VEL II ACCT OF STATE MUTUAL LIFE ASSUR CO OF AMERICA, 497, 1998-05-07

VEL II ACCT OF STATE MUTUAL LIFE ASSUR CO OF AMERICA
497, 1998-05-07

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INDIVIDUAL OR GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE

This Prospectus describes an individual or group flexible premium variable life
insurance policy ("Policy" or "Policies") offered by First Allmerica Financial
Life Insurance Company ("Company") to applicants Age 85 (currently 80 in New
York) and under.

The Policy permits you to allocate net premiums among up to 20 sub-accounts
("Sub-Accounts") of the VEL II Account ("Separate Account"), a separate account
of the Company, and a fixed-interest account ("General Account") of the Company
(collectively, "Accounts"). Each Sub-Account invests its assets in a
corresponding investment portfolio of Allmerica Investment Trust ("Trust"),
Fidelity Variable Insurance Products Fund ("Fidelity VIP"), Fidelity Variable
Insurance Products Fund II ("Fidelity VIP II"), T. Rowe Price International
Series, Inc. ("T. Rowe Price") or Delaware Group Premium Fund, Inc. ("DGPF").
The following Underlying Funds are available under the Policy:

<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VIP
Select Aggressive Growth Fund Overseas Portfolio
Select Capital Appreciation Fund Equity-Income Portfolio
Select Value Opportunity Fund Growth Portfolio
Select Emerging Markets Fund High Income Portfolio
Select International Equity Fund
Select Growth Fund FIDELITY VIP II
Select Strategic Growth Fund Asset Manager Portfolio
Growth Fund
Equity Index Fund T. ROWE PRICE
Select Growth and Income Fund International Stock Portfolio
Investment Grade Income Fund
Government Bond Fund DGPF
Money Market Fund International Equity Series
</TABLE>

CERTAIN FUNDS MAY NOT BE AVAILABLE IN ALL STATES.

THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, FIDELITY VARIABLE INSURANCE PRODUCTS FUND, FIDELITY
VARIABLE INSURANCE PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC.,
AND DELAWARE GROUP PREMIUM FUND, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO MAY
INVEST IN HIGHER-YIELDING, HIGHER-RISK, LOWER-RATED DEBT SECURITIES (SEE
"INVESTMENT OBJECTIVES AND POLICIES" IN THIS PROSPECTUS). INVESTORS SHOULD
RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.

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

THE POLICY IS AN OBLIGATION OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY,
AND IS DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICY IS NOT A DEPOSIT OR
OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT UNION. THE
POLICY IS NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE POLICY ARE
SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE LOSS
OF PRINCIPAL.

CORRESPONDENCE MAY BE MAILED TO
ALLMERICA LIFE, P.O. BOX 8014,
BOSTON, MA 02266-8014

PROSPECTUS DATED MAY 1, 1998
WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
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(Continued from cover page)

Each Underlying Fund has its own investment objectives. The accompanying
prospectuses of the Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF
describe the investment objectives and certain attendant risks of each
Underlying Fund.

Within limits, you may choose the amount of initial premium desired and the
initial Sum Insured. You have the flexibility to vary the frequency and amount
of premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Policy's Surrender Value, or the Policy may be fully
surrendered at any time, subject to certain limitations. Because of the
substantial nature of the surrender charge, the Policy is not suitable for
short-term investment purposes. A Policyowner contemplating surrender of a
Policy should pay special attention to the limitation of deferred sales charges
on surrenders in the first two years following issuance or Face Amount increase.

There is no guaranteed minimum Policy Value. The value of a Policy will vary up
or down to reflect the investment experience of allocations to the Sub-Accounts
and the fixed rates of interest earned by allocations to the General Account.
The Policy Value also will be adjusted for other factors, including the amount
of charges imposed. A Policy will remain in effect so long as the Policy Value
less any surrender charges and less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Policy. The Policy Value
may decrease to the point where the Policy will lapse and provide no further
death benefit without additional premium payments, unless the optional
Guaranteed Death Benefit Rider is in effect.

If the Policy is in effect at the death of the Insured, the Company will pay a
death benefit (the "Death Proceeds") to the Beneficiary. Prior to the Final
Premium Payment Date, the Death Proceeds equal the Sum Insured, less any Debt,
partial withdrawals, and any due and unpaid charges. You may choose either Sum
Insured Option 1 (the Sum Insured is fixed in amount) or Sum Insured Option 2
(the Sum Insured includes the Policy Value in addition to a fixed insurance
amount). The Policyowner has the right to change the Sum Insured Option, subject
to certain conditions. A Guideline Minimum Sum Insured, equivalent to a
percentage of the Policy Value, will apply if greater than the Sum Insured
otherwise payable under Option 1 or Option 2.

In certain circumstances, the Policy may be considered a "modified endowment
contract." Under the Internal Revenue Code (the "Code"), any policy loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See "FEDERAL TAX CONSIDERATIONS -- Modified
Endowment Contracts."

IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE, OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.

THE PURPOSE OF THE POLICY IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. THE POLICY,
TOGETHER WITH ITS ATTACHED APPLICATION, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN
YOU AND THE COMPANY.

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TABLE OF CONTENTS

<TABLE>
<S> <C>
SPECIAL TERMS......................................................................... 5
SUMMARY............................................................................... 8
PERFORMANCE INFORMATION............................................................... 19
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT AND THE UNDERLYING FUNDS............. 24
INVESTMENT OBJECTIVES AND POLICIES.................................................... 26
INVESTMENT ADVISORY SERVICES.......................................................... 28
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 31
VOTING RIGHTS......................................................................... 31
THE POLICY............................................................................ 32
Applying for the Policy............................................................. 32
Free-Look Period.................................................................... 33
Conversion Privileges............................................................... 34
Premium Payments.................................................................... 34
Incentive Funding Discount.......................................................... 35
Guaranteed Death Benefit Rider...................................................... 35
Paid-Up Insurance Option............................................................ 36
Allocation of Net Premiums.......................................................... 37
Transfer Privilege.................................................................. 38
Death Proceeds...................................................................... 39
Sum Insured Options................................................................. 39
Change in Sum Insured Option........................................................ 41
Change in the Face Amount........................................................... 42
Policy Value and Surrender Value.................................................... 43
Death Proceeds Payment Options...................................................... 45
Optional Insurance Benefits......................................................... 45
Policy Surrender.................................................................... 45
Partial Withdrawals................................................................. 46
CHARGES AND DEDUCTIONS................................................................ 46
Tax Expense Charge.................................................................. 46
Monthly Deduction from the Policy Value............................................. 47
Charges Against Assets of the Separate Account...................................... 49
Surrender Charge.................................................................... 49
Possible Surrender Charge on a Face Amount Decrease................................. 51
Charges on Partial Withdrawal....................................................... 51
Transfer Charges.................................................................... 52
Charge for Increase in the Face Amount.............................................. 52
Other Administrative Charges........................................................ 52
POLICY LOANS.......................................................................... 53
Loan Interest....................................................................... 53
Repayment of Loans.................................................................. 54
Effect of Policy Loans.............................................................. 54
Policies Issued in Connection with TSA Plans........................................ 54
POLICY TERMINATION AND REINSTATEMENT.................................................. 55
Termination......................................................................... 55
Reinstatement....................................................................... 55
OTHER POLICY PROVISIONS............................................................... 56
Policyowner......................................................................... 56
Beneficiary......................................................................... 56
Incontestability.................................................................... 57
Suicide............................................................................. 57
Age and Sex......................................................................... 57
</TABLE>

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<TABLE>
<S> <C>
Assignment.......................................................................... 57
Postponement of Payments............................................................ 57
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY....................................... 58
DISTRIBUTION.......................................................................... 59
SERVICES.............................................................................. 59
REPORTS............................................................................... 59
LEGAL PROCEEDINGS..................................................................... 60
FURTHER INFORMATION................................................................... 60
INDEPENDENT ACCOUNTANTS............................................................... 60
FEDERAL TAX CONSIDERATIONS............................................................ 60
The Company and the Separate Account................................................ 60
Taxation of the Policy.............................................................. 61
Modified Endowment Contracts........................................................ 62
MORE INFORMATION ABOUT THE GENERAL ACCOUNT............................................ 63
General Description................................................................. 63
General Account Values.............................................................. 63
The Policy.......................................................................... 64
FINANCIAL STATEMENTS.................................................................. 64
APPENDIX A -- OPTIONAL BENEFITS....................................................... A-1
APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS.......................................... B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, POLICY VALUES AND
ACCUMULATED PREMIUMS................................................................. C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES................................ D-1
</TABLE>

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SPECIAL TERMS

ACCUMULATION UNIT: a measure of your interest in a Sub-Account.

AGE: the Insured's age as of the nearest birthday measured from a Policy
anniversary.

BENEFICIARY: the person(s) designated by the Policyowner to receive the
insurance proceeds upon the death of the Insured.

COMPANY: First Allmerica Financial Life Insurance Company.

DATE OF ISSUE: the date set forth in the Policy used to determine the Monthly
Payment Date, Policy months, Policy years, and Policy anniversaries.

DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Sum Insured Option (Option 1 or
Option 2), less Debt outstanding at the time of the Insured's death, partial
withdrawals, if any, partial withdrawal charges, and any due and unpaid Monthly
Deductions. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Policy, unless the optional Guaranteed Death Benefit
Rider is in effect. If the Rider is in effect, the Death Proceeds will be the
greater of (a) the Face Amount as of the Final Premium Payment Date, or (b) the
Policy Value as of the date due proof of death is received by the Company. This
Rider may not be available in all states.

DEBT: all unpaid Policy loans plus interest due or accrued on such loans.

DELIVERY RECEIPT: an acknowledgment, signed by the Policyowner and returned to
the Company's Principal Office, that the Policyowner has received the Policy and
the Notice of Withdrawal Rights.

EVIDENCE OF INSURABILITY: information, including medical information
satisfactory to the Company, that is used to determine the Insured's Premium
Class.

FACE AMOUNT: the amount of insurance coverage applied for; the Face Amount of
each Policy is set forth in the specifications pages of the Policy.

FINAL PREMIUM PAYMENT DATE: the Policy anniversary nearest the Insured's 95th
birthday. The Final Premium Payment Date is the latest date on which a premium
payment may be made. After this date, the Death Proceeds equal the Surrender
Value of the Policy, unless the optional Guaranteed Death Benefit Rider is in
effect.

GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.

GUIDELINE ANNUAL PREMIUM: the annual amount of premium that would be payable
through the Final Premium Payment Date of a Policy for the specified Sum
Insured, if premiums were fixed by the Company as to both timing and amount, and
monthly cost of insurance charges were based on the 1980 Commissioners Standard
Ordinary Mortality Tables, Smoker or Non-smoker (Mortality Table B for unisex
Policies), net investment earnings at an annual effective rate of 5%, and fees
and charges as set forth in the Policy and any Policy riders. The Sum Insured
Option 1 Guideline Annual Premium is used when calculating the maximum surrender
charge.

GUIDELINE MINIMUM SUM INSURED: the minimum Sum Insured required to qualify the
Policy as "life insurance" under federal tax laws. The Guideline Minimum Sum
Insured varies by age; it is calculated by multiplying the Policy Value by a
percentage determined by the Insured's Age.

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INSURANCE AMOUNT AT RISK: the Sum Insured less the Policy Value.

LOAN VALUE: the maximum amount that may be borrowed under the Policy.

MINIMUM MONTHLY FACTOR: a monthly premium amount calculated by the Company and
specified in your Policy. If you pay this amount, the Company guarantees that
your Policy will not lapse prior to the 49th Monthly Deduction after the Date of
Issue or the effective date of an increase in the Face Amount. Making payments
at least equal to the Minimum Monthly Factors, however, will not prevent the
Policy from lapsing if (a) Debt exceeds Policy Value less surrender charges, or
(b) Debt, partial withdrawals, and partial withdrawal charges have reduced
premium payments below an amount equal to the Minimum Monthly Factor multiplied
by the number of months since the Date of Issue or the effective date of an
increase.

MONTHLY DEDUCTION: charges deducted monthly from the Policy Value prior to the
Final Premium Payment Date. The charges include the monthly cost of insurance,
the monthly cost of any benefits provided by riders, and the monthly
administrative charge.

MONTHLY PAYMENT DATE: the date on which the Monthly Deduction is deducted from
the Policy Value.

NET PREMIUM: an amount equal to the premium less a tax expense charge.

POLICY CHANGE: any change in the Face Amount, the addition or deletion of a
rider, or a change in the Sum Insured Option.

POLICY VALUE: the total amount available for investment under a Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to a Policy in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Policy.

POLICYOWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Policy.

PREMIUM CLASS: the risk classification that the Company assigns the Insured
based on the information in the application and any other Evidence of
Insurability considered by the Company. The Insured's Premium Class will affect
the cost of insurance charge and the amount of premium required to keep the
Policy in force.

PRINCIPAL OFFICE: the Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.

PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account the Policy
Value will be allocated. If you do not, the Company will allocate the deduction
or Policy Value among the General Account and the Sub-Accounts in the same
proportion that the Policy Value in the General Account and the Policy Value in
each Sub-Account bear to the total Policy Value on the date of deduction or
allocation.

SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.

SUB-ACCOUNT: a division of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust ("Trust"), a corresponding Portfolio of the Variable Insurance Products
Fund ("Fidelity VIP") or the Variable Insurance Products Fund II ("Fidelity VIP
II"), the T. Rowe Price International Stock Portfolio of T. Rowe Price
International Series ("T. Rowe Price"), Inc. or the International Equity Series
of the Delaware Group Premium Fund, Inc. ("DGPF").

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SUM INSURED: the amount payable upon the death of the Insured, before the Final
Premium Payment Date, prior to deductions for Debt outstanding at the time of
the Insured's death, partial withdrawals and partial withdrawal charges, if any,
and any due and unpaid Monthly Deductions. The amount of the Sum Insured will
depend on the Sum Insured Option chosen, but always will be at least equal to
the Face Amount.

SURRENDER VALUE: the amount payable upon a full surrender of the Policy. It is
the Policy Value less any Debt and applicable surrender charges.

UNDERLYING FUNDS (FUNDS): the Funds of the Allmerica Investment Trust, the
Portfolios of the Fidelity Variable Insurance Products Fund and Fidelity
Variable Insurance Products Fund II, the Portfolio of T. Rowe Price
International Series, Inc., and the Series of the Delaware Group Premium Fund,
Inc., which are available under the Policy.

VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and Accumulation Unit values of the Sub-Accounts
are determined. Valuation Dates currently occur on each day on which the New
York Stock Exchange is open for trading, and on such other days (other than a
day during which no payment, partial withdrawal, or surrender of a Policy is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
affected materially.

WRITTEN REQUEST: a request in writing, by the Policyowner, satisfactory to the
Company.

YOU OR YOUR: the Policyowner, as shown in the application or the latest change
filed with the Company.

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SUMMARY

The following is a summary of the flexible premium variable life insurance
policy sold by the Company. It highlights key points from the Prospectus which
follows. If you are considering the purchase of this product, you should read
the Prospectus carefully before making a decision. It offers a more complete
presentation of the topics presented here, and will help you better understand
the product.

FREE-LOOK PERIOD -- The Policy provides for an initial Free-Look Period. You
may cancel the Policy by mailing or delivering it to the Principal Office or
to an agent of the Company on or before the latest of:

- 45 days after the application for the Policy is signed,

- 10 days after you receive the Policy (or, if required by state law, the
longer period indicated in the Policy), or

- 10 days after the Company mails or personally delivers a Notice of
Withdrawal Rights to you.

Upon returning the Policy, you will receive a refund equal to the sum of:

(1) the difference between the premium, including fees and charges paid,
and any amount allocated to the Separate Account, PLUS

(2) the value of the amounts allocated to the Separate Account, PLUS

(3) any fees or charges imposed on the amounts allocated to the Separate
Account.

The amount refunded in (1) above includes any premiums allocated to the
General Account. Where required by state law, however, the Company will refund
the entire amount of premiums paid. A free-look privilege also applies after a
requested increase in the Face Amount. See THE POLICY -- "Free-Look Period."

CONVERSION PRIVILEGES -- During the first 24 Policy months after the Date of
Issue, subject to certain restrictions, you may convert the Policy to a
non-variable flexible premium adjustable life insurance policy by
simultaneously transferring all accumulated value in the Sub-Accounts to the
General Account and instructing the Company to allocate all future premiums to
the General Account. A similar conversion privilege is in effect for 24 Policy
months after the date of an increase in the Face Amount. Where required by
state law, and at your request, the Company will issue a flexible premium
adjustable life insurance policy to you. The new policy will have the same
Face Amount, issue Age, Date of Issue, and Premium Class as the original
Policy. See THE POLICY -- "Conversion Privileges."

ABOUT THE POLICY

The Policy allows you to make premium payments in any amount and frequency,
subject to certain limitations. As long as the Policy remains in force, it will
provide for:

- life insurance coverage on the named Insured,

- Policy Value,

- surrender rights and partial withdrawal rights,

- loan privileges, and

- in some cases, additional insurance benefits available by rider for an
additional charge.

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LIFE INSURANCE

The Policy is a life insurance contract with death benefits, Policy Value, and
other features traditionally associated with life insurance. The Policy is
"variable" because the Policy Value will increase or decrease depending on the
investment experience of the Sub-Accounts of the Separate Account. Under some
circumstances, the Death Benefit may vary with the investment experience of the
Sub-Accounts.

FLEXIBLE PREMIUM

The Policy is a "flexible premium" policy because, unlike traditional insurance
policies, there is no fixed schedule for premium payments. You may vary the
frequency and amount of future premium payments, subject to certain limits,
restrictions and conditions set by Company standards and federal tax laws.
Although you may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause the Policy to lapse. Because of the variable nature of the Policy, making
planned premium payments does not guarantee that the Policy will remain in
force. Thus, you may, but are not required to, pay additional premiums. However,
if the optional Guaranteed Death Benefit Rider is in effect, certain minimum
premium payment tests must be met. This Rider may not be available in all
states.

The Policy will remain in force until the Surrender Value is insufficient to
cover the next Monthly Deduction and loan interest accrued, if any, and a grace
period of 62 days has expired without adequate payment being made by you. During
the first 48 Policy months after the Date of Issue or the effective date of an
increase in the Face Amount, the Policy will not lapse if the total premiums
paid less the Debt, partial withdrawals and withdrawal charges are equal to or
exceed the sum of the Minimum Monthly Factors for the number of months the
Policy, increase, or a Policy Change which causes a change in the Minimum
Monthly Factor has been in force. Even during these periods, however, making
payments at least equal to the Minimum Monthly Factor will not prevent the
Policy from lapsing if the Debt equals or exceeds the Policy Value less
surrender charges.

CONDITIONAL INSURANCE

If at the time of application you make a payment equal to at least one Minimum
Monthly Factor for the Policy as applied for, the Company will provide
conditional insurance, equal to the amount of insurance applied for but not to
exceed $500,000. If the application is approved, the Policy will be issued as of
the date the terms of the conditional insurance are met. If you do not wish to
make any payment at the time of application, insurance coverage will not be in
force until delivery of the Policy and payment of sufficient premium to place
the insurance in force.

If any premiums are paid prior to the issuance of the Policy, such premiums will
be held in the General Account. If your application is approved and the Policy
is issued and accepted, the initial premiums held in the General Account will be
credited with interest at a specified rate beginning not later than the date of
receipt of the premiums at the Principal Office. IF THE POLICY IS NOT ISSUED AND
ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.

POLICIES ISSUED IN CONNECTION WITH TSA PLANS

The Policies may be issued in connection with Internal Revenue Service Code
("Code") Section 403(b) tax-sheltered annuity plans ("TSA Plans") of certain
public school systems and organizations that are tax exempt under Section
501(c)(3) of the Code. A Policy issued in connection with a TSA Plan will be
endorsed to reflect the restrictions imposed on assignment, premium payments,
withdrawals, and surrender under Code Section 403(b). The Policyowner may
terminate the endorsement at any time. However, the termination of the
endorsement may cause the Policy to fail to qualify under Code Section 403(b).
See FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS"
and POLICY LOANS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS."

MINIMUM MONTHLY FACTOR

The Minimum Monthly Factor is a monthly premium amount calculated by the Company
and specified in your Policy. If you pay this amount, the Company guarantees
that the Policy will not lapse prior to the 49th

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Monthly Deduction after the Date of Issue or the effective date of an increase
in the Face Amount. At all other times, however, payments of such premiums do
not guarantee that the Policy will remain in force, unless the Guaranteed Death
Benefit Rider is in effect. See THE POLICY -- "Premium Payments." Moreover, even
during the 48-month period, if Debt exceeds the Policy Value less surrender
charges, then making payments at least equal to the Minimum Monthly Factor will
not prevent the Policy from lapsing. However, if the optional Guaranteed Death
Benefit Rider is in effect, the Company (a) guarantees that the Policy will not
lapse, regardless of the investment performance of the Variable Account, and (b)
provides a guaranteed death benefit. See THE POLICY -- "Guaranteed Death Benefit
Rider."

ALLOCATION OF INITIAL PREMIUMS

Upon completion of issuance procedures, delivery of the Policy, and receipt of
any additional premiums, if you have paid less than $10,000 of initial Net
Premiums, such Net Premiums will be allocated to the Sub-Accounts according to
your instructions. If initial Net Premiums equal or exceed $10,000, or if the
Policy provides for planned premium payments during the first year equal to or
exceeding $10,000 annually, $5,000 semi-annually, $2,500 quarterly or $1,000
monthly, the entire Net Premium plus any interest earned will be allocated to
the Sub-Accounts upon return to the Company of a Delivery Receipt. See THE
POLICY -- "Applying for a Policy."

Net premiums may be allocated to one or more Sub-Accounts of the Separate
Account, to the General Account, or to any combination of Accounts. You bear the
investment risks of amounts allocated to the Sub-Accounts. Allocations may be
made to no more than 20 Sub-Accounts at any one time. The minimum allocation is
1% of Net Premium. All allocations must be in whole numbers and must total 100%.
See THE POLICY -- "Allocation of Net Premiums." Premiums allocated to the
General Account will earn a fixed rate of interest. Net premiums and minimum
interest are guaranteed by the Company. For more information, see MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.

PARTIAL WITHDRAWALS

After the first Policy year, you may make partial withdrawals in a minimum
amount of $500 from the Policy Value. Under Option 1, the Face Amount is reduced
by the amount of the partial withdrawal. A partial withdrawal will not be
allowed under Option 1 if it would reduce the Face Amount below $40,000.

A partial withdrawal charge, which is described in CHARGES AND DEDUCTIONS --
"Charges on Partial Withdrawal," will be assessed to reimburse the Company for
the cost of processing each partial withdrawal. A partial withdrawal charge also
may be imposed upon a partial withdrawal. Generally, amounts withdrawn during
each Policy year in excess of 10% of the Policy Value ("excess withdrawal") are
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Policy's outstanding surrender
charge will be reduced by the amount of the partial withdrawal charge deducted.
See THE POLICY -- "Partial Withdrawal" and CHARGES AND DEDUCTIONS -- "Charges on
Partial Withdrawal."

LOAN PRIVILEGE

You may borrow against the Policy Value. The total amount you may borrow is the
Loan Value. Loan Value in the first Policy year is 75% of an amount equal to the
Policy Value less surrender charge, Monthly Deductions, and interest on Policy
loan to the end of the Policy year. Thereafter, Loan Value is 90% of an amount
equal to the Policy Value less the surrender charge.

Policy loans will be allocated among the General Account and the Sub-Accounts in
accordance with your instructions. If no allocation is made by you, the Company
will make a Pro-Rata Allocation among the Accounts. In either case, Policy Value
equal to the Policy loan will be transferred from the appropriate Sub-Accounts
to the General Account, and will earn monthly interest at an effective annual
rate of at least 6%. Therefore, a Policy loan may have a permanent impact on the
Policy Value even though it eventually is repaid.

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Although the loan amount is a part of the Policy Value, the Death Proceeds will
be reduced by the amount of outstanding Debt at the time of death.

Policy loans will bear interest at a fixed rate of 8% per year, due and payable
in arrears at the end of each Policy year. If interest is not paid when due, it
will be added to the loan balance. Policy loans may be repaid at any time. You
must notify the Company if a payment is a loan repayment; otherwise, it will be
considered a premium payment. Any partial or full repayment of Debt by you will
be allocated to the General Account or Sub-Accounts in accordance with your
instructions. If you do not specify an allocation, the Company will allocate the
loan repayment in accordance with your most recent premium allocation
instructions. See POLICY LOANS.

PREFERRED LOAN OPTION

There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.

POLICIES ISSUED IN CONNECTION WITH TSA PLANS

Loans from Policies issued in connection with tax-sheltered annuity plans ("TSA
Plans") of certain public school systems and organizations that are tax exempt
under Section 501(c)(3) of the Code are subject to additional restrictions. See
POLICY LOANS -- "Policies Issued in Connection with TSA Plans."

POLICY LAPSE AND REINSTATEMENT

Except as otherwise provided in the optional Guaranteed Death Benefit Rider, the
failure to make premium payments will not cause a Policy to lapse unless:

(a) the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued, if any; or

(b) Debt exceeds Policy Value less surrender charges.

A 62-day grace period applies to each situation.

Even if the situation described in (a) above exists, the Policy will not lapse
if you meet the so-called "Minimum Monthly Factor" test. The Minimum Monthly
Factor test is only used to determine whether the Policy will enter the grace
period during the first 48 months or within 48 months following an increase in
the Face Amount. Under the Minimum Monthly Factor test, the Company determines
two amounts:

- the sum of the payments your have made, MINUS any Policy loans,
withdrawals and withdrawal charges.

- the amount of the Minimum Monthly Factor (the amount is shown on page 5 of
the Policy) MULTIPLIED by the number of months the Policy has been in
force or the number of months which have elapsed since the last increase
in the Face Amount.

The Company then compares the first amount to the second amount. The Policy will
not enter the grace period if the first amount is greater than the second
amount. If the Policy lapses, it may be reinstated within three years of the
date of default (but not later that the Final Premium Payment Date). In order to
reinstate, you must pay the reinstatement premium and provide satisfactory
Evidence of Insurability. The Company reserves the

11
<PAGE>
right to increase the Minimum Monthly Factor upon reinstatement. See POLICY
TERMINATION AND REINSTATEMENT.

In addition, if the Guaranteed Death Benefit Rider is in effect, the Company
guarantees that your Policy will not lapse regardless of the investment
performance of the Variable Account. However, the Policy may lapse under certain
circumstances. See THE POLICY -- "Guaranteed Death Benefit Rider." This Rider
may not be available in all states.

POLICY VALUE AND SURRENDER VALUE

The Policy Value is the total amount available for investment under the Policy
at any time. It is the sum of the value of all Accumulation Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account credited to the Policy. The Policy Value reflects the amount and
frequency of Net Premiums paid, charges and deductions imposed under the Policy,
interest credited to accumulations in the General Account, investment
performance of the Sub-Accounts to which Policy Value has been allocated, and
partial withdrawals. The Policy Value may be relevant to the computation of the
Death Proceeds. You bear the entire investment risk for amounts allocated to the
Separate Account. The Company does not guarantee a minimum Policy Value.

The Surrender Value will be the Policy Value less any Debt and applicable
surrender charges. The Surrender Value is relevant, for example, to the
continuation of the Policy and in the computation of the amounts available upon
partial withdrawals, Policy loans or surrender.

DEATH PROCEEDS

The Policy provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Sum Insured, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Policy month in which
the Insured dies.

Two Sum Insured Options are available. Under Option 1, the Sum Insured is the
greater of the Face Amount of the Policy or the Guideline Minimum Sum Insured.
Under Option 2, the Sum Insured is the greater of the Face Amount of the Policy
plus the Policy Value or the Guideline Minimum Sum Insured. The Guideline
Minimum Sum Insured is equivalent to a percentage (determined each month based
on the Insured's Age) of the Policy Value. On or after the Final Premium Payment
Date, the Death Proceeds will equal the Surrender Value, unless the optional
Guaranteed Death Benefit Rider is in effect. See THE POLICY -- "Death Proceeds"
and "Guaranteed Death Benefit Rider."

The Death Proceeds under the Policy may be received in a lump sum or under one
of the Payment Options described in the Policy. See APPENDIX B -- DEATH PROCEEDS
PAYMENT OPTIONS.

FLEXIBILITY TO ADJUST SUM INSURED

Subject to certain limitations, you may adjust the Sum Insured, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Policy. Any change in the Face
Amount will affect the monthly cost of insurance charges and the amount of the
surrender charge. If the Face Amount is decreased, a pro-rata surrender charge
may be imposed. The Policy Value is reduced by the amount of the charge. See THE
POLICY -- "Change in the Face Amount."

The minimum increase in the Face Amount is $10,000, and any increase also may
require additional Evidence of Insurability. The increase is subject to a
"free-look period" and, during the first 24 months after the increase, to a
conversion privilege. See THE POLICY -- "Free-Look Period" and "Conversion
Privileges."

ADDITIONAL INSURANCE BENEFITS

You have the flexibility to add additional insurance benefits by rider. These
include the Waiver of Premium Rider, Accidental Death Benefit Rider, Guaranteed
Insurability Rider, Other Insured Rider, Children's

12
<PAGE>
Insurance Rider, Exchange Option Rider, Living Benefits Rider, and Guaranteed
Death Benefit Rider. See APPENDIX A -- OPTIONAL BENEFITS.

The cost of these optional insurance benefits will be deducted from the Policy
Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from the Policy Value."

POLICY FEES AND CHARGES

There are costs related to the insurance and investment features of the Policy.
Fees and charges to cover these costs are deducted in several ways.

DEDUCTIONS FROM EACH PREMIUM

A tax expense charge will be deducted from each premium payment to compensate
the Company for premium taxes imposed by various states and local jurisdictions
and for federal taxes imposed for deferred acquisition cost ("DAC") taxes. The
tax expense charge is currently 2 1/4% but may be increased or decreased to
reflect changing tax rates. See CHARGES AND DEDUCTIONS -- "Tax Expense Charge."

MONTHLY DEDUCTIONS FROM THE POLICY VALUE

On the Date of Issue and each Monthly Payment Date, certain charges ("Monthly
Deductions") will be deducted from the Policy Value. The Monthly Deduction
consists of a charge for cost of insurance, a charge for administrative
expenses, and a charge for the cost of any additional benefits provided by
rider. You may instruct the Company to deduct the Monthly Deduction from one
specific Sub-Account. If you do not, the Company will make a Pro-Rata Allocation
of the charge. No Monthly Deductions are made on or after the Final Premium
Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from the Policy
Value."

The MONTHLY COST OF INSURANCE CHARGE is determined by multiplying the Insurance
Amount at Risk for each Policy month by the applicable cost of insurance rate or
rates. The Insurance Amount at Risk will be affected by any decreases or
increases in the Face Amount.

A MONTHLY ADMINISTRATIVE CHARGE of $5 per month is made for administrative
expenses. The charge is designed to reimburse the Company for the costs
associated with issuing and administering the Policies, such as processing
premium payments, Policy loans and loan repayments, changes in Sum Insured
Option, and death claims. These charges also help cover the cost of providing
annual statements and responding to Policy-holder inquiries.

As noted above, certain ADDITIONAL INSURANCE RIDER BENEFITS are available under
the Policy for an additional monthly charge. See APPENDIX A -- OPTIONAL
BENEFITS.

DEDUCTIONS FROM THE SEPARATE ACCOUNT

A daily charge currently equivalent to an effective annual rate of 0.80% of the
average daily net asset value of each Sub-Account of the Separate Account is
imposed to compensate the Company for its assumption of certain mortality and
expense risks and for administrative costs associated with the Separate Amount.
The rate is 0.65% for the mortality and expense risk and 0.15% for the Separate
Account administrative charge. The administrative charge is eliminated after the
tenth Policy year. See CHARGES AND DEDUCTIONS -- "CHARGES AGAINST ASSETS OF THE
SEPARATE ACCOUNT."

The Underlying Funds also incur certain expenses which are reflected in the net
asset value of the Sub-Accounts. See INVESTMENT OPTIONS -- "Charges of the
Underlying Investment Companies," below.

13
<PAGE>
OTHER CHARGES (NON-PERIODIC)

TRANSACTION CHARGE ON PARTIAL WITHDRAWALS

A transaction charge is assessed at the time of each partial withdrawal to
reimburse the Company for the cost of processing the withdrawal. The transaction
charge is the smaller of 2% of the amount withdrawn, or $25. In addition to the
partial withdrawal transaction charge, a partial withdrawal charge also may be
made under certain circumstances. See CHARGES AND DEDUCTIONS -- "Charges on
Partial Withdrawal."

