travel, and legal, actuarial and accounting fees. The deduction for
administrative expenses for 1997 as a percentage of average account value was
.046%.

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There is an additional administrative charge against each Premium Deposit
of $.50 and a one-time certificate issuance fee of $15. The $.50 per payment
deduction will not be increased until Premium Deposits on behalf of a
Participant equal twice the amount of Premium Deposits made during the first
year of participation. The deduction may be increased on Premium Deposits in
excess of such amount.

Minimum Death Benefit. A deduction of 3/4% of each Premium Deposit is made
for the minimum death payment. This deduction is not applicable after a
Participant attains age 65.

Mortality and Expense Risk. American Fidelity assumes the risk that the
actuarial estimate of mortality rates among variable annuitants may be erroneous
and the reserves based on such estimate will not be sufficient to meet annuity
payment obligations. For mortality and expense risks assumed, American Fidelity
receives .96025% on an annual basis (.0026308% for each one-day valuation
period) of average account value. Of this amount, .85% is for mortality risks
and .11025% is for expense risks.

PREMIUM TAXES

Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. American Fidelity is responsible for the payment
of these taxes and will make a deduction from the value of your Participant
Account for them. Some of these taxes are due when Premium Deposits are made;
others are due when Annuity Payments begin. It is our current practice to pay
any premium taxes when they become payable to the states. Premium taxes
presently range from 0% to 4%, depending on the state.

INCOME TAXES

American Fidelity will deduct from each Contract any income taxes which it
may incur because of the Contract. Currently, American Fidelity is not making
any such deductions.

DUAL STRATEGY FUND EXPENSES

There are deductions from and expenses paid out of the assets of Dual
Strategy Fund which are described in the attached prospectus for Dual Strategy
Fund.

WITHDRAWALS

Prior to commencement of Annuity Payments, you may withdraw cash by
redeeming all or a portion of the Accumulation Units in your Participant
Account. The redemption value of a Participant's Account is equal to the
Accumulation Unit value under the account next computed after the request for
redemption is received by American Fidelity. There is no assurance that the
redemption value of your Participant Account will equal or exceed the aggregate
amount of Premium Deposits at any time. There are no administrative fees for
withdrawals.

A partial redemption will result in a reduction of the Accumulation Units
in your Participant Account. The reduction in the number of Accumulation Units
will equal the amount withdrawn divided by the applicable Accumulation Unit
value next computed after receipt of the redemption request. If a partial
redemption reduces the value of your Participant Account to less than $1,000, we
may pay you cash equal to the value of all Accumulation Units in the account and
cancel your account. After full redemption and cancellation of a Participant's
Account, no further Premium Deposits may be made on behalf of the Participant
without our consent.

A Participant's request for redemption should be submitted to us in
writing. A redemption request requires the signature of the person in whose name
the Participant Account is registered, signed exactly as the name appears on
American Fidelity's register. In certain instances, we may require additional
documents such as trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. All proper
redemption requests received before 3:00 p.m., Central Time, will receive
same-day pricing.

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<PAGE> 13

Payment for Accumulation Units redeemed are made within three business days
after our receipt of a properly tendered request. Redemption rights may be
suspended or payment postponed at times when the New York Stock Exchange is
closed (other than customary weekend and holiday closings) or trading on the New
York Stock Exchange is restricted; when an emergency exists as a result of which
disposal by Dual Strategy Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for Dual Strategy Fund to
determine the value of its net assets; or for such other periods as the SEC may
by order permit for the protection of Participants. We may delay the mailing of
a redemption check for recently purchased Accumulation Units until such time as
the payment check has cleared.

We are required by federal income tax law to restrict certain withdrawals.
In addition, certain adverse tax consequences may result from withdrawals, as
explained below under "Federal Tax Matters."

DEATH BENEFIT

In the event of a Participant's death prior to commencement of Annuity
Payments, death proceeds are payable to a named beneficiary in an amount equal
to (1) the value of the Participant's Account as of the valuation date (the date
on which we have received both written notice of death and the beneficiary's
written instructions) or (2) if greater and if the Participant's death occurs
prior to age 65, 100% of the total Premium Deposits made by the Participant,
less any redemptions. Payments normally are made within seven days of receipt of
such notice.

If the Participant dies during the Annuity Period, we will pay any
remaining guaranteed payments to (1) the Participant's beneficiary or (2) the
Participant's estate, if no beneficiary survives. Any payments made to a
beneficiary must be on a payment schedule at least as rapid as that made to the
Participant.

A beneficiary who is the spouse of a deceased Participant may choose to
receive the death benefit in any form that the Participant could have chosen to
receive Annuity Payments. Federal tax law requires that annuity contracts issued
after January 18, 1985 restrict the length of time over which non-spouse
beneficiaries may elect to receive death benefit proceeds. Contracts issued
after this date provide that non-spouse beneficiaries must either take a total
distribution within five years of the death of the Participant or, within one
year of the Participant's death, begin Annuity Payments under an Annuity Option
for a period not to exceed the expected lifetime of the beneficiary.

FEDERAL TAX MATTERS

The following description of federal income tax consequences under the
Contracts is not exhaustive, and special rules may apply to situations not
discussed herein. For further information, consult a qualified tax adviser
before establishing any retirement program.

GENERAL

Annuity contracts are a means of setting aside money for future
needs -- usually retirement. Congress has recognized how important saving for
retirement is and provided special rules in the Internal Revenue Code (the
"Code") for annuities. Basically, these rules provide that you will not be taxed
on the money you contribute under your Contract and/or the earnings on your
contributions until you receive a distribution from your Contract. There are
different rules regarding how you will be taxed depending upon how you take
money out from your Contract.

TAXES PAYABLE BY PARTICIPANTS AND ANNUITANTS

The Contracts offered by this Prospectus are used with retirement programs
which receive favorable tax deferred treatment under Federal income tax law.
Increases in the value of a Participant's account are not subject to income tax
until annuity payments commence, at which time the amount of each payment is
considered as ordinary income.

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Annuity Payments or other amounts received under all Contracts generally
are subject to some form of federal income tax withholding. The withholding
requirement will vary among recipients depending on the type of program, the tax
status of the individual and the type of payments from which taxes are withheld.
Additionally, Annuity Payments or other amounts received under all Contracts may
be subject to state income tax withholding requirements.

SECTION 403(B) ANNUITIES FOR EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS OR
PUBLIC EDUCATIONAL INSTITUTIONS

Premium Deposits. Under Section 403(b) of the Code, payments made by
tax-exempt organizations meeting the requirements of Section 501(c)(3) of the
Code and public educational institutions to purchase annuity Contracts for their
employees are excludable from the gross income of employees to the extent that
the aggregate Premium Deposits do not exceed the limitations prescribed by
Section 402(g), Section 403(b)(2) and Section 415 of the Code. This gross income
exclusion applies to employer contributions and voluntary salary reduction
contributions.

An individual's voluntary salary reduction contributions under Section
403(b) are generally limited to $9,500. Additional catch-up contributions are
permitted under certain circumstances. Combined employer and salary reduction
contributions are generally limited to the individual's "exclusion allowance."
An employee's exclusion allowance for a taxable year is equal to 20% of
includible compensation times years of service, minus amounts previously
excludable from the employee's gross income. In addition, employer contributions
must comply with various nondiscrimination rules; these rules may have the
effect of further limiting the rate of employer contributions for highly
compensated employees.

Taxation of Distributions. Distributions of voluntary salary reduction
amounts are restricted. The restrictions apply to amounts accumulated after
December 31, 1988 (including voluntary contributions after that date and
earnings on prior and current voluntary contributions). These restrictions
require that no distributions will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3) death,
(4) disability, or (5) hardship (hardship distributions are limited to the
amount of salary reduction contributions, not including any earnings).

Other distributions from a Section 403(b) annuity Contract are taxed as
ordinary income to the recipient in accordance with Section 72 of the Code.
Distributions received before the recipient attains age 59 1/2 generally are
subject to a 10% penalty tax in addition to regular income tax. Certain
distributions are excepted from this penalty tax, including distributions
following (1) death, (2) disability, (3) separation from service during or after
the year the Participant reaches age 55, (4) separation from service at any age
if the distribution is in the form of substantially equal periodic payments over
the life (or life expectancy) of the Participant (or the Participant and
beneficiary), and (5) distributions in excess of tax deductible medical
expenses.

Required Distributions. Generally, distributions from Section 403(b)
annuities must commence no later than April 1 of the calendar year following the
later of the calendar year in which the Participant attains age 70 1/2 or the
calendar year in which the Participant retires. Such distributions must be made
over a period that does not exceed the life expectancy of the Participant (or
the Participant and beneficiary). If a Participant dies prior to the
commencement of Annuity Payments, the amount accumulated under the account must
be distributed within five years or, if distributions to a beneficiary
designated under the account start within one year of the Participant's death,
distributions are permitted over the life of the beneficiary or over a period
not extending beyond the beneficiary's life expectancy. If the designated
beneficiary is the Participant's surviving spouse, the beneficiary must commence
receiving benefits on or before the later of the end of the calendar year in
which the deceased spouse would have attained age 70 1/2 or the end of the
calendar year following the year in which the Participant died. If the
Participant has started receiving annuity distributions prior to his or her
death, distributions must continue at least as rapidly as under the method in
effect at the date of death. A penalty tax of 50% will be imposed on the amount
by which the minimum required distribution in any year exceeds the amount
actually distributed in that year.

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Tax-Free Transfers and Rollovers. The Internal Revenue Service has ruled
(Revenue Ruling 90-24) that total or partial amounts may be transferred tax free
between Section 403(b) annuity contracts and/or Section 403(b)(7) custodial
accounts under certain circumstances. In addition, Section 403(b)(8) of the Code
permits tax-free rollovers from Section 403(b) programs to IRAs or other Section
403(b) programs under certain circumstances. Such a rollover must be completed
within 60 days of receipt of the distribution. The portion of any distribution
which is eligible to be rolled over to an IRA or another Section 403(b) program
is subject to 20% federal income tax withholding unless the Participant elects a
direct rollover of such distribution to an IRA or other Section 403(b) program.

SECTIONS 401(A) AND 403(A) QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY PLANS

Premium Deposits. Premium Deposits made by an employer (or a self-employed
individual) under a pension, profit-sharing or annuity plan qualified under
Section 401(a) or Section 403(a) of the Code are excluded from the gross income
of the employee for federal income tax purposes. Payments made by an employee
generally are made on an after-tax basis unless they are made on a pre-tax basis
by reason of Sections 401(k) or 414(h) of the Code.

Taxation of Distributions. Distributions from Contracts purchased under
qualified plans are taxable as ordinary income, except to the extent allocable
to an employee's after-tax contributions (which constitute "investment in the
Contract"). However, if prior to January 1, 2000 an employee or the beneficiary
receives a lump sum distribution, as defined in the Code, from an exempt
employees' trust, the taxable portion of the distribution may be subject to
special tax treatment. For most individuals receiving lump sum distributions
after attainment of age 59 1/2, the rate of tax may be determined under a
special 5-year income averaging provision. Those who attained age 50 by January
1, 1986 may instead elect to use a 10-year income averaging provision based on
the income tax rates in effect for 1986. In addition, individuals who attained
age 50 by January 1, 1986 may elect capital gains treatment for the taxable
portion of a lump sum distribution attributable to years of service before 1974;
such capital gains treatment has otherwise been repealed. Taxable distributions
received from an account under a qualified plan prior to attainment of age
59 1/2 are subject to the same 10% penalty tax (and the same exceptions) as
described with respect to Section 403(b) annuities.