CHARGE FOR INCREASE IN THE FACE AMOUNT

For each increase in the Face Amount, a charge of $40 will be deducted from the
Policy Value. This charge is designed to reimburse the Company for underwriting
and administrative costs associated with the increase. See THE POLICY -- "Change
in the Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Increase in the
Face Amount."

TRANSFER CHARGE

The first 12 transfers of Policy Value in a Policy year will be free of charge.
Thereafter, with certain exceptions, a transfer charge of $10 will be imposed
for each transfer request to reimburse the Company for the costs of processing
the transfer. See THE POLICY -- "Transfer Privilege" and CHARGES AND DEDUCTIONS
- -- "Transfer Charges."

SURRENDER CHARGES

At any time that the Policy is in effect, the Policyowner may elect to surrender
the Policy and receive its Surrender Value. A surrender charge is calculated
upon issuance of the Policy and upon each increase in the Face Amount. The
duration of the surrender charge is 15 years for issue Ages 0 through 50,
grading down to 10 years for issue Ages 55 and above. The surrender charge is
imposed only if, during its duration, you request a full surrender or a decrease
in the Face Amount.

SURRENDER CHARGE ON THE INITIAL FACE AMOUNT

The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b), where (a) is a DEFERRED ADMINISTRATIVE CHARGE, and (b)
is a DEFERRED SALES CHARGE.

The DEFERRED ADMINISTRATIVE CHARGE is $8.50 per thousand dollars of the initial
Face Amount or of an increase in the Face Amount. The charge is designed to
reimburse the Company for administrative costs associated with product research
and development, underwriting, Policy administration, decreasing the Face
Amount, and surrendering a Policy. Because the maximum surrender charge reduces
by 0.5% or more per month (depending on issue Age) after the 40th Policy month
from the Date of Issue or the effective date of an increase in the Face Amount,
in certain situations some or all of the deferred administrative charge may not
be assessed upon surrender of the Policy. The deferred sales charge is equal to
49% of premiums received up to a maximum number of Guideline Annual Premiums
that vary by issue Age. This maximum number varies from 1.660714 (for Ages 0
through 55) to 0.948980 (for Ages 80 and above). See THE POLICY -- "Policy
Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."

In accordance with state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per $1,000 of the initial
Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES.

If you surrender the Policy during the first two Policy years following the Date
of Issue, before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the initial Face
Amount, as described above. The deferred sales charge, however, will not exceed
29% of premiums received, up to one Guideline Annual Premium, plus 9% of
premiums received that are in excess of one Guideline Annual Premium, but less
than the maximum number of Guideline Annual Premiums subject to the deferred
sales

14
<PAGE>
charge. See THE POLICY-- "Policy Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."

SURRENDER CHARGES FOR INCREASES IN THE FACE AMOUNT

A separate surrender charge will apply to, and is calculated for, each increase
in the Face Amount. The maximum surrender charge for the increase is equal to
the sum of (a) plus (b), where (a) is the deferred administrative charge, and
(b) is a deferred sales charge. The deferred administrative charge is equal to
$8.50 per thousand dollars of increase. The deferred sales charge is equal to
49% of premiums associated with the increase, up to a maximum number of
Guideline Annual Premiums that varies by issue Age. This maximum number varies
from 1.660714 (for Ages 0 through 55) to 0.948980 (for Ages 80 and above).

In accordance with state insurance regulations, the amount of the surrender
charge will not exceed a specified amount per $1,000 of increase, as indicated
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. This maximum
surrender charge remains level for the first 40 Policy months following the
increase, and reduces by 0.5% or more per month (depending on Age at increase)
thereafter. See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. The
actual surrender charge with respect to the increase may be less than the
maximum. See THE POLICY -- "Policy Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."

SURRENDER CHARGES ON DECREASES IN THE FACE AMOUNT

In the event of a decrease in the Face Amount, the surrender charge imposed is
proportional to the charge that would apply to a full Policy surrender. See THE
POLICY -- "Policy Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."

OTHER CHARGES

The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. No such charges currently are imposed, and any such
charge is guaranteed not to exceed $25. See CHARGES AND DEDUCTIONS -- "Other
Administrative Charges."

INVESTMENT OPTIONS

The Policy permits Net Premiums to be allocated either to the General Account or
to the Separate Account. The Separate Account currently is comprised of 20
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding Underlying
Fund of the Allmerica Investment Trust ("Trust") managed by Allmerica Financial
Investment Management Services, Inc. ("AFIMS"), Fidelity Variable Insurance
Products Fund ("Fidelity VIP") and Fidelity Variable Insurance Products Fund II
("Fidelity VIP II") managed by Fidelity Management, T. Rowe Price International
Series, Inc. ("T. Rowe Price") managed by Rowe Price-Fleming International,
Inc., with respect to the International Stock Portfolio, or the Delaware Group
Premium Fund, Inc. ("DGPF") managed by Delaware International Advisers, Ltd.
with respect to the International Equity Series. The Policy permits you to
transfer Policy Value among the available Sub-Accounts and between the Sub-
Accounts and the General Account, subject to certain limitations described under
THE POLICY -- "Transfer Privilege." The Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price and DGPF are open-end, diversified series management investment
companies. The following Underlying Funds are available under the Policy:

15
<PAGE>

Each of the Underlying Funds has its own investment objectives. Certain
Underlying Funds, however, have investment objectives similar to certain other
Underlying Funds.

The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved.

CHARGES OF THE UNDERLYING FUNDS

In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1997. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.

<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER FUND
(AFTER ANY EXPENSES (AFTER ANY
VOLUNTARY APPLICABLE TOTAL FUND
UNDERLYING FUND WAIVER) REIMBURSEMENTS) EXPENSES
- --------------------------------------------------------------- ------------------ --------------------- ---------------
<S> <C> <C> <C>
Select Aggressive Growth Fund.................................. 0.89%* 0.09% 0.98%(1)(3)
Select Capital Appreciation Fund............................... 0.95% 0.15% 1.10%(1)
Select Value Opportunity Fund.................................. 0.90%** 0.14% 1.04%(1)(3)
Select Emerging Markets Fund(@)................................ 1.35% 0.65% 2.00%(1)
Select International Equity Fund............................... 0.92% 0.20% 1.12%(1)(3)
DGPF International Equity Series............................... 0.75%(4) 0.15% 0.90%(4)
Fidelity VIP Overseas Portfolio................................ 0.75% 0.17% 0.92%(2)
T. Rowe Price International Stock Portfolio.................... 1.05% 0.00% 1.05%
Select Growth Fund............................................. 0.85% 0.08% 0.93%(1)(3)
Select Strategic Growth Fund(@)................................ 0.85% 0.13% 0.98%(1)
Growth Fund.................................................... 0.46%* 0.06% 0.52%(1)(3)
Fidelity VIP Growth Portfolio.................................. 0.60% 0.09% 0.69%(2)
Equity Index Fund.............................................. 0.31% 0.13% 0.44%(1)
Select Growth and Income Fund.................................. 0.70%* 0.07% 0.77%(1)(3)
Fidelity VIP Equity-Income Portfolio........................... 0.50% 0.08% 0.58%(2)
Fidelity VIP II Asset Manager Portfolio........................ 0.55% 0.10% 0.65%(2)
Fidelity VIP High Income Portfolio............................. 0.59% 0.12% 0.71%
Investment Grade Income Fund................................... 0.44%* 0.10% 0.54%(1)
Government Bond Fund........................................... 0.50% 0.17% 0.67%(1)
Money Market Fund.............................................. 0.27% 0.08% 0.35%(1)
</TABLE>

16
<PAGE>
* Effective September 1, 1997, the management fee rates for these funds were
revised. The management fee ratios shown in the table above have been adjusted
to assume that the revised rates took effect on January 1, 1997.

(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations in February, 1998. Expenses shown are annualized and are based on
estimated amounts for the current fiscal year. Actual expense may be greater or
less than shown.

** The Select Value Opportunity Fund was formerly known as the "Small-Mid Cap
Value Fund." Effective April 1, 1997, the management fee rate of the former
Small-Mid Cap Value Fund was revised. In addition, effective April 1, 1997 and
until further notice, the management fee rate has been voluntarily limited to an
annual rate of 0.90% of average daily net assets, and total expenses are limited
to 1.25% of average daily net assets. The management fee ratio shown above for
the Select Value Opportunity Fund has been adjusted to assume that the revised
rate and the voluntarily limitations took effect on January 1, 1997. Without
these adjustments, the management fee ratio and the total fund expense ratio
would have been 0.95% and 1.09%, respectively. The management fee limitation may
be terminated at any time.

(1) Until further notice, AFIMS has declared a voluntary expense limitation of
1.35% of average net assets for the Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.50% for the Select International Equity Fund, 1.25%
for the Select Value Opportunity Fund, 1.20% for the Growth Fund and Select
Growth Fund, 1.10% for the Select Growth and Income, 1.00% for the Investment
Grade Income Fund and Government Bond Fund, and 0.60% for the Money Market Fund
and Equity Index Fund. The total operating expenses of these Funds of the Trust
were less than their respective expense limitations throughout 1997.

Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser.

The declaration of a voluntary expense limitation in any year does not bind
AFIMS to declare future expense limitations with respect to these funds. These
limitations may be terminated at any time.

(2) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
Including these reductions, the total operating expenses presented in the table
would have been 0.57% for Fidelity VIP Equity Income Portfolio, 0.67% for
Fidelity VIP Growth Portfolio, 0.90% for Fidelity VIP Overseas Portfolio and
0.64% for Fidelity VIP II Asset Manager Portfolio.

(3) These funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expenses ratios would have been 0.93% for the
Select Aggressive Growth Fund, 1.10% for the Select International Equity Fund,
0.91% for the Select Growth Fund, 0.50% for the Growth Fund, 0.98% for the
Select Value Opportunity Fund, and 0.74% for the Select Growth and Income Fund.

(4) Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. The fee ratios shown above have been adjusted to
assume that the new voluntarily limitation took effect on January 1, 1997. In
1997, the actual ratio of total annual expenses of the International Equity
Series was 0.85%, and the actual management fee ratio was 0.70%.

17
<PAGE>
TAXATION OF THE POLICIES

The Policy generally is subject to the same federal income tax treatment as a
conventional fixed benefit life insurance Policy. Under current tax law, to the
extent there is no change in benefits and the Policy is not a modified endowment
contract, the Policyowner will be taxed on Policy Value withdrawn from the
Policy only to the extent that the amount withdrawn exceeds the total premiums
paid. Withdrawals in excess of premiums paid will be treated as ordinary income.
During the first 15 Policy years, however, an "interest-first" rule applies to
any distribution of cash that is required under Section 7702 of the Code because
of a reduction in benefits under the Policy. Death Proceeds under the Policy are
generally excludable from the gross income of the Beneficiary, but in some
circumstances the Death Proceeds or the Policy Value may be subject to federal
estate tax. See FEDERAL TAX CONSIDERATIONS -- "Taxation of the Policy."

A Policy may be considered a "modified endowment contract" if it fails a
"seven-pay" test. The Policy fails to satisfy the seven-pay test if the
cumulative premiums paid under the Policy at any time during the first seven
Policy years, or within seven years of a material change in the policy, exceed
the sum of the net level premiums that would have been paid had the Policy
provided for paid-up future benefits after the payment of seven level premiums.
If the Policy is considered a modified endowment contract, all distributions
(including Policy loans, partial withdrawals, Policy surrenders or assignments)
will be taxed on an "income-first" basis. With certain exceptions, an additional
10% penalty will be imposed on the portion of any distribution that is
includible in income. For more information, see FEDERAL TAX CONSEQUENCES --
"Modified Endowment Contracts."

18
<PAGE>
PERFORMANCE INFORMATION

The Policy was first offered to the public in 1994. The Company, however, may
advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Sub-Accounts have been in existence
(Tables I[A] and I[B]), and based on the periods that the Underlying Funds have
been in existence (Tables II[A] and II[B]). The results for any period prior to
the Policy being offered will be calculated as if the Policy had been offered
during that period of time, with all charges assumed to be those applicable to
the Sub-Accounts, the Underlying Funds, and (in Table I[A]) under a
"representative" Policy that is surrendered at the end of the applicable period.
FOR MORE INFORMATION ON CHARGES UNDER THE POLICY, SEE CHARGES AND DEDUCTIONS.

In each Table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1997. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.

Performance information may be compared, in reports and promotional literature,
to:

- Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Dow Jones
Industrial Average ("DJIA"), Shearson, Lehman Aggregate Bond Index, or
other unmanaged indices so that investors may compare results with those
of a group of unmanaged securities widely regarded by investors as
representative of the securities markets in general (unmanaged indices may
assume the reinvestment of dividends, but generally do not reflect
deductions for administrative and management costs and expenses); or

- other groups of variable life separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by
overall performance, investment objectives and assets, or tracked by other
services, companies, publications or persons, such as Morningstar, Inc.,
who rank such investment products on overall performance or other
criteria; or

- the Consumer Price Index (a measure for inflation) to assess the real rate
of return from an investment.

At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues,
and do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.

The Company may provide information on various topics of interest to
Policyowners and prospective Policyowners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar-cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.

19
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY

The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (non-smoker) Premium Class, that the Face Amount of
the Policy is $250,000, that an annual premium payment of $3,000 (approximately
one Guideline Annual Premium) was made at the beginning of each Policy year,
that ALL premiums were allocated to EACH Sub-Account individually, and that
there was a full surrender of the Policy at the end of the applicable period.

<TABLE>
<CAPTION>
10 YEARS
OR LIFE
ONE-YEAR OF
TOTAL 5 SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund -98.08% N/A -7.29%
Select Capital Appreciation Fund -100.00% N/A -15.01%
Select Value Opportunity Fund -92.55% N/A -6.73%
T. Rowe Price International Stock Portfolio -100.00% N/A -36.03%
Fidelity VIP Overseas Portfolio -100.00% N/A -17.05%
Select International Equity Fund -100.00% N/A -15.16%
DGPF International Equity Series -100.00% N/A -14.27%
Fidelity VIP Growth Portfolio -93.78% N/A -3.73%
Select Growth Fund -84.26% N/A -1.54%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund -92.29% N/A -1.56%
Equity Index Fund -85.75% N/A 3.75%
Fidelity VIP Equity-Income Portfolio -89.62% N/A 0.52%
Select Growth and Income Fund -94.65% N/A -2.39%
Fidelity VIP II Asset Manager Portfolio -96.33% N/A -11.78%
Fidelity VIP High Income Portfolio -99.01% N/A -11.03%
Investment Grade Income Fund -100.00% N/A -18.51%
Government Bond Fund -100.00% N/A -20.88%
Money Market Fund -100.00% N/A -23.12%
</TABLE>

The inception dates for the Sub-Accounts are: 7/6/93 for Growth; 7/18/93 for
Money Market, Equity Index, Fidelity VIP Growth, Fidelity VIP Equity-Income,
Fidelity VIP High Income, Select Value Opportunity and DGPF International
Equity; 7/19/93 for Investment Grade Income; 7/20/93 for Select Aggressive
Growth, Select Growth, Fidelity VIP Overseas; 7/22/93 for Government Bond;
7/26/93 for Select Growth and Income; 5/3/94 for Select International Equity;
5/10/94 for Fidelity VIP II Asset Manager; 4/30/95 for Select Capital
Appreciation and 6/21/95 for the T. Rowe Price International Stock. The Select
Emerging Markets Fund and the Select Strategic Growth Fund commenced operations
in February 1998.

PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS, AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.

20
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE SUB-ACCOUNTS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES

The following performance information is based on the periods that the
Sub-Accounts have been in existence. The performance information is net of total
Underlying Fund expenses, all Sub-Account charges, and premium tax and expense
charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE POLICY OR SURRENDER
CHARGES. It is assumed that an annual premium payment of $3,000 (approximately
one Guideline Annual Premium) was made at the beginning of each Policy year and
that ALL premiums were allocated to EACH Sub-Account individually.

<TABLE>
<CAPTION>
10 YEARS
OR LIFE
ONE-YEAR OF
TOTAL 5 SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund 17.76% N/A 15.37%
Select Capital Appreciation Fund 13.37% N/A 21.80%
Select Value Opportunity Fund 23.86% N/A 15.81%
T. Rowe Price International Stock Portfolio 2.27% N/A 8.37%
Fidelity VIP Overseas Portfolio 10.67% N/A 7.95%
Select International Equity Fund 3.81% N/A 10.08%
DGPF International Equity Series 5.76% N/A 10.02%
Fidelity VIP Growth Portfolio 22.50% N/A 18.18%
Select Growth Fund 33.00% N/A 20.04%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund 24.15% N/A 19.94%
Equity Index Fund 31.36% N/A 24.61%
Fidelity VIP Equity-Income Portfolio 27.09% N/A 21.59%
Select Growth and Income Fund 21.54% N/A 19.57%
Fidelity VIP II Asset Manager Portfolio 19.69% N/A 12.85%
Fidelity VIP High Income Portfolio 16.73% N/A 12.48%
Investment Grade Income Fund 8.58% N/A 7.26%
Government Bond Fund 6.26% N/A 6.07%
Money Market Fund 4.63% N/A 4.31%
</TABLE>

PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.

21
<PAGE>
TABLE II(A):
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY

The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (non-smoker) Premium Class, that the Face Amount of
the Policy is $250,000, that an annual premium payment of $3,000 (approximately
one Guideline Annual Premium) was made at the beginning of each Policy year,
that ALL premiums were allocated to EACH Sub-Account individually, and that
there was a full surrender of the Policy at the end of the applicable period.

<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund -98.08% 3.13% 7.57%
Select Capital Appreciation Fund -100.00% N/A -14.97%
Select Value Opportunity Fund -92.55% N/A 0.76%
T. Rowe Price International Stock Portfolio -100.00% N/A -18.32%
Fidelity VIP Overseas Portfolio -100.00% -0.58% 3.47%
Select International Equity Fund -100.00% N/A -15.14%
DGPF International Equity Series -100.00% -3.02% -2.81%
Fidelity VIP Growth Portfolio -93.78% 4.05% 11.73%
Select Growth Fund -84.26% 0.67% 3.38%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund -92.29% 2.12% 11.65%
Equity Index Fund -85.75% 5.85% 11.77%
Fidelity VIP Equity-Income Portfolio -89.62% 6.57% 11.32%
Select Growth and Income Fund -94.65% 2.36% 2.19%
Fidelity VIP II Asset Manager Portfolio -96.33% -1.95% 6.21%
Fidelity VIP High Income Portfolio -99.01% -0.82% 6.98%
Investment Grade Income Fund -100.00% -8.75% 3.00%
Government Bond Fund -100.00% -10.68% -4.65%
Money Market Fund -100.00% -12.34% -0.84%
</TABLE>

The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/19/85 for Fidelity VIP High Income; 10/09/86
for Fidelity VIP Equity-Income and Fidelity VIP Growth; 1/28/87 for Fidelity VIP
Overseas; 9/06/89 for Fidelity VIP II Asset Manager; 9/28/90 for Equity Index;
8/26/91 for Government Bond; 8/21/92 for Select Aggressive Growth, Select
Growth, and Select Growth and Income; 10/29/92 for DGPF International Equity;
4/30/93 for Select Value Opportunity; 5/02/94 for Select International Equity;
4/28/95 for the Select Capital Appreciation; and 3/31/94 for the T. Rowe Price
International Stock. The Select Emerging Markets Fund and the Select Strategic
Growth Fund commenced operations in February 1998.

PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.

22
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES

The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, all Sub-Account charges, and premium tax and
expense charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE POLICY OR
SURRENDER CHARGES. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Policy year and that ALL premiums were allocated to EACH Sub-Account
individually.

<TABLE>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund 17.76% 16.04% 18.74%
Select Capital Appreciation Fund 13.37% N/A 21.74%
Select Value Opportunity Fund 23.86% N/A 15.77%
T. Rowe Price International Stock Portfolio 2.27% N/A 6.86%
Fidelity VIP Overseas Portfolio 10.67% 12.96% 8.44%
Select International Equity Fund 3.81% N/A 10.07%
DGPF International Equity Series 5.76% 10.97% 10.61%
Fidelity VIP Growth Portfolio 22.50% 16.81% 15.93%
Select Growth Fund 33.00% 13.99% 15.17%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund 24.15% 15.19% 15.86%
Equity Index Fund 31.36% 18.33% 18.41%
Fidelity VIP Equity-Income Portfolio 27.09% 18.94% 15.56%
Select Growth and Income Fund 21.54% 15.39% 14.17%
Fidelity VIP II Asset Manager Portfolio 19.69% 11.84% 12.21%
Fidelity VIP High Income Portfolio 16.73% 12.76% 11.59%
Investment Grade Income Fund 8.58% 6.42% 8.02%
Government Bond Fund 6.26% 4.92% 5.86%
Money Market Fund 4.63% 3.65% 4.66%
</TABLE>

The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/19/85 for Fidelity VIP High Income; 10/09/86
for Fidelity VIP Equity-Income and Fidelity VIP Growth 1/28/87 for Fidelity VIP
Overseas; 9/06/89 for Fidelity VIP II Asset Manager; 9/28/90 for Equity Index;
8/26/91 for Government Bond; 8/21/92 for Select Aggressive Growth, Select
Growth, and Select Growth and Income; 10/29/92 for DGPF International Equity;
4/30/93 for Select Value Opportunity; 5/02/94 for Select International Equity;
4/28/95 for the Select Capital Appreciation; and 3/31/94 for the T. Rowe Price
International Stock. The Select Emerging Markets Fund and the Select Strategic
Growth Fund commenced operations in February 1998.

PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.

23
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT
AND THE UNDERLYING FUNDS

THE COMPANY

The Company, organized under the laws of Massachusetts in 1844, is the fifth
oldest life insurance company in America. Effective October 16, 1995, the
Company converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and adopted
its present name. As of December 31, 1997, the Company and its subsidiaries had
over $16.3 billion in combined assets. The Company is a wholly owned subsidiary
of Allmerica Financial Corporation ("AFC"). The Company's principal office is
located at 440 Lincoln Street, Worcester, Massachusetts 01653, telephone
508-855-1000 ("Principal Office").

The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.

The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.

THE SEPARATE ACCOUNT

The Separate Account was authorized by vote of the Board of Directors of the
Company on August 20, 1991. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.

The assets used to fund the variable portion of the Policy are set aside in the
Separate Account, and are kept separate from the general assets of the Company.
Under Massachusetts law, assets equal to the reserves and other liabilities of
the Separate Account may not be charged with any liabilities arising out of any
other business of the Company. The Separate Account currently has 20
Sub-Accounts. Each Sub-Account is administered and accounted for as part of the
general business of the Company, but the income, capital gains, or capital
losses of each Sub-Account are allocated to such Sub-Account, without regard to
other income, capital gains or capital losses of the Company or the other
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding Underlying
Fund of one of the following investment companies:

- Allmerica Investment Trust

- Fidelity Variable Insurance Products Fund

- Fidelity Variable Insurance Products Fund II

- T. Rowe Price International Series, Inc.

- Delaware Group Premium Fund, Inc.

The assets of each Underlying Fund are held separate from the assets of the
other Underlying Funds. Each Underlying Fund operates as a separate investment
vehicle, and the income or losses of one Underlying Fund generally have no
effect on the investment performance of another Underlying Fund. Shares of each
Underlying Fund are not offered to the general public but solely to separate
accounts of life insurance companies, such as the Separate Account.

24
<PAGE>
Each Sub-Account has two subdivisions. One subdivision applies to a Policy
during the first ten Policy years, which are subject to the Separate Account
administrative charge. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of
the Separate Account." Thereafter, such a Policy automatically is allocated to
the second subdivision to account for the elimination of the Separate Account
administrative charge.

The Company reserves the right, subject to compliance with applicable law, to
change the names of the Sub-Accounts and the Separate Account.

ALLMERICA INVESTMENT TRUST

Allmerica Investment Trust (the "Trust") is an open-end, diversified, management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment funds.

The Trust was established by the Company as a Massachusetts business trust on
October 11, 1984, for the purpose of providing a vehicle for the investment of
assets of various separate accounts established by the Company, or other
affiliated insurance companies. Thirteen investment portfolios of the Trust
("Funds") are available under the Policy, each issuing a series of shares:
Select Aggressive Growth Fund, Select Capital Appreciation Fund, Select Value
Opportunity Fund, Select Emerging Markets Fund, Select International Equity
Fund, Select Growth Fund, Select Strategic Growth Fund, Growth Fund, Equity
Index Fund, Select Growth and Income Fund, Investment Grade Income Fund,
Government Bond Fund and Money Market Fund.

AFIMS serves as investment adviser of the Trust, and has entered into
sub-advisory agreements with other investment managers ("Sub-Advisers") who
manage the investments of the Underlying Funds. See INVESTMENT ADVISORY SERVICES
- -- "Investment Advisory Services to the Trust."

FIDELITY VARIABLE INSURANCE PRODUCTS FUND

Fidelity Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("Fidelity Management"), is an open-end,
diversified, management investment company organized as a Massachusetts business
trust on November 13, 1981, and registered with the SEC under the 1940 Act. Four
of its investment portfolios are available under the Policy: Fidelity VIP High
Income Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth
Portfolio and Fidelity VIP Overseas Portfolio.

Various Fidelity companies perform certain activities required to operate
Fidelity VIP. Fidelity Management is one of America's largest investment
management organizations, and has its principal business address at 82
Devonshire Street, Boston, Massachusetts. It is composed of a number of
different companies which provide a variety of financial services and products.
Fidelity Management is the original Fidelity company, founded in 1946. It
provides a number of mutual funds and other clients with investment research and
portfolio management services.

FIDELITY VARIABLE INSURANCE PRODUCTS FUND II

Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), managed by
Fidelity Management (see discussion under "Variable Insurance Products Fund"),
is an open-end, diversified, management investment company organized as a
Massachusetts business trust on March 21, 1988, and is registered with the SEC
under the 1940 Act. One of its investment portfolios is available under the
Policy: the Fidelity VIP II Asset Manager Portfolio.

T. ROWE PRICE INTERNATIONAL SERIES, INC.

T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming") (See "Investment Advisory
Services to T. Rowe Price"), is an open-end,

25
<PAGE>
diversified, management investment company organized in 1994 as a Maryland
corporation, and is registered with the SEC under the 1940 Act. One of its
investment portfolios is available under the Policy: the T. Rowe Price
International Stock Portfolio. See "Investment Advisory Services to T. Rowe
Price."

DELAWARE GROUP PREMIUM FUND, INC.

Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified
management investment company registered with the SEC under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policy of DGPF or its separate investment series. DGPF was
established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio ("Series") is available under the Policy: the International Equity
Series. The Investment adviser for the International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). See "Investment Advisory
Services to DGPF."

INVESTMENT OBJECTIVES AND POLICIES

A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS, AND OTHER
RELEVANT INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND
IN THEIR RESPECTIVE PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS, AND SHOULD BE
READ CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.

SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies which are believed to have
significant potential for capital appreciation.

SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital in a
manner consistent with the preservation of capital. Realization of income is not
a significant investment consideration, and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund invests
primarily in common stock of industries and companies which are believed to be
experiencing favorable demand for their products and services, and which operate
in a favorable competitive environment and regulatory climate.

SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies, whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued.

SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets.

SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies.

DGPF INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.

FIDELITY VIP OVERSEAS PORTFOLIO -- seeks long-term growth of capital primarily
through investments in foreign securities and provides a means for aggressive
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.

T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.

26
<PAGE>
SELECT GROWTH FUND -- seeks to achieve long-term growth of capital by investing
in a diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential.

SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies.

GROWTH FUND -- is invested in common stocks and securities convertible into
common stocks that are believed to represent significant underlying value in
relation to current market prices. The objective of the Growth Fund is to
achieve long-term growth of capital. Realization of current investment income,
if any, is incidental to this objective.

FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation also may be found
in other types of securities, including bonds and preferred stocks.

EQUITY INDEX FUND -- seeks to provide investment results that correspond to the
aggregate price and yield performance of a representative selection of United
States publicly traded common stocks. The Equity Index Fund seeks to achieve its
objective by attempting to replicate the aggregate price and yield performance
of the S&P 500.

SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks.

FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S&P 500. The Portfolio may invest in high yielding,
lower-rated fixed-income securities (commonly referred to as "junk bonds") which
are subject to greater risk than investments in higher-rated securities. See
"Risks of Lower-Rated Debt Securities" in the Fidelity VIP prospectus.

FIDELITY VIP II ASSET MANAGER PORTFOLIO -- seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term money-market instruments.

FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities often are considered to be speculative, and involve
greater risk of default or price changes than securities assigned a high quality
rating.

INVESTMENT GRADE INCOME FUND -- is invested in a diversified portfolio of fixed
income securities with the objective of seeking as high a level of total return
(including both income and capital appreciation) as is consistent with prudent
investment management.

GOVERNMENT BOND FUND -- has the investment objectives of seeking high income,
preservation of capital and maintenance of liquidity, primarily through
investments in debt instruments issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, and in related options, futures and
repurchase agreements.

MONEY MARKET FUND -- is invested in a diversified portfolio of high-quality,
short-term money market instruments with the objective of obtaining maximum
current income consistent with the preservation of capital and liquidity.

27
<PAGE>
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST WILL MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH THIS
PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY
OF PARTICULAR SUB-ACCOUNTS.

If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Policy Value in that Sub-Account, the
Company will transfer it without charge on Written Request within sixty (60)
days of the later of (1) the effective date of such change in the investment
policy, or (2) your receipt of the notice of the right to transfer. You may then
change the percentages of your premium and deduction allocations.

INVESTMENT ADVISORY SERVICES

INVESTMENT ADVISORY SERVICES TO THE TRUST

The overall responsibility for the supervision of the affairs of the Trust vests
in the Trustees. The Trustees have entered into a Management Agreement with
AFIMS to handle the day-to-day affairs of the Trust. AFIMS, subject to review by
the Trustees, is responsible for the general management of the Funds. AFIMS also
performs certain administrative and management services for the Trust, furnishes
to the Trust all necessary office space, facilities and equipment, and pays the
compensation, if any, of officers and Trustees who are affiliated with AFIMS.
Allmerica Asset Management, Inc., an indirect wholly owned subsidiary of
Allmerica Financial Corporation, is an affiliate of the Company.

Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with
AFIMS, expenses for proxies, prospectuses, reports to shareholders, and other
expenses.

28
<PAGE>
For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund as follows:

<TABLE>
<S> <C> <C>
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%

Select Capital Appreciation First $100 million
Fund 1.00%
Next $150 million 0.90%
Over $250 million 0.85%

Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%

Select Emerging Markets Fund * 1.35%

Select International Equity First $100 million
Fund 1.00%
Next $150 million 0.90%
Over $250 million 0.85%

Select Growth Fund * 0.85%

Select Strategic Growth Fund * 0.85%

Growth Fund First $250 million 0.60%
Next $250 million 0.40%
Over $500 million 0.35%

Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%

Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%

Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%

Government Bond Fund * 0.50%

Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>

* For the Select Emerging Markets Fund, the Select Growth Fund, the Select
Strategic Growth Fund, and the Government Bond Fund, the investment management
fee does not vary according to the level of assets in the Fund. AFIMS' fee
computed for each Fund will be paid from the assets of such Fund.

Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreements, the Sub-Advisers are
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. The terms of a Sub-Adviser Agreement cannot be materially

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changed without the approval of a majority in interest of the shareholders of
the affected Fund. AFIMS is solely responsible for the payment of all fees for
investment management services to the Sub-Advisers.

The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds and
fees paid to the Sub-Advisers by AFIMS, and should be read in conjunction with
this Prospectus.

INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II FUNDS

For managing investments and business affairs, each Portfolio pays a monthly fee
to Fidelity Management. The prospectuses of Fidelity VIP and Fidelity VIP II
contain additional information concerning the Portfolios, including information
about additional expenses paid by the Portfolios, and should be read in
conjunction with this Prospectus.

The Fidelity VIP High Income Portfolio pays a monthly fee to Fidelity Management
at an annual fee rate made up of the sum of two components:

1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by Fidelity Management. On an annual basis this rate cannot
rise above 0.37%, and drops as total assets in all these funds rise.

2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month. One-twelfth of the
annual management fee rate is applied to net assets averaged over the most
recent month, resulting in a dollar amount which is the management fee for
that month.

The fee rates of the Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity
VIP II Asset Manager and Fidelity VIP Overseas Portfolios each are made of two
components:

1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by Fidelity Management. On an annual basis, this rate
cannot rise above 0.52%, and drops as total assets in all these mutual funds
rise.

2. An individual Portfolio fee rate of 0.20% for the Fidelity VIP Equity-Income
Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.25% for the
Fidelity VIP II Asset Manager Portfolio and 0.45% for the Fidelity VIP
Overseas Portfolio.

One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month. Thus, the Fidelity VIP High Income
Portfolio may have a fee as high as 0.82% of its average net assets. The
Fidelity VIP Equity-Income Portfolio may have a fee as high as 0.72% of its
average net assets. The Fidelity VIP Growth Portfolio may have a fee as high as
0.82% of its average net assets. The Fidelity VIP II Asset Manager Portfolio may
have a fee as high as 0.77% of its average net assets. The Fidelity VIP Overseas
Portfolio may have a fee as high as 0.97% of its average net assets. The actual
fee rate may be less depending on the total assets in the funds advised by
Fidelity Management.

INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE

The Investment Adviser for the International Stock Portfolio is Rowe
Price-Fleming International, Inc. ("Price-Fleming"). Price-Fleming, founded in
1979 as a joint venture between T. Rowe Price Associates, Inc. and Robert
Fleming Holdings, Limited, is one of America's largest international mutual fund
asset managers with approximately $30 billion under management in its offices in
Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. To cover
investment management and operating expenses, the T. Rowe Price International
Stock Portfolio pays Price-Fleming a single, all-inclusive fee of 1.05% of its
average daily net assets.

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INVESTMENT ADVISORY SERVICES TO DGPF

Each Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is equal to 0.75% of the average daily net
assets of the Series.

ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS

The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Policy interest in a Sub-Account without notice to
the Policyowner and prior approval of the SEC and state insurance authorities,
to the extent required by law. The Separate Account may, to the extent permitted
by law, purchase other securities for other policies or permit a conversion
between policies upon request by a Policyowner.

The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares of a new Underlying Fund
or in shares of another investment company. Subject to applicable law and any
required SEC approval, the Company may, in its sole discretion, establish new
Sub-Accounts or eliminate one or more Sub-Accounts if marketing needs, tax
considerations or investment conditions warrant. Any new Sub-Accounts may be
made available to existing Policyowners on a basis to be determined by the
Company.

Shares of the Funds of the Trust also are issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, the
Portfolio of T. Rowe Price and the Series of DGPF also are issued to other
unaffiliated insurance companies ("shared funding"). It is conceivable that in
the future such mixed funding or shared funding may be disadvantageous for
variable life Policyowners or variable annuity contract owners. Although the
Company and the Underlying Investment Companies currently do not foresee any
such disadvantages to either variable life insurance policyowners or variable
annuity contract owners, the Company and the respective Trustees intend to
monitor events in order to identify any material conflicts and to determine what
action, if any, should be taken. If the Trustees were to conclude that separate
Funds should be established for variable life and variable annuity separate
accounts, the Company will bear the expenses.

If any of these substitutions or changes are made, the Company may endorse the
Policy to reflect the substitution or change, and will notify Policyowners of
all such changes. If the Company deems it to be in the best interest of
Policyowners, and subject to any approvals that may be required under applicable
law, the Separate Account or any Sub-Account(s) may be operated as a management
company under the 1940 Act, may be deregistered under the 1940 Act if
registration is no longer required, or may be combined with other Sub-Accounts
or other separate accounts of the Company.

VOTING RIGHTS

To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Policyowners
with Policy Value in such Sub-Account. If the 1940 Act or any rules thereunder
should be amended, or if the present interpretation of the 1940 Act or such
rules should change and, as a result the Company determines that it is permitted
to vote shares in its own right, whether or not such shares are attributable to
the Policy, the Company reserves the right to do so.

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Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions which have been received by the Company. The Company also will vote
shares held in the Separate Account that it owns and which are not attributable
to the Policy in the same proportion.

The number of votes which a Policyowner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Policyowner's Policy Value in
the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.

The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (1) to cause a change in the sub-classification or investment
objective of one or more of the Underlying Funds, or (2) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Policyowners or the Trustees. The Company's disapproval of any such
change must be reasonable and, in the case of a change in investment policies or
investment adviser, based on a good faith determination that such change would
be contrary to state law or otherwise is inappropriate in light of the
objectives and purposes of the Underlying Funds. In the event the Company does
disregard voting instructions, a summary of and the reasons for that action will
be included in the next periodic report to Policyowners.

THE POLICY

APPLYING FOR THE POLICY

The Policy cannot be issued until the underwriting procedure has been completed.
Upon receipt at the Principal Office of a completed application from a
prospective Policyowner, the Company will follow certain insurance underwriting
procedures designed to determine whether the proposed Insured is insurable. This
process may involve medical examinations, and may require that further
information be provided by the proposed Policyowner before a determination of
insurability can be made. The Company reserves the right to reject an
application which does not meet its underwriting guidelines, but in underwriting
insurance, the Company complies with all applicable federal and state
prohibitions concerning unfair discrimination.

CONDITIONAL INSURANCE AGREEMENT

It is possible to obtain life insurance protection during the underwriting
process through a Conditional Insurance Agreement. If at the time of application
you make a payment equal to at least one "Minimum Monthly Factor" for the Policy
as applied for, the Company will provide fixed conditional insurance in the
amount of insurance applied for up to a maximum of $500,000, pending
underwriting approval. This coverage generally will continue for a maximum of 90
days from the date of the application or the completion of a medical exam,
should one be required. In no event will any insurance proceeds be paid under
the Conditional Insurance Agreement if death is by suicide.

If the application is approved, the Policy will be issued as of the date the
terms of the Conditional Insurance Agreement were met. If no Conditional
Insurance Agreement is in effect because the prospective Policyowner does not
wish to make any payment until the Policy is issued or has paid an initial
premium that is not sufficient to place the Policy in force, upon delivery of
the Policy the Company will require payment of sufficient premium to place the
insurance in force.

PREMIUMS HELD IN THE GENERAL ACCOUNT PENDING UNDERWRITING APPROVAL

Pending completion of insurance underwriting and Policy issuance procedures, the
initial premium will be held in the General Account. If the application is
approved and the Policy is issued and accepted by you, the initial premium held
in the General Account will be credited with interest at a specified rate,
beginning not

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later than the date of receipt of the premium at the Principal Office. IF THE
POLICY IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.

If the Policy is issued to the trustee of an employee benefit plan, the amounts
held in the General Account will be allocated to the Sub-Accounts according to
the Policyowner's instructions when the Delivery Receipt is returned to the
Principal Office. For all other Policyowners, the date the Company transfers the
initial net premium from the General Account to the selected Sub-Accounts
depends on the premium amount. If the initial net premiums are less than
$10,000, the amounts held in the General Account will be allocated to the
selected Sub-Accounts not later than three days after underwriting approval of
the Policy. If the initial net premiums equal or exceed $10,000, or if the
Policy provides for planned premium payments during the first year equal to or
exceeding $10,000 annually, $5,000 semi-annually, $2,500 quarterly or $1,000
monthly, the entire Net Premium, plus any interest earned, will remain in the
General Account until return of the Policy's Delivery Receipt to the Principal
Office. The entire amount held in the General Account for allocation to the
Separate Account then will be allocated to the Sub-Accounts according to your
instructions.

FREE-LOOK PERIOD

The Policy provides for an initial "Free-Look" period. You may cancel the Policy
by mailing or delivering the Policy to the Principal Office or an agent of the
Company on or before the latest of:

- 45 days after the application for the Policy is signed, or

- 10 days after you receive the Policy (or longer if required by state law),
or

- 10 days after the Company mails or personally delivers a notice of
withdrawal rights to you.

When you return the Policy, the Company will, within seven days, mail a refund
equal to the sum of:

(1) the difference between the premiums, including fees and charges paid, and
any amounts allocated to the Separate Account, PLUS

(2) the value of the amounts allocated to the Separate Account, PLUS

(3) any fees or charges imposed on the amounts allocated to the Separate
Account.

The amount refunded in (1) above includes any premiums allocated to the General
Account. Where required by state law, the refund will equal the premiums paid.
The refund of any premium paid by check, however, may be delayed until the check
has cleared your bank.

FREE LOOK WITH FACE AMOUNT INCREASES

After an increase in the Face Amount, the Company will mail or personally
deliver a notice of a "Free Look" with respect to the increase. You will have
the right to cancel the increase before the latest of:

- 45 days after the application for the increase is signed, or

- 10 days after you receive the new specification pages issued for the
increase (or longer if required by state law), or

- 10 days after the Company mails or delivers a notice of withdrawal rights
to you.

Upon canceling the increase, you will receive a credit to the Policy Value of
charges which would not have been deducted but for the increase. The amount to
be credited will be refunded if you so request. The Company also will waive any
surrender charge calculated for the increase.

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CONVERSION PRIVILEGES

Once during the first 24 months after the Date of Issue or after the effective
date of an increase in the Face Amount (assuming the Policy is in force), you
may convert your Policy without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Policy Value in the Separate Account to the General Account
and by simultaneously changing your premium allocation instructions to allocate
future premium payments to the General Account. Within 24 months after the
effective date of each increase, you can transfer, without charge, all or part
of the Policy Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.

Where required by state law, at your request, the Company will issue a flexible
premium adjustable life insurance policy to you. The new policy will have the
same Face Amount, Issue Age, Dates of Issue, and Premium Class as the original
Policy.

PREMIUM PAYMENTS

Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through one of the Company's authorized agents. All premium
payments after the initial premium payment are credited to the Separate Account
or the General Account as of date of receipt at the Principal Office.

PREMIUM FLEXIBILITY

Unlike conventional insurance policies, the Policy does not obligate you to pay
premiums in accordance with a rigid and inflexible premium schedule. You may
establish a schedule of planned premiums which will be billed by the Company at
regular intervals. Failure to pay planned premiums, however, will not itself
cause the Policy to lapse. However, if the optional Guaranteed Death Benefit
Rider is in effect, certain minimum premium payment tests must be met. This
Rider may not be available in all states.

You also may make unscheduled premium payments at any time prior to the Final
Premium Payment Date, or skip planned premium payments, subject to the maximum
and minimum premium limitations described below.

You also may elect to pay premiums by means of a monthly automatic payment
procedure. Under this procedure, amounts will be deducted each month from your
checking account, generally on the Monthly Payment Date, and applied as a
premium under a Policy. The minimum payment permitted under this procedure is
$50.

Premiums are not limited as to frequency and number. No premium payment may be
less than $100, however, without the Company's consent. Moreover, premium
payments must be sufficient to provide a positive Surrender Value at the end of
each Policy month, or the Policy may lapse. See POLICY TERMINATION AND
REINSTATEMENT.

MINIMUM MONTHLY FACTOR

If, in the first 48 Policy months following issue or an increase in the Face
Amount, you make premium payments, less Debt, partial withdrawals and partial
withdrawal charges, at least equal to the sum of the Minimum Monthly Factor for
the number of months the Policy, increase in the Face Amount, or Policy Change
which causes a change in the Minimum Monthly Factor has been in force, the
Policy is guaranteed not to lapse during that period. EXCEPT FOR THE 48 POLICY
MONTHS AFTER THE DATE OF ISSUE, OR THE EFFECTIVE DATE OF AN INCREASE IN THE FACE
AMOUNT, MAKING MONTHLY PAYMENTS AT LEAST EQUAL TO THE MINIMUM MONTHLY FACTOR
DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN FORCE.

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In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Policy which are required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the Sum
Insured Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will accept only
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned, and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by IRS rules. Notwithstanding the current maximum premium
limitations, however, the Company will accept a premium which is needed in order
to prevent a lapse of the Policy during a Policy year. See POLICY TERMINATION
AND REINSTATEMENT.

INCENTIVE FUNDING DISCOUNT

The Company will lower the cost of insurance charges by 5% during any Policy
year for which you qualify for an incentive funding discount. To qualify, total
premiums paid under the Policy, less any Debt, withdrawals and withdrawal
charges, and transfers from other policies issued by the Company, must exceed
90% of the guideline level premiums (as defined in Section 7702 of the Code)
accumulated from the Date of Issue to the date of qualification. The incentive
funding discount may not be available in all states.

The amount needed to qualify for the incentive funding discount is determined on
the Date of Issue for the first Policy year and on each Policy anniversary for
each subsequent Policy year. If the Company receives the proceeds from a policy
issued by an unaffiliated company to be exchanged for the Policy, however, the
qualification for the incentive funding discount for the first Policy year will
be determined on the date the proceeds are received by the Company, and only
insurance charges becoming due after the date such proceeds are received will be
eligible for the incentive funding discount.

GUARANTEED DEATH BENEFIT RIDER (MAY NOT BE AVAILABLE IN ALL STATES)

An optional Guaranteed Death Benefit Rider is available only at Date of Issue of
the Policy. If this Rider is in effect, the Company:

- guarantees that your Policy will not lapse regardless of the investment
performance of the Separate Account and

- provides a guaranteed net death benefit.

In order to maintain the Guaranteed Death Benefit Rider, certain minimum premium
payment tests must be met on each Policy anniversary and within 48 months
following the Date of Issue and/or the date of any increase in the Face Amount,
as described below. In addition, a one-time administrative charge of $25 will be
deducted from the Policy Value when the Rider is elected. Certain transactions,
including Policy loans, partial withdrawals, and changes in Sum Insured Options,
can result in the termination of the Rider. IF THIS RIDER IS TERMINATED, IT
CANNOT BE REINSTATED.

GUARANTEED DEATH BENEFIT TESTS

While the Guaranteed Death Benefit Rider is in effect, the Policy will not lapse
if the following two tests are met:

1. Within 48 months following the Date of Issue of the Policy or of any
increase in the Face Amount, the sum of the premiums paid, less any Debt,
partial withdrawals and withdrawal charges, must be greater than the Minimum
Monthly Factor (if any) multiplied by the number of months which have
elapsed since the relevant Date of Issue; and

2. On each Policy anniversary, (a) must exceed (b), where, since the Date of
Issue:

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(a) is the sum of your premiums, less any withdrawals, partial withdrawal
charges and Debt which is classified as a preferred loan; and

(b) is the sum of the minimum Guaranteed Death Benefit premiums, as shown on
the specifications page of the Policy.

GUARANTEED DEATH BENEFIT

If the Guaranteed Death Benefit Rider is in effect on the Final Premium Payment
Date, guaranteed Death Proceeds will be provided as long as the Rider is in
force. The Death Proceeds will be the greater of:

- the Face Amount as of the Final Premium Payment Date; or

- the Policy Value as of the date due proof of death is received by the
Company.

TERMINATION OF THE GUARANTEED DEATH BENEFIT RIDER

The Guaranteed Death Benefit Rider will end and may not be reinstated on the
first to occur of the following:

- foreclosure of a Policy Loan; or

- the date on which the sum of your payments does not meet or exceed the
applicable Guaranteed Death Benefit test (above); or

- any Policy change that results in a negative guideline level premium; or

- the effective date of a change from Sum Insured Option 2 to Sum Insured
Option I, if such changes occurs within five Policy years of the Final
Premium Payment Date; or

- a request for a partial withdrawal or preferred loan is made after the
Final Premium Payment Date.

It is possible that the Policy Value will not be sufficient to keep the Policy
in force on the first Monthly Payment Date following the date the Rider
terminates. The net amount payable to keep the Policy in force will never exceed
the surrender charge plus three Monthly Deductions.

PAID-UP INSURANCE OPTION

Upon written request, a Policyowner may exercise a paid-up insurance option.
Paid-up life insurance is fixed insurance, usually having a reduced Face Amount,
for the lifetime of the insured with no further premiums due. If the Policyowner
elects this option, certain Policyowner rights and benefits may be limited.

The paid-up fixed insurance will be in the amount that the Surrender Value of
the Policy can purchase for a net single premium at the Insured's Age and
Underwriting Class on the date this option is elected. The Company will transfer
any Policy Value in the Separate Account to the General Account on the date it
receives the Written Request to elect the option. If the Surrender Value exceeds
the net single premium necessary for the fixed insurance, the Company will pay
the excess to the Policyowner. The net single premium is based on the
Commissioners 1980 Standard Ordinary Mortality Tables, Smoker or Non-Smoker
(Table B for unisex Policies) with increases in the tables for non-standard
risks. Interest will not be less than 4.5%.

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IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING POLICYOWNER RIGHTS AND
BENEFITS WILL BE AFFECTED:

- As described above, the paid-up insurance benefit is computed differently
from the net death benefit, and the death benefit options will not apply.

- The Company will transfer the Policy Value in the Separate Account to the
General Account on the date it receives the Written Request electing the
option. The Company will not allow transfers of Policy Value from the
General Account back to the Separate Account.

- The Policyowner may not make further premium payments.

- The Policyowner may not increase or decrease the Face Amount or make
partial withdrawals.

- Riders will continue only with the Company's consent.

After electing paid-up fixed insurance, the Policyowner may make Policy loans or
surrender the Policy for its net cash value. The cash value is equal to the net
single premium for paid-up insurance at the Insured's attained Age. The net cash
value is the cash value less any Debt.

ALLOCATION OF NET PREMIUMS

The Net Premium equals the premium paid less the 2 1/4% tax expense charge. In
the application for the Policy, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts. You may allocate
premiums to one or more Sub-Accounts, but may not have Policy Value in more than
20 Sub-Accounts at any one time. The minimum amount which may be allocated to a
Sub-Account is 1% of Net Premium paid. Allocation percentages must be in whole
numbers (for example, 33 1/3% may not be chosen) and must total 100%.

FUTURE CHANGES ALLOWED

You may change the allocation of future Net Premiums at any time pursuant to
written or telephone request. An allocation change will be effective as of the
date of receipt of the notice at the Principal Office. Currently, no charge is
imposed for changing premium allocation instructions. The Company reserves the
right to impose such a charge in the future, but guarantees that the charge will
not exceed $25.

If allocation changes by telephone are elected by the Policyowner, a properly
completed authorization form must be on file before telephone requests will be
honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions.

The procedures the Company follows for telephone transactions include requiring
callers to identify themselves by name, and to identify the Policyowner by name,
date of birth and social security number. All transfer instructions by telephone
are tape recorded.

INVESTMENT RISK

The Policy Value in the Sub-Accounts will vary with their investment experience;
you bear this investment risk. The investment performance may affect the Death
Proceeds as well. Policyowners periodically should review their allocations of
premiums and Policy Value in light of market conditions and overall financial
planning requirements.

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TRANSFER PRIVILEGE

Subject to the Company's then current rules, you may at any time transfer the
Policy Value among the Sub-Accounts or between a Sub-Account and the General
Account. However, the Policy Value held in the General Account to secure a
Policy loan may not be transferred.

All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Policy Value in the Accounts next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone request. As discussed in THE POLICY -- "Allocation of Net
Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.

Currently, transfers involving the General Account are permitted only if:

- there has been at least a 90-day period since the last transfer from the
General Account, and

- the amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000, or 25% of the Accumulated Value under the
Policy.

These rules are subject to change by the Company.

DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION

You may have automatic transfers of at least $100 a month made on a periodic
basis:

- from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust, respectively, to one or more of the other
Sub-Accounts ("Dollar-Cost Averaging Option"), or

- to reallocate Policy Value among the Sub-Accounts ("Automatic Rebalancing
Option").

Automatic transfers may be made on a monthly, bi-monthly, quarterly, semi-annual
or annual schedule. Generally, all transfers will be processed on the 15th of
each scheduled month. If the 15th is not a business day, however, or is the
Monthly Payment Date, the automatic transfer will be processed on the next
business day. The Dollar-Cost Averaging Option and the Automatic Rebalancing
Option may not be in effect at the same time.

TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITS

The transfer privilege is subject to the Company's consent. The Company reserves
the right to impose limitations on transfers including, but not limited to:

- the minimum amount that may be transferred,

- the minimum amount that may remain in a Sub-Account following a transfer
from that Sub-Account,

- the minimum period of time between transfers involving the General
Account, and

- the maximum amount that may be transferred each time from the General
Account.

Currently, the first 12 transfers in a Policy year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Policy year. The Company may increase or decrease this
charge, but it is guaranteed never to exceed $25. The first automatic transfer
counts as one transfer towards the 12 free transfers allowed in each Policy
year; each subsequent automatic transfer is without charge and does not reduce
the remaining number of transfers which may be made free of charge. Any

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transfers made with respect to a conversion privilege, Policy loan or material
change in investment policy will not count towards the 12 free transfers.

DEATH PROCEEDS

As long as the Policy remains in force (see POLICY TERMINATION AND
REINSTATEMENT), upon due proof of the Insured's death, the Company will pay the
Death Proceeds of the Policy to the named Beneficiary. The Company normally will
pay the Death Proceeds within seven days of receiving due proof of the Insured's
death, but the Company may delay payments under certain circumstances. See OTHER
POLICY PROVISIONS -- "Postponement of Payments." The Death Proceeds may be
received by the Beneficiary in cash or under one or more of the payment options
set forth in the Policy. See APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS.

Prior to the Final Premium Payment Date, the Death Proceeds are equal to:

- the Sum Insured provided under Option 1 or Option 2, whichever is elected
and in effect on the date of death; PLUS

- any additional insurance on the Insured's life that is provided by rider;
MINUS

- any outstanding Debt, any partial withdrawals and partial withdrawal
charges, and any Monthly Deductions due and unpaid through the Policy
month in which the Insured dies.

After the Final Premium Payment Date, the Death Proceeds equal the Surrender
Value unless the Guaranteed Death Benefit Rider is in effect. If the Guaranteed
Death Benefit Rider is in effect, the Death Proceeds equal the greater of the
Face Amount or Surrender Value. The amount of Death Proceeds payable will be
determined as of the date of the Company's receipt of due proof of the Insured's
death.

SUM INSURED OPTIONS

The Policy provides two Sum Insured Options: Option 1 and Option 2, as described
below. You designate the desired Sum Insured Option in the application. You may
change the Option once per Policy year by Written Request. There is no charge
for a change in Option.

Under Option 1, the Sum Insured is equal to the greater of the Face Amount of
insurance or the Guideline Minimum Sum Insured. Under Option 2, the Sum Insured
is equal to the greater of the Face Amount of insurance plus the Policy Value or
the Guideline Minimum Sum Insured.

GUIDELINE MINIMUM SUM INSURED

To remain qualified as "life insurance" for federal tax purposes, federal tax
law requires that policies have a minimum amount of pure life insurance
protection in relation to the size of the Policy Value. The Guideline Minimum
Sum Insured is used to determine compliance with this requirement. So long as
the Policy qualifies as a life insurance contract, the insurance proceeds will
be excluded from the gross income of the Beneficiary.

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GUIDELINE MINIMUM SUM INSURED TABLE

<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Policy Value
- ------------------------------------------------------------- -----------------
<S> <C>
40 and under............................................. 250%
45....................................................... 215%
50....................................................... 185%
55....................................................... 150%
60....................................................... 130%
65....................................................... 120%
70....................................................... 115%
75....................................................... 105%
80....................................................... 105%
85....................................................... 105%
90....................................................... 105%
95 and above............................................. 100%
</TABLE>

For the Ages not listed, the progression between the listed Ages is linear.

Under both Option 1 and Option 2, the Sum Insured provides insurance protection.
Under Option 1, the Sum Insured remains level unless the applicable percentage
of Policy Value under the Guideline Minimum Sum Insured exceeds the Face Amount,
in which case the Sum Insured will vary as the Policy Value varies. Under Option
2, the Sum Insured varies as the Policy Value changes.

For any Face Amount, the amount of the Sum Insured (and the Death Proceeds) will
be greater under Option 2 than under Option 1. This is because the Policy Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. Under Option 2, however, the cost of insurance included in the
Monthly Deduction will be greater, and the rate at which Policy Value will
accumulate will be slower (assuming the same specified Face Amount and the same
actual premiums paid). See CHARGES AND DEDUCTIONS -- "Monthly Deductions from
the Policy Value."

If you desire to have premium payments and investment performance reflected in
the amount of the Sum Insured, you should choose Option 2. If you desire premium
payments and investment performance reflected to the maximum extent in the
Policy Value, you should select Option 1.

ILLUSTRATIONS

For the purposes of the following illustrations, assume that the Insured is
under the Age of 40 and that there is no outstanding Debt.

ILLUSTRATION OF OPTION 1

Under Option 1, the Face Amount generally will equal the Sum Insured. If at any
time, however, the Policy Value multiplied by the applicable percentage is less
than the Face Amount, the Sum Insured will equal the Face Amount of the Policy.

For example, a Policy with a $50,000 Face Amount will generally have a Sum
Insured equal to $50,000. Because the Sum Insured must be equal to or greater
than 250% of Policy Value, however, if at any time the Policy Value exceeds
$20,000, the Sum Insured will exceed the $50,000 Face Amount. In this example,
each additional dollar of Policy Value above $20,000 will increase the Sum
Insured by $2.50. For example, a Policy with a Policy Value of $35,000 will have
a Guideline Minimum Sum Insured of $87,500 ($35,000 X 2.50); Policy Value of
$40,000 will produce a Guideline Minimum Sum Insured of $100,000 ($40,000 X
2.50); and Policy Value of $50,000 will produce a Guideline Minimum Sum Insured
of $125,000 ($50,000 X 2.50).

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<PAGE>
Similarly, so long as the Policy Value exceeds $20,000, each dollar taken out of
the Policy Value will reduce the Sum Insured by $2.50. If, for example, the
Policy Value is reduced from $25,000 to $20,000 (because of partial withdrawals,
charges or negative investment performance), the Sum Insured will be reduced
from $62,500 to $50,000.

The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Sum Insured would not
exceed the $50,000 Face Amount unless the Policy Value exceeded $27,027 (rather
than $20,000), and each dollar then added to or taken from Policy Value would
change the Sum Insured by $1.85.

ILLUSTRATION OF OPTION 2

Under Option 2, the Sum Insured is generally equal to the Face Amount PLUS the
Policy Value. The Sum Insured under Option 2, however, always will be the
greater of :

- the Face Amount plus Policy Value; or

- the Policy Value multiplied by the applicable percentage from the
Guideline Minimum Sum Insured table.

For example, a Policy with a Face Amount of $50,000 and with Policy Value of
$5,000 will produce a Sum Insured of $55,000 ($50,000 + $5,000). A Policy Value
of $10,000 will produce a Sum Insured of $60,000 ($50,000 + $10,000); a Policy
Value of $25,000 will produce a Sum Insured of $75,000 ($50,000 + $25,000).
According to the Guideline Minimum Sum Insured table, however, the Sum Insured
for the example must be at least 250% of the Policy Value. Therefore, if the
Policy Value is greater than $33,333, 250% of that amount will be the required
Sum Insured, which will be greater than the Face Amount plus the Policy Value.
In this example, each additional dollar of Policy Value above $33,333 will
increase the Sum Insured by $2.50. For example, if the Policy Value is $35,000,
the Guideline Minimum Sum Insured will be $87,500 ($35,000 X 2.50); a Policy
Value of $40,000 will produce a Guideline Minimum Sum Insured of $100,000
($40,000 X 2.50); and a Policy Value of $50,000 will produce a Guideline Minimum
Sum Insured of $125,000 ($50,000 X 2.50).

Similarly, if the Policy Value exceeds $33,333, each dollar taken out of the
Policy Value will reduce the Sum Insured by $2.50. If, for example, the Policy
Value is reduced from $45,000 to $40,000 because of partial withdrawals, charges
or negative investment performance, the Sum Insured will be reduced from
$112,500 to $100,000. If at any time, however, the Policy Value multiplied by
the applicable percentage is less than the Face Amount plus the Policy Value,
then the Sum Insured will be the current Face Amount plus the Policy Value.

The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Sum Insured must be at least
1.85 times the Policy Value. The amount of the Sum Insured would be the sum of
the Policy Value plus $50,000 unless the Policy Value exceeded $58,824 (rather
than $33,000). Each dollar added to or subtracted from the Policy Value would
change the Sum Insured by $1.85.

CHANGE IN SUM INSURED OPTION

Generally, the Sum Insured Option in effect may be changed once each Policy year
by sending a Written Request for change to the Principal Office. Changing Sum
Insured Options will not require Evidence of Insurability. The effective date of
any such change will be the Monthly Payment Date on or following the date of
receipt of the request. No charges will be imposed on changes in Sum Insured
Options.

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<PAGE>
CHANGE FROM OPTION 1 TO OPTION 2

If the Sum Insured Option is changed from Option 1 to Option 2, the Face Amount
will be decreased to equal the Sum Insured less the Policy Value on the
effective date of the change. This change may not be made if it would result in
a Face Amount of less than $40,000. A change from Option 1 to Option 2 will not
alter the amount of the Sum Insured at the time of the change, but will affect
the determination of the Sum Insured from that point on. Because the Policy
Value will be added to the new specified Face Amount, the Sum Insured will vary
with the Policy Value. Under Option 2, the Insurance Amount at Risk always will
equal the Face Amount unless the Guideline Minimum Sum Insured is in effect. The
cost of insurance also may be higher or lower than it otherwise would have been
without the change in Sum Insured Option. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions from the Policy Value."

CHANGE FROM OPTION 2 TO OPTION 1

If the Sum Insured Option is changed from Option 2 to Option 1, the Face Amount
will be increased to equal the Sum Insured which would have been payable under
Option 2 on the effective date of the change (i.e., the Face Amount immediately
prior to the change plus the Policy Value on the date of the change). The amount
of the Sum Insured will not be altered at the time of the change. The change in
option, however, will affect the determination of the Sum Insured from that
point on, since the Policy Value no longer will be added to the Face Amount in
determining the Sum Insured; the Sum Insured will equal the new Face Amount (or,
if higher, the Guideline Minimum Sum Insured). The cost of insurance may be
higher or lower than it otherwise would have been since any increases or
decreases in the Policy Value will reduce or increase, respectively, the
Insurance Amount at Risk under Option 1. Assuming a positive net investment
return with respect to any amounts in the Separate Account, changing the Sum
Insured Option from Option 2 to Option 1 will reduce the Insurance Amount at
Risk and therefore the cost of insurance charge for all subsequent Monthly
Deductions, compared to what such charge would have been if no such change were
made.

A change in Sum Insured Option may result in total premiums paid exceeding the
then-current maximum premium limitation determined by Internal Revenue Service
("IRS") rules. In such event, the Company will pay the excess to the
Policyowner. See THE POLICY -- "Premium Payments."

CHANGE IN THE FACE AMOUNT

Subject to certain limitations, you may increase or decrease the specified Face
Amount at any time by submitting a Written Request to the Company. Any increase
or decrease in the specified Face Amount requested by you will become effective
on the Monthly Payment Date on or next following the date of receipt of the
request at the Principal Office or, if Evidence of Insurability is required, the
date of approval of the request.

INCREASES IN THE FACE AMOUNT

Along with the Written Request for an increase, you must submit Evidence of
Insurability. The consent of the Insured also is required whenever the Face
Amount is increased. A request for an increase in the Face Amount may not be
less than $10,000. You may not increase the Face Amount after the Insured
reaches Age 85. An increase must be accompanied by an additional premium if the
Surrender Value is less than $50 plus an amount equal to the sum of two Minimum
Monthly Factors.

On the effective date of each increase in the Face Amount, a transaction charge
of $40 will be deducted from the Policy Value for administrative costs. The
effective date of the increase will be the first Monthly Payment Date on or
following the date all of the conditions for the increase are met.

An increase in the Face Amount generally will affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Premium Classes (if more than one Premium Class applies), both of which
may affect the monthly cost of insurance charges. A surrender charge also will
be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions from the Policy Value" and "Surrender Charge."

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<PAGE>
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase cancelled, and the charges which would not have
been deducted but for the increase will be credited to the Policy, and (2)
during the first 24 months following the increase, to transfer any or all Policy
Value to the General Account free of charge. See THE POLICY --"Free-Look Period"
and "Conversion Privileges." A refund of charges which would not have been
deducted but for the increase will be made at your request.

DECREASES IN THE FACE AMOUNT

The minimum amount for a decrease in the Face Amount is $10,000. The Face Amount
in force after any decrease may not be less than $50,000. If, following a
decrease in the Face Amount, the Policy would not comply with the maximum
premium limitation applicable under IRS rules, the decrease may be limited or
the Policy Value may be returned to the Policyowner (at your election) to the
extent necessary to meet the requirements. A return of Policy Value may result
in a tax liability to you.

A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Premium Classes,
both of which may affect a Policyowner's monthly cost of insurance charges. See
CHARGES AND DEDUCTIONS -- "Monthly Deductions from the Policy Value." For
purposes of determining the cost of insurance charge, any decrease in the Face
Amount will reduce the Face Amount in the following order:

- the Face Amount provided by the most recent increase;

- the next most recent increases successively; and

- the initial Face Amount.

This order also will be used to determine whether a surrender charge will be
deducted and in what amount. If you request a decrease in the Face Amount, the
amount of any surrender charge deducted will reduce the current Policy Value.
You may specify one Sub-Account from which the surrender charge will be
deducted. If no specification is provided, the Company will make a Pro-Rata
Allocation. The current surrender charge will be reduced by the amount deducted.
See CHARGES AND DEDUCTIONS -- "Surrender Charge."

POLICY VALUE AND SURRENDER VALUE

The Policy Value is the total amount available for investment, and is equal to
the sum of:

- your accumulation in the General Account, PLUS

- the value of the Accumulation Units in the Sub-Accounts.