Required Distributions. The minimum distribution requirements for qualified
plans are generally the same as described with respect to Section 403(b)
annuities.

Tax-Free Rollovers. The taxable portion of certain distributions from a
plan qualified under Sections 401 or 403(a) may be transferred in a tax-free
rollover to an individual retirement account or annuity or to another such plan.
Such a rollover must be completed within 60 days of receipt of the qualifying
distribution. The portion of any distribution which is eligible to be rolled
over to an IRA or another Section 401(a) or 403(a) plan is subject to 20%
federal income tax withholding unless the Participant elects direct rollover of
such distribution to an IRA or other Section 401(a) or 403(a) plan.

INDIVIDUAL RETIREMENT ANNUITIES (IRAS)

Regular IRAs

Premium Deposits. Federal tax laws limit the extent to which individuals
may make tax-deductible contributions for regular IRA Contracts. Deductible
contributions equal to the lesser of $2,000 or 100% of compensation are
permitted only for an individual who (i) is (and whose spouse is not) an active
participant in another retirement plan; (ii) is an active participant in another
retirement plan, but is unmarried and has adjusted gross income in 1998 of
$30,000 or less; (iii) is an active participant in another retirement plan, but
is married and has adjusted gross income in 1998 of $50,000 or less; or (iv) is
not an active participant in another retirement plan, but his or her spouse is
an active participant in another retirement plan and has adjusted gross income
of $150,000 or less. Such individuals may also establish an IRA for a spouse
during the tax year if the combined compensation of both spouses is at least
equal to the contributed amount. An individual who is an active participant in
another retirement plan and whose adjusted gross income exceeds the cut-off
point ($30,000 if unmarried and $50,000 if married) by less than $10,000 is
entitled to make deductible IRA contributions in proportionately reduced
amounts.

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<PAGE> 16

An individual may make nondeductible IRA contributions to the extent of the
excess of (i) the lesser of $2,000 or 100% of compensation over (ii) the IRA
deduction limit with respect to the individual.

Taxation of Distributions. Distributions from IRA Contracts are taxed as
ordinary income to the recipient. In addition, a 10% penalty tax will be imposed
on taxable distributions received before the year in which the recipient attains
age 59 1/2, except that distributions made on account of death, disability or in
the form of substantially equal periodic payments over the life (or life
expectancy) of the Participant (or the Participant and beneficiary) are not
subject to the penalty tax. In addition, early withdrawals for the purchase of a
home by a first-time home buyer (subject to a $10,000 lifetime limit) or to pay
qualified higher education expenses are not subject to penalty tax.

Required Distributions. The minimum distribution requirements for IRA
Contracts are generally the same as described with respect to Section 403(b)
annuities, except that no amounts are exempted from the minimum distribution
requirements and in all events such distributions must commence no later than
April 1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2.

Tax-Free Rollovers. Federal law permits funds to be transferred in a
tax-free rollover from a qualified employer pension, profit-sharing or annuity
plan, or a Section 403(b) annuity Contract to an IRA Contract under certain
conditions. Amounts accumulated under such a rollover IRA may subsequently be
rolled over on a tax-free basis to another such plan or Section 403(b) annuity
Contract. In addition, a tax-free rollover may be made from one IRA to another,
provided that not more than one such rollover may be made during any
twelve-month period. In order to qualify for tax-free treatment, all rollovers
must be completed within 60 days after the distribution is received.

Roth IRA

Premium Deposits. The "Roth IRA" permits individuals to make nondeductible
contributions and, if specific requirements are met, receive distributions that
are tax free. The Roth IRA is an individual retirement account and is treated in
the same manner as a regular IRA with certain exceptions. An individual can make
an annual nondeductible contribution to a Roth IRA up to the lesser of $2,000 or
100% of the individual's annual compensation minus the aggregate amount of
contributions for the tax year to all other IRAs maintained for the benefit of
that individual. Unlike a regular IRA, active participation in an employer's
qualified plan does not reduce the amount that an individual can contribute to a
Roth IRA. The contribution that can be made to a Roth IRA is phased out for
individuals with adjusted gross income of between $95,000 and $110,000, and for
joint filers with combined adjusted gross income of between $150,000 and
$160,000.

Taxation of Distributions. Distributions from a Roth IRA are not includible
in income if the contribution to which the distribution relates is a "qualified
distribution." A "qualified distribution" is a distribution which is made on or
after the recipient becomes age 59 1/2, on account of death or disability or for
a qualified first-time home buyer expense. A distribution is not considered to
be a "qualified distribution" if it is made within the five-year period
beginning with the first tax year for which the individual made a contribution
to a Roth IRA. A distribution is also not a "qualified distribution" for
payments properly allocable to a "qualified rollover contribution" from a
regular IRA if it is made within the five-year period beginning with the first
tax year in which the rollover contribution was made. Nonqualifying
distributions from a Roth IRA are includible in income to the extent of earnings
on contributions. Distributions that are attributable to contributions to a Roth
IRA are received tax free, since these contributions were nondeductible.

Required Distributions. Roth IRAs are not subject to minimum distribution
rules before death.

Tax-Free Rollovers. A tax-free rollover may be made to a Roth IRA from (a)
another Roth IRA or (b) a regular IRA that meets the requirements for the
exclusion of a rollover under Code Section 408(d)(3) if the taxpayer has
adjusted gross income of not more than $100,000 and, if married, does not file a
separate return.

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Simplified Employee Pension Plans

Premium Deposits. Under Section 408(k) of the Code, employers may establish
a type of IRA plan referred to as a simplified employee pension plan ("SEP").
Employer contributions under a SEP, which generally must be made at a rate
representing a uniform percent of the compensation of participating employees,
are excluded from the gross income of employees for federal income tax purposes.
Employer contributions to a SEP cannot exceed the lesser of $30,000 or 15% of an
employee's compensation.

Salary Reduction SEPs. Federal tax law allows employees of certain small
employers to have contributions made to the SEP on their behalf on a salary
reduction basis. These salary reduction contributions may not exceed $7,000
indexed for inflation. Employees of tax-exempt organizations are not eligible
for this type of SEP. Additionally, only certain small employers who have SEPs
that permitted salary reduction contributions on December 31, 1996 may continue
to allow salary reduction contributions.

Taxation of Distributions. SEP distributions are subject to taxation in the
same manner as regular IRA distributions.

Required Distributions. SEP distributions are subject to the same minimum
required distribution rules applicable to regular IRAs.

Tax-Free Rollovers. Funds may be rolled over tax free from one SEP to
another as long as the rollover is completed within 60 days after the
distribution is received and is done no more frequently than once every twelve
months.

DIVERSIFICATION

The Code provides that the underlying investments for a variable annuity
must satisfy certain diversification requirements in order to be treated as an
annuity contract. American Fidelity believes that Dual Strategy Fund is being
managed so as to comply with the requirements.

OTHER INFORMATION

DISTRIBUTION

American Fidelity Securities, Inc., a wholly owned subsidiary of American
Fidelity, acts as the distributor of the Contracts.

LEGAL PROCEEDINGS

There are no material pending legal proceedings affecting Separate Account
A, Dual Strategy Fund, American Fidelity or American Fidelity Securities, Inc.

FINANCIAL STATEMENTS

The financial statements of Separate Account A and of American Fidelity
have been included in the SAI.

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TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History............................. B-2
Performance Information..................................... B-2
Annuity Payments............................................ B-2
Federal Income Tax Considerations........................... B-4
Underwriter................................................. B-6
Independent Accountants..................................... B-6
Legal Matters............................................... B-6
Financial Statements........................................ B-6
</TABLE>

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STATEMENT OF ADDITIONAL INFORMATION

AMERICAN FIDELITY SEPARATE ACCOUNT A
(Registrant)

AMERICAN FIDELITY ASSURANCE COMPANY
(Depositor)

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS DATED JANUARY 11, 1999 RELATING TO GROUP
VARIABLE ANNUITY CONTRACTS. FOR A COPY OF THE PROSPECTUS, WRITE OR CALL US AT

American Fidelity Assurance Company
P.O. Box 25523
Oklahoma City, Oklahoma 73125-0523
(800) 654-8489

This Statement of Additional Information is dated January 11, 1999.

TABLE OF CONTENTS

GENERAL INFORMATION AND HISTORY

American Fidelity Assurance Company ("Company") was organized in the State
of Oklahoma in 1960 and during its existence has never changed its name. Neither
the sales of variable annuity contracts nor the sales of any other insurance
product by the Company have ever been suspended by any state where the Company
has done or is presently doing business.

The Company is a wholly owned subsidiary of American Fidelity Corporation,
an insurance holding company. The stock of American Fidelity Corporation is
controlled by a family investment partnership, Cameron Enterprises, A Limited
Partnership, an Oklahoma limited partnership ("CELP"). In accordance with the
partnership agreement, management of the affairs of CELP is vested in five
managing general partners: William M. Cameron, William E. Durrett, Edward C.
Joullian, III, John W. Rex and Theodore M. Elam.

PERFORMANCE INFORMATION

American Fidelity Variable Annuity Fund A's average annual total returns
for the one, five and ten year periods ended June 30, 1998 were 19.98%, 18.80%
and 15.67%, respectively. The average annual total return (T) is computed by
equating the value at the end of the period (ERV) with a hypothetical initial
investment of $1,000 (P) over a period of years (n) according to the following
formula as required by the Securities and Exchange Commission: P(1 + T)(n) =
ERV. Average annual total returns are calculated after deduction of all
applicable fees and expenses.

American Fidelity Variable Annuity Fund A's total returns for the one, five
and ten year time periods ended June 30, 1998 were 19.98%, 136.65% and 328.92%,
respectively. Total return is measured by comparing the investment return at the
end of a specified period to the initial investment. To calculate total return,
an initial investment is multiplied by 96% (which gives effect to the 3.00%
sales charge, 0.25% administrative fee and 0.75% minimum death benefit expense).
The product is then reduced by the $0.50 per payment expense and the one-time
contract certificate fee of $15. The resulting amount is divided by the
Accumulation Unit value as of the first day of the period in order to determine
the initial number of Accumulation Units purchased. The number of Accumulation
Units purchased is multiplied by the Accumulation Unit value as of the end of
the period in order to determine the ending value. The difference between the
ending value and the initial investment divided by the initial investment
converted to a percentage equals total return. Total return may be calculated
for one, five and ten year periods and for other time periods.

Returns for periods prior to Separate Account A's reorganization on January
1, 1999 reflect the investment performance of American Fidelity Variable Annuity
Fund A. For periods subsequent to 1998, Separate Account A will report its
performance as a unit investment trust investing in Dual Strategy Fund.
Performance will fluctuate over time, and any past performance results are not
an indication of future results.

The following assumptions are reflected in computations of average annual
total returns and in calculating total return: (1) reinvestment of dividends and
other distributions, (2) a complete redemption at the end of any period
illustrated and (3) no deduction for premium taxes.