The Policy Value is used in determining the Surrender Value. See THE POLICY
- --"Policy Surrender." There is no guaranteed minimum Policy Value. Because the
Policy Value on any date depends upon a number of variables, it cannot be
predetermined.

The Policy Value and the Surrender Value will reflect frequency and amount of
Net Premiums paid, interest credited to accumulations in the General Account,
the investment performance of the chosen Sub-Accounts, any partial withdrawals,
any loans, any loan repayments, any loan interest paid or credited, and any
charges assessed in connection with the Policy.

CALCULATION OF POLICY VALUE

The Policy Value is determined first on the Date of Issue and thereafter on each
Valuation Date. On the Date of Issue, the Policy Value will be the Net Premiums
received, plus any interest earned during the period when premiums are held in
the General Account (before being transferred to the Separate Account; see THE

43
<PAGE>
POLICY -- "Applying for the Policy") less any Monthly Deductions due. On each
Valuation Date after the Date of Issue the Policy Value will be:

- the aggregate of the values in each of the Sub-Accounts on the Valuation
Date, determined for each Sub-Account by multiplying the value of an
Accumulation Unit in that Sub-Account on that date by the number of such
Accumulations Units allocated to the Policy; PLUS

- the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).

Thus, the Policy Value is determined by multiplying the number of Accumulation
Units in each Sub-Account by the value of the applicable Accumulation Units on
the particular Valuation Date, adding the products, and adding the amount of the
accumulations in the General Account, if any.

THE ACCUMULATION UNIT

Each Net Premium is allocated to the Sub-Accounts selected by you. Allocations
to the Sub-Accounts are credited to the Policy in the form of Accumulation
Units. Accumulation Units are credited separately for each Sub-Account.

The number of Accumulation Units of each Sub-Account credited to the Policy is
equal to the portion of the Net Premium allocated to the Sub-Account, divided by
the dollar value of the applicable Accumulation Unit as of the Valuation Date
the payment is received at the Principal Office. The number of Accumulation
Units will remain fixed unless changed by a subsequent split of Accumulation
Unit value, transfer, partial withdrawal or Policy surrender. In addition, if
the Company is deducting the Monthly Deduction or other charges from a
Sub-Account, each such deduction will result in cancellation of a number of
Accumulation Units equal in value to the amount deducted.

The dollar value of an Accumulation Unit of each Sub-Account varies from
Valuation Date to Valuation Date based on the investment experience of that
Sub-Account. That experience, in turn, will reflect the investment performance,
expenses and charges of the respective Underlying Fund. The value of an
Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account. The dollar value of an Accumulation Unit on a given Valuation Date
is determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.

NET INVESTMENT FACTOR

The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b) and subtracting (c) and (d) from the result,
where:

(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any;

(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;

(c) is a charge for each day in the Valuation Period equal, on an annual basis,
to 0.65% of the daily net asset value of that Sub-Account for mortality and
expense risks. This charge may be increased or decreased by the Company, but
may not exceed 0.90%; and

(d) is the Separate Account administrative charge for each day in the Valuation
Period equal, on an annual basis, to 0.15% of the daily net asset value of
the Sub-Account. The administrative charge may be increased or decreased by
the Company, but may not exceed 0.25%. This charge is applicable only during
the first ten Policy years.

44
<PAGE>
The net investment factor may be greater or less than one. Therefore, the value
of an Accumulation Unit may increase or decrease. You bear the investment risk.

Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.

DEATH PROCEEDS PAYMENT OPTIONS

During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the available payment options. The
payment options currently available are described in APPENDIX B -- DEATH
PROCEEDS PAYMENT OPTIONS. These choices also are available at the Final Premium
Payment Date and if the Policy is surrendered. The Company may make more payment
options available in the future.

If no election is made, the Company will pay the Death Proceeds in a single sum.
When the Death Proceeds are payable in a single sum, the Beneficiary may, within
one year of the Insured's death, select one or more of the payment options if no
payments have yet been made.

OPTIONAL INSURANCE BENEFITS

Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to the Policy by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from
the Policy Value."

POLICY SURRENDER

You may surrender the Policy at any time and receive its Surrender Value. The
Surrender Value is equal to:

- the Policy Value, MINUS

- any Debt and applicable surrender charges.

The Surrender Value will be calculated as of the Valuation Date on which a
Written Request for surrender is received at the Principal Office. A surrender
charge is calculated upon issuance of the Policy and from the effective date of
any increase in the Face Amount. The duration of the surrender charge is 15
years for issue Ages 0 through 50, grading down to 10 years for issue Ages 55
and above. See CHARGES AND DEDUCTIONS -- "Surrender Charge."

The proceeds on surrender may be paid in a lump sum or under one of the payment
options described in APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS. Normally, the
Company will pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER POLICY PROVISIONS -- "Postponement of
Payments."

The surrender rights of Policyowners who are participants under Section 403(b)
plans, or who are participants in the Texas Optional Retirement Program ("Texas
ORP") are restricted; see FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN
CONNECTION WITH TSA PLANS."

For important tax consequences which may result from surrender, see FEDERAL TAX
CONSIDERATIONS.

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<PAGE>
PARTIAL WITHDRAWALS

Any time after the first Policy year, you may withdraw a portion of the
Surrender Value, subject to the limits stated below, upon Written Request filed
at the Principal Office. The Written Request must indicate the dollar amount you
wish to receive and the Accounts from which such amount is to be withdrawn. You
may allocate the amount withdrawn among the Sub-Accounts and the General
Account. If you do not provide allocation instructions, the Company will make a
Pro-Rata Allocation. Each partial withdrawal must be in a minimum amount of
$500.

Under Option 1, the Face Amount is reduced by the amount of the withdrawal, and
a withdrawal will not be allowed if it would reduce the Face Amount below
$40,000.

A withdrawal from a Sub-Account will result in the cancellation of the number of
Accumulation Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND DEDUCTIONS
- -- "Charges on Partial Withdrawal." Normally, the Company will pay the amount of
the partial withdrawal within seven days following the Company's receipt of the
partial withdrawal request, but the Company may delay payment under certain
circumstances described in OTHER POLICY PROVISIONS -- "Postponement of
Payments."

The withdrawal rights of Policyowners who are participants under Section 403(b)
plans or who are participants in the Texas ORP are restricted; see FEDERAL TAX
CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS." For important
tax consequences which may result from partial withdrawals, see FEDERAL TAX
CONSIDERATIONS.

CHARGES AND DEDUCTIONS

Charges will be deducted in connection with the Policy to compensate the Company
for providing the insurance benefits set forth in the Policy and any additional
benefits added by rider, administering the Policy, incurring distribution
expenses, and assuming certain risks in connection with the Policy. Each of the
charges identified as an administrative charge is intended to reimburse the
Company for actual administrative costs incurred, and is not intended to result
in a profit to the Company.

TAX EXPENSE CHARGE

Currently, a deduction of 2 1/4% of premiums for state and local premium taxes
and federal taxes imposed for deferred acquisition cost ("DAC") taxes is made
from each premium payment. The premium payment, less the tax expense charge,
equals the Net Premium. The total charge is a combined state and local premium
tax deduction of 1 1/4% of premiums and a DAC tax deduction of 1% of premiums.

While the premium tax of 2 1/2% is deducted from each premium payment, some
jurisdictions may not impose premium taxes. Premium taxes vary from state to
state, ranging from zero to 4.0%, and the 2 1/2% rate attributable to premiums
for state and local premium taxes approximates the average expenses to the
Company associated with the premium taxes. The 2 1/2% charge may be higher or
lower than the actual premium tax imposed by the applicable jurisdiction. The
Company, however, does not expect to make a profit from this charge.

The 1% rate attributable to premiums for DAC taxes approximates the Company's
expenses in paying federal taxes for deferred acquisition costs associated with
the Policy. The Company reserves the right to increase or decrease the DAC tax
charge to reflect changes in the Company's expenses for premium taxes and DAC
taxes.

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<PAGE>
MONTHLY DEDUCTION FROM THE POLICY VALUE

Prior to the Final Premium Payment Date, a Monthly Deduction from the Policy
Value will be made to cover a charge for the cost of insurance, a charge for any
optional insurance benefits added by rider, and a monthly administrative charge.
The cost of insurance charge and the monthly administrative charge is discussed
below. The Monthly Deduction on or following the effective date of a requested
increase in the Face Amount also will include a $40 administrative charge for
the increase. See THE POLICY -- "Change in the Face Amount."

Prior to the Final Premium Payment Date, the Monthly Deduction will be deducted
as of each Monthly Payment Date commencing with the Date of Issue of the Policy.
It will be allocated to one Sub-Account according to your instructions or, if no
allocation is specified, the Company will make a Pro-Rata Allocation. If the
Sub-Account you specify does not have sufficient funds to cover the Monthly
Deduction, the Company will deduct the charge for that month as if no
specification were made. If, however, on subsequent Monthly Payment Dates there
is sufficient Policy Value in the Sub-Account you specified, the Monthly
Deduction will be deducted from that Sub-Account. No Monthly Deductions will be
made on or after the Final Premium Payment Date.

COST OF INSURANCE

This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is determined on a monthly
basis, and is determined separately for the initial Face Amount and for each
subsequent increase in the Face Amount, and for riders. Because the cost of
insurance depends upon a number of variables, it can vary from month to month.

CALCULATION OF THE CHARGE

If you select Sum Insured Option 2, the monthly cost of insurance charge for the
initial Face Amount generally will equal the applicable cost of insurance rate
multiplied by the initial Face Amount. If you select Sum Insured Option 1,
however, the applicable cost of insurance rate will be multiplied by the initial
Face Amount less the Policy Value (minus charges for rider benefits) at the
beginning of the Policy month. Thus, the cost of insurance charge may be greater
for Policyowners who have selected Sum Insured Option 2 than for those who have
selected Sum Insured Option 1 (assuming the same Face Amount in each case and
assuming that the Guideline Minimum Sum Insured is not in effect). In other
words, since the Sum Insured under Option 1 remains constant while the Sum
Insured under Option 2 varies with the Policy Value, any Policy Value increases
will reduce the insurance charge under Option 1 but not under Option 2.

If you select Sum Insured Option 2, the monthly insurance charge for each
increase in the Face Amount (other than an increase caused by a change in Sum
Insured Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If you select Sum
Insured Option 1, the applicable cost of insurance rate will be multiplied by
the increase in the Face Amount reduced by any Policy Value (minus rider
charges) in excess of the initial Face Amount at the beginning of the Policy
month.

EFFECT OF THE GUIDELINE MINIMUM SUM INSURED

If the Guideline Minimum Sum Insured is in effect under either Option, a monthly
cost of insurance charge also will be calculated for that additional portion of
the Sum Insured which is required to comply with the Guideline rules. This
charge will be calculated by:

- multiplying the cost of insurance rate applicable to the initial Face
Amount times the Guideline Minimum Sum Insured (Policy Value times the
applicable percentage), MINUS

- the greater of the Face Amount or the Policy Value (if you selected Sum
Insured Option 1)

- the Face Amount PLUS the Policy Value (if you selected Sum Insured
Option 2).

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<PAGE>
When the Guideline Minimum Sum Insured is in effect, the cost of insurance
charge for the initial Face Amount and for any increases will be calculated as
set forth above. The monthly cost of insurance charge also will be adjusted for
any decreases in the Face Amount. See THE POLICY -- "Change in the Face Amount"
and "Decreases."

COST OF INSURANCE RATES

Cost of insurance rates are based on male, female or a blended unisex rate
table, Age and Premium Class of the Insured, the effective date of an increase
or date of rider, as applicable, the amount of premiums paid less Debt, any
partial withdrawals and withdrawal charges, and risk classification and the
Incentive Funding Discount, if applicable. For those Policies issued on a unisex
basis in certain states or in certain cases, sex-distinct rates do not apply.

The cost of insurance rates are determined at the beginning of each Policy year
for the initial Face Amount. The cost of insurance rates for an increase in the
Face Amount or rider are determined annually on the anniversary of the effective
date of each increase or rider. The cost of insurance rates generally increase
as the Insured's Age increases. The actual monthly cost of insurance rates will
be based on the Company's expectations as to future mortality experience. They
will not, however, be greater than the guaranteed cost of insurance rates set
forth in the Policy. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables Smoker or Non-Smoker (Mortality Table B for
unisex Policies) and the Insured's sex and Age. The Tables used for this purpose
set forth different mortality estimates for males and females and for smokers
and non-smokers. Any change in the cost of insurance rates will apply to all
persons of the same insuring Age, sex and Premium Class whose Policies have been
in force for the same length of time.

The Premium Class of an Insured will affect the cost of insurance rates. The
Company currently places Insureds into preferred Premium Classes, standard
Premium Classes and substandard Premium Classes. In an otherwise identical
Policy, an Insured in the preferred Premium Class will have a lower cost of
insurance than an Insured in a standard Premium Class who, in turn, will have a
lower cost of insurance than an Insured in a substandard Premium Class with a
higher mortality risk.

Premium Classes also are divided into two categories: smokers and non-smokers.
Non-smoking Insureds will incur lower cost of insurance rates than Insureds who
are classified as smokers but who are otherwise in the same Premium Class. Any
Insured with an Age at issuance under 18 will be classified initially as regular
or substandard. The Insured then will be classified as a smoker at Age 18 unless
the Insured provides satisfactory evidence that the Insured is a non-smoker. The
Company will provide notice to you of the opportunity for the Insured to be
classified as a non-smoker when the Insured reaches Age 18.

The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Premium Class than previously, a correspondingly higher cost of insurance rate
will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Premium Class previously applicable. On the other hand, if the Insured's
Premium Class improves on an increase, the lower cost of insurance rate
generally will apply to the entire Insurance Amount at Risk.

MONTHLY ADMINISTRATIVE CHARGES

Prior to the Final Premium Payment Date, a monthly administrative charge of $5
per month will be deducted from the Policy Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Policy, and will compensate the Company for first-year underwriting and other
start-up expenses incurred in connection with the Policy. These expenses include
the cost of processing applications, conducting medical examinations,
determining insurability and the Insured's Premium Class, and establishing
Policy records. The Company does not expect to derive a profit from these
charges.

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CHARGES AGAINST ASSETS OF THE SEPARATE ACCOUNT

The Company assesses each Sub-Account with a charge for mortality and expense
risks assumed by the Company, and a charge for administrative expenses of the
Separate Account.

MORTALITY AND EXPENSE RISK CHARGE

The Company currently makes a charge on an annual basis of 0.65% of the daily
net asset value in each Sub-Account. This charge is for the mortality risk and
expense risk which the Company assumes in relation to the variable portion of
the Policy. The total charges may be increased or decreased by the Board of
Directors of the Company once each year, subject to compliance with applicable
state and federal requirements, but it may not exceed 0.90% on an annual basis.

The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company therefore will pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policy
will exceed the amounts realized from the administrative charges provided in the
Policy. If the charge for mortality and expense risks is not sufficient to cover
actual mortality experience and expenses, the Company will absorb the losses. If
costs are less than the amounts provided, the difference will be a profit to the
Company. To the extent this charge results in a current profit to the Company,
such profit will be available for use by the Company for, among other things,
the payment of distribution, sales and other expenses. Since mortality and
expense risks involve future contingencies which are not subject to precise
determination in advance, it is not feasible to identify specifically the
portion of the charge which is applicable to each.

SEPARATE ACCOUNT ADMINISTRATIVE CHARGE

During the first ten Policy years, the Company assesses a charge on an annual
basis of 0.15% of the daily net asset value in each Sub-Account. The charge is
assessed to help defray administrative expenses actually incurred in the
administration of the Separate Account and the Sub-Accounts. The administrative
functions and expenses assumed by the Company in connection with the Separate
Account and the Sub-Accounts include, but are not limited to, clerical,
accounting, actuarial and legal services, rent, postage, telephone, office
equipment and supplies, expenses of preparing and printing registration
statements, expenses of preparing and typesetting prospectuses, and the cost of
printing prospectuses not allocable to sales expense, filing and other fees. No
Separate Account administrative charge is imposed after the tenth Policy year.
The charge may be increased or decreased by the Board of Directors of the
Company, subject to compliance with applicable state and federal requirements,
but it may not exceed 0.25% on an annual basis.

OTHER CHARGES AND EXPENSES

Because the Sub-Accounts purchase shares of the Underlying Funds, the value of
the Accumulation Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. The prospectuses and
statements of additional information of the Trust, Fidelity VIP, Fidelity VIP
II, T. Rowe Price and DGPF contain additional information concerning such fees
and expenses.

Currently, no charges are made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Policy Value in the Sub-Accounts.

SURRENDER CHARGE

The Policy provides for a contingent surrender charge. A separate surrender
charge is calculated upon the issuance of the Policy and for each increase in
the Face Amount. A surrender charge may be deducted if you request a full
surrender of the Policy or a decrease in the Face Amount.

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The surrender charge is comprised of a contingent deferred administrative charge
and a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Policy. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Policy, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.

The duration of the surrender charge is 15 years from the Date of Issue or from
the effective date of any increase in the Face Amount for issue Ages 0 through
50, grading down to 10 years for issue Ages 55 and above.

The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b) where:

(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and

(b) is a deferred sales charge of 49% of premiums received, up to a maximum
number of Guideline Annual Premiums subject to the deferred sales charge
that varies by issue Age from 1.660714 (for Ages 0 through 55) to 0.948980
(for Age 80 and above).

In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per $1,000
initial face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge continues in a level amount for
40 Policy months, and reduces by 0.5% or more per month (depending on issue Age)
thereafter, as described in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES. This reduction in the maximum surrender charge will reduce the deferred
sales charge and the deferred administrative charge proportionately.

MAXIMUM SURRENDER CHARGE DURING FIRST TWO POLICY YEARS

If you surrender the Policy during the first two Policy years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the initial Face
Amount, as described above, but the deferred sales charge will not exceed 29% of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium, but less than the maximum
number of Guideline Annual Premiums subject to the deferred sales charge. See
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.

SEPARATE SURRENDER CHARGE FOR EACH FACE AMOUNT INCREASE

A separate surrender charge will apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is
equal to the sum of (a) plus (b), where (a) is equal to $8.50 per thousand
dollars of increase, and (b) is a deferred sales charge of 49% of premiums
associated with the increase, up to a maximum number of Guideline Annual
Premiums (for the increase) subject to the deferred sales charge that varies by
Age (at the time of increase) from 1.660714 (for Ages 0 through 55) to 0.948980
(for Age 80 and above).

In accordance with limitations under state insurance regulations, the amount of
the surrender charge will not exceed a specified amount per $1,000 of increase,
as indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. As is
true for the initial Face Amount, (a) is a deferred administrative charge, and
(b) is a deferred sales charge. The maximum surrender charge for the increase
continues in a level amount for 40 Policy months, and reduces by 0.5% or more
per month (depending on Age) thereafter, as provided in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.

REDUCED CHARGE DURING FIRST TWO YEARS FOLLOWING INCREASE

During the first two Policy years following an increase in the Face Amount
before making premium payments associated with the increase in the Face Amount
which are at least equal to one Guideline Annual Premium,

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the deferred administrative charge will be $8.50 per thousand dollars of the
Face Amount increase, as described above, but the deferred sales charge imposed
will be less than the maximum described above. Upon such a Surrender, the
deferred sales charge will not exceed 29% of premiums associated with the
increase, up to one Guideline Annual Premium (for the increase), plus 9% of
premiums associated with the increase in excess of one Guideline Annual Premium,
but less than the maximum number of Guideline Annual Premiums (for the increase)
subject to the deferred sales charge. See APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The premiums associated with the increase are determined as
described below.

Additional premium payments may not be required to fund a requested increase in
the Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies to allocate a portion of the existing Policy
Value to the increase, and to allocate subsequent premium payments between the
initial Policy and the increase. For example, suppose the Guideline Annual
Premium is equal to $1,500 before an increase, and is equal to $2,000 as a
result of the increase. The Policy Value on the effective date of the increase
would be allocated 75% ($1,500/$2,000) to the initial Face Amount and 25% to the
increase. All future premiums also would be allocated 75% to the initial Face
Amount and 25% to the increase. Thus, existing Policy Value associated with the
increase will equal the portion of the Policy Value allocated to the increase on
the effective date of the increase before any deductions are made. Premiums
associated with the increase will equal the portion of the premium payments
actually made on or after the effective date of the increase which are allocated
to the increase.

See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.

POSSIBLE SURRENDER CHARGE ON A FACE AMOUNT DECREASE

A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Policy. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face
Amount), the surrender charge will be applied in the following order:

- the most recent increase;

- the next most recent increases successively, and

- the initial Face Amount. Where a decrease causes a partial reduction in an
increase or in the initial Face Amount, a proportionate share of the
surrender charge for that increase or for the initial Face Amount will be
deducted.

CHARGES ON PARTIAL WITHDRAWAL

Partial withdrawals of Surrender Value may be made after the first Policy year.
The minimum withdrawal is $500. Under Option 1, the Face Amount is reduced by
the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.

A transaction charge, which is the smaller of 2% of the amount withdrawn, or
$25, will be assessed on each partial withdrawal to reimburse the Company for
the cost of processing the withdrawal. The Company does not expect to make a
profit on this charge.

A partial withdrawal charge also may be deducted from the Policy Value. For each
partial withdrawal you may withdraw an amount equal to 10% of the Policy Value
on the date the written withdrawal request is received by

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<PAGE>
the Company less the total of any prior withdrawals in that Policy year which
were not subject to the Partial Withdrawal charge, without incurring a partial
withdrawal charge. Any partial withdrawal in excess of this amount ("excess
withdrawal") will be subject to the partial withdrawal charge. The partial
withdrawal charge is equal to 5% of the excess withdrawal up to the amount of
the surrender charge(s) on the date of withdrawal. This right is not cumulative
from Policy year to Policy year. For example, if only 8% of Policy Value were
withdrawn in Policy year two, the amount you could withdraw in subsequent Policy
years would not be increased by the amount you did not withdraw in the second
Policy year.

The Policy's outstanding surrender charge will be reduced by the amount of the
partial withdrawal charge deducted by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:

- first, the surrender charge for the most recent increase in the Face
Amount;

- second, the surrender charge for the next most recent increases
successively;

- last, the surrender charge for the initial Face Amount.

TRANSFER CHARGES

The first 12 transfers in a Policy year will be free of charge. Thereafter, a
transfer charge of $10 will be imposed for each transfer request to reimburse
the Company for the administrative costs incurred in processing the transfer
request. The Company reserves the right to increase the charge, but it never
will exceed $25. The Company also reserves the right to change the number of
free transfers allowed in a Policy Year. See THE POLICY -- "Transfer Privilege."

You may have automatic transfers of at least $100 a month made on a periodic
basis:

- from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust to one or more of the other Sub-Accounts; or

- to reallocate Policy Value among the Sub-Accounts.

The first automatic transfer counts as one transfer towards the 12 free
transfers allowed in each Policy year. Each subsequent automatic transfer is
without charge and does not reduce the remaining number of transfers which may
be made without charge.

If you utilize the Conversion Privilege, Loan Privilege or reallocate Policy
Value within 20 days of the Date of Issue of the Policy, any resulting transfer
of Policy Value from the Sub-Accounts to the General Account will be free of
charge and in addition to the 12 free transfers in a Policy year. See THE POLICY
- -- "Conversion Privileges" and POLICY LOANS.

CHARGE FOR INCREASE IN THE FACE AMOUNT

For each increase in the Face Amount you request, a transaction charge of $40
will be deducted from Policy Value to reimburse the Company for administrative
costs associated with the increase. This charge is guaranteed not to increase
and the Company does not expect to make a profit on this charge.

OTHER ADMINISTRATIVE CHARGES

Currently the Company makes no charge for the administrative costs incurred for
changing the Net Premium allocation instructions, for changing the allocation of
any Monthly Deductions among the various Sub-Accounts, or for a projection of
values. Any such charge imposed in the future is guaranteed not exceed $25.

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POLICY LOANS

You may borrow against the Policy Value. Policy loans may be obtained by request
to the Company on the sole security of the Policy. The total amount which may be
borrowed is the Loan Value.

In the first Policy year, the Loan Value is 75% of the Policy Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on
Policy loan to the end of the Policy year. The Loan Value in the second Policy
year and thereafter is 90% of an amount equal to the Policy Value reduced by
applicable surrender charges. There is no minimum limit on the amount of the
loan.

The loan amount normally will be paid within seven days after the Company
receives the loan request at the Principal Office, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments."

A Policy loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. The Policy Value in each Sub-Account equal to the Policy loan
allocated to such Sub-Account will be transferred to the General Account, and
the number of Accumulation Units equal to the Policy Value so transferred will
be cancelled. This will reduce the Policy Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.

The Policy loan rights of Policyowners who are participants under Section 403(b)
plans or who are participants in the Texas ORP are restricted; see FEDERAL TAX
CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS."

LOAN INTEREST

LOAN AMOUNT EARNS INTEREST IN GENERAL ACCOUNT

As long as the Policy is in force, the Policy Value in the General Account equal
to the loan amount will be credited with interest at an effective annual yield
of at least 6.00%.

PREFERRED LOAN OPTION

A preferred loan option is available under the Policy. The preferred loan option
will be available upon Written Request. It may be revoked by you at any time. If
this option has been selected, after the tenth Policy anniversary the Policy
Value in the General Account that is equal to the loan amount will be credited
with interest at an effective annual yield of at least 7.5%. The Company's
current position is to credit a rate of interest equal to the rate being charged
for the preferred loan. There is some uncertainty as to the tax treatment of
preferred loans. Consult a qualified tax adviser (and see FEDERAL TAX
CONSIDERATIONS). THE PREFERRED LOAN OPTION MAY NOT BE AVAILABLE IN ALL STATES.

LOAN INTEREST CHARGED

Outstanding Policy loans are charged interest. Interest accrues daily and is
payable in arrears at the annual rate of 8%. Interest is due and payable at the
end of each Policy year or on a pro-rata basis for such shorter period as the
loan may exist. Interest not paid when due will be added to the loan amount and
will bear interest at the same rate. If the new loan amount exceeds the Policy
Value in the General Account after the due and unpaid interest is added to the
loan amount, the Company will transfer the Policy Value equal to that excess
loan amount from the Policy Value in each Sub-Account to the General Account as
security for the excess loan amount. The Company will allocate the amount
transferred among the Sub-Accounts in the same proportion that the Policy Value
in each Sub-Account bears to the total Policy Value in all Sub-Accounts.

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REPAYMENT OF LOANS

Loans may be repaid at any time prior to the lapse of the Policy. Upon repayment
of the Debt, the portion of the Policy Value that is in the General Account
securing the loan repaid will be allocated to the various Accounts and increase
the Policy Value in such Accounts in accordance with your instructions. If you
do not make a repayment allocation, the Company will allocate the Policy Value
in accordance with your most recent premium allocation instructions; provided,
however, that loan repayments allocated to the Separate Account cannot exceed
the Policy Value previously transferred from the Separate Account to secure the
Debt.

If Debt exceeds the Policy Value less the surrender charge, the Policy will
terminate. A notice of such pending termination will be mailed to the last known
address of you and any assignee. If you do not make sufficient payment within 62
days after this notice is mailed, the Policy will terminate with no value. See
POLICY TERMINATION AND REINSTATEMENT.

EFFECT OF POLICY LOANS

Although Policy loans may be repaid at any time prior to the lapse of the
Policy, Policy loans will permanently affect the Policy Value and Surrender
Value, and may permanently affect the Death Proceeds. The effect could be
favorable or unfavorable, depending upon whether the investment performance of
the Sub-Accounts is less than or greater than the interest credited to the
Policy Value in the General Account attributable to the loan. Moreover,
outstanding Policy loans and the accrued interest will be deducted from the
proceeds payable upon the death of the Insured or surrender.

POLICIES ISSUED IN CONNECTION WITH TSA PLANS

Policy loans are permitted in accordance with the terms of the Policy. However,
if a Policy loan does not comply with the requirements of Code Section 72(p),
the Policyowner's TSA Plan may become disqualified and Policy values may be
includible in current income. Policy loans must meet the following additional
requirements:

- Loans must be repaid within five years, except when the loan is used to
acquire any dwelling unit which within a reasonable time is to be used as
the Policyowner's principal residence.

- All Policy loans must be amortized on a level basis with loan repayments
being made not less frequently than quarterly.

- The sum of all outstanding loan balances for all loans from all the
Policyowner's TSA Plans may not exceed the lesser of:

- $50,000 reduced by the excess (if any) of

- the highest outstanding balance of loans from all of the
Policyowner's TSA Plans during the one-year period preceding the
date of the loan, minus

- the outstanding balance of loans from the Policyowner's TSA plans
on the date on which such loan was made

- 50% of the Policyowner's non-forfeitable accrued benefit in all of
his/her TSA plans, but not less than $10,000.

See FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA
PLANS."

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POLICY TERMINATION AND REINSTATEMENT

TERMINATION

The failure to make premium payments will not cause the Policy to lapse unless:

(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued; or

(b) the Debt exceeds the Policy Value less surrender charges.

If one of these situations occurs, the Policy will be in default. You then will
have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.

Failure to make a sufficient payment within the grace period will result in
termination of the Policy. If the Insured dies during the grace period, the
Death Proceeds still will be payable, but any Monthly Deductions due and unpaid
through the Policy month in which the Insured dies, and any other overdue
charge, will be deducted from the Death Proceeds.

LIMITED 48-MONTH GUARANTEE

Except for the situation described in (b) above, the Policy is guaranteed not to
lapse during the first 48 months after the Date of Issue or the effective date
of an increase in the Face Amount if you make a minimum amount of premium
payments. The minimum amount paid, minus the Debt, partial withdrawals and
partial withdrawal charges, must be at least equal to the sum of the Minimum
Monthly Factors for the number of months the Policy, increase, or a Policy
Change which causes a change in the Minimum Monthly Factor has been in force. A
Policy Change which may cause a change in the amount of the Minimum Monthly
Factor is a change in the Face Amount or the addition or deletion of a rider.

Except for the first 48 months after the Date of Issue or the effective date of
an increase, payments equal to the Minimum Monthly Factor do not guarantee that
the Policy will remain in force. However, see THE POLICY-- "Guaranteed Death
Benefit Rider."

REINSTATEMENT

If the Policy has not been surrendered and the Insured is alive, the terminated
Policy may be reinstated any time within three years after the date of default
and before the Final Premium Payment Date. The reinstatement will be effective
on the Monthly Payment Date following the date you submit the following to the
Company:

- a written application for reinstatement,

- Evidence of Insurability showing that the Insured is insurable according
to the Company's underwriting rules, and

- a premium that, after the deduction of the tax expense charge, is large
enough to cover the minimum amount payable, as described below.

MINIMUM AMOUNT PAYABLE

If reinstatement is requested when fewer than 48 Monthly Deductions have been
made since the Date of Issue or the effective date of an increase in the Face
Amount, you must pay the lesser of the amount shown in (1) or (2). Under (1),
the minimum amount payable is the Minimum Monthly Factor for the three-month
period beginning on the date of reinstatement. Under (2), the minimum amount
payable is the sum of:

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<PAGE>
- the amount by which the surrender charge as of the date of reinstatement
exceeds the Policy Value on the date of default, PLUS

- Monthly Deductions for the three-month period beginning on the date of
reinstatement.

If reinstatement is requested after 48 Monthly Deductions have been made since
the Date of Issue or any
increase in the Face Amount, you must pay the amount shown in (2) above. The
Company reserves the right to increase the Minimum Monthly Factor upon
reinstatement.

SURRENDER CHARGE

The surrender charge on the date of reinstatement is the surrender charge which
would have been in effect had the Policy remained in force from the Date of
Issue. The Policy Value less Debt on the date of default will be restored to the
Policy to the extent it does not exceed the surrender charge on the date of
reinstatement. Any Policy Value less Debt as of the date of default which
exceeds the surrender charge on the date of reinstatement will not be restored.

POLICY VALUE ON REINSTATEMENT

The Policy Value on the date of reinstatement is:

- the Net Premium paid to reinstate the Policy increased by interest from
the date the payment was received at the Principal Office, PLUS

- an amount equal to the Policy Value less Debt on the date of default to
the extent it does not exceed the surrender charge on the date of
reinstatement, MINUS

- the Monthly Deduction due on the date of reinstatement.

You may not reinstate any Debt outstanding on the date of default or
foreclosure.

OTHER POLICY PROVISIONS

The following Policy provisions may vary in certain states in order to comply
with requirements of the insurance laws, regulations and insurance regulatory
agencies in those states.

POLICYOWNER

The Policyowner is the Insured unless another Policyowner has been named in the
application for the Policy. The Policyowner generally is entitled to exercise
all rights under the Policy while the Insured is alive, subject to the consent
of any irrevocable Beneficiary (the consent of a revocable Beneficiary is not
required). The consent of the Insured is required whenever the Face Amount of
insurance is increased.