ANNUITY PAYMENTS

VARIABLE ANNUITY PAYMENTS

A Participant may elect a variable annuity payout. Variable Annuity
Payments reflect the investment performance of Dual Strategy Fund during the
Annuity Period. Variable Annuity Payments are not guaranteed as to dollar
amounts.

The Company will determine the first Annuity Payment by using the 4.5%
annuity table in the Contract. It shows the dollar amount of the first monthly
payment which can be purchased with each $1,000 of value in a Participant
Account after deducting any applicable premium taxes.

B-2
<PAGE> 21

The value of a Participant Account is determined by multiplying the
Participant's Accumulation Units by the Accumulation Unit value on the
fourteenth day before the first Annuity Payment. The first Annuity Payment
varies according to the Annuity Option selected and the Participant's age.

The Company will determine the number of Annuity Units payable for each
payment by dividing the dollar amount of the first Annuity Payment by the
Annuity Unit value on the Annuity Date. This sets the number of Annuity Units.
The number of Annuity Units payable remains the same unless a Participant
transfers a portion of the annuity benefit to a fixed annuity. The dollar amount
is not fixed and will change from month to month.

The dollar amount of Annuity Payments after the first payment is determined
by multiplying the fixed number of Annuity Units per payment by the Annuity Unit
value on the fourteenth calendar day preceding the payment date. The result is
the dollar amount of the payment.

ANNUITY UNIT

The value of an Annuity Unit is determined by multiplying the value of an
Annuity Unit for the immediately preceding period by the product of

1. the net investment factor for the fourteenth calendar day prior to the
valuation date for which the value is being determined, and

2. .9998794.

VARIABLE ANNUITY FORMULAS

The following formulas summarize the Annuity Payment calculations described
above:

<TABLE>
<S> <C> <C>
Dollar Amount of First Monthly Payment
Number of Variable Annuity Units = -----------------------------------------------------
Variable Annuity Unit Value on Date of First Payment
</TABLE>

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Value of Annuity Net Investment Factor
Annuity = Unit on Preceding X .9998794 X for 14th Day Preceding
Unit Value Valuation Date Current Valuation Date
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
Dollar Amount
of Second and Number of Annuity Unit Value
Subsequent Annuity = Annuity Units X for Period in Which
Payments Per Payment Payment is Due
</TABLE>

FIXED ANNUITY PAYMENTS

The dollar amount of each fixed Annuity Payment will be at least as great
as that determined in accordance with the 4% annuity table in the Contract. The
fixed annuity provides a 4% annual guaranteed interest rate on all Annuity
Options. The Company may pay or credit excess interest on a fixed annuity at its
discretion.

B-3
<PAGE> 22

FEDERAL INCOME TAX CONSIDERATIONS

Note: The following description is based upon the Company's understanding of
current federal income tax law applicable to annuities in general. The Company
cannot predict the probability that any changes in such laws will be made.
Purchasers are cautioned to seek competent tax advice regarding the possibility
of such changes. The Company does not guarantee the tax status of the policies.
Purchasers bear the complete risk that the policies may not be treated as
"Annuity Contracts" under federal income tax laws. It should be further
understood that the following discussion is not exhaustive and that special
rules not described herein may be applicable in certain situations. Moreover, no
attempt has been made to consider any applicable state or other tax laws.

GENERAL

Section 72 of the Internal Revenue Code of 1986, as amended (the "Code")
governs taxation of annuities in general. A Participant is not taxed on
increases in the value of his or her Participant Account until distribution
occurs, either in the form of a lump sum payment or as Annuity Payments under
the Annuity Option elected. For a lump sum payment received as a total surrender
(total redemption) or death benefit, the recipient is taxed on the portion of
the payment that exceeds the Participant's cost basis, which may be zero. The
taxable portion of a lump sum payment is taxed at ordinary income tax rates.

For Annuity Payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments based
on a fixed Annuity Option is determined by multiplying the payment by the ratio
that the Participant's cost basis (adjusted for any period certain or refund
feature) bears to the expected return under the Contract. The exclusion amount
for payments based on a variable annuity option is determined by dividing the
Participant's cost basis (adjusted for any period certain or refund feature) by
the number of years over which the annuity is expected to be paid. Payments
received after the Participant's investment has been recovered (i.e., when the
total of the excludable amounts equal the Participant's investment) are fully
taxable. The taxable portion is taxed at ordinary income rates. Participants,
Annuitants and beneficiaries under the Contracts should seek competent financial
advice about the tax consequences of any distributions.

The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, Separate Account A is not a separate entity from
the Company, and its operations form a part of the Company.

DIVERSIFICATION

Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the Contract as
an annuity contract would result in imposition of federal income tax to the
Participant with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contract meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than 55% of the total assets consist of cash, cash items, U.S.
government securities and securities of other regulated investment companies.

On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
1.817-5) which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contract. The regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more than 70% of the
value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the

B-4
<PAGE> 23

portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.

The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."

The Company intends that Dual Strategy Fund will be managed in such a
manner as to comply with these diversification requirements.

INCOME TAX WITHHOLDING

All distributions or the portion thereof which is includible in the gross
income of the Participant are subject to federal income tax withholding.
Generally, amounts are withheld from periodic payments at the same rate as wages
and at the rate of 10% from non-periodic payments. However, the Participant, in
most cases, may elect not to have taxes withheld or to have withholding done at
a different rate.

Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a mandatory
20% withholding for federal income tax. The 20% withholding requirement
generally does not apply to: (a) a series of substantially equal payments made
at least annually for the life or life expectancy of the participant or joint
and last survivor expectancy of the participant and a designated beneficiary, or
for a specified period of 10 years or more; or (b) distributions which are
required minimum distributions; or (c) the portion of the distributions not
includible in gross income (i.e., returns of after-tax contributions).
Participants should consult their own tax counsel or other tax adviser regarding
withholding requirements.

QUALIFIED PLANS

The Contracts offered by the Prospectus are designed to be suitable for use
under various types of qualified plans. Because of the minimum Premium Deposit
requirements, the Contracts may not be appropriate for some periodic payment
retirement plans. Taxation of participants in each qualified plan varies with
the type of plan and terms and conditions of each specific plan. Participants,
Annuitants and beneficiaries are cautioned that benefits under a qualified plan
may be subject to the terms and conditions of the plan regardless of the terms
and conditions of the Contracts issued pursuant to the plan. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into the Company's administrative procedures. Participants,
Annuitants and beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law. The Prospectus, under "Federal Tax Matters," describes the types
of qualified plans with which the Contract may be used. Such descriptions are
not exhaustive and are for general informational purposes only. The tax rules
regarding qualified plans are very complex and will have differing applications,
depending on individual facts and circumstances. Each purchaser should obtain
competent tax advice prior to participating in a Contract issued under a
qualified plan.

Contracts issued pursuant to qualified plans include special provisions
restricting Contract provisions that may otherwise be available and described in
this Statement of Additional Information. Generally, Contracts issued pursuant
to qualified plans are not transferable except upon surrender or annuitization.
Various penalty and excise taxes may apply to contributions or distributions
made in violation of applicable limitations. Furthermore, certain withdrawal
penalties and restrictions may apply to surrenders from qualified policies.

B-5
<PAGE> 24

UNDERWRITER

The Contracts are offered on a continuous basis by the Company's wholly
owned subsidiary, American Fidelity Securities, Inc. ("AFS"), 2000 N. Classen
Boulevard, Oklahoma City, Oklahoma 73106. AFS may also serve as an underwriter
and distributor of other separate accounts of the Company. The aggregate
underwriting commissions paid to and retained by AFS for 1995, 1996 and 1997
were $256,000, $312,800 and $449,200, respectively.

INDEPENDENT ACCOUNTANTS

The financial statements of the Company included in this Statement of
Additional Information have been audited by KPMG LLP, independent auditors, as
set forth in its report appearing below. KPMG LLP's address is 700 Oklahoma
Tower, Oklahoma City, Oklahoma 73102.

LEGAL MATTERS

McAfee & Taft A Professional Corporation, Oklahoma City, Oklahoma, has
provided advice on certain matters relating to the federal securities and income
tax laws applicable to the Contracts.

FINANCIAL STATEMENTS

The following financial statements appear hereafter:

AMERICAN FIDELITY SEPARATE ACCOUNT A

Statement of Assets and Liabilities as of January 1, 1999 (unaudited)
Notes to Statement of Assets and Liabilities (unaudited)

AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Schedule III -- Business Segment Information for the Years Ended December
31, 1997, 1996 and 1995
Schedule IV -- Reinsurance for the Years Ended December 31, 1997, 1996 and
1995

The consolidated financial statements of the Company should be considered only
as bearing on the ability of the Company to meet its obligations under the
Contracts. They should not be considered as bearing on the investment
performance of the assets held in Separate Account A.

B-6
<PAGE> 25

AMERICAN FIDELITY SEPARATE ACCOUNT A
(FORMERLY KNOWN AS AMERICAN FIDELITY VARIABLE ANNUITY FUND A)

STATEMENT OF ASSETS AND LIABILITIES
JANUARY 1, 1999 (UNAUDITED)

<TABLE>
<S> <C>
Investments, at fair value:
American Fidelity Dual Strategy Fund shares (cost
$184,548,449).......................................... $ 184,548,449
--------------
Total assets...................................... 184,548,449
Total liabilities................................. 0
--------------
Net assets.................................................. $ 184,548,449
==============
Accumulation units outstanding.............................. 7,584,331,949
==============
Net asset value per unit.................................... $ 24.3329
==============
</TABLE>

See accompanying notes to financial statements.

B-7
<PAGE> 26

AMERICAN FIDELITY SEPARATE ACCOUNT A
(FORMERLY KNOWN AS AMERICAN FIDELITY VARIABLE ANNUITY FUND A)

NOTES TO FINANCIAL STATEMENTS
JANUARY 1, 1999 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) General

American Fidelity Separate Account A (Account A) is a separate account of
American Fidelity Assurance Company (AFA). Account A was formerly known as
American Fidelity Variable Annuity Fund A, and operated as an open-end
diversified management investment company from 1968 to 1998. Effective January
1, 1999, it was converted to a unit investment trust separate account, and it
transferred its investment portfolio to American Fidelity Dual Strategy Fund
(the Fund) in exchange for shares of the Fund.

(B) Investments

Account A's investment objectives are primarily long-term growth of capital
and secondarily the production of income. Investments are made in the portfolio
of the Fund and are valued at the reported net asset values of such portfolio,
which values its investment securities at fair value. Transactions are recorded
on a trade date basis.

Account A is not taxed separately because the operations of Account A are
part of the total operations of AFA. AFA files its federal income tax returns
under sections of the Internal Revenue Code applicable to life insurance
companies. Account A will not be taxed as a "Regulated Investment Company" under
Subchapter "M" of the Internal Revenue Code.

(D) Annuity Reserves

Annuity reserves are computed for currently payable contracts according to
the Progressive Annuity Mortality Table. The assumed interest rate is 3.5
percent unless the annuitant elects otherwise, in which case the rate may vary
from zero to 5 percent as regulated by the laws of the respective states.
Charges to annuity reserves for mortality and expense risks experience are
reimbursed to AFA if the reserves required are less than originally estimated.

If additional reserves are required, AFA reimburses Account A. At January
1, 1999, there were no contract owners who had elected the variable annuity
method of payout. Accordingly, Account A held no annuity reserves at January 1,
1999.