BENEFICIARY

The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Policy, the
Beneficiary has no rights in the Policy before the death of the Insured. While
the Insured is alive, you may change any Beneficiary unless you have declared a
Beneficiary to be irrevocable. If no Beneficiary is alive when the Insured dies,
the Policyowner (or the Policyowner's estate) will be the Beneficiary. If more
than one Beneficiary is alive when the Insured dies, they will be paid in equal
shares, unless you have chosen otherwise. Where there is more than one
Beneficiary, the interest of a Beneficiary who dies before the Insured will pass
to surviving Beneficiaries proportionately, unless otherwise requested.

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<PAGE>
INCONTESTABILITY

The Company will not contest the validity of the Policy after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any rider or increase in the Face
Amount after such rider or increase has been in force during the Insured's
lifetime for two years from its effective date.

SUICIDE

The Death Proceeds will not be paid if the Insured commits suicide within two
years from the Date of Issue. Instead, the Company will pay the Beneficiary an
amount equal to all premiums paid for the Policy, without interest, and less any
outstanding Debt and any partial withdrawals. If the Insured commits suicide,
generally within two years from the effective date of any increase in the Sum
Insured, the Company's liability with respect to such increase will be limited
to a refund of the cost thereof. The Beneficiary will receive the administrative
charges and insurance charges paid for such increase.

AGE AND SEX

If the Insured's Age or sex as stated in the application for the Policy is not
correct, benefits under the Policy will be adjusted to reflect the correct Age
and sex, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age and sex. In no event will the Sum Insured be
reduced to less than the Guideline Minimum Sum Insured. In the case of a Policy
issued on a unisex basis, this provision as it relates to misstatement of sex
does not apply.

ASSIGNMENT

The Policyowner may assign the Policy as collateral or make an absolute
assignment of the Policy. All rights under the Policy will be transferred to the
extent of the assignee's interest. The consent of the assignee may be required
in order to make changes in premium allocations, to make transfers, or to
exercise other rights under the Policy. The Company is not bound by an
assignment or release thereof, unless it is in writing and is recorded at the
Principal Office. When recorded, the assignment will take effect as of the date
the Written Request was signed. Any rights created by the assignment will be
subject to any payments made or actions taken by the Company before the
assignment is recorded. The Company is not responsible for determining the
validity of any assignment or release.

POSTPONEMENT OF PAYMENTS

Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Policy loan and
transfers, may be postponed whenever: (1) the New York Stock Exchange is closed
other than customary weekend and holiday closings, or trading on the New York
Stock Exchange is restricted as determined by the SEC, or (2) an emergency
exists, as determined by the SEC, as a result of which disposal of securities is
not reasonably practicable or it is not reasonably practicable to determine the
value of the Separate Account's net assets. Payments under the Policy of any
amounts derived from the premiums paid by check may be delayed until such time
as the check has cleared your bank.

The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal or death of the Insured, as
well as payments of Policy loans and transfers from the General Account, for a
period not to exceed six months.

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DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY

<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------- --------------------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996) and Vice President (since 1984) of
Director and Vice President First Allmerica

Abigail M. Armstrong Secretary (since 1996) and Counsel (since 1991) of First
Secretary and Counsel Allmerica

Robert E. Bruce Director and Chief Information Officer (since 1997),
Director, Vice President and Vice President (since 1995) of First Allmerica; and
Chief Information Officer Corporate Manager (1979 to 1995) of Digital Equipment
Corporation

John P. Kavanaugh Director and Chief Investment Officer (since 1996) and
Director, Vice President and Vice President (since 1991) of First Allmerica
Chief Investment Officer

John F. Kelly Director (since 1996), General Counsel (since 1981),
Director, Senior Vice President, Senior Vice President (since 1986), and Assistant
General Counsel and Assistant Secretary (since 1986) of First Allmerica
Secretary

J. Barry May Director (since 1996) of First Allmerica; Director and
Director President (since 1996), Vice President (1993 to 1996)
and General Manager (1989 to 1993) of The Hanover
Insurance Company

James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994), and CEO (since
1996) of Citizens Insurance Company of America; Vice
President (1982 to 1994), and Chief Investment Officer
(1986 to 1994) of First Allmerica

John F. O'Brien Director, Chairman of the Board, President and Chief
Director, Chairman of the Board, Executive Officer (since 1989) of First Allmerica
President and Chief Executive
Officer

Edward J. Parry, III Director and Chief Financial Officer (since 1996), Vice
Director, Vice President, Chief President and Treasurer (since 1993), and Assistant Vice
Financial Officer and Treasurer President (1992 to 1993) of First Allmerica

Richard M. Reilly Director (since 1996), Vice President (since 1990) of
Director and Vice President First Allmerica; Director (since 1990) of Allmerica
Investments, Inc.; and Director and President (since
1990) of Allmerica Financial Investment Management
Services, Inc.

Eric A. Simonsen Director (since 1996), Vice President (since 1990), and
Director and Vice President Chief Financial Officer (1990 to 1996) of First
Allmerica

Phillip E. Soule Director (since 1996) and Vice President (since 1987) of
Director and Vice President First Allmerica
</TABLE>

58
<PAGE>
DISTRIBUTION

Allmerica Investments, Inc., an indirect wholly owned subsidiary of the Company,
acts as the principal underwriter of the Policies pursuant to a Sales and
Administrative Services Agreement with the Company and the Separate Account.
Allmerica Investments, Inc. is registered with the SEC as a broker-dealer, and
is a member of the National Association of Securities Dealers ("NASD"). The
Policies are sold by agents of the Company who are registered representatives of
Allmerica Investments, Inc., or of certain independent broker-dealers which are
members of the NASD.

The Company pays registered representatives who sell the Policy commissions
based on a commission schedule. After issue of the Policy or an increase in Face
Amount, commissions generally will equal 50 percent of the first-year premiums
up to a basic premium amount established by the Company. Thereafter, commissions
will generally equal 4% of any additional premiums. Certain registered
representatives, including registered representatives enrolled in the Company's
training program for new agents, may receive additional first-year and renewal
commissions and training reimbursements. General Agents of the Company and
certain registered representatives may also be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 10%of first-year or
14% of renewal premiums.

The Company intends to recoup the commission and other sales expense through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, and the investment earnings on amounts allocated
to accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by the Company. There is no additional charge to Policyowners or
the Separate Account. Any surrender charge assessed on the Policy will be
retained by the Company except for amounts it may pay to Allmerica Investments,
Inc. for services it performs and expenses it may incur as principal underwriter
and general distributor.

SERVICES

The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Policyowners. Currently, the Company receives service fees with respect to
the Fidelity VIP Overseas Portfolio, Fidelity VIP Equity-Income Portfolio,
Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio, and Fidelity
VIP II Asset Manager Portfolio, at an annual rate of 0.10% of the aggregate net
asset value, respectively, of the shares of such Underlying Funds held by the
Separate Account. With respect to the T. Rowe Price International Stock
Portfolio, the Company receives service fees at an annual rate of 0.15% per
annum of the aggregate net asset value of shares held by the Separate Account.
The Company may in the future render services for which it will receive
compensation from the investment advisers or other service providers of other
Underlying Funds.

REPORTS

The Company will maintain the records relating to the Separate Account.
Statements of significant transactions such as premium payments, changes in
specified Face Amount, changes in Sum Insured Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement will be sent to you promptly. An annual statement also will be
sent to you within 30 days after a Policy anniversary. The annual statement will
summarize all of the above transactions and deductions of charges during the
Policy year. It also will set forth the status of the Death Proceeds, Policy
Value, Surrender Value, amounts in the Sub-Accounts and General Account, and any
Policy loans. In addition, you will be sent periodic reports containing
financial statements and other information for the Separate Account and the
Underlying Funds as required by the 1940 Act.

59
<PAGE>
LEGAL PROCEEDINGS

There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.

FURTHER INFORMATION

A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Policy and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.

INDEPENDENT ACCOUNTANTS

The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997, and the financial
statements of the VEL II Account of the Company as of December 31, 1997 and for
the periods indicated, included in this Prospectus constituting part of this
Registration Statement, have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.

The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policies.

FEDERAL TAX CONSIDERATIONS

The effect of federal income taxes on the value of the Policy, on loans,
withdrawals, or surrenders, on death benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they currently are interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely and,
possibly retroactively, affect the taxation of the Policy. No representation is
made regarding the likelihood of continuation of current federal income tax laws
or of current interpretations by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws.

It should be recognized that the following summary of federal income tax aspects
of amounts received under the Policy is not exhaustive, does not purport to
cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Policyowner is a corporation or the trustee of an employee benefit plan.
A qualified tax adviser always should be consulted with regard to the
application of law to individual circumstances.

THE COMPANY AND THE SEPARATE ACCOUNT

The Company is taxed as a life insurance company under Subchapter L of the Code,
and files a consolidated tax return with its parent and affiliates. The Company
does not expect to incur any income tax upon the earnings or realized capital
gains attributable to the Separate Account. Based on this, no charge is made for
federal income taxes which may be attributable to the Separate Account.

Periodically, the Company will review the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company ultimately is determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be

60
<PAGE>
designed to cover the federal income taxes attributable to the investment
results of the Separate Account. Under current laws the Company also may incur
state and local taxes (in addition to premium taxes) in several states. At
present these taxes are not significant. If there is a material change in
applicable state or local tax laws, charges may be made for such taxes paid, or
reserves for such taxes, attributable to the Separate Account.

TAXATION OF THE POLICY

The Company believes that the Policy described in this Prospectus will be
considered a life insurance contract under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies, and places
limitations on the relationship of the Policy Value to the Insurance Amount at
Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in the Policy Value is not
taxable until received by the Policyowner or the Policyowner's designee. But see
MODIFIED ENDOWMENT CONTRACTS.

The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury Department regulations in order to be
treated as a life insurance policy for tax purposes. Although the Company does
not have control over the investments of the Underlying Funds, the Company
believes that the Underlying Funds currently meet the Treasury's diversification
requirements, and the Company will monitor continued compliance with these
requirements. In connection with the issuance of previous regulations relating
to diversification requirements, the Treasury Department announced that such
regulations do not provide guidance concerning the extent to which Policyowners
may direct their investments to particular divisions of a separate account.
Regulations in this regard may be issued in the future. It is possible that if
and when regulations are issued, the Policy may need to be modified to comply
with such regulations. For these reasons, the Policy or the Company's
administrative rules may be modified as necessary to prevent a Policyowner from
being considered the owner of the assets of the Separate Account.

Depending upon the circumstances, a surrender, partial withdrawal, change in the
Sum Insured Option, change in the Face Amount, lapse with Policy loan
outstanding or assignment of the Policy may have tax consequences. In
particular, under specified conditions, a distribution under the Policy during
the first 15 years from Date of Issue that reduces future benefits under the
Policy will be taxed to the Policyowner as ordinary income to the extent of any
investment earnings in the Policy. Federal, state and local income, estate,
inheritance, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Insured, Policyowner or
Beneficiary.

POLICY LOANS

The Company believes that non-preferred loans received under the Policy will be
treated as an indebtedness of the Policyowner for federal income tax purposes.
Under current law, these loans will not constitute income for the Policyowner
while the Policy is in force (but see "Modified Endowment Policies"). There is a
risk, however, that a preferred loan may be characterized by the IRS as a
withdrawal, and taxed accordingly. At the present time, the IRS has not issued
any guidance on whether loans with the attributes of a preferred loan should be
treated differently than a non-preferred loan. This lack of specific guidance
makes the tax treatment of preferred loans uncertain. In the event pertinent IRS
guidelines are issued in the future, you may revoke your request for a preferred
loan.

Section 264 of the Code restricts the deduction of interest on Policy loans.
Consumer interest paid on Policy loans under an individually owned Policy is not
tax deductible. Generally, no tax deduction for interest is allowed on Policy
loans if the Insured is an officer or employee of, or is financially interested
in, any business carried on by the taxpayer. There is an exception to this rule
which permits a deduction for interest on loans up to $50,000 related to any
policies covering the greater of (1) five individuals, or (2) the lesser of (a)
5% of the total number of officers and employees of the corporation, or (b) 20
individuals.

61
<PAGE>
POLICIES ISSUED IN CONNECTION WITH TSA PLANS

The Policies may be issued in connection with tax-sheltered annuity plans ("TSA
Plans") of certain public school systems and organizations that are tax exempt
under Section 501(c)(3) of the Code.

Under the provisions of Section 403(b) of the Code, payments made for annuity
policies purchased for employees under TSA Plans are excludable from the gross
income of such employees, to the extent that the aggregate purchase payments in
any year do not exceed the maximum contribution permitted under the Code. The
Company has received a Private Letter Ruling with respect to the status of the
Policies as providing "incidental life insurance" when issued in connection with
TSA Plans. In the Private Letter Ruling, the IRS has taken the position that the
purchase of a life insurance policy by the employer as part of a TSA Plan will
not violate the "incidental benefit" rules of Section 403(b) and the regulations
thereunder. The Private Letter Ruling also stated that the use of current or
accumulated contributions to purchase a life insurance policy will not result in
current taxation of the premium payments for the life insurance policy, except
for the current cost of the life insurance protection.

A policy qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings) may not begin before the employee attains age
59 1/2, separates from service, dies, or becomes disabled. In the case of
hardship, a policyowner may withdraw amounts contributed by salary reduction,
but not the earnings on such amounts. Even though a distribution may be
permitted under these rules (e.g., for hardship or after separation from
service), it may nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax.

Policy loans are generally permitted in accordance with the terms of the policy.
However, if a policy loan does not comply with the requirements of Code Section
72(p), the policyowner's TSA Plan may become disqualified and policy values may
be includible in current income.

MODIFIED ENDOWMENT CONTRACTS

The Technical and Miscellaneous Revenue Act of 1988 ("the 1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance policy, including the Policy
offered by this Prospectus, that fails to satisfy a "seven-pay" test is
considered a modified endowment contract. The Policy would fail to satisfy the
seven-pay test if the cumulative premiums paid under the Policy at any time
during the first seven Policy years (or within seven years of a material change
in the Policy) exceed the sum of the net level premiums that would have been
paid, had the Policy provided for paid-up future benefits after the payment of
seven level premiums.

If the Policy is considered a modified endowment contract, all distributions
under the Policy will be taxed on an "income-first" basis. Most distributions
received by the Policyowner directly or indirectly (including loans,
withdrawals, surrenders, or the assignment or pledge of any portion of the
Policy Value) will be includible in gross income to the extent that the
Surrender Value of the Policy exceeds the Policyowner's investment in the
Policy. Any additional amounts will be treated as a return of capital to the
extent of the Policyowner's basis in the Policy. With certain exceptions, an
additional 10% tax will be imposed on the portion of any distribution that is
includible in income. All modified endowment contracts issued by the same
insurance company to the same policyowner during any 12-month period will be
treated as a single modified endowment contract in determining taxable
distributions.

Currently, each Policy is reviewed when premiums are received to determine if it
satisfies the seven-pay test. If the Policy does not satisfy the seven-pay test,
the Company will notify the Policyowner of the option of requesting a refund of
the excess premium. The refund process must be completed within 60 days after
the Policy anniversary, or the Policy will be classified permanently as a
modified endowment contract.

62
<PAGE>
MORE INFORMATION ABOUT THE GENERAL ACCOUNT

As discussed earlier, you may allocate Net Premiums and transfer Policy Value to
the General Account. Because of exemption and exclusionary provisions in the
securities law, any amount in the General Account generally is not subject to
regulation under the provisions of the 1933 Act or the 1940 Act. Accordingly,
the disclosures in this section have not been reviewed by the SEC. Disclosures
regarding the fixed portion of the Policy and the General Account may, however,
be subject to certain generally applicable provisions of the federal securities
laws concerning the accuracy and completeness of statements made in
prospectuses.

GENERAL DESCRIPTION

The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.

A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.

GENERAL ACCOUNT VALUES

The Company bears the full investment risk for amounts allocated to the General
Account, and guarantees that interest credited to each Policyowner's Policy
Value in the General Account will not be less than an annual rate of 4%
("Guaranteed Minimum Rate").

The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of 4% per year, and might not do so. The excess interest rate, if any, in effect
on the date a premium is received at the Principal Office, however, is
guaranteed on that premium for one year, unless the Policy Value associated with
the premium becomes security for a Policy loan. AFTER SUCH INITIAL ONE-YEAR
GUARANTEE OF INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON THE POLICY'S
ACCUMULATED VALUE IN THE GENERAL ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM
RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. THE
POLICYOWNER ASSUMES THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE
GUARANTEED MINIMUM RATE.

Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Policy Value which is
equal to the Debt. Such Policy Value, however, will be credited interest at an
effective annual yield of at least 6%.

The Company guarantees that, on each Monthly Payment Date, the Policy Value in
the General Account will be the amount of the Net Premiums allocated or the
Policy Value transferred to the General Account, plus interest at an annual rate
of 4%, plus any excess interest which the Company credits, less the sum of all
Policy charges allocable to the General Account and any amounts deducted from
the General Account in connection with loans, partial withdrawals, surrenders or
transfers.

63
<PAGE>
THE POLICY

This Prospectus describes a flexible premium variable life insurance policy, and
is intended generally to serve as a disclosure document only for the aspects of
the Policy relating to the Separate Account. For complete details regarding the
General Account, see the Policy itself.

SURRENDERS AND PARTIAL WITHDRAWALS

If the Policy is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed. In the event
of a decrease in the Face Amount, the surrender charge deducted is a fraction of
the charge that would apply to a full surrender of the Policy. Partial
withdrawals are made on a last-in/first-out basis from the Policy Value
allocated to the General Account.

TRANSFERS

The first 12 transfers in a Policy year are free of charge. Thereafter, a $10
transfer charge will be deducted for each transfer in that Policy year. The
transfer privilege is subject to the consent of the Company and to the Company's
then current rules.

Policy loans also may be made from the Policy Value in the General Account.

DELAY OF PAYMENTS

Transfers, surrenders, partial withdrawals, Death Proceeds and Policy loans
payable from the General Account may be delayed up to six months. If payment is
delayed for 30 days (10 days in New York) or more, however, the Company will pay
interest at least equal to an effective annual yield of 3 1/2% for the period of
deferment. Amounts from the General Account used to pay premiums on policies
with the Company will not be delayed.

FINANCIAL STATEMENTS

Financial Statements for the Company and the Separate Account are included in
this Prospectus beginning immediately after this section. The financial
statements of the Company should be considered only as bearing on the ability of
the Company to meet its obligations under the Policy. They should not be
considered as bearing on the investment performance of the assets held in the
Separate Account.

64
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY

CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of First
Allmerica Financial Life Insurance Company and its subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP

PRICE WATERHOUSE LLP

Boston, Massachusetts

February 3, 1998
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,311.0 $2,236.3 $2,222.8
Universal life and investment product
policy fees............................... 237.3 197.2 172.4
Net investment income...................... 641.8 670.8 710.5
Net realized investment gains.............. 76.5 66.8 19.1
Realized gain from sale of mutual fund
processing business....................... -- -- 20.7
Other income............................... 117.6 108.4 109.3
--------- --------- ---------
Total revenues......................... 3,384.2 3,279.5 3,254.8
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 2,004.6 1,957.0 2,010.3
Policy acquisition expenses................ 425.1 470.1 470.9
Loss from cession of disability income
business.................................. 53.9 -- --
Other operating expenses................... 523.7 503.2 468.7
--------- --------- ---------
Total benefits, losses and expenses.... 3,007.3 2,930.3 2,949.9
--------- --------- ---------
Income before federal income taxes......... 376.9 349.2 304.9
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 83.3 96.8 119.7
Deferred................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total federal income tax expense....... 97.5 81.1 82.7
--------- --------- ---------
Income before minority interest................ 279.4 268.1 222.2
Minority interest.............................. (79.4) (74.6) (73.1)
--------- --------- ---------
Income before extraordinary item............... 200.0 193.5 149.1
Extraordinary item -- demutualization
expenses...................................... -- -- (12.1)
--------- --------- ---------
Net income..................................... $ 200.0 $ 193.5 $ 137.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$6,992.8 and $7,279.1)............................. $ 7,253.5 $ 7,461.5
Equity securities at fair value (cost of $341.1 and
$327.9)............................................ 479.0 473.1
Mortgage loans...................................... 567.5 650.1
Real estate......................................... 50.3 120.7
Policy loans........................................ 141.9 132.4
Other long term investments......................... 148.3 128.8
---------- ----------
Total investments............................... 8,640.5 8,966.6
---------- ----------
Cash and cash equivalents............................. 213.9 175.9
Accrued investment income............................. 141.8 148.6
Deferred policy acquisition costs..................... 965.5 822.7
---------- ----------
Reinsurance receivables:
Future policy benefits.............................. 307.1 102.8
Outstanding claims, losses and loss adjustment
expenses........................................... 626.7 663.8
Unearned premiums................................... 32.9 46.2
Other............................................... 73.5 62.8
---------- ----------
Total reinsurance receivables................... 1,040.2 875.6
---------- ----------
Deferred federal income taxes......................... -- 66.9
Premiums, accounts and notes receivable............... 554.4 533.0
Other assets.......................................... 373.0 304.4
Closed block assets................................... 806.7 810.8
Separate account assets............................... 9,755.4 6,233.0
---------- ----------
Total assets.................................... $22,491.4 $18,937.5
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,598.5 $ 2,613.7
Outstanding claims, losses and loss adjustment
expenses........................................... 2,825.0 2,944.1
Unearned premiums................................... 846.8 822.5
Contractholder deposit funds and other policy
liabilities........................................ 1,852.7 2,060.4
---------- ----------
Total policy liabilities and accruals........... 8,123.0 8,440.7
---------- ----------
Expenses and taxes payable............................ 662.6 617.5
Reinsurance premiums payable.......................... 37.7 31.4
Short term debt....................................... 33.0 38.4
Deferred federal income taxes......................... 12.9 --
Long term debt........................................ 2.6 2.7
Closed block liabilities.............................. 885.6 899.4
Separate account liabilities.......................... 9,749.7 6,227.2
---------- ----------
Total liabilities............................... 19,507.1 16,257.3
---------- ----------
Minority interest..................................... 748.9 784.0
Commitments and contingencies (Notes 13 and 18)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,000 shares issued and outstanding... 5.0 5.0
Additional paid in capital............................ 453.7 392.4
Unrealized appreciation on investments, net........... 209.3 131.4
Retained earnings..................................... 1,567.4 1,367.4
---------- ----------
Total shareholder's equity...................... 2,235.4 1,896.2
---------- ----------
Total liabilities and shareholder's equity...... $22,491.4 $18,937.5
---------- ----------
---------- ----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 5.0 $ 5.0 $ --
Demutualization transaction................ -- -- 5.0
--------- --------- ---------
Balance at end of period................... 5.0 5.0 5.0
--------- --------- ---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of period............. 392.4 392.4 --
Contributed from parent.................... 61.3 -- 392.4
--------- --------- ---------
Balance at end of period................... 453.7 392.4 392.4
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 1,367.4 1,173.9 1,071.4
Net income prior to demutualization........ -- -- 93.2
--------- --------- ---------
1,367.4 1,173.9 1,164.6
Demutualization transaction................ -- -- (34.5)
Net income subsequent to demutualization... 200.0 193.5 43.8
--------- --------- ---------
Balance at end of period................... 1,567.4 1,367.4 1,173.9
--------- --------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 131.4 153.0 (79.0)
Effect of transfer of securities from
held-to-maturity to available-for-sale:
Net appreciation on available-for-sale
debt securities........................ -- -- 22.4
Provision for deferred federal income taxes
and minority interest..................... -- -- (9.6)
--------- --------- ---------
-- -- 12.8
--------- --------- ---------
Net appreciation (depreciation) on
available for sale securities............. 170.9 (35.1) 466.0
(Benefit) provision for deferred federal
income taxes.............................. (59.8) 11.8 (163.1)
Minority interest.......................... (33.2) 1.7 (83.7)
--------- --------- ---------
209.3 (21.6) 219.2
--------- --------- ---------
Balance at end of period................... 209.3 131.4 153.0
--------- --------- ---------
Total shareholder's equity............. $2,235.4 $1,896.2 $1,724.3
--------- --------- ---------
--------- --------- ---------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.0 $ 193.5 $ 137.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 79.4 74.6 73.1
Net realized gains.................. (77.8) (66.8) (39.8)
Net amortization and depreciation... 31.6 44.7 57.7
Deferred federal income taxes....... 14.2 (15.7) (37.0)
Change in deferred acquisition
costs............................... (189.7) (73.9) (38.4)
Change in premiums and notes
receivable, net of reinsurance...... (15.1) (16.8) (42.0)
Change in accrued investment
income.............................. 7.1 16.7 7.0
Change in policy liabilities and
accruals, net....................... (134.9) (184.3) 116.2
Change in reinsurance receivable.... 27.2 123.8 (75.6)
Change in expenses and taxes
payable............................. 49.4 26.0 7.5
Separate account activity, net...... -- 5.2 (0.1)
Loss from cession of disability
income business..................... 53.9 -- --
Payment related to cession of
disability income business.......... (207.0) -- --
Other, net.......................... 20.4 38.5 (33.8)
---------- ---------- ----------
Net cash (used in) provided by
operating activities......... (141.3) 165.5 131.8
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 2,947.9 3,985.8 2,738.4
Proceeds from disposals of
held-to-maturity fixed maturities...... -- -- 271.3
Proceeds from disposals of equity
securities............................. 162.7 228.7 120.0
Proceeds from disposals of other
investments............................ 116.3 99.3 40.5
Proceeds from mortgages matured or
collected.............................. 204.7 176.9 230.3
Purchase of available-for-sale fixed
maturities............................. (2,596.0) (3,771.1) (3,273.3)
Purchase of equity securities........... (67.0) (90.9) (254.0)
Purchase of other investments........... (175.0) (168.0) (24.8)
Proceeds from sale of mutual fund
processing business.................... -- -- 32.9
Capital expenditures.................... (15.3) (12.8) (14.1)
Other investing activities, net......... 1.3 4.3 4.7
---------- ---------- ----------
Net cash provided by (used in)
investing activities................ 579.6 452.2 (128.1)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 457.6 268.7 445.8
Withdrawals from contractholder deposit
funds.................................. (647.1) (905.0) (1,069.9)
Change in short term debt............... (5.4) 10.4 (4.8)
Change in long term debt................ (0.1) (0.1) 0.2
Dividends paid to minority
shareholders........................... (9.4) (3.9) (4.1)
Additional paid in capital.............. 0.1 -- 392.4
Payments to policyholders' membership
interests.............................. -- -- (27.9)
Subsidiary treasury stock purchased, at
cost................................... (195.0) (42.0) (20.9)
---------- ---------- ----------
Net cash used in financing
activities................... (399.3) (671.9) (289.2)
---------- ---------- ----------
Net change in cash and cash equivalents..... 39.0 (54.2) (285.5)
Net change in cash held in the Closed
Block...................................... (1.0) (6.5) (17.6)
Cash and cash equivalents, beginning of
period..................................... 175.9 236.6 539.7
---------- ---------- ----------
Cash and cash equivalents, end of period.... $ 213.9 $ 175.9 $ 236.6
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.6 $ 18.6 $ 4.1
Income taxes paid....................... $ 66.3 $ 72.0 $ 90.6
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

First Allmerica Financial Life Insurance Company ("FAFLIC", or the "Company")
was organized as a mutual life insurance company until October 16, 1995. FAFLIC
converted to a stock life insurance company pursuant to a plan of reorganization
effective October 16, 1995 and became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC"). The consolidated financial statements have been
prepared as if FAFLIC were organized as a stock life insurance company for all
periods presented. Thus, generally accepted accounting principles for stock life
insurance companies have been applied retroactively for all periods presented.

The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), its wholly
owned life insurance subsidiary, non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), and Allmerica Property and
Casualty Companies, Inc. (a 65.78%-owned non-insurance holding company). The
Closed Block assets and liabilities at December 31, 1997 and 1996, and its
results of operations subsequent to demutualization are presented in the
consolidated financial statements as single line items. Unless specifically
stated, all disclosures contained herein supporting the consolidated financial
statements at December 31, 1997 and 1996, and the years then ended exclude the
Closed Block related amounts. All significant intercompany accounts and
transactions have been eliminated.

Minority interest relates to the Company's investment in Allmerica P&C (APY) and
its only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's 82.5%-owned subsidiary is Citizens Corporation, the holding company
for Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.

APY and a wholly-owned subsidiary of AFC merged on July 16, 1997. Through the
merger, AFC acquired all of the outstanding common stock of Allmerica P&C that
it did not already own in exchange for cash and stock. The merger has been
accounted for as a purchase. A total of $90.6 million, representing the excess
of the purchase price over the fair values of the net assets acquired, net of
deferred taxes, has been allocated to goodwill and is being amortized over a
40-year period. Additional information pertaining to the merger agreement is
included in Note 2, significant transactions.

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 amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

B. CLOSED BLOCK

As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating policies
included therein, consisting of certain individual life insurance participating
policies, individual deferred annuity contracts and supplementary contracts not
involving life contingencies which were in force on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policies are in force. On October
16, 1995, FAFLIC, allocated to the Closed Block, assets in an amount that is
expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy

F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

benefits, certain future expenses and taxes and for continuation of policyholder
dividend scales in effect in 1994 so long as the experience underlying such
dividend scales continues. The Company expects that the factors underlying such
experience will fluctuate in the future and policyholder dividend scales for
Closed Block Business will be set accordingly.

Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets at October 16, 1995 measured
on a GAAP basis represent the expected future post-tax income from the Closed
Block which may be recognized in income over the period the policies and
contracts in the Closed Block remain in force.

If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at October 16, 1995, the
expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.

If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.

C. VALUATION OF INVESTMENTS

In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.

In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholder's equity of $12.8 million.

Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.

Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers

F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

of mortgage loans to real estate (upon foreclosure), on the disposition or
settlement of mortgage loans and on mortgage loans which the Company believes
may not be collectible in full. In establishing reserves, the Company considers,
among other things, the estimated fair value of the underlying collateral.

Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.

Policy loans are carried principally at unpaid principal balances.

During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.

Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.

D. FINANCIAL INSTRUMENTS

In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, and interest rate futures contracts. These instruments involve
credit risk and also may be subject to risk of loss due to interest rate
fluctuation. The Company evaluates and monitors each financial instrument
individually and, when appropriate, obtains collateral or other security to
minimize losses.

Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge foreign
currency exchange risk are accounted for using a combination of the fair value
method and accrual method, with changes in fair value reported in unrealized
gains and losses in equity consistent with the underlying hedged security, and
the net payment or receipt on the swaps reported in net investment income.
Futures contracts used to hedge interest rate risk are accounted for using the
deferral method, with gains and losses deferred in unrealized gains and losses
in equity and recognized in earnings in conjunction with the earnings
recognition of the underlying hedged item. Other swap contracts entered into for
investment purposes are accounted for using the fair value method, with changes
in fair value reported in realized investment gains and losses in earnings.

E. CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.

F. DEFERRED POLICY ACQUISITION COSTS

Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition

F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

costs related to universal life products, variable annuities and contractholder
deposit funds are deferred and amortized in proportion to total estimated gross
profits from investment yields, mortality, surrender charges and expense margins
over the expected life of the contracts. This amortization is reviewed annually
and adjusted retrospectively when the Company revises its estimate of current or
future gross profits to be realized from this group of products, including
realized and unrealized gains and losses from investments. Acquisition costs
related to fixed annuities and other life insurance products are deferred and
amortized, generally in proportion to the ratio of annual revenue to the
estimated total revenues over the contract periods based upon the same
assumptions used in estimating the liability for future policy benefits.

Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, management
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.

G. PROPERTY AND EQUIPMENT

Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.

H. SEPARATE ACCOUNTS

Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.

I. POLICY LIABILITIES AND ACCRUALS

Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges. Liabilities for
outstanding claims, losses and loss adjustment expenses are estimates of
payments to be made on property and casualty and health insurance for reported
losses and estimates of losses incurred but not reported. These liabilities are
determined using case basis evaluations and statistical analyses and represent
estimates of the ultimate cost of all losses incurred but not paid. These
estimates are continually reviewed and adjusted as necessary; such adjustments
are reflected in

F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

current operations. Estimated amounts of salvage and subrogation on unpaid
property and casualty losses are deducted from the liability for unpaid claims.

Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.

Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.

J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES

Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values. Certain policy charges that represent compensation for
services to be provided in future periods are deferred and amortized over the
period benefited using the same assumptions used to amortize capitalized
acquisition costs.