(E) Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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 increase and decrease in net assets from
operations during the period. Actual results could differ from those estimates.

(2) VARIABLE ANNUITY CONTRACTS

During the accumulation period, contract owners may partially or totally
withdraw from Account A by surrendering a portion or all of their accumulation
units. The Internal Revenue Code may limit certain withdrawals based upon age,
disability, and other factors. When contract owners withdraw, they receive the
current value of their accumulation units.

B-8
<PAGE> 27
AMERICAN FIDELITY SEPARATE ACCOUNT A
(FORMERLY KNOWN AS AMERICAN FIDELITY VARIABLE ANNUITY FUND A)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(3) YEAR 2000 RISKS

Like other separate accounts, financial and business organizations and
individuals around the world, the Account A could be adversely affected if the
computer systems used by AFA and Account A's other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." AFA has had
a formal project team (including 22 information systems professionals) working
to correct the problem since 1996. In the briefest terms, the correction is to
change all date-related fields in AFA's computer systems to four digits instead
of two digits. At the same time, all relationships with systems outside AFA must
be checked for the same change and all must be tested to determine that
relationships continue to be compatible. Those systems tested in December 31,
1997 and went through year-end processing without incident. The final test of
all systems will be run in 1999. Even though management of AFA is expending
considerable resources in a concerted effort to meet this technology-related
threat, there is no guarantee that there will be no adverse impact on Account A
of some sort as January 1, 2000 passes.

B-9
<PAGE> 28

INDEPENDENT AUDITORS' REPORT

Board of Directors
American Fidelity Assurance Company:

We have audited the accompanying consolidated balance sheets of American
Fidelity Assurance Company and subsidiaries (the Company) as of December 31,
1997 and 1996, and the related consolidated statements of income, stockholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Fidelity Assurance Company 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.

Also, in our opinion, the related 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.

KPMG LLP

March 16, 1998

B-10
<PAGE> 29

AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Investments:
Fixed maturities held-to-maturity, at amortized cost (fair
value $241,863 and $251,034 in 1997 and 1996,
respectively)........................................... $ 234,799 $ 251,944
Fixed maturities available-for-sale, at fair value
(amortized cost of $622,712 and $551,856 in 1997 and
1996, respectively)..................................... 642,577 559,121
Equity securities, at fair value:
Common stocks (cost $11,023 and $9,692 in 1997 and 1996,
respectively).......................................... 11,736 12,046
Mortgage loans on real estate, net........................ 135,122 130,508
Investment real estate, at cost (less accumulated
depreciation of $1,350 and $7,047 in 1997 and 1996,
respectively)........................................... 9,070 18,954
Policy loans.............................................. 8,668 8,359
Short-term and other investments.......................... 20,770 12,763
---------- ----------
1,062,742 993,695
---------- ----------
Cash........................................................ 8,427 15,962
Accrued investment income................................... 14,357 14,248
Accounts receivable:
Uncollected premiums...................................... 20,571 21,665
Reinsurance receivable.................................... 57,503 36,794
Other..................................................... 15,248 12,341
---------- ----------
93,322 70,800
---------- ----------
Deferred policy acquisition costs........................... 177,737 162,497
Other assets................................................ 5,761 6,954
Separate account assets..................................... 137,090 98,896
---------- ----------
Total assets........................................ $1,499,436 $1,363,052
========== ==========

LIABILITIES AND STOCKHOLDER'S EQUITY

Policy liabilities:
Reserves for future policy benefits:
Life and annuity........................................ $ 105,663 $ 102,820
Accident and health..................................... 140,530 121,097
Unearned premiums......................................... 2,686 2,376
Benefits payable.......................................... 35,347 33,178
Funds held under deposit administration contracts......... 580,499 556,665
Other policy liabilities.................................. 92,144 85,068
---------- ----------
956,869 901,204
---------- ----------
Other liabilities:
Net deferred income tax liability......................... 59,198 48,278
General expenses, taxes, licenses and fees payable and
other liabilities....................................... 36,099 34,125
---------- ----------
95,297 82,403
---------- ----------
Notes payable............................................... 50,719 19,839
Separate account liabilities................................ 137,090 98,896
---------- ----------
Total liabilities................................... 1,239,975 1,102,342
---------- ----------
Stockholder's equity:
Common stock, par value $10 per share. 250,000 shares
authorized, issued and outstanding...................... 2,500 2,500
Additional paid-in capital................................ 23,244 19,916
Net unrealized holding gain on investments
available-for-sale, net of deferred tax expense of
$7,207 and $3,367 in 1997 and 1996, respectively........ 13,371 6,252
Retained earnings......................................... 220,346 232,042
---------- ----------
Total stockholder's equity.......................... 259,461 260,710
Commitments and contingencies (notes 9, 10, 11, 13 and 14)
---------- ----------
Total liabilities and stockholder's equity.......... $1,499,436 $1,363,052
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

B-11
<PAGE> 30

AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Premiums:
Life and annuity....................................... $ 25,282 $ 24,187 $ 24,514
Accident and health.................................... 181,944 166,057 156,960
-------- -------- --------
207,226 190,244 181,474
Net investment income..................................... 69,175 67,502 65,326
Other..................................................... 13,190 11,250 12,190
-------- -------- --------
Total revenues.................................... 289,591 268,996 258,990
-------- -------- --------
Benefits:
Benefits paid or provided:
Life and annuity....................................... 18,045 18,539 18,849
Accident and health.................................... 105,594 93,858 74,219
Interest credited to funded contracts..................... 30,207 28,386 27,635
Increase in reserves for future policy benefits:
Life and annuity (net of increase (decrease) in
reinsurance reserves ceded of $55, $(3), and $53 in
1997, 1996, and 1995, respectively).................. 2,788 4,336 4,619
Accident and health (net of increase (decrease) in
reinsurance reserves ceded of $9,838, $6,704, and
$(250), in 1997, 1996, and 1995, respectively)....... 10,250 13,259 15,535
-------- -------- --------
166,884 158,378 140,857
-------- -------- --------
Expenses:
Selling costs............................................. 56,835 47,105 48,784
Other operating, administrative and general expenses...... 43,241 44,942 42,586
Taxes, other than federal income taxes, and licenses and
fees................................................... 7,251 6,535 6,250
Increase in deferred policy acquisition costs............. (15,240) (10,082) (11,902)
-------- -------- --------
92,087 88,500 85,718
-------- -------- --------
Total benefits and expenses....................... 258,971 246,878 226,575
-------- -------- --------
Income before income taxes........................ 30,620 22,118 32,415
Income taxes:
Current................................................... 2,680 4,421 10,443
Deferred.................................................. 5,802 4,650 554
-------- -------- --------
8,482 9,071 10,997
-------- -------- --------
Net income........................................ $ 22,138 $ 13,047 $ 21,418
======== ======== ========
Basic net income per share.................................. $ 88.55 $ 52.19 $ 85.67
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

B-12
<PAGE> 31

AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN HOLDING RETAINED
STOCK CAPITAL GAIN EARNINGS
------ ---------- ---------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994........................ $2,500 $13,633 $ 949 $201,777
Net income.......................................... -- -- -- 21,418
Investments transferred to available for-sale, net
of deferred taxes................................. -- -- 8,828 --
Increase in unrealized holding gain, net of deferred
taxes............................................. -- -- 6,251 --
Capital contributed by parent on sale of AFI........ -- 4,085 -- --
------ ------- ------- --------
Balance at December 31, 1995........................ 2,500 17,718 16,028 223,195
Net income.......................................... -- -- -- 13,047
Decrease in unrealized holding gain, net of deferred
taxes............................................. -- -- (9,776) --
Capital contributed by parent....................... -- 2,198 -- --
Dividends........................................... -- -- -- (4,200)
------ ------- ------- --------
Balance at December 31, 1996........................ 2,500 19,916 6,252 232,042
Net income.......................................... -- -- -- 22,138
Increase in unrealized holding gain, net of deferred
taxes............................................. -- -- 7,119 --
Capital contributed by parent....................... -- 3,328 -- --
Dividends........................................... -- -- -- (33,834)
------ ------- ------- --------
Balance at December 31, 1997........................ $2,500 $23,244 $13,371 $220,346
====== ======= ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

B-13
<PAGE> 32

AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 22,138 $ 13,047 $ 21,418
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for depreciation on investment real
estate............................................. 653 935 876
Accretion of discount on investments................. (546) (469) (605)
Realized gains on investments........................ (1,823) (1,793) (2,423)
Increase in deferred policy acquisition costs........ (15,240) (10,082) (11,902)
Increase in accrued investment income................ (218) (478) (1,819)
(Increase) decrease in accounts receivable........... (23,254) (15,006) 847
Increase in policy liabilities....................... 56,043 36,130 66,489
Increase in general expenses, taxes, licenses and
fees payable and other liabilities................. 2,656 4,257 256
Deferred income taxes................................ 5,802 4,650 554
Other................................................ 949 840 471
--------- --------- ---------
Total adjustments............................... 25,022 18,984 52,744
--------- --------- ---------
Net cash provided by operating activities....... 47,160 32,031 74,162
--------- --------- ---------
Cash flows from investing activities:
Sale, maturity or repayment of investments:
Fixed maturities held-to-maturity.................... 20,940 26,867 73,984
Fixed maturities available-for-sale.................. 133,727 166,678 36,640
Equity securities.................................... 11,673 5,708 5,635
Mortgage loans on real estate........................ 20,200 15,736 12,426
Real estate.......................................... 9,221 9,101 7,677
Net (increase) decrease in short-term and other
investments.......................................... (11,013) (3,416) 3,283
Purchase of investments:
Fixed maturities held-to-maturity.................... (4,349) (45,961) (60,439)
Fixed maturities available-for-sale.................. (211,464) (171,753) (164,417)
Equity securities.................................... (19,489) (4,580) (4,249)
Mortgage loans on real estate........................ (24,793) (24,671) (14,328)
Real estate.......................................... (1,403) (907) (2,820)
Policy loans, net.................................... (309) (194) (305)
Cash received from sale of AFI to AFC, net of cash
transferred.......................................... -- -- 21,005
--------- --------- ---------
Net cash used in investing activities........... (77,059) (27,392) (85,908)
--------- --------- ---------
Cash flows from financing activities:
Dividends paid to parent................................ (14,156) (4,200) --
Capital contribution from parent........................ 3,328 -- 4,085
Proceeds from notes payable............................. 109,775 9,075 7,095
Repayment of notes payable.............................. (76,583) (8,278) (5,849)
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................... 22,364 (3,403) 5,331
--------- --------- ---------
Net (decrease) increase in cash........................... (7,535) 1,236 (6,415)
Cash at beginning of year................................. 15,962 14,726 21,141
--------- --------- ---------
Cash at end of year....................................... $ 8,427 $ 15,962 $ 14,726
========= ========= =========
</TABLE>

B-14
<PAGE> 33
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on notes payable............................ $ 2,076 $ 1,340 $ 1,478
========= ========= =========
Federal income taxes................................. $ 4,800 $ 7,100 $ 12,500
========= ========= =========
Supplemental disclosure of noncash investing activities:
Change in unrealized holding gain on investments
available-for-sale, net of deferred tax expense
(benefit) of $3,840, $(6,289), and $15,554, in 1997,
1996, and 1995, respectively......................... $ 7,119 $ (9,776) $ 15,079
========= ========= =========
Investments transferred to available-for-sale........... $ -- $ -- $ 300,850
========= ========= =========
Supplemental disclosure of noncash financing activities:
Capital contribution from parent through forgiveness of
deferred tax liability............................... $ -- $ 2,198 $ --
========= ========= =========
Amounts transferred to Parent through dividend of common
stock of affiliated companies:
Fixed maturities..................................... $ 8,567 $ -- $ --
========= ========= =========
Real estate, net..................................... $ 2,632 $ -- $ --
========= ========= =========
Short-term and other investments..................... $ 3,006 $ -- $ --
========= ========= =========
Accounts receivable.................................. $ 732 $ -- $ --
========= ========= =========
Accrued investment income............................ $ 109 $ -- $ --
========= ========= =========
Other assets......................................... $ 241 $ -- $ --
========= ========= =========
Policy liabilities................................... $ 378 $ -- $ --
========= ========= =========
Notes payable........................................ $ 2,312 $ -- $ --
========= ========= =========
Deferred tax liability............................... $ 683 $ -- $ --
========= ========= =========
Other liabilities.................................... $ 682 $ -- $ --
========= ========= =========
Amounts transferred to Parent through dividend of common
stock of non-affiliated companies:
Common stock......................................... $ 6,485 $ -- $ --
========= ========= =========
Deferred tax liability assumed by the Company........ $ (1,961) $ -- $ --
========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

B-15
<PAGE> 34

AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995

(1) SIGNIFICANT ACCOUNTING POLICIES

Business

American Fidelity Assurance Company (AFA or the Company) and subsidiaries
provide a variety of financial services. AFA is a wholly owned subsidiary of
American Fidelity Corporation (AFC), a Nevada insurance holding company. The
principal subsidiary of AFA for the years ended December 31, 1996 and 1995, is
Security General Life Insurance Company (SGLI), a life insurance company. The
Company and its insurance subsidiaries are subject to state insurance
regulations and periodic examinations by state insurance departments.

AFA is licensed in 49 states and the District of Columbia with
approximately 34% of direct premiums written in Oklahoma, Texas, and Georgia.
AFA is represented by approximately 235 salaried managers and agents, and over
3,500 brokers. Activities of AFA are largely concentrated in the group
disability income, group and individual annuity, and individual medical markets.
In addition, individual and group life business is also conducted. The main
thrust of AFA's sales is worksite marketing of voluntary products through the
use of payroll deduction. The Company sells these voluntary products through a
salaried sales force that is broken down into two divisions: the Association
Group Division (AGD) and American Fidelity Educational Services (AFES). AGD
specializes in voluntary disability income insurance programs aimed at selected
groups and associations whose premiums are funded by employees through payroll
deductions. AFES focuses on marketing to public school employees with ancillary
insurance products such as disability income, tax sheltered annuities, life
insurance, dread disease, and accidental death and dismemberment. These premiums
are also funded by employees through payroll deductions. The expertise gained by
the Company in worksite marketing of voluntary products is used by the Brokerage
Division in developing products to meet special situations and focuses on
marketing to a broad range of employers through independent broker agencies and
agents interested in getting into or enhancing their payroll deduction
capability.

A significant portion of the Company's business consists of group and
individual annuities. The Company's earnings related to these products are
impacted by conditions in the overall interest rate environment. Additionally,
the Company has taken measures to reduce its involvement with major medical
products in order to concentrate on its more profitable lines of business.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles, which vary in some respects from
statutory accounting practices prescribed or permitted by state insurance
departments. (See note 2.) The consolidated financial statements include the
accounts and operations of AFA and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in the
consolidated financial statements.

Use of Estimates

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates. Principal estimates that could change
in the future are the actuarial assumptions used in establishing deferred policy
acquisition costs and policy liabilities.

Investments

Management determines the appropriate classification of investments at the
time of purchase. If management has the intent and the Company has the ability
at the time of purchase to hold the investments

B-16
<PAGE> 35
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

until maturity, they are classified as held-to-maturity and carried at amortized
cost. Investments to be held for indefinite periods of time and not intended to
be held-to-maturity are classified as available-for-sale and carried at fair
value. Fair value of investments available-for-sale are based on quoted market
prices.

The effect of any unrealized holding gains or losses on securities
available-for-sale are reported as a separate component of stockholder's equity,
net of deferred taxes. Transfers of securities between categories are recorded
at fair value at the date of transfer.

Fixed maturities held-to-maturity and short-term investments (bonds, notes,
and redeemable preferred stocks) are reported at cost, adjusted for amortization
of premium or accretion of discount because it is management's intent to hold
these investments to maturity. Equity securities (common and nonredeemable
preferred stocks) are reported at current fair value. Mortgage loans on real
estate are reported at the unpaid balance less an allowance for possible losses.
Investment in real estate is carried at cost less accumulated depreciation.
Investment in real estate, excluding land, is depreciated on a straight-line
basis using estimated lives ranging from 6 to 35 years. Policy loans are
reported at the unpaid balance.

Realized gains or losses on disposal of investments are determined on a
specific-identification basis and are included in the accompanying consolidated
statements of income.

Because the Company's primary business is in the insurance industry, the
Company holds a significant amount of assets that are matched with its
liabilities in relation to maturity and interest margin. In order to maximize
earnings and minimize risk, the Company invests in a diverse portfolio of
investments. The portfolio is diversified by geographic region, investment type,
underlying collateral, maturity, and industry. Management does not believe the
Company has any significant concentrations of credit risk in its investments.

The investment portfolio includes fixed maturities, equity securities,
mortgage loans, real estate, policy loans, and short-term investments. The
Company's portfolio does not include any fixed maturities that are low
investment-grade and have a high-yield ("junk bonds"). The Company limits its
risks by investing in fixed maturities and equity securities of rated companies;
mortgage loans adequately collateralized by real estate; selective real estate
supported by appraisals; and policy loans collateralized by policy cash values.
In addition, the Company performs due diligence procedures prior to making
mortgage loans. These procedures include evaluations of the creditworthiness of
the mortgagees and/or tenants and independent appraisals. Certain fixed
maturities are guaranteed by the United States government.

The Company periodically reviews its investment portfolio to determine if
allowances for possible losses are necessary. In connection with this
determination, management reviews published market values, credit ratings,
independent appraisals, and other valuation information. While management
believes that the allowances are adequate, adjustments may be necessary in the
future due to changes in economic conditions. In addition, regulatory agencies
periodically review investment valuation as an integral part of their
examination process. Such agencies may require the Company to recognize
adjustments to the losses based upon available information and judgments of the
regulatory examiners at the time of their examination.

Recognition of Premium Revenue and Costs

Revenues from life, payout annuity (with life contingencies), and accident
and health policies represent premiums recognized over the premium-paying period
and are included in life, annuity, and accident and health premiums. Expenses
are associated with earned premiums to result in recognition of profits over the
life of the policies. Expenses include benefits paid to policyholders and the
change in the reserves for future policy benefits.

Revenues from accumulation policies, which are included in other revenues,
represent amounts assessed against policyholders. Such assessments are
principally surrender charges. Policyholder account balances for accumulation
annuities consist of premiums received, plus credited interest, less accumulated
policyholder

B-17
<PAGE> 36
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assessments. Policyholder account balances are reported in the consolidated
balance sheets as funds held under deposit administration contracts. Expenses
for accumulation annuities represent interest credited to policyholder account
balances.

Revenues from most universal life policies, which are included in other
revenues, represent amounts assessed against policyholders. Such assessments are
principally mortality charges, surrender charges, and policy service fees.
Policyholder account balances consist of premiums received plus credited
interest, less accumulated policyholder assessments. Policyholder account
balances are reported in the consolidated balance sheets as other policy
liabilities. Expenses include interest credited to policyholder account balances
and benefits in excess of account balances returned to policyholders.

Policy Acquisition Costs

The Company defers costs which vary with and are primarily related to the
production of new business. Deferred costs associated with life, annuity,
universal life, and accident and health insurance policies consist principally
of field sales compensation, direct response costs, underwriting and issue
costs, and related expenses. Deferred costs associated with life policies are
amortized (with interest) over the anticipated premium paying period of the
policies using assumptions that are consistent with the assumptions used to
calculate policy reserves. Deferred costs associated with annuities and
universal life policies are amortized over the life of the policies at a
constant rate based on the present value of the estimated gross profit to be
realized. Deferred costs related to accident and health insurance policies are
amortized over the anticipated premium paying period of the policies based on
the Company's experience. Deferred policy acquisition costs are subject to
recoverability testing at time of policy issue and at the end of each accounting
period, and are written off if determined to be unrecoverable.

Policy Liabilities

Life and annuity and accident and health policy benefit reserves are
primarily calculated using the net level reserve method. The net level reserve
method includes assumptions as to future investment yields, withdrawal rates,
mortality rates, and other assumptions based on the Company's experience. These
assumptions are modified as necessary to reflect anticipated trends and include
provisions for possible unfavorable deviation.

Reserves for benefits payable are determined using case-basis evaluations
and statistical analyses. These reserves represent the estimate of all benefits
incurred but unpaid. The estimates are periodically reviewed and, as adjustments
become necessary, they are reflected in current operations. Although such
estimates are the Company's best estimate of the ultimate value, the actual
results may vary from these values in either direction.

Reinsurance

The Company accounts for reinsurance transactions as prescribed by
Statement of Financial Accounting Standards No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" (Statement 113).
Statement 113 requires the reporting of reinsurance transactions relating to the
balance sheet on a gross basis and precludes immediate gain recognition on
reinsurance contracts.

Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected

B-18
<PAGE> 37
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

Equipment

Equipment, which is included in other assets, is stated at cost and is
depreciated on a straight-line basis using estimated lives of 3 to 10 years.
Additions, renewals, and betterments are capitalized. Expenditures for software,
maintenance, and repairs generally are expensed. Upon retirement or disposal of
an asset, the asset and related accumulated depreciation are eliminated and any
related gain or loss is included in income.

Separate Account

The Company maintains a separate account under Oklahoma insurance law
designated as American Fidelity Variable Annuity Fund A (the Fund). The Fund is
an open-end, diversified management investment company under the Investment
Company Act of 1940, as amended. Under Oklahoma law, the assets of the Fund are
segregated from the Company's assets. The Fund's assets primarily consist of
equity securities, cash, and cash equivalents. The Company acts as investment
manager of the Fund, assumes certain expense risks, and provides sales and
administrative services.

Basic Net Income Per Share

Basic net income per share is based on the weighted average number of
shares outstanding. During the years ended December 31, 1997, 1996, and 1995,
the weighted average number of shares was 250,000. There are no dilutive
securities outstanding.

Reclassifications

Certain prior year amounts have been reclassified to be consistent with the
current year presentation.

(2) STATUTORY FINANCIAL INFORMATION

The Company is required to file statutory financial statements with state
insurance regulatory authorities. Accounting principles used to prepare these
statutory financial statements differ from financial statements prepared on the
basis of generally accepted accounting principles. The Company reported
statutory net income for the years ended December 31, 1997 (unaudited), 1996,
and 1995, of approximately $16,276,000, $13,227,000, and $30,510,000,
respectively. The Company reported statutory capital and surplus at December 31,
1997 (unaudited) and 1996, of approximately $119,523,000 and $146,033,000,
respectively.