K. POLICYHOLDER DIVIDENDS

Prior to demutualization, certain life, health and annuity insurance policies
contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. Upon
demutualization, certain participating individual life insurance policies and
individual annuity and supplemental contracts were transferred to the Closed
Block. The Closed Block was funded to protect the dividend expectations of such
policies and contracts. Accordingly, these policies no longer participate in the
earnings and surplus of the Open Block. Subsequent to demutualization, the
Company ceased issuance of participating policies.

Prior to demutualization, the participating life insurance in force was 16.2% of
the face value of total life insurance in force at December 31, 1994. The
premiums on participating life, health and annuity policies were 11.3% and 6.4%
of total life, health and annuity statutory premiums prior to demutualization in
1995 and 1994, respectively. Total policyholders' dividends were $23.3 million
and $32.8 million prior to demutualization in 1995 and 1994, respectively.

F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

L. FEDERAL INCOME TAXES

AFC, its life insurance subsidiaries, FAFLIC, AFLIAC, and its non-life insurance
domestic subsidiaries file a life-nonlife consolidated United States Federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. APY and its subsidiaries will be included in the AFC consolidated return
as part of the non-life insurance company subgroup for the period July 17, 1997
through December 31, 1997. For the period January 1, 1997 through July 16, 1997,
APY and its subsidiaries will file a separate consolidated United States Federal
income tax return.

The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.

Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.

M. NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, Financial Reporting for Segments of a Business
Enterprise. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.

In June 1997, the FASB also issued Statement No. 130, Reporting Comprehensive
Income, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.

N. RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year
presentation.

F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

2. SIGNIFICANT TRANSACTIONS

On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million are intended to fund a portion of the
acquisition of the 24.2 million publicly-held shares of APY pursuant to an
Agreement and Plan of Merger dated February 19, 1997.

The merger of APY and a wholly-owned subsidiary of AFC was consummated on July
16, 1997. Through the merger, AFC acquired all of the outstanding common stock
of APY that FAFLIC did not already own in exchange for cash of $425.6 million
and approximately 9.7 million shares of AFC stock valued at $372.5 million. At
consummation of this transaction AFC owned 59.5% through FAFLIC and 40.5%
directly.

The merger has been accounted for as a purchase by AFC. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.

The pushdown of goodwill to APY resulted in an increase to the consolidated
equity of FAFLIC of $61.3 million as additional paid in capital. The effects of
this transaction on the 1997 results of the Company are as follows:

<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
<S> <C>
Revenue........................................................................................ $ (6.7)
-----
-----
Realized capital gains included in revenue..................................................... $ (4.9)
-----
-----
Net income..................................................................................... $ (6.1)
-----
-----
Unrealized appreciation on investments......................................................... $ 4.4
-----
-----
</TABLE>

In December 1997, APY redeemed 5,735.3 shares of its issued and outstanding
common stock owned by AFC for $195 million in cash and securities. The effect of
this transaction was to increase FAFLIC's ownership of APY by 6.3%.

On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.

Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.

Pursuant to the plan of reorganization effective October 16, 1995, AFC issued
37.5 million shares of its common stock to eligible policyholders. AFC also
issued 12.6 million shares of its common stock at a price of

F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

$21.00 per share in a public offering, resulting in net proceeds of $248.0
million, and issued Senior Debentures in the principal amount of $200.0 million
which resulted in net proceeds of $197.2 million. AFC contributed $392.4 million
of these proceeds to FAFLIC.

Effective March 31, 1995, the Company entered into an agreement with TSSG, a
division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995. Additionally, the Company received a
non-recurring $3.1 million contingent payment, net of taxes of $1.7 million, in
1996, related to the aforementioned sale.

3. INVESTMENTS

A. SUMMARY OF INVESTMENTS

The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with SFAS No. 115.

The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 265.3 $ 9.5 $ 0.9 $ 273.9
States and political subdivisions....... 2,200.6 78.3 3.1 2,275.8
Foreign governments..................... 110.8 8.5 2.2 117.1
Corporate fixed maturities.............. 4,041.6 175.1 12.2 4,204.5
Mortgage-backed securities.............. 374.5 9.7 2.0 382.2
--------- ---------- ----------- --------
Total fixed maturities.................. $ 6,992.8 $281.1 $ 20.4 $7,253.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 341.1 $141.9 $ 4.0 $ 479.0
--------- ---------- ----------- --------
--------- ---------- ----------- --------

1996
-----------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 273.6 $ 9.3 $ 1.6 $ 281.3
States and political subdivisions....... 2,236.9 48.5 7.7 2,277.7
Foreign governments..................... 108.0 7.3 -- 115.3
Corporate fixed maturities.............. 4,277.5 140.3 15.7 4,402.1
Mortgage-backed securities.............. 383.1 4.7 2.7 385.1
--------- ---------- ----------- --------
Total fixed maturities.................. $ 7,279.1 $210.1 $ 27.7 $7,461.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 327.9 $148.9 $ 3.7 $ 473.1
--------- ---------- ----------- --------
--------- ---------- ----------- --------
</TABLE>

(1) Amortized cost for fixed maturities and cost for equity securities.

In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1997, the amortized cost and market

F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

value of assets on deposit were $276.8 million and $291.7 million, respectively.
At December 31, 1996, the amortized cost and market value of assets on deposit
were $284.9 million and $292.2 million, respectively.

In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.1 million and $98.0 million were on deposit
with various state and governmental authorities at December 31, 1997 and 1996,
respectively.

There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.

The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.

<TABLE>
<CAPTION>
1997
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ---------------------------------------- --------- --------

<S> <C> <C>
Due in one year or less................. $ 464.5 $ 467.7
Due after one year through five years... 2,142.9 2,225.7
Due after five years through ten
years.................................. 2,137.3 2,217.1
Due after ten years..................... 2,248.1 2,343.0
--------- --------
Total................................... $ 6,992.8 $7,253.5
--------- --------
--------- --------
</TABLE>

The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:

<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31 VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- --------------------------------------------- ------------------ ----- ------

<S> <C> <C> <C>
1997
Fixed maturities............................. $1,894.8 $27.6 $ 16.2
Equity securities............................ $ 145.5 $55.8 $ 1.3
1996
Fixed maturities............................. $2,432.8 $19.3 $ 30.5
Equity securities............................ $ 228.1 $56.1 $ 1.3
1995
Fixed maturities............................. $1,612.3 $23.7 $ 33.0
Equity securities............................ $ 122.2 $23.1 $ 6.9
</TABLE>

F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:

<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEARS ENDED DECEMBER 31 FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ ---------- ----------- -------

<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $ 131.4
Net appreciation (depreciation) on available-for-sale
securities.............................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C........................................... 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................ (65.9) (27.1) (93.0)
---------- ----------- -------
51.3 26.6 77.9
---------- ----------- -------
Net appreciation, end of year............................... $122.6 $ 86.7 $ 209.3
---------- ----------- -------
---------- ----------- -------

1996
Net appreciation, beginning of year......................... $108.7 $ 44.3 $ 153.0
Net (depreciation) appreciation on available-for-sale
securities.............................................. (94.1) 35.9 (58.2)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. 23.1 -- 23.1
Provision for deferred federal income taxes and minority
interest................................................ 33.6 (20.1) 13.5
---------- ----------- -------
(37.4) 15.8 (21.6)
---------- ----------- -------
Net appreciation, end of year............................. $ 71.3 $ 60.1 $ 131.4
---------- ----------- -------
---------- ----------- -------

1995
Net appreciation (depreciation), beginning of year.......... $(89.4) $ 10.4 $ (79.0)
Effect of transfer of securities between classifications:
Net appreciation on available-for-sale securities......... 29.2 -- 29.2
Net depreciation from the effect of accounting change on
deferred policy acquisition costs and on policy
liabilities............................................. (6.8) -- (6.8)
Provision for deferred federal income taxes and minority
interest................................................ (9.6) -- (9.6)
---------- ----------- -------
12.8 -- 12.8
---------- ----------- -------
Net appreciation on available-for-sale securities........... 465.4 87.5 552.9
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (86.9) (86.9)
Provision for deferred federal income taxes and minority
interest................................................... (193.2) (53.6) (246.8)
---------- ----------- -------
185.3 33.9 219.2
---------- ----------- -------
Net appreciation, end of year............................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
---------- ----------- -------
</TABLE>

(1) Includes net appreciation on other investments of $1.8 million, $0.6
million, and 2.2 million in 1997, 1996 and 1995, respectively.

B. MORTGAGE LOANS AND REAL ESTATE

FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.

F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------

<S> <C> <C>
Mortgage loans.......................... $567.5 $ 650.1
Real estate:
Held for sale......................... 50.3 110.4
Held for production of income......... -- 10.3
------ --------
Total real estate................... 50.3 120.7
------ --------
Total mortgage loans and real estate.... $617.8 $ 770.8
------ --------
------ --------
</TABLE>

Reserves for mortgage loans were $20.7 million and $19.6 million at December 31,
1997 and 1996, respectively.

During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $54.7 million were written down to the estimated fair value less cost
to sell of $50.3 million, and a net realized investment loss of $4.4 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.

There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996 and 1995, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million and $26.1 million,
respectively.

At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $39.4 million, of which $10.0
million related to the Closed Block. These commitments generally expire within
one year.

Mortgage loans and real estate investments comprised the following property
types and geographic regions:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------

<S> <C> <C>
Property type:
Office building....................... $265.1 $ 317.1
Residential........................... 66.6 95.4
Retail................................ 132.8 177.0
Industrial/warehouse.................. 107.2 124.8
Other................................. 66.8 91.0
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
Geographic region:
South Atlantic........................ 173.4 227.0
Pacific............................... 152.8 154.4
East North Central.................... 102.0 119.2
Middle Atlantic....................... 73.8 112.6
West South Central.................... 34.9 41.6
New England........................... 46.9 50.9
Other................................. 54.7 99.6
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
</TABLE>

F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $136.4 million; 1999 -- $70.8 million; 2000 -- $129.2 million; 2001 -- $26.4
million; 2002 -- $29.9 million; and $174.8 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.

C. INVESTMENT VALUATION ALLOWANCES

Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------

<S> <C> <C> <C> <C>
1997
Mortgage loans........... $19.6 $ 2.5 $ 1.4 $20.7
Real estate.............. 14.9 6.0 20.9 --
----- --------- ----- -----
Total................ $34.5 $ 8.5 $22.3 $20.7
----- --------- ----- -----
----- --------- ----- -----

1996
Mortgage loans........... $33.8 $ 5.5 $19.7 $19.6
Real estate.............. 19.6 -- 4.7 14.9
----- --------- ----- -----
Total................ $53.4 $ 5.5 $24.4 $34.5
----- --------- ----- -----
----- --------- ----- -----

1995
Mortgage loans........... $47.2 $ 1.5 $14.9 $33.8
Real estate.............. 22.9 (0.6) 2.7 19.6
----- --------- ----- -----
Total................ $70.1 $ 0.9 $17.6 $53.4
----- --------- ----- -----
----- --------- ----- -----
</TABLE>

The carrying value of impaired loans was $30.5 million and $33.6 million, with
related reserves of $13.8 million and $11.9 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.

The average carrying value of impaired loans was $30.8 million, $50.4 million
and $117.9 million, with related interest income while such loans were impaired
of $3.2 million, $5.8 million and $9.3 million as of December 31, 1997, 1996 and
1995, respectively.

D. FUTURES CONTRACTS

The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. The Company's exposure
to credit risk under futures contracts is limited to the margin deposited with
the broker. The Company only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.

There were no futures contracts outstanding at December 31, 1997, and $(33.0)
million notional amount of short contracts at December 31, 1996. The notional
amounts of the contracts represent the extent of the

F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Company's investment but not the future cash requirements, as the Company
generally settles open positions prior to maturity. The fair value of futures
contracts outstanding were $(32.4) million at December 31, 1996.

Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. There
were no deferred hedging gains (losses) in 1997. Deferred hedging gains were
$0.5 million and $5.6 million in 1996 and 1995, respectively. Gains and losses
on hedge contracts that are deemed ineffective by the Company are realized
immediately.

A reconciliation of the notional amount of futures contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $(33.0) $ 74.7 $126.6
New contracts................................ (0.2) (1.1) 349.2
Contracts terminated......................... 33.2 (106.6) (401.1)
------ ------ ------
Contracts outstanding, end of year........... -- $(33.0) $ 74.7
------ ------ ------
------ ------ ------
</TABLE>

E. FOREIGN CURRENCY SWAP CONTRACTS

The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange. The fair values of the foreign currency swap contracts
outstanding were $0.1 million and $(9.2) million at December 31, 1997 and 1996,
respectively. Changes in the fair value of contracts are reported in unrealized
gains or losses, consistent with the reporting for the underlying hedged
security. The Company does not require collateral or other security to support
financial instruments with credit risk.

The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1997, 1996 and 1995. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gains or losses on
foreign currency swap contracts.

A reconciliation of the notional amount of swap contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 68.6 $104.6 $118.7
New contracts................................ 5.0 -- --
Contracts expired............................ (18.2) (36.0) --
Contracts terminated......................... -- -- (14.1)
------ ------ ------
Contracts outstanding, end of year........... $ 55.4 $ 68.6 $104.6
------ ------ ------
------ ------ ------
</TABLE>

Expected maturities of foreign currency swap contracts are $25.0 million in
1999, $11.6 million in 2000 and $18.8 million thereafter. There are no expected
maturities of foreign currency swap contracts in 1998, 2001 and 2002.

F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

F. INTEREST RATE SWAP CONTRACTS

The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Under these swap contracts, the Company agrees to
exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated on an agreed-upon notional principal amount. As with
foreign currency swap contracts, the primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by the nationally recognized rating agencies. Because the underlying
principal of swap contracts is not exchanged, the Company's maximum exposure to
counterparty credit risk is the difference in payments exchanged, which at
December 31, 1997 was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.

The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The (decrease) or increase
in net investment income related to interest rate swap contracts was $(0.4)
million, $0.6 million and $0.7 million for the years ended December 31, 1997,
1996 and 1995, respectively. The fair values of interest rate swap contracts
outstanding were $(2.3) million at December 31, 1997. There were no interest
rate contracts outstanding at December 31, 1996. Changes in the fair value of
contracts are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Any gain or loss on the termination of interest rate
swap contracts accounted for as hedges are deferred and recognized with the gain
or loss on the hedged transaction. The Company had no deferred gain or loss on
interest rate swap contracts in 1997 or 1996.

A reconciliation of the notional amount of interest rate and other swap
contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 5.0 $ 17.5 $ 22.8
New contracts................................ 244.7 63.6 --
Contracts expired............................ (5.6) (17.5) (5.3)
------ ------ ------
Contracts outstanding, end of year........... $244.1 $ 63.6 $ 17.5
------ ------ ------
------ ------ ------
</TABLE>

Expected maturities of interest rate swap contracts outstanding at December 31,
1997 are as follows: $5.0 million in 1998, and $239.1 million in 2000 and
thereafter. There are no expected maturities of interest rate contracts in 1999.

G. OTHER SWAP CONTRACTS

The Company enters into security return-linked swap contracts and insurance
portfolio-linked swap contracts for investment purposes. Under the security
return-linked contracts, the Company agrees to exchange cash flows according to
the performance of a specified security or portfolio of securities. Under the
insurance portfolio-linked swap contracts, the Company agrees to exchange cash
flows according to the performance of a specified underwriter's portfolio of
insurance business. As with interest rate swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by the nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1997, were not material to the
Company. Swap contracts also subject the Company to market risk associated with
changes in interest rates. The Company does not require collateral or other
security to support financial instruments with credit risk.

F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The swap contracts are marked to market with any gain or loss recognized
currently. The net amount receivable or payable under these contracts is
recognized when the contracts are marked to market. The fair values of swap
contracts outstanding were $(0.1) million and $0.1 million at December 31, 1997
and 1996, respectively. The net decrease in realized investment gains related to
other swap contracts was $(1.6) million for the year ended December 31, 1997.
There were no realized investment gains on other swap contracts recognized in
1996 and 1995.

A reconciliation of the notional amount of other swap contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 58.6 $ -- $ --
New contracts................................ 192.1 58.6 --
Contracts expired............................ (211.6) -- --
Contracts terminated......................... (24.1) -- --
------ ------ ------
Contracts outstanding, end of year........... $ 15.0 $ 58.6 $ --
------ ------ ------
------ ------ ------
</TABLE>

Expected maturities of other swap contracts outstanding at December 31, 1997 are
as follows: $10 million in 1999 and $5 million in 2001. There are no expected
maturities of such other swap contracts in 1998, 2000, or 2002.

H. OTHER

At December 31, 1997, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity, except for investments with the
U.S. Treasury with a carrying value of $262.5 million.

4. INVESTMENT INCOME AND GAINS AND LOSSES

A. NET INVESTMENT INCOME

The components of net investment income were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Fixed maturities............................. $541.9 $553.8 $555.1
Mortgage loans............................... 57.5 69.5 97.0
Equity securities............................ 10.6 11.1 13.2
Policy loans................................. 10.9 10.3 20.3
Real estate.................................. 20.1 40.8 48.7
Other long-term investments.................. 12.4 19.9 7.5
Short-term investments....................... 12.8 10.6 21.2
------ ------ ------
Gross investment income...................... 666.2 716.0 763.0
Less investment expenses..................... (24.4) (45.2) (52.5)
------ ------ ------
Net investment income........................ $641.8 $670.8 $710.5
------ ------ ------
------ ------ ------
</TABLE>

At December 31, 1997, mortgage loans on non-accrual status were $3.6 million
which were all restructured loans. There were no fixed maturities which were on
non-accrual status at December 31, 1997. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, had no impact in 1997, and reduced net income by $0.5
million and $0.6 million in 1996 and 1995, respectively.

F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $40.3 million, $51.3 million and $98.9 million at December 31,
1997, 1996 and 1995, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $3.9 million, $7.7 million and $11.1 million in 1997,
1996 and 1995, respectively. Actual interest income on these loans included in
net investment income aggregated $4.2 million, $4.5 million and $7.1 million in
1997, 1996 and 1995, respectively.

There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.

Included in other long-term investments is income from limited partnerships of
$7.8 million, $13.7 million and $0.1 million in 1997, 1996 and 1995
respectively.

B. REALIZED INVESTMENT GAINS AND LOSSES

Realized gains (losses) on investments were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Fixed maturities............................. $ 14.7 $ (9.7) $ (7.0)
Mortgage loans............................... (1.2) (2.4) 1.4
Equity securities............................ 53.6 54.8 16.2
Real estate.................................. 12.8 21.1 5.3
Other........................................ (3.4) 3.0 3.2
------ ------ ------
Net realized investment gains................ $ 76.5 $ 66.8 $ 19.1
------ ------ ------
------ ------ ------
</TABLE>

5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality. Fair values of
interest rate futures were not material at December 31, 1997 and 1996.

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:

CASH AND CASH EQUIVALENTS

For these short-term investments, the carrying amount approximates fair value.

FIXED MATURITIES

Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.

F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

EQUITY SECURITIES

MORTGAGE LOANS

Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.

POLICY LOANS

The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.

REINSURANCE RECEIVABLES

The carrying amount reported in the consolidated balance sheets approximates
fair value.

INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)

Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.

DEBT

The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.

F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The estimated fair values of the financial instruments were as follows:

<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
DECEMBER 31 CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- --------------------------------------------- --------- -------- --------- --------

<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 213.9 $ 213.9 $ 175.9 $ 175.9
Fixed maturities........................... 7,253.5 7,253.5 7,461.5 7,461.5
Equity securities.......................... 479.0 479.0 473.1 473.1
Mortgage loans............................. 567.5 597.0 650.1 675.7
Policy loans............................... 141.9 141.9 132.4 132.4
--------- -------- --------- --------
$ 8,655.8 $8,685.3 $ 8,893.0 $8,918.6
--------- -------- --------- --------
--------- -------- --------- --------

FINANCIAL LIABILITIES
Guaranteed investment contracts............ $ 985.2 $1,004.7 $ 1,101.3 $1,119.2
Supplemental contracts without life
contingencies............................ 22.4 22.4 23.1 23.1
Dividend accumulations..................... 87.8 87.8 87.3 87.3
Other individual contract deposit funds.... 57.9 55.7 76.9 74.3
Other group contract deposit funds......... 714.8 715.5 789.1 788.3
Individual annuity contracts............... 907.4 882.2 935.6 911.7
Short-term debt............................ 33.0 33.0 38.4 38.4
Long-term debt............................. 2.6 2.6 2.7 2.7
--------- -------- --------- --------
$ 2,811.1 $2,803.9 $ 3,054.4 $3,045.0
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>

6. CLOSED BLOCK

Included in other income in the Consolidated Statement of Income for 1997 and
1996 is a net pre-tax contribution from the Closed Block of $9.1 million and
$8.6 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1997 and 1996 and for the period ended December 31, 1997 and
1996 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $400.1 and $397.2, respectively).......... $ 412.9 $ 403.9
Mortgage loans............................................................................... 112.0 114.5
Policy loans................................................................................. 218.8 230.2
Cash and cash equivalents.................................................................... 25.1 24.1
Accrued investment income.................................................................... 14.1 14.3
Deferred policy acquisition costs............................................................ 18.2 21.1
Other assets................................................................................. 5.6 2.7
--------- ---------
Total assets............................................................................... $ 806.7 $ 810.8
--------- ---------
--------- ---------
Liabilities
Policy liabilities and accruals.............................................................. $ 875.1 $ 883.4
Other liabilities............................................................................ 10.4 16.0
--------- ---------
Total liabilities.......................................................................... $ 885.5 $ 899.4
--------- ---------
--------- ---------
</TABLE>

F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues
Premiums..................................................................................... $ 58.3 $ 61.7
Net investment income........................................................................ 53.4 52.6
Realized investment loss..................................................................... 1.3 (0.7)
--------- ---------
Total revenues................................................................................. 113.0 113.6
--------- ---------
Benefits and expenses
Policy benefits.............................................................................. 100.5 101.2
Policy acquisition expenses.................................................................. 3.0 3.2
Other operating expenses..................................................................... 0.4 0.6
--------- ---------
Total benefits and expenses.................................................................... 103.9 105.0
--------- ---------
Contribution from the Closed Block............................................................. $ 9.1 $ 8.6
--------- ---------
--------- ---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block......................................................... $ 9.1 $ 8.6
Initial cash transferred to the Closed Block............................................... -- --
Change in deferred policy acquisition costs, net........................................... 2.9 3.4
Change in premiums and other receivables................................................... -- 0.2
Change in policy liabilities and accruals.................................................. (11.6) (13.9)
Change in accrued investment income........................................................ 0.2 2.3
Deferred Taxes............................................................................. (5.1) 1.0
Change in other assets..................................................................... (2.9) (1.6)
Change in expenses and taxes payable....................................................... (2.0) 1.7
Other, net................................................................................. (1.2) 1.4
--------- ---------
Net cash (used in) provided by operating activities............................................ (10.6) 3.1
--------- ---------
Cash flows from investing activities:
Sales, maturities and repayments of investments............................................ 161.6 188.1
Purchases of investments................................................................... (161.4) (196.9)
Other, net................................................................................. 11.4 12.2
--------- ---------
Net cash provided by (used in) investing activities............................................ 11.6 3.4
--------- ---------
Net increase in cash and cash equivalents...................................................... 1.0 6.5
Cash and cash equivalents, beginning of year................................................... 24.1 17.6
--------- ---------
Cash and cash equivalents, end of year......................................................... $ 25.1 $ 24.1
--------- ---------
--------- ---------
</TABLE>

On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans in the Closed Block at December 31, 1997 or 1996, respectively.

Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.

F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

7. DEBT

Short- and long-term debt consisted of the following:

FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by various lines of credit. At December 31, 1997, the weighted average
interest rate for outstanding commercial paper was approximately 5.8%.

At December 31, 1997, AFC had approximately $140.0 million in committed lines of
credit provided by U.S. banks, of which $107.2 million was available for
borrowing. These lines of credit generally have terms of less than one year, and
require the Company to pay annual commitment fees limited to 0.07% of the
available credit. Interest that would be charged for usage of these lines of
credit is based upon negotiated arrangements.

During 1996, the Company utilized repurchase agreements to finance certain
investments. These repurchase agreements were settled by the end of 1996.

In October, 1995, AFC issued $200.0 million face amount of Senior Debentures for
proceeds of $197.2 million net of discounts and issuance costs. These securities
have an effective interest rate of 7.65%, and mature on October 16, 2025.
Interest is payable semiannually on October 15 and April 15 of each year. The
Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC and
APY.

Interest expense was $3.6 million, $16.8 million and $4.3 million in 1997, 1996
and 1995, respectively. Interest paid on the credit agreement during 1997 was
approximately $2.8 million. Interest expense during 1996 also included $11.0
million related to interest payments on repurchase agreements. All interest
expense is recorded in other operating expenses.

8. FEDERAL INCOME TAXES

Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:

F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The federal income taxes attributable to the consolidated results of operations
are different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate. The sources of the
difference and the tax effects of each were as follows:

Until conversion to a stock life insurance company, FAFLIC, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying the average
equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.

The deferred income tax liability (asset) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. As a result of the purchase discussed in Note 2, all companies
will file a single consolidated federal income tax return for tax years ending
on and after December 31, 1997. Deferred tax amounts presented for 1996 reflect
the combination of the former FAFLIC/ AFLIAC consolidated group with the former
APY consolidated group. Its components were as follows:

Gross deferred income tax assets totaled $469.5 million and $444.8 million at
December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities
totaled $482.4 million and $377.9 million at December 31, 1997 and 1996,
respectively.

The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1997, there are available alternative
minimum tax credit carryforwards of $15.6 million.

F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the FAFLIC/ AFLIAC consolidated
group's federal income tax returns through 1991. The IRS has also examined the
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed certain adjustments proposed by the IRS with
respect to the federal income tax returns for 1989, 1990, and 1991 for both the
FAFLIC/AFLIAC consolidated group as well as the former Allmerica P&C
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.

9. PENSION PLANS

FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Effective January 1, 1995, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee based on a percentage
of that employee's salary, similar to a defined contribution plan arrangement.
The 1997 and 1996 allocations were based on 7.0% of each eligible employee's
salary. In addition to the cash balance allocation, certain transition group
employees, who have met specified age and service requirements as of December
31, 1994, are eligible for a grandfathered benefit based primarily on the
employees' years of service and compensation during their highest five
consecutive plan years of employment. The Company's policy for the plans is to
fund at least the minimum amount required by the Employee Retirement Income
Security Act of 1974.

Components of net pension expense were as follows:

F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The following table summarizes the combined status of the three pension plans.
At December 31, 1997 and 1996 the plans' assets exceeded their projected benefit
obligations.

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................................... $ 332.6 $ 308.9
Unvested benefit obligation.................................................................. 7.5 6.6
--------- ---------
Accumulated benefit obligation................................................................. $ 340.1 $ 315.5
--------- ---------
--------- ---------

Pension liability included in Consolidated Balance Sheets:
Projected benefit obligation................................................................. $ 370.4 $ 344.2
Plan assets at fair value.................................................................... 395.5 347.8
--------- ---------
Plan assets greater (less) than projected benefit obligation............................... 25.1 3.6
Unrecognized net (gain) loss from past experience............................................ (44.9) (9.1)
Unrecognized prior service benefit........................................................... (13.9) (11.5)
Unamortized transition asset................................................................. (26.2) (24.7)
--------- ---------
Net pension liability.......................................................................... $ (59.9) $ (41.7)
--------- ---------
--------- ---------
</TABLE>

As a result of AFC's purchase of the minority shares of APY, certain pension
liabilities were reduced by $11.7 million to reflect their fair value as of the
purchase date.

Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1997 and 1996 and the assumed long-term rate of
return on plan assets was 9.0%. The actuarial present value of the projected
benefit obligations was determined using assumed rates of increase in future
compensation levels ranging from 5.0% to 5.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. The
plans also hold stock of AFC.

The Company has three separate defined contribution 401(k) plans for its
employees. The Company matches employee elective 401(k) contributions, up to a
maximum percentage determined annually by the Board of Directors. During 1997
and 1996, the Company matched 50% of employees' contributions up to 6.0% of
eligible compensation. The total expenses related to these plans were $3.3
million and $5.5 million, in 1997 and 1996, respectively. In addition to these
plans, the Company has a defined contribution plan for substantially all of its
agents. The Plan expense in 1997 and 1996, was $2.8 million and $2.0 million,
respectively.

On January 1, 1998, substantially all of the aforementioned defined benefit and
defined contribution 401k plans were merged with the existing benefit plans of
FAFLIC. The transfer of benefit plans will not have a material impact on the
results of operations or financial position of the Company.

10. OTHER POSTRETIREMENT BENEFIT PLANS

In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover, and Citizens.
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective January 1,
1996, the Company revised these benefits so as to establish limits on future
benefit payments and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.

F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The plan changes, effective January 1, 1996, resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.

The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:

The components of net periodic postretirement benefit expense were as follows:

As a result of AFC's purchase of the minority shares of APY, certain
postretirement liabilities were reduced by $6.1 million to reflect their fair
value as of the purchase date.

For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1997, health care costs were assumed to increase 8.0% in 1998,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1997
by $4.9 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1997 by $0.6 million.

The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1997 and 1996.

As described in Note 9, all of the postretirement benefit plans of the Company
were merged with the existing plans of FAFLIC, effective January 1, 1998.

F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

11. DIVIDEND RESTRICTIONS

Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.

Dividends from FAFLIC and APY (from Hanover) to AFC will be the primary source
of cash for repayment of the debt and capital securities by AFC and payment of
dividends to AFC stockholders.

Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. No dividends were declared nor paid
during 1997,1996 or 1995. During 1998, FAFLIC could pay dividends of $196.3
million to AFC without prior approval of the Commissioner. On January 12, 1998
FAFLIC declared a dividend of $50 million to AFC of which $18 million was paid
in February, 1998.

Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. No dividends were paid by AFLIAC to FAFLIC during
1997, 1996 or 1995. During 1998, AFLIAC could pay dividends of $33.9 million to
FAFLIC without prior approval.

Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
Hanover declared dividends to Allmerica P&C totaling $120.0 million, 105.0
million and 40.0 million during 1997, 1996 and 1995, respectively. During 1998,
the maximum dividend and other distributions that could be paid to Allmerica P&C
by Hanover, without prior approval of the Insurance Commissioner, was
approximately $127.6 million.

Pursuant to Michigan's statute, the maximum dividends and other distributions
that an insurer may pay in any twelve month period, without prior approval of
the Michigan Insurance Commissioner, is limited to the greater of 10% of
policyholders' surplus as of December 31 of the immediately preceding year or
the statutory net income less realized gains, for the immediately preceding
calendar year. Citizens Insurance paid dividends to Citizens Corporation
totaling $6.3 million and $3.0 million during 1996 and 1995, respectively. No
dividends were paid by Citizens Insurance during 1997. During, 1998, Citizens
Insurance could pay dividends of $86.9 million to Citizens Corporation without
prior approval.

F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

12. SEGMENT INFORMATION

The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas, the
Company conducts business principally in five operating segments.

The Risk Management group includes two segments: Regional Property and Casualty
and Corporate Risk Management Services.

The Regional Property and Casualty segment includes property and casualty
insurance products, such as automobile insurance, homeowners insurance,
commercial multiple-peril insurance, and workers' compensation insurance. These
products are offered by Allmerica P&C through its operating subsidiaries,
Hanover and Citizens. Substantially all of the Regional Property and Casualty
segment's earnings are generated in Michigan and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine). The Corporate Risk Management Services segment includes group life and
health insurance products and services which assist employers in administering
employee benefit programs and in managing the related risks.

The Retirement and Asset Accumulation group includes three segments: Allmerica
Financial Services, Institutional Services and Allmerica Asset Management. The
Allmerica Financial Services segment includes variable annuities, variable
universal life-type, traditional and health insurance products distributed via
retail channels to individuals across the country. The Institutional Services
segment includes primarily group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to institutions
across the country via work-site marketing and other arrangements. Allmerica
Asset Management is a Registered Investment Advisor which provides investment
advisory services primarily to affiliates and to other institutions, such as
insurance companies and pension plans.

Summarized below is financial information with respect to business segments for
the year ended and as of December 31.