Retained earnings of the Company and its insurance subsidiaries are
restricted as to payment of dividends by statutory limitations applicable to
insurance companies. Without prior approval of the state insurance department,
dividends that can be paid by the Company or an insurance subsidiary are
generally limited to the greater of (a) 10% of statutory capital and surplus, or
(b) the statutory net gain from operations. These limitations are based on the
amounts reported for the previous calendar year.

The Oklahoma Insurance Department has adopted risk based capital (RBC)
requirements for life insurance companies. These requirements are applicable to
the Company and its principal subsidiary, SGLI. The RBC calculation serves as a
benchmark for the regulation of life insurance companies by state insurance
regulators. RBC provides for surplus formulas similar to target surplus formulas
used by commercial rating agencies. The formulas specify various weighting
factors that are applied to statutory financial balances or various levels of
activity based on the perceived degree of risk, and are set forth in the RBC
requirements. The amount determined under such formulas is called the authorized
control level RBC (ACLC).

B-19
<PAGE> 38
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The RBC guidelines define specific capital levels based on a company's ACLC
that are determined by the ratio of the company's total adjusted capital (TAC)
to its ACLC. TAC is equal to statutory capital, plus the Asset Valuation Reserve
and any voluntary investment reserves, 50% of dividend liability, and certain
other specified adjustments. Companies where TAC is less than or equal to 2.0
times ACLC are subject to certain corrective actions, as set forth in the RBC
requirements.

At December 31, 1997 and 1996, the statutory TAC of the Company
significantly exceeds the level requiring corrective action. At December 31,
1996, the statutory TAC of SGLI significantly exceeded the level requiring
corrective action.

(3) INVESTMENTS

Investment income for the years ended December 31 is summarized below (in
thousands):

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Interest on fixed maturities.......................... $ 61,556 $ 58,271 $53,931
Dividends on equity securities........................ 25 44 139
Interest on mortgage loans............................ 12,091 11,747 11,543
Investment real estate income......................... 2,285 3,295 4,055
Interest on policy loans.............................. 1,411 1,281 1,200
Interest on short-term investments.................... 244 120 571
Net realized gains on investments..................... 1,823 1,793 2,423
Other................................................. 787 1,186 1,071
-------- -------- -------
80,222 77,737 74,933
Less investment expenses.............................. (11,047) (10,235) (9,607)
-------- -------- -------
Net investment income................................. $ 69,175 $ 67,502 $65,326
======== ======== =======
</TABLE>

Net realized gains (losses) and the changes in unrealized gains (losses) on
investments for the years ended December 31 are as follows (in thousands):

<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
REALIZED UNREALIZED REALIZED UNREALIZED REALIZED UNREALIZED
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities
held-to-maturity................ $ 173 $ -- $(1,127) $ -- $ 581 $ --
Fixed maturities
available-for-sale.............. 449 12,600 573 (19,051) 271 31,529
Equity securities................. -- (1,641) 27 2,986 611 (896)
Real estate....................... 1,219 -- 2,398 -- 1,436 --
Mortgage loans.................... (15) -- (68) -- (196) --
Other............................. (3) -- (10) -- (280) --
------ ------- ------- -------- ------ -------
$1,823 $10,959 $ 1,793 $(16,065) $2,423 $30,633
====== ======= ======= ======== ====== =======
</TABLE>

Included in the above realized gains (losses) is the increase (decrease) in
the allowance for possible losses on mortgage loans of $16,000, $(790,000), and
$235,000 in 1997, 1996, and 1995, respectively, and the increase in the
allowance for losses on investment real estate of $117,000 in 1996. In addition,
the Company realized net gains (losses) of approximately $1,000, and $(11,000)
during 1996, and 1995, respectively, on investments in fixed maturities that
were called or prepaid.

In December 1995, the Company transferred investments with an estimated
fair value and an amortized cost of approximately $300,850,000 and $287,269,000,
respectively, from the held to-maturity portfolio to the available-for-sale
portfolio at their estimated fair value in response to the guidance included in
the Financial Accounting Standards Board Special Report, "A Guide to
Implementation of Statement 115." This guidance

B-20
<PAGE> 39
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

offered a one-time reassessment opportunity, without calling into question the
intent of the Company to hold other securities to maturity in the future. At the
date of transfer, the net unrealized gain on the transferred securities was
approximately $13,581,000 and was included as an increase in stockholder's
equity, net of deferred taxes.

Held-to-Maturity

The amortized cost and estimated fair value of investments in fixed
maturities held-to-maturity are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................. $ 9,001 $ 659 $ -- $ 9,660
Corporate securities....................... 131,251 4,826 (354) 135,723
Mortgage-backed securities................. 94,547 2,037 (104) 96,480
-------- ------ ------- --------
Totals........................... $234,799 $7,522 $ (458) $241,863
======== ====== ======= ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................. $ 9,925 $ 365 $ -- $ 10,290
Corporate securities....................... 142,209 1,078 (2,271) 141,016
Mortgage-backed securities................. 99,810 1,146 (1,228) 99,728
-------- ------ ------- --------
Totals........................... $251,944 $2,589 $(3,499) $251,034
======== ====== ======= ========
</TABLE>

The amortized cost and estimated fair value of investments in fixed
maturities held-to-maturity at December 31 are shown below (in thousands) by
contractual maturity. Expected maturities will differ from contractual
maturities because the issuers of such securities may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
1997
----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due after one year through five years....................... $ 11,635 $ 11,878
Due after five years through ten years...................... 45,957 47,624
Due after ten years......................................... 82,660 85,881
-------- --------
140,252 145,383
Mortgage-backed securities.................................. 94,547 96,480
-------- --------
$234,799 $241,863
======== ========
</TABLE>

Proceeds from sales of investments in fixed maturities held-to-maturity
during 1997, 1996, and 1995 were approximately $9,006,000, $7,948,000, and
$33,685,000, respectively. Gross gains of approximately $173,000, $33,000, and
$1,022,000, respectively, were realized on those sales. In 1996 and 1995, gross
losses of approximately $1,161,000 and $430,000, respectively, were realized on
those sales. In 1997, 1996, and 1995, changes in circumstances caused the
Company to change its intent to hold these securities to maturity. These

B-21
<PAGE> 40
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

changes primarily consisted of the significant deterioration in the issuers'
creditworthiness in 1997, 1996, and 1995.

Available-for-Sale

The gross unrealized holding gains on equity securities available-for-sale
were $779,000 and $2,369,000 in 1997 and 1996, respectively. Gross unrealized
holding losses on equity securities available-for-sale were $66,000 and $15,000
in 1997 and 1996, respectively.

The amortized cost and estimated fair value of investments in fixed
maturities available-for-sale are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................. $ 89,182 $ 2,249 $ (65) $ 91,366
Corporate securities....................... 382,599 14,128 (195) 396,532
Mortgage-backed securities................. 150,931 3,909 (161) 154,679
-------- ------- ------- --------
Totals........................... $622,712 $20,286 $ (421) $642,577
======== ======= ======= ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................. $ 86,884 $ 1,627 $ (674) $ 87,837
Corporate securities....................... 353,707 7,074 (2,414) 358,367
Mortgage-backed securities................. 111,265 2,135 (483) 112,917
-------- ------- ------- --------
Totals........................... $551,856 $10,836 $(3,571) $559,121
======== ======= ======= ========
</TABLE>

The amortized cost and estimated fair value of investments in fixed
maturities available-for-sale at December 31 are shown below (in thousands) by
contractual maturity. Expected maturities will differ from contractual
maturities because the issuers of such securities may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
1997
----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less..................................... $ 22,964 $ 23,140
Due after one year through five years....................... 157,919 162,717
Due after five years through ten years...................... 202,614 209,128
Due after ten years......................................... 88,284 92,913
-------- --------
471,781 487,898
Mortgage-backed securities.................................. 150,931 154,679
-------- --------
$622,712 $642,577
======== ========
</TABLE>

Proceeds from sales of investments in fixed maturities available-for-sale
were approximately $100,220,000, $136,577,000, and $31,944,000 in 1997, 1996,
and 1995, respectively. Gross gains of

B-22
<PAGE> 41
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $1,152,000, $1,257,000, and $359,000 and gross losses of
approximately $703,000, $684,000, and $88,000 were realized on those sales in
1997, 1996, and 1995, respectively.

At December 31, 1997 and 1996, investments with carrying values of
approximately $2,497,000 and $5,282,000, respectively, were on deposit with
state insurance departments as required by statute.

(4) FAIR VALUE OF FINANCIAL INSTRUMENTS

A summary of the Company's financial instruments (in thousands) and the
fair value estimates, methods, and assumptions are set forth below:

<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash..................................... $ 8,427 $ 8,427 $ 15,962 $ 15,962
Short-term and other investments......... 20,770 20,770 12,763 12,763
Accounts receivable...................... 35,819 35,819 34,006 34,006
Accrued investment income................ 14,357 14,357 14,248 14,248
Reinsurance receivables on paid and
unpaid benefits....................... 57,503 57,503 36,794 36,794
Policy loans............................. 8,668 8,668 8,359 8,359
Fixed maturities held-to-maturity........ 234,799 241,863 251,944 251,034
Fixed maturities available-for-sale...... 642,577 642,577 559,121 559,121
Equity securities........................ 11,736 11,736 12,046 12,046
Mortgage loans........................... 135,122 145,763 130,508 137,978
Financial liabilities:
Certain policy liabilities............... 639,272 620,976 613,151 596,386
Other liabilities........................ 36,099 36,099 34,125 34,125
Notes payable............................ 50,719 51,247 19,839 19,758
</TABLE>

Cash, Short-term and Other Investments, Accounts Receivable, Accrued Investment
Income, Reinsurance Receivables on Paid and Unpaid Benefits, and Other
Liabilities

The carrying amount of these financial instruments approximates fair value
because they mature within a relatively short period of time and do not present
unanticipated credit concerns.

Policy Loans

Policy loans have average interest rates of 6.95% and 6.60% as of December
31, 1997 and 1996, respectively, and have no specified maturity dates. The
aggregate fair value of policy loans approximates the carrying value reflected
on the consolidated balance sheets. These loans typically carry an interest rate
that is tied to the crediting rate applied to the related policy and contract
reserves. Policy loans are an integral part of the life insurance policies which
the Company has in force and cannot be valued separately.

Fixed Maturity Investments

The fair value of fixed maturity investments is estimated based on bid
prices published in financial newspapers or bid quotations received from
securities dealers. The fair value of certain securities is not readily
available through market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar instruments, adjusted for
the differences between the quoted instruments and the instruments being valued.

B-23
<PAGE> 42
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of equity securities investments of the Company is based on
bid prices published in financial newspapers or bid quotations received from
securities dealers.

Mortgage Loans

Fair values are estimated for portfolios of loans with similar
characteristics. Mortgage loans are segregated into either commercial or
residential categories, and have average net yield rates of 8.70% and 8.92% for
December 31, 1997 and 1996, respectively. The fair value of mortgage loans was
calculated by discounting scheduled cash flows to maturity using estimated
market discount rates of 7.29% and 7.71% for December 31, 1997 and 1996,
respectively. These rates reflect the credit and interest rate risk inherent in
the loan. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information. The fair value of certain residential loans is based on the
approximate fair value of the underlying real estate securing the mortgages.

Certain Policy Liabilities

Certain policies sold by the Company are investment-type contracts. These
liabilities are segregated into two categories: deposit administration funds and
immediate annuities which do not have life contingencies. The fair value of the
deposit administration funds is estimated as the cash surrender value of each
policy less applicable surrender charges. The fair value of the immediate
annuities without life contingencies is estimated as the discounted cash flows
of expected future benefits less the discounted cash flows of expected future
premiums, using the current pricing assumptions. The carrying amount of all
other policy liabilities approximates fair value.

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Funds held under deposit administration
contracts........................................ $580,499 $562,961 $556,665 $540,105
Annuities.......................................... 58,773 58,015 56,486 56,281
</TABLE>

Notes Payable

The fair value of the Company's notes payable is estimated by discounting
the scheduled cash flows of each instrument through the scheduled maturity. The
discount rates used are similar to those used for the valuation of the Company's
commercial mortgage loan portfolio, except for the Company's notes payable to
the Federal Home Loan Bank of Topeka, which are valued using discount rates at
or near the carried rates because the notes have relatively short lives or carry
the option of conversion to an adjustable rate.

Limitations

Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument, nor do they reflect income taxes on differences between
fair value and tax basis of the assets. Because no established exchange exists
for a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.

B-24
<PAGE> 43
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) DEFERRED POLICY ACQUISITION COSTS

Deferred policy acquisition costs principally represent field sales
compensation, direct response costs, underwriting and issue costs, and related
expenses. Information relating to the increase in deferred policy acquisition
costs, is summarized as follows (in thousands):

<TABLE>
<CAPTION>
LIFE ACCIDENT
AND ANNUITY AND HEALTH TOTAL
----------- ---------- --------
<S> <C> <C> <C>
Year ended December 31, 1997:
Deferred costs.................................... $ 8,600 $ 28,734 $ 37,334
Amortization...................................... (5,581) (16,513) (22,094)
------- -------- --------
Net increase...................................... $ 3,019 $ 12,221 $ 15,240
======= ======== ========
Year ended December 31, 1996:
Deferred costs.................................... 7,088 22,145 29,233
Amortization...................................... (6,437) (12,714) (19,151)
------- -------- --------
Net increase...................................... $ 651 $ 9,431 $ 10,082
======= ======== ========
Year ended December 31, 1995:
Deferred costs.................................... 9,234 17,516 26,750
Amortization...................................... (3,385) (11,463) (14,848)
------- -------- --------
Net increase...................................... $ 5,849 $ 6,053 $ 11,902
======= ======== ========
</TABLE>

(6) RESERVES FOR FUTURE POLICY BENEFITS

Reserves for life and annuity future policy benefits as of December 31 are
principally based on the interest assumptions set forth below (in thousands):

<TABLE>
<CAPTION>
INTEREST
1997 1996 ASSUMPTIONS
-------- -------- ---------------
<S> <C> <C> <C>
Life and annuity reserves:
Issued prior to 1970......................... $ 3,308 $ 3,305 4.75%
Issued 1970 through 1980..................... 28,796 28,792 6.75% to 5.25%
Issued after 1982 (indeterminate premium
products)................................. 559 530 10.00% to 8.50%
Issued through 1987 (SGLI acquisition)....... 1,360 1,423 11.00%
Issued 1981 -- 1994 (all other).............. 28,018 27,357 8.50% to 7.00%
Issued after 1994 (all other)................ 2,892 1,701 7.00%
Life contingent annuities.................... 30,894 30,151 Various*
Group term life waiver of premium disabled
lives..................................... 5,311 5,105 6.00%
All other life reserves...................... 4,525 4,456 Various
-------- --------
$105,663 $102,820
======== ========
</TABLE>

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

* These reserves are revalued as limited-pay contracts. As a result, the reserve
is somewhat greater than the present value of future benefits and expenses at
these interest rates, i.e., the actual interest rates required to support the
reserves are somewhat lower than the rates shown.

Assumptions as to mortality are based on the Company's prior experience.
This experience approximates the 1955-60 Select and Ultimate Table (individual
life issued prior to 1981), the 1965-70 Select and Ultimate Table (individual
life issued in 1981 and after) and the 1960 Basic Group Table (all group
issues).

B-25
<PAGE> 44
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Assumptions for withdrawals are based on the Company's prior experience. All
assumptions used are adjusted to provide for possible adverse deviations.

(7) LIABILITY FOR BENEFITS PAYABLE

The provision for benefits pertaining to prior years did not change
significantly in 1997. The provisions for benefits pertaining to prior years
decreased in 1996 by approximately $1,850,000 primarily due to the improvement
in the loss ratios of life and cancer products.

(8) NOTES PAYABLE

Notes payable as of December 31 is summarized as follows:

<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
5.91% line of credit, due in 1998, interest due monthly..... $ 3,500 $ 3,500
5.97% line of credit, due in 1998, interest due monthly..... 5,000 5,000
5.54% line of credit, due in 1998, interest due monthly..... 3,500 --
5.56% line of credit, due in 1998, interest due monthly..... 5,000 --
5.66% line of credit, due in 1999, interest due monthly..... 3,000 --
5.62% line of credit, due in 1999, interest due monthly..... 10,000 --
6.84% line of credit, due in 2000, interest due monthly..... 4,000 4,000
5.81% line of credit, due in 2002, interest due monthly..... 10,000 --
5.78% line of credit, due in 2002, interest due monthly..... 3,000 --
8.4% mortgage loan, due in monthly installments of $22,000
(including interest) to 2027.............................. 2,881 2,902
Other....................................................... 838 2,054
Various notes payable, paid in 1997......................... -- 2,383
------- -------
$50,719 $19,839
======= =======
</TABLE>

The promissory notes are guaranteed by AFC. The mortgage loan is secured by
a mortgage on other investment real estate. The mortgage loan is also secured by
an assignment of the leases on investment real estate.

AFA has a $50,000,000 line of credit with the Federal Home Loan Bank of
Topeka. The line of credit is secured by investment securities pledged as
collateral by AFA with a carrying value of approximately $61,954,000 at December
31, 1997. The collateral required for this line of credit at December 31, 1997,
was $57,500,000. The pledged securities are held in the Company's name in a
custodial account at Bank of Oklahoma to secure current and future borrowings.
To participate in this available credit, AFA has purchased 114,916 shares of
Federal Home Loan Bank of Topeka common stock with a total carrying value of
approximately $11,491,600 at December 31, 1997.

The Company has unused lines of credit of $3,000,000 at December 31, 1997.

Interest expense for the years ended December 31, 1997, 1996, and 1995,
totaled approximately $2,076,000, $1,319,000, and $1,482,000, respectively.

B-26
<PAGE> 45
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Scheduled maturities (excluding interest) of the above indebtedness at
December 31, 1997, are as follows (in thousands):

<TABLE>
<S> <C>
1998........................................................ $17,070
1999........................................................ 13,078
2000........................................................ 4,084
2001........................................................ 92
2002........................................................ 13,100
Thereafter.................................................. 3,295
-------
$50,719
=======
</TABLE>

(9) INCOME TAXES

Total income tax expense in the accompanying consolidated statements of
income differs from the federal statutory rate of 35% of income before income
taxes principally due to the recapture of certain tax reserve benefits on
reinsurance recaptured by the ceding company in 1997, loss on the disposition of
a subsidiary in 1997, payments made to AFC in 1997 treated as management fees
for tax purposes, and the correction of prior year estimates of deferred taxes
in 1997 and 1996.

The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at December 31, are presented below (in
thousands):

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Investment real estate.................................... $ -- $ 311
Other investments......................................... 522 428
Life and health reserves.................................. 12,783 12,956
Other liabilities......................................... -- 1,433
-------- --------
Total gross deferred tax assets................... 13,305 15,128
-------- --------
Deferred tax liabilities:
Fixed maturities.......................................... (7,602) (3,010)
Equity securities......................................... (250) (824)
Deferred policy acquisition costs......................... (57,151) (51,937)
Investment real estate.................................... (39) --
Other assets.............................................. (6,863) (7,635)
Other liabilities......................................... (598) --
-------- --------
Total gross deferred tax liabilities.............. (72,503) (63,406)
-------- --------
Net deferred tax liability........................ $(59,198) $(48,278)
======== ========
</TABLE>

Management believes that it is more likely than not that the results of
operations will generate sufficient taxable income to realize the deferred tax
assets reported on the consolidated balance sheets.

The Company and its subsidiaries are included in AFC's consolidated federal
income tax return. Income taxes are reflected in the accompanying consolidated
financial statements as if the Company and its subsidiaries were separate tax
paying entities. At December 31, 1997 and 1996, other accounts receivable
includes income taxes receivable from AFC and other members of the consolidated
group of approximately $6,550,000 and $4,988,000, respectively.

Prior to 1984, life insurance companies were taxed under the 1959 Tax Act
on the lesser of taxable income or gain from operations plus one-half of any
excess of gain from operations over taxable investment
B-27
<PAGE> 46
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

income. The one-half of the excess of the gain from operations was accumulated
in a special memorandum tax account known as the "policyholders surplus account"
(PSA). Accumulations at December 31, 1997 were approximately $8,161,000 for AFA.
Pursuant to the Tax Reform Act of 1984, the PSA was "frozen" at the December 31,
1983, amount and, accordingly, no further additions to the PSA will be made.
These excess amounts in the PSA will become taxable at the regular corporate tax
rate, if distributions to stockholders exceed certain stated amounts or if
certain criteria are not met. No provision for deferred federal income taxes
applicable to the PSA has been made because management is of the opinion that no
distribution of the PSA will be made in the foreseeable future.

(10) REINSURANCE

Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. 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.
Management believes that all reinsurers presently used are financially sound and
will be able to meet their contractual obligations; therefore, no allowance for
uncollectible amounts has been included in the financial statements. At December
31, 1997 and 1996, reinsurance receivables with a carrying value of
approximately $18,183,000 and $11,688,000, respectively were associated with two
reinsurers.

During 1997, the Company entered into litigation with one of its
reinsurance carriers. The litigation is still in process. Management and legal
counsel do not expect the anticipated result to have a material financial impact
on the Company.

Reinsurance agreements in effect for life insurance policies vary according
to the age of the insured and the type of risk. Retention amounts for life
insurance range from $500,000 on group life to $250,000 on individual life
coverages, with slightly lower limits on accidental death benefits. At December
31, 1997 and 1996, the face amounts of life insurance in force that are
reinsured amounted to approximately $307,000,000 (approximately 4.6% of total
life insurance in force) and approximately $403,000,000 (approximately 6.3% of
total life insurance in force), respectively.

Reinsurance agreements in effect for accident and health insurance policies
vary with the type of coverage. Retention limits range from $50,000 for
individual cancer coverage to $250,000 for major medical coverage.

The effects of reinsurance agreements on earned and written premiums, prior
to deductions for benefits and commission allowances, were approximately
$(92,731,000), $(83,947,000), and $(76,143,000) for life and accident and health
reinsurance ceded, and $416,000, $2,897,000, and $2,750,000 for life and
accident and health reinsurance assumed, for the years ended December 31, 1997,
1996 and 1995, respectively.