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty......................................... $ 2,275.3 $ 2,196.6 $ 2,109.0
Corporate Risk Management.............................................. 396.3 361.5 328.5
---------- ---------- ----------
Subtotal............................................................... 2,671.6 2,558.1 2,437.5
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 470.6 450.9 487.1
Institutional Services................................................. 243.4 270.7 330.2
Allmerica Asset Management............................................. 8.7 8.8 4.4
---------- ---------- ----------
Subtotal............................................................... 722.7 730.4 821.7
Eliminations............................................................. (10.1) (8.7) (4.4)
---------- ---------- ----------
Total...................................................................... $ 3,384.2 $ 3,279.8 $ 3,254.8
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
Income from continuing operations before income taxes:
<S> <C> <C> <C>
Risk Management
Regional Property and Casualty......................................... $ 206.4 $ 197.7 $ 206.3
Corporate Risk Management.............................................. 19.3 20.7 18.3
---------- ---------- ----------
Subtotal............................................................... 225.7 218.4 224.6
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 87.4 76.9 35.2
Institutional Services................................................. 62.4 52.8 42.8
Allmerica Asset Management............................................. 1.4 1.1 2.3
---------- ---------- ----------
Subtotal............................................................... 151.2 130.8 80.3
---------- ---------- ----------
Total...................................................................... $ 376.9 $ 349.2 $ 304.9
---------- ---------- ----------
---------- ---------- ----------

Identifiable assets:
Risk Management
Regional Property and Casualty......................................... $ 5,710.4 $ 5,703.9 $ 5,741.8
Corporate Risk Management.............................................. 568.8 522.1 458.9
---------- ---------- ----------
Subtotal............................................................... 6,279.2 6,226.0 6,200.7
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 12,049.6 8,822.4 7,218.6
Institutional Services................................................. 4,158.5 3,886.7 4,280.9
Allmerica Asset Management............................................. 4.1 2.4 2.1
---------- ---------- ----------
Subtotal............................................................... 16,212.2 12,711.5 11,501.6
---------- ---------- ----------
Total...................................................................... $ 22,491.4 $ 18,937.5 $ 17,702.3
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

13. LEASE COMMITMENTS

Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $34.9 million and $36.4 million in 1997, 1996 and
1995, respectively. At December 31, 1997, future minimum rental payments under
non-cancelable operating leases were approximately $72.5 million, payable as
follows: 1998 -- $24.8 million; 1999 -- $19.8 million; 2000 -- $13.6 million;
2001 -- $7.9 million; and $6.4 million thereafter. It is expected that, in the
normal course of business, leases that expire will be renewed or replaced by
leases on other property and equipment; thus, it is anticipated that future
minimum lease commitments will not be less than the amounts shown for 1998.

14. REINSURANCE

In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of SFAS No. 113, ACCOUNTING AND
REPORTING FOR REINSURANCE OF SHORT DURATION AND LONG DURATION CONTRACTS.

Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. 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;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also

F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

believes that the terms of its reinsurance contracts are consistent with
industry practice in that they contain standard terms with respect to lines of
business covered, limit and retention, arbitration and occurrence. Based on its
review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.

The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims
Association ("MCCA"). At December 31, 1997, CAR was the only reinsurer which
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company cedes a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1997, 1996 and 1995 were
$32.3 million and $28.2 million, $38.0 million and $21.8 million, and $49.1
million and $33.7 million, respectively.

The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses in 1997, 1996 and 1995 of $9.8 million and $(0.8) million, $50.5
million and $(52.9) million, and $66.8 million and $62.9 million, respectively.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.

The effects of reinsurance were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct....................................................................... $ 417.4 $ 389.1 $ 438.9
Assumed...................................................................... 110.7 87.8 71.0
Ceded........................................................................ (170.1) (138.9) (150.3)
--------- --------- ---------
Net premiums................................................................... $ 358.0 $ 338.0 $ 359.6
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums written:
Direct....................................................................... $ 2,068.5 $ 2,039.7 $ 2,039.4
Assumed...................................................................... 103.1 108.7 125.0
Ceded........................................................................ (179.8) (234.0) (279.1)
--------- --------- ---------
Net premiums................................................................... $ 1,991.8 $ 1,914.4 $ 1,885.3
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums earned:
Direct....................................................................... $ 2,046.2 $ 2,018.5 $ 2,021.7
Assumed...................................................................... 102.0 112.4 137.7
Ceded........................................................................ (195.1) (232.6) (296.2)
--------- --------- ---------
Net premiums................................................................... $ 1,953.1 $ 1,898.3 $ 1,863.2
--------- --------- ---------
--------- --------- ---------
Life insurance and other individual policy benefits, claims, losses and loss
adjustment expenses:
Direct....................................................................... $ 656.4 $ 606.5 $ 741.0
Assumed...................................................................... 61.6 44.9 38.5
Ceded........................................................................ (158.8) (77.8) (69.5)
--------- --------- ---------
Net policy benefits, claims, losses and loss adjustment expenses............... $ 559.2 $ 573.6 $ 710.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
Property and casualty benefits, claims, losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct....................................................................... $ 1,464.9 $ 1,299.8 $ 1,383.3
Assumed...................................................................... 101.2 85.8 146.1
Ceded........................................................................ (120.6) (2.2) (229.1)
--------- --------- ---------
Net policy benefits, claims, losses, and loss adjustment expenses.............. $ 1,445.5 $ 1,383.4 $ 1,300.3
--------- --------- ---------
--------- --------- ---------
</TABLE>

15. DEFERRED POLICY ACQUISITION COSTS

The following reflects changes to the deferred policy acquisition asset:

At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.

16. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded.

The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$533.6 million, $471.7 million and $446.9 million at December 31, 1997, 1996 and
1995, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were decreased by $0.2 million and $0.6 million in 1997 and
1996, respectively, and increased by $17.6 million in 1995. Unfavorable
development in the accident and health business during 1995 was primarily due to
reserve strengthening and adverse experience in the Company's individual
disability line of business. Effective October 1, 1997, the Company ceded
substantially all of its individual disability income line of business, under a
100% coinsurance agreement to Metropolitan Life Insurance Company. At December
31, 1997, the individual disability income reserves ceded under this agreement
were $249.0 million, representing 46.7% of the Company's total accident and
health reserves.

F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year.............................. $ 2,744.1 $ 2,896.0 $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year............................. 1,564.1 1,513.3 1,427.3
Decrease in provision for insured events of prior years...................... (127.9) (141.4) (137.6)
--------- --------- ---------
Total incurred losses and LAE.................................................. 1,436.2 1,371.9 1,289.7
--------- --------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year................ 775.1 759.6 652.2
Losses and LAE attributable to insured events of prior years................. 732.1 627.6 614.3
--------- --------- ---------
Total payments................................................................. 1,507.2 1,387.2 1,266.5
--------- --------- ---------
Change in reinsurance recoverable on unpaid losses............................. (50.2) (136.6) 51.1
--------- --------- ---------
Other(1) (7.5) -- --
--------- --------- ---------
Reserve for losses and LAE, end of year........................................ $ 2,615.4 $ 2,744.1 $ 2,896.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

(1) Includes purchase accounting adjustments.

As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.9 million,
$141.4 million and $137.6 million in 1997, 1996 and 1995, respectively.

The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million in the personal automobile line,
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997 reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million and in the commercial multiple peril line where favorable
development increased $7.0 million to $4.3 million, partially offset by less
favorable development in the personal automobile line, where favorable
development decreased $10.5 million to $22.5 million in 1997.

The increase in favorable development on prior years' reserves of $3.8 million
in 1996 results primarily from an $11.4 million increase in favorable
development at Citizens. The increase in Citizens' favorable development of
$11.4 million in 1996 reflects improved severity in the personal automobile
line, where favorable development increased $28.6 million to $33.0 million in
1996, partially offset by less favorable development in the workers'
compensation line of $10.9 million Hanover's favorable development, including
voluntary and involuntary pools, decreased $7.7 million in 1996 to $82.9
million, primarily attributable to a decrease in favorable development in the
workers' compensation line of $19.8 million. Favorable development in the
personal automobile line also decreased $4.7 million, to $42.4 million in 1996.
These decreases were offset by increases in favorable development of $1.9
million and $5.6 million, to $12.6 million and $5.7 million, in the commercial
automobile and commercial multiple peril lines, respectively. Favorable
development in other lines increased by $8.8 million, primarily as a result of
environmental reserve strengthening in 1995. Favorable development in Hanover's
voluntary and involuntary pools increased $3.7 million to $4.1 million during
1996.

F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Citizens' favorable development in 1997 primarily reflects a modest shift over
the past few years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than Eastern
Michigan.

Citizens' favorable development in 1996 and 1995 primarily reflects the
initiatives taken by the Company to manage medical costs in both the automobile
and workers' compensation lines, as well as the impact of the Michigan Supreme
Court ruling on workers' compensation indemnity payments in 1995, which
decreases the maximum amount to be paid for indemnity cases on all existing and
future claims.

Hanover's favorable development from 1995 to 1997 primarily reflects favorable
legislation related to workers' compensation, improved safety features in
automobiles, improved driving habits and a moderation of medical costs and
inflation.

In 1995, Hanover's favorable development was primarily attributable to a
re-estimate of reserves with respect to certain types of workers' compensation
policies including large deductibles and excess of loss policies. In addition,
during 1995 Hanover refined its estimation of unallocated loss adjustment
expenses which increased favorable development in that year.

This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.

Due to the nature of the business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $53.1
million and $50.8 million, net of reinsurance of $15.7 million and $20.2 million
at the end of 1997 and 1996, respectively. The Regional Property and Casualty
subsidiaries do not specifically underwrite policies that include this coverage,
but as case law expands policy provisions and insurers' liability beyond the
intended coverage, the Regional Property and Casualty subsidiaries may be
required to defend such claims. Due to their unusual nature and absence of
historical claims data, reserves for these claims are not determined using
historical experience to project future losses. The Company estimated its
ultimate liability for these claims based upon currently known facts, reasonable
assumptions where the facts are not known, current law and methodologies
currently available. Although these claims are not material, their existence
gives rise to uncertainty and is discussed because of the possibility, however
remote, that they may become material. The Company believes that,
notwithstanding the evolution of case law expanding liability in environmental
claims, recorded reserves related to these claims for environmental liability
are adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.

17. MINORITY INTEREST

The Company's interest in Allmerica P&C is represented by ownership of 65.8%,
59.5% and 58.3% of the outstanding shares of common stock at December 31, 1997,
1996 and 1995, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.

F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

18. CONTINGENCIES

REGULATORY AND INDUSTRY DEVELOPMENTS

Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by, solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.

LITIGATION

In July 1997, a lawsuit was instituted in Louisiana against AFC and certain of
its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive
acts, breach of contract, misrepresentation and related claims in the sale of
life insurance policies. In October 1997, plaintiffs voluntarily dismissed the
Louisiana suit and refiled the action in Federal District Court in Worcester,
Massachusetts. The plaintiffs seek to be certified as a class. The case is in
early stages of discovery and the Company is evaluating the claims. Although the
Company believes it has meritorious defenses to plaintiffs' claims, there can be
no assurance that the claims will be resolved on a basis which is satisfactory
to the Company.

On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers were liable for $65.0 million and
employers would contribute $110.0 million payable through surcharges on premiums
over the course of the next ten years. The major insurers are responsible for
90% of the $65.0 million. Hanover's allocated share of the settlement is
approximately $4.2 million, which was paid in December 1995. The remainder of
the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in
quarterly contributions over ten years. A group of smaller carriers filed
litigation to appeal the settlement. Although the Company believes that adequate
reserves have been established for any additional liability, there can be no
assurance that the appeal will be resolved on a basis which is satisfactory to
the Company.

The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based on
the advice of legal counsel, the ultimate resolution of these proceedings will
not have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.

RESIDUAL MARKETS

The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.

YEAR 2000

The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or

F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Although the Company does not believe
that there is a material contingency associated with the Year 2000 project,
there can be no assurance that exposure for material contingencies will not
arise.

19. STATUTORY FINANCIAL INFORMATION

The Company and its insurance subsidiaries are required to file annual
statements with state regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). Statutory surplus
differs from shareholder's equity reported in accordance with generally accepted
accounting principles for stock life insurance companies primarily because
policy acquisition costs are expensed when incurred, investment reserves are
based on different assumptions, postretirement benefit costs are based on
different assumptions and reflect a different method of adoption, life insurance
reserves are based on different assumptions and income tax expense reflects only
taxes paid or currently payable. Statutory net income and surplus are as
follows:

<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Statutory net income (Combined)
Property and Casualty Companies.............................................. $ 190.3 $ 155.3 $ 155.3
Life and Health Companies.................................................... 191.2 133.3 134.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies.............................................. $ 1,279.8 $ 1,201.6 $ 1,128.4
Life and Health Companies.................................................... 1,221.3 1,120.1 965.6
</TABLE>

F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of First Allmerica Financial Life Insurance Company
and Policyowners of the VEL II Account of First Allmercia Financial Life
insurance Company

In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
(Growth, Investment Grade Income, Money Market, Equity Index, Government Bond,
Select Aggressive Growth, Select Growth, Select Growth and Income, Select Value
Opportunity, Select International Equity, Select Capital Appreciation, Fidelity
VIP High Income, Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP
Overseas, Fidelity VIP II Asset Manager, T. Rowe Price International Stock, and
DGPF International Equity) constituting the VEL II Account of First Allmerica
Financial Life Insurance Company at December 31, 1997, the results of each of
their operations and the changes in each of their net assets for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of First Allmerica Financial Life
Insurance Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. we believe that our audits, which included
confirmation of investments at December 31, 1997 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP

PRICE WATERHOUSE LLP

Boston, Massachusetts

March 25, 1998
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT EQUITY
GROWTH GRADE INCOME MONEY MARKET INDEX GOVERNMENT BOND
----------- ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $1,233,305 $ 424,280 $1,038,299 $1,204,211 $ 234,668
Investments in shares of Fidelity Variable
Insurance
Products Funds (VIP)...................... -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
Total assets.............................. 1,233,305 424,280 1,038,299 1,204,211 234,668

LIABILITIES:................................ -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
Net assets................................ $1,233,305 $ 424,280 $1,038,299 $1,204,211 $ 234,668
----------- ------------ ------------ ----------- ---------------
----------- ------------ ------------ ----------- ---------------
Net asset distribution by category:
Variable life policies.................... $1,233,305 $ 424,280 $1,038,299 $1,204,211 $ 234,668
----------- ------------ ------------ ----------- ---------------
----------- ------------ ------------ ----------- ---------------

Units outstanding, December 31, 1997........ 625,481 327,399 889,690 533,726 189,348
Net asset value per unit, December 31,
1997...................................... $ 1.971772 $1.295911 $ 1.167036 $ 2.256235 $1.239345

<CAPTION>
SELECT
SELECT SELECT VALUE
AGGRESSIVE GROWTH SELECT GROWTH GROWTH AND INCOME OPPORTUNITY**
----------------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $2,085,154 $ 1,699,033 $ 885,561 $1,229,616
Investments in shares of Fidelity Variable
Insurance
Products Funds (VIP)...................... -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- --
----------------- ------------- ----------------- -----------
Total assets.............................. 2,085,154 1,699,033 885,561 1,229,616
LIABILITIES:................................ -- -- -- --
----------------- ------------- ----------------- -----------
Net assets................................ $2,085,154 $ 1,699,033 $ 885,561 $1,229,616
----------------- ------------- ----------------- -----------
----------------- ------------- ----------------- -----------
Net asset distribution by category:
Variable life policies.................... $2,085,154 $ 1,699,033 $ 885,561 $1,229,616
----------------- ------------- ----------------- -----------
----------------- ------------- ----------------- -----------
Units outstanding, December 31, 1997........ 1,221,944 860,217 456,707 710,356
Net asset value per unit, December 31,
1997...................................... $1.706423 $ 1.975122 $1.939014 $1.730986
</TABLE>

** Name changed. See Note 1.

The accompanying notes are an integral part of these financial statements.

SA-1
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT SELECT FIDELITY FIDELITY FIDELITY FIDELITY
INTERNATIONAL CAPITAL VIP VIP VIP VIP
EQUITY APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS
------------- ------------ ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ 971,904 $ 974,137 $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance
Products Funds (VIP)...................... -- -- 972,007 2,368,879 2,289,553 707,116
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- -- --
------------- ------------ ------------- ------------- ----------- ------------
Total assets.............................. 971,904 974,137 972,007 2,368,879 2,289,553 707,116

LIABILITIES:................................ -- -- -- -- -- --
------------- ------------ ------------- ------------- ----------- ------------
Net assets................................ $ 971,904 $ 974,137 $ 972,007 $2,368,879 $2,289,553 $ 707,116
------------- ------------ ------------- ------------- ----------- ------------
------------- ------------ ------------- ------------- ----------- ------------
Net asset distribution by category:
Variable life policies.................... $ 971,904 $ 974,137 $ 972,007 $2,368,879 $2,289,553 $ 707,116
------------- ------------ ------------- ------------- ----------- ------------
------------- ------------ ------------- ------------- ----------- ------------

Units outstanding, December 31, 1997........ 683,613 575,173 626,383 1,141,086 1,226,356 531,345
Net asset value per unit, December 31,
1997...................................... $1.421716 $1.693643 $1.551777 $ 2.075986 $ 1.866956 $1.330804

<CAPTION>
FIDELITY T. ROWE PRICE DGPF
VIP II INTERNATIONAL INTERNATIONAL
ASSET MANAGER STOCK EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance
Products Funds (VIP)...................... 517,054 -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- 529,556 --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- 575,511
------------- ------------- -------------
Total assets.............................. 517,054 529,556 575,511
LIABILITIES:................................ -- -- --
------------- ------------- -------------
Net assets................................ $ 517,054 $ 529,556 $ 575,511
------------- ------------- -------------
------------- ------------- -------------
Net asset distribution by category:
Variable life policies.................... $ 517,054 $ 529,556 $ 575,511
------------- ------------- -------------
------------- ------------- -------------
Units outstanding, December 31, 1997........ 332,908 432,633 402,759
Net asset value per unit, December 31,
1997...................................... $1.553143 $1.224031 $1.428923
</TABLE>

The accompanying notes are an integral part of these financial statements.

SA-2
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
FOR THE YEAR ENDED DECEMBER FOR THE YEAR ENDED DECEMBER
31, 31,
----------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 13,601 $ 7,259 $ 3,225 $ 18,772 $ 11,714 $ 8,047
--------- -------- -------- -------- -------- --------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 5,407 2,195 1,111 1,605 1,160 1,014
Administrative expense
fees.................... 1,502 610 308 446 322 282
--------- -------- -------- -------- -------- --------
Total expenses.......... 6,909 2,805 1,419 2,051 1,482 1,296
--------- -------- -------- -------- -------- --------
Net investment income
(loss).................. 6,692 4,454 1,806 16,721 10,232 6,751
--------- -------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 191,234 44,438 14,563 -- -- --
Net realized gain from
sales of investments.... 10,534 1,118 4,355 1,016 826 1,691
--------- -------- -------- -------- -------- --------
Net realized gain....... 201,768 45,556 18,918 1,016 826 1,691
Net unrealized gain
(loss).................. (42,649) 9,486 11,702 4,203 (5,164) 8,501
--------- -------- -------- -------- -------- --------
Net realized and
unrealized gain
(loss)................ 159,119 55,042 30,620 5,219 (4,338) 10,192
--------- -------- -------- -------- -------- --------
Net increase (decrease)
in net assets from
operations............ $ 165,811 $ 59,496 $ 32,426 $ 21,940 $ 5,894 $ 16,943
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------

MONEY MARKET EQUITY INDEX
FOR THE YEAR ENDED DECEMBER FOR THE YEAR ENDED DECEMBER
31, 31,
---------------------------- -----------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 52,306 $ 29,482 $ 19,962 $ 10,943 $ 3,519 $ 278
-------- -------- -------- --------- -------- --------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 6,125 3,818 3,134 4,839 1,224 491
Administrative expense
fees.................... 1,701 1,061 870 1,344 340 136
-------- -------- -------- --------- -------- --------
Total expenses.......... 7,826 4,879 4,004 6,183 1,564 627
-------- -------- -------- --------- -------- --------
Net investment income
(loss).................. 44,480 24,603 15,958 4,760 1,955 (349)
-------- -------- -------- --------- -------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- -- -- 31,998 4,610 3,752
Net realized gain from
sales of investments.... -- -- -- 12,757 4,070 100
-------- -------- -------- --------- -------- --------
Net realized gain....... -- -- -- 44,755 8,680 3,852
Net unrealized gain
(loss).................. -- -- -- 138,917 27,526 10,948
-------- -------- -------- --------- -------- --------
Net realized and
unrealized gain
(loss)................ -- -- -- 183,672 36,206 14,800
-------- -------- -------- --------- -------- --------
Net increase (decrease)
in net assets from
operations............ $ 44,480 $ 24,603 $ 15,958 $ 188,432 $ 38,161 $ 14,451
-------- -------- -------- --------- -------- --------
-------- -------- -------- --------- -------- --------
</TABLE>

The accompanying notes are an integral part of these financial statements.

SA-3
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ------------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 13,395 $ 11,232 $ 11,211 $ -- $ -- $ --
-------- -------- -------- --------- --------- --------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 1,437 1,307 1,678 9,966 4,437 2,474
Administrative expense
fees.................... 400 363 466 2,768 1,232 687
-------- -------- -------- --------- --------- --------
Total expenses.......... 1,837 1,670 2,144 12,734 5,669 3,161
-------- -------- -------- --------- --------- --------
Net investment income
(loss).................. 11,558 9,562 9,067 (12,734) (5,669) (3,161)
-------- -------- -------- --------- --------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- -- -- 161,459 64,509 --
Net realized gain from
sales of investments.... 1,338 413 1,190 20,458 22,167 1,962
-------- -------- -------- --------- --------- --------
Net realized gain....... 1,338 413 1,190 181,917 86,676 1,962
Net unrealized gain
(loss).................. 1,652 (4,855) 10,688 110,749 18,048 72,394
-------- -------- -------- --------- --------- --------
Net realized and
unrealized gain
(loss)................ 2,990 (4,442) 11,878 292,666 104,724 74,356
-------- -------- -------- --------- --------- --------
Net increase (decrease)
in net assets from
operations............ $ 14,548 $ 5,120 $ 20,945 $ 279,932 $ 99,055 $ 71,195
-------- -------- -------- --------- --------- --------
-------- -------- -------- --------- --------- --------

<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 4,885 $ 1,286 $ 23 $ 8,608 $ 3,662 $ 1,744
--------- --------- -------- --------- --------- --------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 6,152 1,569 875 3,860 1,619 876
Administrative expense
fees.................... 1,708 435 243 1,072 450 244
--------- --------- -------- --------- --------- --------
Total expenses.......... 7,860 2,004 1,118 4,932 2,069 1,120
--------- --------- -------- --------- --------- --------
Net investment income
(loss).................. (2,975) (718) (1,095) 3,676 1,593 624
--------- --------- -------- --------- --------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 84,825 61,596 -- 74,145 26,101 5,903
Net realized gain from
sales of investments.... 7,827 5,615 1,381 9,955 3,046 390
--------- --------- -------- --------- --------- --------
Net realized gain....... 92,652 67,211 1,381 84,100 29,147 6,293
Net unrealized gain
(loss).................. 178,767 (23,258) 13,793 27,327 15,235 17,723
--------- --------- -------- --------- --------- --------
Net realized and
unrealized gain
(loss)................ 271,419 43,953 15,174 111,427 44,382 24,016
--------- --------- -------- --------- --------- --------
Net increase (decrease)
in net assets from
operations............ $ 268,444 $ 43,235 $ 14,079 $ 115,103 $ 45,975 $ 24,640
--------- --------- -------- --------- --------- --------
--------- --------- -------- --------- --------- --------
</TABLE>

The accompanying notes are an integral part of these financial statements.

SA-4
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT
SELECT VALUE OPPORTUNITY** INTERNATIONAL
EQUITY
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ------------------
1997 1996 1995 1997 1996
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 6,715 $ 3,474 $ 1,306 $ 21,935 $ 8,686
--------- -------- -------- -------- --------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 5,335 1,989 1,266 4,837 1,791
Administrative expense
fees.................... 1,482 552 352 1,343 497
--------- -------- -------- -------- --------
Total expenses.......... 6,817 2,541 1,618 6,180 2,288
--------- -------- -------- -------- --------
Net investment income
(loss).................. (102) 933 (312) 15,755 6,398
--------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 161,396 22,066 4,889 30,519 1,024
Net realized gain from
sales of investments.... 9,659 20,692 2,486 7,247 888
--------- -------- -------- -------- --------
Net realized gain....... 171,055 42,758 7,375 37,766 1,912
Net unrealized gain
(loss).................. 13,106 31,714 14,137 (30,852) 51,093
--------- -------- -------- -------- --------
Net realized and
unrealized gain
(loss)................ 184,161 74,472 21,512 6,914 53,005
--------- -------- -------- -------- --------
Net increase (decrease)
in net assets from
operations............ $ 184,059 $ 75,405 $ 21,200 $ 22,669 $ 59,403
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------

SELECT CAPITAL APPRECIATION FIDELITY VIP HIGH INCOME
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, FOR THE PERIOD DECEMBER 31,
------------------- 4/28/95* -----------------------------
1995 1997 1996 TO 12/31/95 1997 1996 1995
-------- --------- -------- -------------------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 1,492 $ -- $ -- $ 2,134 $ 38,428 $ 18,458 $ 8,429
-------- --------- -------- ------- --------- -------- --------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 700 4,815 1,775 312 4,525 2,268 1,535
Administrative expense
fees.................... 194 1,338 493 87 1,257 630 426
-------- --------- -------- ------- --------- -------- --------
Total expenses.......... 894 6,153 2,268 399 5,782 2,898 1,961
-------- --------- -------- ------- --------- -------- --------
Net investment income
(loss).................. 598 (6,153) (2,268) 1,735 32,646 15,560 6,468
-------- --------- -------- ------- --------- -------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 589 -- 724 -- 4,749 3,611 --
Net realized gain from
sales of investments.... 441 9,538 829 169 3,431 561 2,195
-------- --------- -------- ------- --------- -------- --------
Net realized gain....... 1,030 9,538 1,553 169 8,180 4,172 2,195
Net unrealized gain
(loss).................. 9,816 124,106 6,477 12,007 70,794 20,923 20,200
-------- --------- -------- ------- --------- -------- --------
Net realized and
unrealized gain
(loss)................ 10,846 133,644 8,030 12,176 78,974 25,095 22,395
-------- --------- -------- ------- --------- -------- --------
Net increase (decrease)
in net assets from
operations............ $ 11,444 $ 127,491 $ 5,762 $13,911 $ 111,620 $ 40,655 $ 28,863
-------- --------- -------- ------- --------- -------- --------
-------- --------- -------- ------- --------- -------- --------
</TABLE>

* Date of initial investment.

** Name changed. See Note 1.

The accompanying notes are an integral part of these financial statements.

SA-5
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
FOR THE YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31,
------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 23,872 $ 1,094 $ 10,638 $ 9,562 $ 1,943 $ 1,164
--------- --------- --------- --------- --------- ---------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 11,759 6,486 3,803 11,865 6,641 3,677
Administrative expense
fees.................... 3,267 1,802 1,056 3,296 1,845 1,021
--------- --------- --------- --------- --------- ---------
Total expenses.......... 15,026 8,288 4,859 15,161 8,486 4,698
--------- --------- --------- --------- --------- ---------
Net investment income
(loss).................. 8,846 (7,194) 5,779 (5,599) (6,543) (3,534)
--------- --------- --------- --------- --------- ---------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 120,025 31,346 11,312 42,797 49,063 --
Net realized gain from
sales of investments.... 164,891 24,619 1,925 39,459 63,811 25,500
--------- --------- --------- --------- --------- ---------
Net realized gain....... 284,916 55,965 13,237 82,256 112,874 25,500
Net unrealized gain
(loss).................. 151,595 82,687 100,571 294,634 16,128 74,665
--------- --------- --------- --------- --------- ---------
Net realized and
unrealized gain
(loss)................ 436,511 138,652 113,808 376,890 129,002 100,165
--------- --------- --------- --------- --------- ---------
Net increase (decrease)
in net assets from
operations............ $ 445,357 $ 131,458 $ 119,587 $ 371,291 $ 122,459 $ 96,631
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------

FIDELITY VIP OVERSEAS
FOR THE YEAR ENDED DECEMBER
31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 9,519 $ 4,684 $ 991
-------- -------- --------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 4,004 3,195 2,877
Administrative expense
fees.................... 1,112 888 799
-------- -------- --------
Total expenses.......... 5,116 4,083 3,676
-------- -------- --------
Net investment income
(loss).................. 4,403 601 (2,685)
-------- -------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 37,788 5,152 990
Net realized gain from
sales of investments.... 14,898 12,559 6,939
-------- -------- --------
Net realized gain....... 52,686 17,711 7,929
Net unrealized gain
(loss).................. (1,354) 36,434 25,493
-------- -------- --------
Net realized and
unrealized gain
(loss)................ 51,332 54,145 33,422
-------- -------- --------
Net increase (decrease)
in net assets from
operations............ $ 55,735 $ 54,746 $ 30,737
-------- -------- --------
-------- -------- --------

FIDELITY VIP II
ASSET MANAGER
FOR THE YEAR ENDED DECEMBER
31,
----------------------------
1997 1996 1995
-------- -------- --------
INVESTMENT INCOME:
Dividends................. $ 12,689 $ 11,559 $ 4,679
-------- -------- --------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 2,739 2,266 2,345
Administrative expense
fees.................... 760 629 651
-------- -------- --------
Total expenses.......... 3,499 2,895 2,996
-------- -------- --------
Net investment income
(loss).................. 9,190 8,664 1,683
-------- -------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 31,831 9,531 --
Net realized gain from
sales of investments.... 2,956 5,309 1,938
-------- -------- --------
Net realized gain....... 34,787 14,840 1,938
Net unrealized gain
(loss).................. 33,391 18,987 36,035
-------- -------- --------
Net realized and
unrealized gain
(loss)................ 68,178 33,827 37,973
-------- -------- --------
Net increase (decrease)
in net assets from
operations............ $ 77,368 $ 42,491 $ 39,656
-------- -------- --------
-------- -------- --------
</TABLE>

The accompanying notes are an integral part of these financial statements.