Reinsurance agreements reduced benefits paid for life and accident and
health policies by approximately $72,522,000, $61,730,000, and $52,318,000 for
the years ended December 31, 1997, 1996, and 1995, respectively.

Since 1990, the Company has been involved in a reinsurance agreement with
SGLI. This agreement was amended in 1994 which allowed SGLI to cede most of its
individual major medical business to an unaffiliated company. This transaction
consists of a coinsurance agreement. The transaction was approved by the
Oklahoma Insurance Department.

In 1995, AFA and SGLI entered into an assumption agreement whereby AFA
assumed all of SGLI's remaining rights and insurance liability in force. The
assumption is pending policyholder approval, as certain states allow as much as
three years for policyholders to reject an assumption.

B-28
<PAGE> 47
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1997, AFA and SGLI entered into an assumption agreement whereby SGLI
assumed a small block of life business and a block of stop-loss medical business
from AFA.

(11) EMPLOYEE BENEFIT PLANS

The Company and its subsidiaries participate in a pension plan (the Plan)
covering all employees who have satisfied longevity and age requirements. The
Company's funding policy is to contribute annually the maximum amount that can
be deducted for federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future.

The Plan's funded status as of December 31 is summarized as follows (in
thousands):

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits........................................... $14,455 $11,248
Nonvested benefits........................................ 1,850 1,420
------- -------
Total accumulated benefit obligation.............. $16,305 $12,668
======= =======
Projected benefit obligation for service rendered to date... 19,466 14,679
Plan assets, at fair value.................................. 21,839 16,864
------- -------
Plan assets in excess of projected benefit obligation....... 2,373 2,185
Unrecognized transition amount.............................. (298) (443)
Unrecognized prior service cost due to plan amendment....... 449 521
Unrecognized net loss....................................... 205 370
------- -------
Prepaid pension cost included in other assets............... $ 2,729 $ 2,633
======= =======
</TABLE>

In determining the projected benefit obligation, the weighted average
assumed discount rate used was 7.0% and 7.5% in 1997 and 1996, respectively. The
rate of increase in future salary levels was 5.0% in 1997 and 1996. The expected
long-term rate of return on assets used in determining net periodic pension cost
was 9.5% in 1997 and 1996. Plan assets are invested in fixed maturities, equity
securities, short-term investments and in an unallocated deposit administration
contract with the Company.

Net periodic pension cost for the years ended December 31 included the
following (in thousands):

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service costs -- benefits earned during period.......... $ 1,284 $ 1,237 $ 1,025
Interest cost........................................... 1,193 1,054 919
Return on plan assets................................... (4,065) (3,711) (2,455)
Net amortization and deferral........................... 2,332 2,421 1,366
------- ------- -------
Net periodic pension cost............................... $ 744 $ 1,001 $ 855
======= ======= =======
</TABLE>

The Company participates in a defined contribution thrift and profit
sharing plan as provided under section 401(a) of the Internal Revenue Code,
which includes the tax deferral feature for employee contributions provided by
section 401(k) of the Internal Revenue Code. The Company contributed
approximately $881,000, $822,000, and $831,000 to this plan during the years
ended December 31, 1997, 1996, and 1995, respectively.

B-29
<PAGE> 48
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) DISCONTINUED OPERATIONS

Effective January 1, 1995, AFA sold its subsidiary American Fidelity
Insurance Company (AFI), a property and casualty insurance company, to AFC for
approximately $28,717,000. In connection with this sale, AFC contributed capital
of approximately $4,085,000 to AFA as reflected in the accompanying consolidated
statement of stockholder's equity.

(13) COMMITMENTS AND CONTINGENCIES

Rent expense for the years ended December 31, 1997, 1996, and 1995, was
approximately $6,163,000, $5,674,000, and $5,133,000, respectively. A portion of
rent expense relates to leases that expire or are cancelable within one year.
The aggregate minimum annual rental commitments as of December 31, 1997, under
noncancellable long-term leases for office space are as follows (in thousands):

<TABLE>
<S> <C>
1998........................................................ $2,863
1999........................................................ 1,756
2000........................................................ 798
2001........................................................ 370
2002........................................................ 308
Thereafter.................................................. 331
</TABLE>

The Company has pledged approximately $31,423,000 of its treasury notes as
collateral on lines of credit held by affiliated companies.

The Company has outstanding mortgage loan commitments of approximately
$8,165,000 and $13,182,000 at December 31, 1997 and 1996, respectively.

In the normal course of business, there are various legal actions and
proceedings pending against the Company and its subsidiaries. In management's
opinion, the ultimate liability, if any, resulting from these legal actions will
not have a material adverse effect on the Company's financial position.

(14) LEASES

The Company leases various real estate properties to nonaffiliates under
operating lease agreements, with lease expiration dates ranging from 1998
through 2003. The properties leased are included in the consolidated balance
sheets as investment real estate with the related debt included in notes
payable. Rental income on these properties is included in the consolidated
statements of income as net investment income.

Investments in real estate held for lease can be summarized as follows (in
thousands):

<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land and buildings.......................................... $3,325 $4,857
Less accumulated depreciation............................... 685 1,567
------ ------
Net investment.................................... 2,640 3,290
Less indebtedness........................................... 839 884
------ ------
Investment net of indebtedness.............................. $1,801 $2,406
====== ======
</TABLE>

B-30
<PAGE> 49
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum rentals on noncancellable operating leases can be summarized
as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1998..................................................... $ 392
1999..................................................... 253
2000..................................................... 181
2001..................................................... 133
2002..................................................... 117
Thereafter............................................... 31
------
Total future minimum rentals................................ $1,107
======
</TABLE>

(15) RELATED PARTY TRANSACTIONS

The Company and its subsidiaries lease automobiles, furniture, and
equipment from a partnership that owns a controlling interest in AFC. These
operating leases are cancelable upon one month's notice. During the years ended
December 31, 1997, 1996, and 1995, rentals paid under these leases were
approximately $3,577,000, $2,966,000, and $2,955,000, respectively.

During the year ended December 31, 1997, the Company paid investment
advisory fees to a partnership that owns a controlling interest in AFC totaling
approximately $3,232,000.

During the years ended December 31, 1997, 1996, and 1995, the Company and
its subsidiaries paid management fees and investment advisory fees to AFC
totaling approximately $2,848,000, $16,536,000, and $17,885,000, respectively.

The Company and its subsidiaries lease office space from a subsidiary of
AFC. The rent payments associated with the lease will be approximately
$2,100,000 per year for the next 15 years.

During 1997, the Company paid a dividend of approximately $33,834,000 to
AFC. This dividend was in the form of cash payments of approximately $8,800,000,
common stock in affiliated companies (including SGLI) of approximately
$16,588,000 (including deferred tax liabilities assumed by AFC of $683,000), and
common stock in non-affiliated companies of approximately $8,446,000 (including
a deferred tax liability retained by the Company of $1,961,000). This
transaction was approved by the Oklahoma Insurance Department.

Short-term and other investments at December 31, 1997 includes a note
receivable from AFC of approximately $3,328,000, maturing in 1998.

During 1997, the Company entered into a three-year software lease agreement
with AFC. Lease expense related to this agreement was approximately $569,000 and
is included in selling costs and other operating, administrative and general
expenses.

Short-term and other investments at December 31, 1995 include notes
receivable from AFC totaling approximately $6,485,000 which were repaid in 1996.
During the years ended December 31, 1996 and 1995, the Company recorded
investment income on the notes from AFC of approximately $481,000, and $699,000,
respectively.

AFC and several of its subsidiaries rented office space in the home office
building from the Company until the home office building was sold in 1997.
During the years ended December 31, 1997, 1996, and 1995, the Company received
rental income from AFC and several of its subsidiaries of approximately
$299,000, $1,280,000, and $1,281,000, respectively.

B-31
<PAGE> 50
AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 1996, AFC contributed capital of approximately $2,198,000 through
forgiveness of a deferred tax liability owed by AFA to AFC.

An officer of AFC serves on the board of directors of a financial
institution in which the Company maintains cash balances.

B-32
<PAGE> 51

AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

SCHEDULE III -- BUSINESS SEGMENT INFORMATION
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

The Company's reportable segments are its strategic business units. The
components of operations for the years ended December 31, 1997, 1996, and 1995
are included in the table below.

Assets and related investment income are allocated based upon related
insurance reserves which are backed by such assets. Other operating expenses are
allocated in relation to the mix of related revenues.

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
TOTAL REVENUES:
American Fidelity Education Services Division.......... $ 152,021 $ 142,493 $ 129,628
Association Group Division............................. 105,784 99,979 96,140
Brokerage Division..................................... 32,290 24,558 31,898
Non insurance operations............................... (504) 1,966 1,324
---------- ---------- ----------
$ 289,591 $ 268,996 $ 258,990
========== ========== ==========
PRETAX EARNINGS:
American Fidelity Education Services Division.......... $ 24,621 $ 14,275 $ 16,034
Association Group Division............................. 10,683 9,349 5,751
Brokerage Division..................................... (2,344) (1,903) 10,113
Non insurance operations............................... (2,340) 397 517
---------- ---------- ----------
$ 30,620 $ 22,118 $ 32,415
========== ========== ==========
TOTAL ASSETS:
American Fidelity Education Services Division.......... $1,029,976 $ 922,671 $ 885,216
Association Group Division............................. 192,507 197,225 181,426
Brokerage Division..................................... 274,818 239,986 231,774
Non insurance operations............................... 2,135 3,170 1,891
---------- ---------- ----------
$1,499,436 $1,363,052 $1,300,307
========== ========== ==========
</TABLE>

See accompanying independent auditors' report.

B-33
<PAGE> 52

AMERICAN FIDELITY ASSURANCE COMPANY AND SUBSIDIARIES

SCHEDULE IV -- REINSURANCE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
CEDED ASSUMED PERCENTAGE
GROSS TO OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
---------- --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Life insurance in force............ $6,872,047 $306,917 $ 10 $6,565,140 --%
========== ======== ======== ==========
Premiums:
Life insurance................ $ 26,756 $ 1,474 $ -- $ 25,282 --%
Accident and health
insurance.................. 272,785 91,257 416 181,944 --%
---------- -------- -------- ----------
Total premiums............. $ 299,541 $ 92,731 $ 416 $ 207,226 --%
========== ======== ======== ==========
Year ended December 31, 1996
Life insurance in force............ $6,276,241 $403,148 $125,101 $5,998,194 2.09%
========== ======== ======== ==========
Premiums:
Life insurance................ $ 23,240 $ 1,907 $ 2,854 $ 24,187 11.80%
Accident and health
insurance.................. 248,054 82,040 43 166,057 0.00%
---------- -------- -------- ----------
Total premiums............. $ 271,294 $ 83,947 $ 2,897 $ 190,244 1.52%
========== ======== ======== ==========
Year ended December 31, 1995
Life insurance in force............ $5,679,074 $277,982 $131,621 $5,532,713 2.38%
========== ======== ======== ==========
Premiums:
Life insurance................ $ 23,527 $ 1,758 $ 2,745 $ 24,514 11.20%
Accident and health
insurance.................. 231,340 74,385 5 156,960 --%
---------- -------- -------- ----------
Total premiums............. $ 254,867 $ 76,143 $ 2,750 $ 181,474 1.52%
========== ======== ======== ==========
</TABLE>

See accompanying independent auditors' report.

B-34