SA-6
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
DGPF
INTERNATIONAL
EQUITY
FOR THE
T. ROWE PRICE INTERNATIONAL STOCK YEAR
FOR THE YEAR ENDED
ENDED DECEMBER
DECEMBER 31, FOR THE PERIOD 31,
------------------- 6/21/95* --------
1997 1996 TO 12/31/95 1997
--------- -------- -------------------- --------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 4,863 $ 1,950 $ -- $ 13,052
--------- -------- ----- --------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 2,461 708 60 3,063
Administrative expense
fees.................... 683 197 17 850
--------- -------- ----- --------
Total expenses.......... 3,144 905 77 3,913
--------- -------- ----- --------
Net investment income
(loss).................. 1,719 1,045 (77) 9,139
--------- -------- ----- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 6,889 1,162 -- --
Net realized gain from
sales of investments.... 3,203 162 7 7,136
--------- -------- ----- --------
Net realized gain....... 10,092 1,324 7 7,136
Net unrealized gain
(loss).................. (11,884) 12,983 984 1,321
--------- -------- ----- --------
Net realized and
unrealized gain
(loss)................. (1,792) 14,307 991 8,457
--------- -------- ----- --------
Net increase (decrease)
in net assets from
operations............. $ (73) $ 15,352 $914 $ 17,596
--------- -------- ----- --------
--------- -------- ----- --------

1996 1995
-------- --------
<S> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 5,289 $ 1,494
-------- --------
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 1,546 1,028
Administrative expense
fees.................... 430 285
-------- --------
Total expenses.......... 1,976 1,313
-------- --------
Net investment income
(loss).................. 3,313 181
-------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 1,423 560
Net realized gain from
sales of investments.... 2,086 533
-------- --------
Net realized gain....... 3,509 1,093
Net unrealized gain
(loss).................. 34,758 13,079
-------- --------
Net realized and
unrealized gain
(loss)................. 38,267 14,172
-------- --------
Net increase (decrease)
in net assets from
operations............. $ 41,580 $ 14,353
-------- --------
-------- --------
</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

SA-7
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
----------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 6,692 $ 4,454 $ 1,806 $ 16,721 $ 10,232 $ 6,751
Net realized gain....... 201,768 45,556 18,918 1,016 826 1,691
Net unrealized gain
(loss)................ (42,649) 9,486 11,702 4,203 (5,164) 8,501
----------- --------- -------- --------- --------- ---------
Net increase (decrease)
in net assets from
operations............ 165,811 59,496 32,426 21,940 5,894 16,943
----------- --------- -------- --------- --------- ---------

FROM CAPITAL TRANSACTIONS:
Net premiums............ 474,684 203,910 84,927 78,302 75,471 46,181
Terminations............ (36,020) (2,803) (1,044) (5,869) (424) (3,228)
Insurance and other
charges............... (112,391) (53,009) (22,406) (51,397) (47,840) (27,633)
Other transfers from
(to) the General
Account of First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. 222,893 111,886 67,949 169,945 48,635 30,065
Net increase (decrease)
in investment by First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. -- -- -- -- -- --
----------- --------- -------- --------- --------- ---------
Net increase in net
assets from capital
transactions.......... 549,166 259,984 129,426 190,981 75,842 45,385
----------- --------- -------- --------- --------- ---------
Net increase in net
assets................ 714,977 319,480 161,852 212,921 81,736 62,328
NET ASSETS:
Beginning of year......... 518,328 198,848 36,996 211,359 129,623 67,295
----------- --------- -------- --------- --------- ---------
End of year............... $ 1,233,305 $ 518,328 $198,848 $ 424,280 $ 211,359 $ 129,623
----------- --------- -------- --------- --------- ---------
----------- --------- -------- --------- --------- ---------

<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- ---------------------------------
1997 1996 1995 1997 1996 1995
----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 44,480 $ 24,603 $ 15,958 $ 4,760 $ 1,955 $ (349)
Net realized gain....... -- -- -- 44,755 8,680 3,852
Net unrealized gain
(loss)................ -- -- -- 138,917 27,526 10,948
----------- --------- --------- ----------- --------- ---------
Net increase (decrease)
in net assets from
operations............ 44,480 24,603 15,958 188,432 38,161 14,451
----------- --------- --------- ----------- --------- ---------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 945,902 967,172 446,809 415,586 115,667 42,559
Terminations............ (15,755) (5,135) (443) (26,880) (386) (100)
Insurance and other
charges............... (169,825) (133,467) (67,057) (107,505) (23,001) (6,670)
Other transfers from
(to) the General
Account of First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. (642,788) (342,447) (347,316) 412,109 84,515 30,743
Net increase (decrease)
in investment by First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. -- -- -- -- -- --
----------- --------- --------- ----------- --------- ---------
Net increase in net
assets from capital
transactions.......... 117,534 486,123 31,993 693,310 176,795 66,532
----------- --------- --------- ----------- --------- ---------
Net increase in net
assets................ 162,014 510,726 47,951 881,742 214,956 80,983
NET ASSETS:
Beginning of year......... 876,285 365,559 317,608 322,469 107,513 26,530
----------- --------- --------- ----------- --------- ---------
End of year............... $ 1,038,299 $ 876,285 $ 365,559 $ 1,204,211 $ 322,469 $ 107,513
----------- --------- --------- ----------- --------- ---------
----------- --------- --------- ----------- --------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

SA-8
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- ---------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss).................. $ 11,558 $ 9,562 $ 9,067 $ (12,734) $ (5,669) $ (3,161)
Net realized gain......... 1,338 413 1,190 181,917 86,676 1,962
Net unrealized gain
(loss).................. 1,652 (4,855) 10,688 110,749 18,048 72,394
--------- --------- --------- ----------- --------- ---------
Net increase (decrease) in
net assets from
operations.............. 14,548 5,120 20,945 279,932 99,055 71,195
--------- --------- --------- ----------- --------- ---------

FROM CAPITAL TRANSACTIONS :
Net premiums.............. 41,916 16,260 24,923 687,842 372,698 171,463
Terminations.............. (4,908) (509) (81) (38,504) (5,233) (2,228)
Insurance and other
charges................. (18,542) (11,019) (15,437) (181,723) (82,410) (35,943)
Other transfers from (to)
the General Account of
First Allmerica
Financial Life Insurance
Company (Sponsor)....... 6,311 439 1,342 362,408 162,380 87,433
Net increase (decrease) in
investment by First
Allmerica
Financial Life Insurance
Company (Sponsor)....... -- -- -- -- -- --
--------- --------- --------- ----------- --------- ---------
Net increase in net assets
from capital
transactions............ 24,777 5,171 10,747 830,023 447,435 220,725
--------- --------- --------- ----------- --------- ---------
Net increase in net
assets.................. 39,325 10,291 31,692 1,109,955 546,490 291,920

NET ASSETS:
Beginning of year........... 195,343 185,052 153,360 975,199 428,709 136,789
--------- --------- --------- ----------- --------- ---------
End of year................. $ 234,668 $ 195,343 $ 185,052 $ 2,085,154 $ 975,199 $ 428,709
--------- --------- --------- ----------- --------- ---------
--------- --------- --------- ----------- --------- ---------

<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss).................. $ (2,975) $ (718) $ (1,095) $ 3,676 $ 1,593 $ 624
Net realized gain......... 92,652 67,211 1,381 84,100 29,147 6,293
Net unrealized gain
(loss).................. 178,767 (23,258) 13,793 27,327 15,235 17,723
----------- --------- --------- --------- --------- ---------
Net increase (decrease) in
net assets from
operations.............. 268,444 43,235 14,079 115,103 45,975 24,640
----------- --------- --------- --------- --------- ---------
FROM CAPITAL TRANSACTIONS :
Net premiums.............. 506,794 145,541 66,424 290,841 119,171 65,999
Terminations.............. (44,279) (3,538) (792) (12,453) (2,514) (54)
Insurance and other
charges................. (115,457) (22,814) (11,479) (61,404) (31,629) (14,469)
Other transfers from (to)
the General Account of
First Allmerica
Financial Life Insurance
Company (Sponsor)....... 644,899 121,752 48,174 169,923 94,695 28,804
Net increase (decrease) in
investment by First
Allmerica
Financial Life Insurance
Company (Sponsor)....... -- -- -- -- -- --
----------- --------- --------- --------- --------- ---------
Net increase in net assets
from capital
transactions............ 991,957 240,941 102,327 386,907 179,723 80,280
----------- --------- --------- --------- --------- ---------
Net increase in net
assets.................. 1,260,401 284,176 116,406 502,010 225,698 104,920
NET ASSETS:
Beginning of year........... 438,632 154,456 38,050 383,551 157,853 52,933
----------- --------- --------- --------- --------- ---------
End of year................. $ 1,699,033 $ 438,632 $ 154,456 $ 885,561 $ 383,551 $ 157,853
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

SA-9
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL
SELECT VALUE OPPORTUNITY** EQUITY
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- --------------------
1997 1996 1995 1997 1996
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (102) $ 933 $ (312) $ 15,755 $ 6,398
Net realized gain....... 171,055 42,758 7,375 37,766 1,912
Net unrealized gain
(loss)................ 13,106 31,714 14,137 (30,852) 51,093
----------- --------- --------- --------- ---------
Net increase (decrease)
in net assets from
operations............ 184,059 75,405 21,200 22,669 59,403
----------- --------- --------- --------- ---------

FROM CAPITAL TRANSACTIONS:
Net premiums............ 346,332 161,845 102,108 338,808 139,918
Terminations............ (23,992) (1,968) (372) (15,339) (219)
Insurance and other
charges............... (95,362) (29,868) (17,489) (89,278) (28,163)
Other transfers from
(to) the General
Account of First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. 315,033 112,607 (4,768) 245,642 142,750
Net increase (decrease)
in investment by First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. -- -- -- -- (132)
----------- --------- --------- --------- ---------
Net increase in net
assets from capital
transactions.......... 542,011 242,616 79,479 479,833 254,154
----------- --------- --------- --------- ---------
Net increase in net
assets................ 726,070 318,021 100,679 502,502 313,557

NET ASSETS:
Beginning of year......... 503,546 185,525 84,846 469,402 155,845
----------- --------- --------- --------- ---------
End of year............... $ 1,229,616 $ 503,546 $ 185,525 $ 971,904 $ 469,402
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------

SELECT CAPITAL APPRECIATION FIDELITY VIP HIGH INCOME
YEAR YEAR
ENDED ENDED
DECEMBER 31, PERIOD FROM DECEMBER 31,
-------------------- 4/28/95* -------------------------------
1995 1997 1996 TO 12/31/95 1997 1996 1995
--------- --------- --------- -------------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 598 $ (6,153) $ (2,268) $ 1,735 $ 32,646 $ 15,560 $ 6,468
Net realized gain....... 1,030 9,538 1,553 169 8,180 4,172 2,195
Net unrealized gain
(loss)................ 9,816 124,106 6,477 12,007 70,794 20,923 20,200
--------- --------- --------- -------- --------- --------- ---------
Net increase (decrease)
in net assets from
operations............ 11,444 127,491 5,762 13,911 111,620 40,655 28,863
--------- --------- --------- -------- --------- --------- ---------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 54,409 248,779 219,527 33,186 342,979 202,526 137,014
Terminations............ (309) (24,135) (106) -- (13,891) (4,802) (4,400)
Insurance and other
charges............... (7,923) (72,669) (38,524) (3,733) (100,015) (48,126) (40,348)
Other transfers from
(to) the General
Account of First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. 83,949 197,028 199,365 68,350 142,447 65,471 17,757
Net increase (decrease)
in investment by First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. -- -- (295) 200 -- -- --
--------- --------- --------- -------- --------- --------- ---------
Net increase in net
assets from capital
transactions.......... 130,126 349,003 379,967 98,003 371,520 215,069 110,023
--------- --------- --------- -------- --------- --------- ---------
Net increase in net
assets................ 141,570 476,494 385,729 111,914 483,140 255,724 138,886
NET ASSETS:
Beginning of year......... 14,275 497,643 111,914 -- 488,867 233,143 94,257
--------- --------- --------- -------- --------- --------- ---------
End of year............... $ 155,845 $ 974,137 $ 497,643 $111,914 $ 972,007 $ 488,867 $ 233,143
--------- --------- --------- -------- --------- --------- ---------
--------- --------- --------- -------- --------- --------- ---------
</TABLE>

* Date of initial investment.

** Name changed. See Note 1.

The accompanying notes are an integral part of these financial statements.

SA-10
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- -----------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 8,846 $ (7,194) $ 5,779 $ (5,599) $ (6,543) $ (3,534)
Net realized gain....... 284,916 55,965 13,237 82,256 112,874 25,500
Net unrealized gain
(loss)................ 151,595 82,687 100,571 294,634 16,128 74,665
----------- ----------- --------- ----------- ----------- ---------
Net increase (decrease)
in net assets from
operations............ 445,357 131,458 119,587 371,291 122,459 96,631
----------- ----------- --------- ----------- ----------- ---------

FROM CAPITAL TRANSACTIONS:
Net premiums............ 606,490 500,943 293,480 713,592 616,709 291,237
Terminations............ (47,786) (10,042) (5,120) (42,813) (10,719) (6,100)
Insurance and other
charges............... (175,469) (113,065) (55,037) (245,583) (149,512) (64,540)
Other transfers from
(to) the General
Account of First
Allmerica Financial
Life Insurance Company
(Sponsor)............. 167,296 186,927 130,419 110,034 160,487 110,470
Net increase (decrease)
in investment by First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. -- -- -- -- -- --
----------- ----------- --------- ----------- ----------- ---------
Net increase in net
assets from capital
transactions.......... 550,531 564,763 363,742 535,230 616,965 331,067
----------- ----------- --------- ----------- ----------- ---------
Net increase in net
assets................ 995,888 696,221 483,329 906,521 739,424 427,698

NET ASSETS:
Beginning of year......... 1,372,991 676,770 193,441 1,383,032 643,608 215,910
----------- ----------- --------- ----------- ----------- ---------
End of year............... $ 2,368,879 $ 1,372,991 $ 676,770 $ 2,289,553 $ 1,383,032 $ 643,608
----------- ----------- --------- ----------- ----------- ---------
----------- ----------- --------- ----------- ----------- ---------

<CAPTION>
FIDELITY VIP II
FIDELITY VIP OVERSEAS ASSET MANAGER
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 4,403 $ 601 $ (2,685) $ 9,190 $ 8,664 $ 1,683
Net realized gain....... 52,686 17,711 7,929 34,787 14,840 1,938
Net unrealized gain
(loss)................ (1,354) 36,434 25,493 33,391 18,987 36,035
--------- --------- --------- --------- --------- ---------
Net increase (decrease)
in net assets from
operations............ 55,735 54,746 30,737 77,368 42,491 39,656
--------- --------- --------- --------- --------- ---------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 181,454 165,063 203,407 73,468 75,597 153,730
Terminations............ (11,455) (5,594) (4,920) (4,575) (1,519) (287)
Insurance and other
charges............... (54,192) (48,542) (40,139) (26,113) (22,165) (21,747)
Other transfers from
(to) the General
Account of First
Allmerica Financial
Life Insurance Company
(Sponsor)............. (2,073) (45,590) 16,353 34,648 (44,635) (47,361)
Net increase (decrease)
in investment by First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. -- -- -- -- (129) --
--------- --------- --------- --------- --------- ---------
Net increase in net
assets from capital
transactions.......... 113,734 65,337 174,701 77,428 7,149 84,335
--------- --------- --------- --------- --------- ---------
Net increase in net
assets................ 169,469 120,083 205,438 154,796 49,640 123,991
NET ASSETS:
Beginning of year......... 537,647 417,564 212,126 362,258 312,618 188,627
--------- --------- --------- --------- --------- ---------
End of year............... $ 707,116 $ 537,647 $ 417,564 $ 517,054 $ 362,258 $ 312,618
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

SA-11
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK
YEAR
ENDED
DECEMBER 31,
-------------------- PERIOD FROM
1997 1996 6/21/95* TO 12/31/95
--------- --------- --------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 1,719 $ 1,045 $ (77)
Net realized gain....... 10,092 1,324 7
Net unrealized gain
(loss)................ (11,884) 12,983 984
--------- --------- -------
Net increase (decrease)
in net assets from
operations............ (73) 15,352 914
--------- --------- -------

FROM CAPITAL TRANSACTIONS:
Net premiums............ 203,466 93,585 6,491
Terminations............ (11,363) (34) --
Insurance and other
charges............... (33,225) (12,631) (1,155)
Other transfers from
(to) the General
Account of First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. 135,971 112,453 19,805
Net increase (decrease)
in investment by First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. -- -- --
--------- --------- -------
Net increase in net
assets from capital
transactions.......... 294,849 193,373 25,141
--------- --------- -------
Net increase in net
assets................ 294,776 208,725 26,055

NET ASSETS:
Beginning of year......... 234,780 26,055 --
--------- --------- -------
End of year............... $ 529,556 $ 234,780 $26,055
--------- --------- -------
--------- --------- -------

<CAPTION>
DGPF INTERNATIONAL EQUITY
YEAR
ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 9,139 $ 3,313 $ 181
Net realized gain....... 7,136 3,509 1,093
Net unrealized gain
(loss)................ 1,321 34,758 13,079
--------- --------- ---------
Net increase (decrease)
in net assets from
operations............ 17,596 41,580 14,353
--------- --------- ---------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 198,749 102,071 99,444
Terminations............ (6,206) (1,727) (1,057)
Insurance and other
charges............... (43,358) (19,860) (12,807)
Other transfers from
(to) the General
Account of First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. 62,954 59,757 7,770
Net increase (decrease)
in investment by First
Allmerica
Financial Life
Insurance Company
(Sponsor)............. -- -- --
--------- --------- ---------
Net increase in net
assets from capital
transactions.......... 212,139 140,241 93,350
--------- --------- ---------
Net increase in net
assets................ 229,735 181,821 107,703
NET ASSETS:
Beginning of year......... 345,776 163,955 56,252
--------- --------- ---------
End of year............... $ 575,511 $ 345,776 $ 163,955
--------- --------- ---------
--------- --------- ---------
</TABLE>

* Date of initial investment.

The accompanying notes are an integral part of these financial statements.

SA-12
<PAGE>
VEL II ACCOUNT

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

NOTE 1 -- ORGANIZATION

The VEL II Account (VEL II) is a separate investment account of First Allmerica
Financial Life Insurance Company (the Company), established on April 1, 1994 for
the purpose of separating from the general assets of the Company those assets
used to fund the variable portion of certain flexible premium variable life
policies issued by the Company. The Company is a wholly-owned subsidiary of
Allmerica Financial Corporation (AFC). Under applicable insurance law, the
assets and liabilities of VEL II are clearly identified and distinguished from
the other assets and liabilities of the Company. VEL II cannot be charged with
liabilities arising out of any other business of the Company.

VEL II is registered as a unit investment trust under the Investment Company Act
of 1940, as amended (the 1940 Act). VEL II currently offers eighteen
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of the Company,
or of the Variable Insurance Products Fund (Fidelity VIP) or the Variable
Insurance Products Fund II (Fidelity VIP II) managed by Fidelity Management &
Research Company (FMR), or of T. Rowe Price International Series, Inc. (T. Rowe
Price) managed by Rowe Price-Fleming International, Inc. or of the Delaware
Group Premium Fund, Inc. (DGPF) managed by Delaware International Advisers, Ltd.
The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price, and DGPF (the Funds)
are open-end, diversified, management investment companies registered under the
1940 Act.

Effective April 1, 1997, the investment portfolio of the Trust, which was
formerly known as Small Cap Value Fund, changed its name to Small-Mid Cap Value
Fund. At the Meeting of Shareholders of the Small Cap Value Fund, held on March
18, 1997, shareholders approved the name change and the revisions in the
investment objective of the Fund from investing primarily in small cap value
stocks to investing primarily in small and mid-cap value stocks. Effective
January 9, 1998, this portfolio changed its name to Select Value Opportunity
Fund.

Certain prior year balances have been reclassified to conform with current year
presentation.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS -- Security transactions are recorded on the trade date. Investments
held by the Sub-Accounts are stated at the net asset value per share of the
respective investment portfolio of the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price, or DGPF. Net realized gains and losses on securities sold are
determined using the average cost method. Dividends and capital gain
distributions are recorded on the ex-dividend date and are reinvested in
additional shares of the respective investment portfolio of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, or DGPF at net asset value.

FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company" under
Subchapter L of the Internal Revenue Code (the Code) and files a consolidated
federal income tax return. The Company anticipates no tax liability resulting
from the operations of VEL II. Therefore, no provision for income taxes has been
charged against VEL II.

SA-13
<PAGE>
VEL II ACCOUNT

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 3 -- INVESTMENTS

The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price, and DGPF at December 31, 1997 were as follows:

<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
PORTFOLIO INVESTMENT SHARES COST PER SHARE
- -------------------------------------------------------- ----------- ---------- -----------
<S> <C> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth................................................ 510,474 $1,256,656 $ 2.416
Investment Grade Income............................... 381,547 417,906 1.112
Money Market.......................................... 1,038,299 1,038,299 1.000
Equity Index.......................................... 437,418 1,027,451 2.753
Government Bond....................................... 224,134 229,489 1.047
Select Aggressive Growth.............................. 937,148 1,883,400 2.225
Select Growth......................................... 938,174 1,529,684 1.811
Select Growth and Income.............................. 570,593 827,893 1.552
Select Value Opportunity*............................. 756,221 1,172,456 1.626
Select International Equity........................... 724,760 942,384 1.341
Select Capital Appreciation........................... 574,035 831,547 1.697

FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income........................................... 71,576 860,253 13.580
Equity-Income......................................... 97,565 2,032,744 24.280
Growth................................................ 61,713 1,895,525 37.100
Overseas.............................................. 36,829 651,942 19.200

FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager......................................... 28,709 433,483 18.010

T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock................................... 41,566 527,472 12.740

DELAWARE GROUP PREMIUM FUND, INC.:
DGPF International Equity............................. 37,082 527,192 15.520
</TABLE>

* Name changed. See Note 1.

NOTE 4 -- RELATED PARTY TRANSACTIONS

On the date of issue and each monthly payment date thereafter, a monthly charge
is deducted from the policy value to compensate the Company for the cost of
insurance, which varies by policy, the cost of any additional benefits provided
by rider, and a monthly administrative charge of $5. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value. For the years
ended December 31, 1997, 1996 and 1995, these monthly deductions from
Sub-Account policy values amounted to $1,753,508, $915,196 and $465,796,
respectively. These amounts are included on the statements of changes in net
assets in Insurance and other charges.

SA-14
<PAGE>
VEL II ACCOUNT

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)

The Company currently makes a charge of .65% per annum based on the average
daily net assets of each Sub-Account at each valuation date for mortality and
expense risks. The mortality and expense risk annual charge may be increased or
decreased by the Board of Directors of the Company once each year, subject to
compliance with applicable state and federal requirements, but the total charge
may not exceed 1.275% per annum. The Company also charges each Sub-Account .15%
per annum based on the average daily net assets of each Sub-Account for
administrative expenses. These charges are deducted in the daily computation of
unit values and paid to the Company on a daily basis.

Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned subsidiary
of the Company, is the principal underwriter and general distributor of VEL II,
and does not receive any compensation for sales of VEL II policies. Commissions
are paid to registered representatives of Allmerica Investments and of certain
independent broker-dealers by the Company. As the current series of policies
have a surrender charge, no deduction is made for sales charges at the time of
the sale. For the years ended December 31, 1997, 1996 and 1995, the Company
received $203,151, $52,133, and $14,169, respectively, for surrender charges
applicable to VEL II.

NOTE 5 -- DIVERSIFICATION REQUIREMENTS

Under the provisions of Section 817(h) of the Code, a variable life insurance
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of The Treasury.

The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. The Company believes that VEL II satisfies the current requirements of the
regulations, and it intends that VEL II will continue to meet such requirements.

SA-15
<PAGE>
VEL II ACCOUNT

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 6 -- PURCHASES AND SALES OF SECURITIES

Cost of purchases and proceeds from sales of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, and DGPF shares by VEL II during the year ended December
31, 1997 were as follows:

<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth........................................................... $ 835,021 $ 87,930
Investment Grade Income.......................................... 270,089 62,387
Money Market..................................................... 2,920,978 2,758,964
Equity Index..................................................... 806,301 76,233
Government Bond.................................................. 87,952 51,617
Select Aggressive Growth......................................... 1,085,896 107,148
Select Growth.................................................... 1,132,619 58,811
Select Growth and Income......................................... 539,479 74,751
Select Value Opportunity*........................................ 768,343 65,038
Select International Equity...................................... 600,335 74,229
Select Capital Appreciation...................................... 448,154 105,303

FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income...................................................... 451,679 42,764
Equity-Income.................................................... 1,937,907 1,258,505
Growth........................................................... 1,133,106 560,679
Overseas......................................................... 287,616 131,690

FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager.................................................... 145,899 27,451

T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock.............................................. 360,028 56,571

DELAWARE GROUP PREMIUM FUND, INC.:
DGPF International Equity........................................ 288,891 67,614
----------- ----------
Totals........................................................... $14,100,293 $5,667,685
----------- ----------
----------- ----------
</TABLE>

* Name changed. See Note 1.

SA-16
<PAGE>
APPENDIX A
OPTIONAL BENFITS

This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. For more information, contact your agent.

The following supplemental benefits are available for issue under the Policy for
an additional charge.

WAIVER OF PREMIUM RIDER

This Rider provides that during periods of total disability, continuing more
than four months, the Company will add to the Policy Value each month an
amount selected by you or the amount needed to pay the Policy charges,
whichever is greater. This value will be used to keep the Policy in force.
This benefit is subject to the Company's maximum issue benefits. Its cost
will change yearly.

GUARANTEED INSURABILITY RIDER

This Rider guarantees that insurance may be added at various option dates
without Evidence of Insurability. This benefit may be exercised on the
option dates even if the Insured is disabled.

OTHER INSURED RIDER

This Rider provides a term insurance benefit for up to five Insureds. At
present this benefit is only available for the spouse and children of the
primary Insured. The Rider includes a feature that allows the "other
Insured" to convert the coverage to a flexible premium adjustable life
insurance Policy.

CHILDREN'S INSURANCE RIDER

This Rider provides coverage for eligible minor children. It also covers
future children, including adopted children and stepchildren.

ACCIDENTAL DEATH BENEFIT RIDER

This Rider pays an additional benefit for death resulting from a covered
accident prior to the Policy anniversary nearest the Insured's Age 70.

EXCHANGE OPTION RIDER

This Rider allows you to use the Policy to insure a different person,
subject to Company guidelines.

LIVING BENEFITS RIDER

This Rider permits part of the proceeds of the Policy to be available before
death if the Insured becomes terminally ill or is permanently confined to a
nursing home.

GUARANTEED DEATH BENEFIT RIDER

This Rider, WHICH IS AVAILABLE ONLY AT DATE OF ISSUE, (a) guarantees that
the Policy will not lapse regardless of the performance of the Separate
Account, and (b) provides a guaranteed net death benefit.

Certain of these Riders may not be available in all states.

A-1
<PAGE>
APPENDIX B
DEATH PROCEEDS PAYMENT OPTIONS

PAYMENT OPTIONS

Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options below or any other option
offered by the Company. If you do not make an election, the Company will pay the
benefits in a single sum. A certificate will be provided to the payee describing
the payment option selected. If a payment option is selected, the Beneficiary
may pay to the Company any amount that otherwise would be deducted from the Sum
Insured.

The amounts payable under a payment option for each $1,000 value applied will be
the greater of:

- the rate per $1,000 of value applied based on the Company's non-guaranteed
current payment option rates for the Policy, or

- the rate in the Policy for the applicable payment option.

The following payment options currently are available. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the Separate Account.

<TABLE>
<C> <S>
Option A: PAYMENTS FOR A SPECIFIED NUMBER OF YEARS. The Company will make equal
payments for any selected number of years (not greater than 30). Payments
may be made annually, semi- annually, quarterly or monthly.

Option B: LIFETIME MONTHLY PAYMENTS. Payments are based on the payee's age on the date
the first payment will be made. One of three variations may be chosen.
Depending upon this choice, payments will end:
- upon the death of the payee, with no further payments due (Life Annuity), or
- upon the death of the payee, but not before the sum of the payments made
first equals or exceeds the amount applied under this option (Life Annuity
with Installment Refund), or
- upon the death of the payee, but not before a selected period (5, 10 or 20
years) has elapsed (Life Annuity with Period Certain).

Option C: INTEREST PAYMENTS. The Company will pay interest at a rate determined by the
Company each year, but which will not be less than 3 1/2%. Payments may be
made annually, semi-annually, quarterly or monthly. Payments will end when
the amount left with the Company has been withdrawn. Payments will not
continue, however, after the death of the payee. Any unpaid balance plus
accrued interest will be paid in a lump sum.

Option D: PAYMENTS FOR A SPECIFIED AMOUNT. Payments will be made until the unpaid
balance is exhausted. Interest will be credited to the unpaid balance. The
rate of interest will be determined by the Company each year, but will not
be less than 3 1/2%. Payments may be made annually, semi-annually, quarterly
or monthly. The payment level selected must provide for the payment each
year of at least 8% of the amount applied.

Option E: LIFETIME MONTHLY PAYMENTS FOR TWO PAYEES. One of three variations may be
chosen. After the death of one payee, payments will continue to the
survivor:
- in the same amount as the original amount; or
- in an amount equal to 2/3 of the original amount; or
- in an amount equal to 1/2 of the original amount.
</TABLE>

Payments are based on the payees' ages on the date the first payment is due.
Payments will end upon the death of the surviving payee.

B-1
<PAGE>
SELECTION OF PAYMENT OPTIONS

The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds becomes payable.

If the amount of monthly income payments under Option B(3) for the attained age
of the payee are the same for different periods certain, the Company will deem
an election to have been made for the longest period certain which could have
been elected for such age and amount.

You may give the Beneficiary the right to change from Option C or D to any other
option at any time. If the payee selects Option C or D when the Policy becomes a
claim, the right may be reserved to change to any other option. The payee who
elects to change options must be a payee under the option selected.

ADDITIONAL DEPOSITS

An additional deposit may be made to any proceeds when they are applied under
Option B or E. A charge not to exceed 3% will be made. The Company may limit the
amount of this deposit.

RIGHTS AND LIMITATIONS

A payee does not have the right to assign any amount payable under any option. A
payee does not have the right to commute any amount payable under Option B or E.
A payee will have the right to commute any amount payable under Option A only if
the right is reserved in the written request selecting the option. If the right
to commute is exercised, the commuted values will be computed at the interest
rates used to calculate the benefits. The amount left under Option C, and any
unpaid balance under Option D, may be withdrawn by the payee only as set forth
in the written request selecting the option.

A corporation or fiduciary payee may select only option A, C or D. Such
selection will be subject to the consent of the Company.

PAYMENT DATES

The first payment under any option, except Option C, will be due on the date the
Policy matures by death or otherwise, unless another date is designated.
Payments under Option C begin at the end of the first payment period.

The last payment under any option will be made as stated in the description of
that option. Should a payee under Option B or E die prior to the due date of the
second monthly payment, however, the amount applied less the first monthly
payment will be paid in a lump sum or under any option other than Option E. A
lump sum payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.

B-2
<PAGE>
APPENDIX C
ILLUSTRATIONS OF SUM INSURED, POLICY VALUES
AND ACCUMULATED PREMIUMS

The following tables illustrate the way in which the Policy's Sum Insured and
Policy Value could vary over an extended period of time.

ASSUMPTIONS

The tables illustrate a Policy issued to a male, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, and a Policy issued to
a male, Age 45, under a standard Premium Class and qualifying for the non-smoker
discount. In each case, one table illustrates the guaranteed cost of insurance
rates and the other table illustrates the current cost of insurance rates as
presently in effect.

The tables assume that no Policy loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Policy year (so that no transaction or transfer charges have been incurred).

The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown. The tables are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6%, and 12%. The second column of the tables
show the amount which would accumulate if an amount equal to the Guideline
Annual Premium were invested each year to earn interest (after taxes) at 5%,
compounded annually.

The Policy Values and Death Proceeds would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below such averages for individual Policy
years. The values also would be different depending on the allocation of the
Policy's total Policy Value among the Sub-Accounts of the Separate Account, if
the actual rates of return averaged 0%, 6% or 12%, but the rates of each
Underlying Fund varied above and below such averages.

DEDUCTIONS FOR CHARGES

The amounts shown for the Death Proceeds and the Policy Values take into account
the deduction from premium for the tax expense charge, the Monthly Deduction
from Policy Value, the daily charge against the Separate Account for mortality
and expense risks and the Separate Account administrative charge (for the first
ten Policy years). In the Current Cost of Insurance Tables, the Separate Account
charges are equivalent to an effective annual rate of 0.80% of the average daily
value of the assets in the Separate Account in the first ten Policy Years, and
0.65% thereafter. In the Guaranteed Cost of Insurance Charges Tables, the
Separate Account charges are equivalent to an effective annual rate of 1.15% of
the average daily value of the assets in the Separate Account in the first ten
Policy Years, and 0.90% thereafter.

EXPENSES OF THE UNDERLYING FUNDS

The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Fund. The actual fees
and expenses of each Underlying Fund vary, and in 1997 ranged from an annual
rate of 0.35% to an annual rate of 2.00% of average daily net assets. The fees
and expenses associated with your Policy may be more or less than 0.85% in the
aggregate, depending upon how you make allocations of Policy Value among the
Sub-Accounts.

AFIMS has declared a voluntary expense limitation of 1.35% of average net assets
for the Select Aggressive Growth Fund and Select Capital Appreciation Fund,
1.50% for the Select International Equity Fund, 1.25% for the Select Value
Opportunity Fund, 1.20% for the Growth Fund and Select Growth Fund, 1.10% for
the Select Growth and Income, 1.00% for the Investment Grade Income Fund and
Government Bond Fund, and

C-1
<PAGE>
0.60% for the Money Market Fund and Equity Index Fund. The total operating
expenses of these Funds of the Trust were less than their respective expense
limitations throughout 1997. These limitations may be terminated at any time.

Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. In 1997, the actual ratio of total annual expenses of
the International Equity Series was 0.85%.

NET ANNUAL RATES OF INVESTMENT

In the Current Cost of Insurance tables, taking into account the current
Separate Account mortality and expense risk charge, the current Separate Account
administrative charge, and the assumed 0.85% charge for Underlying Fund advisory
fees and operating expenses, the gross annual rates of investment return of 0%,
6% and 12% correspond to net annual rates of (-1.65%), 4.35%, 10.35%,
respectively, during the first ten Policy years and (-1.50%), 4.50% and 10.50%,
respectively, thereafter.

In the Guaranteed Cost of Insurance tables, taking into account the guaranteed
Separate Account mortality and expense risk charge, the guaranteed Separate
Account administrative charge, and the assumed 0.85% charge for Underlying Fund
advisory fees and operating expenses, the gross annual rates of investment
return of 0%, 6% and 12% correspond to net annual rates of (-2.00%), 4.00%,
10.00%, respectively, during the first ten Policy years and (-1.75%), 4.25% and
10.25%, respectively, thereafter.

The hypothetical returns shown in the tables do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
If in the future, however, such charges are made in order to produce illustrated
death benefits and cash values, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.

UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE, SEX, AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.

TO CHOOSE THE SUB-ACCOUNTS WHICH BEST WILL MEET YOUR NEEDS AND OBJECTIVES,
CAREFULLY READ THE PROSPECTUSES OF THE TRUST, FIDELITY VIP, FIDELITY VIP II, T.
ROWE PRICE AND DGPF ALONG WITH THIS PROSPECTUS.

C-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY

MALE NON-SMOKER AGE 45

SPECIFIED FACE AMOUNT = $250,000

SUM INSURED OPTION 1

CURRENT COST OF INSURANCE CHARGES

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,252 250,000 130 3,473 250,000 351 3,694 250,000
2 9,041 2,680 6,404 250,000 3,326 7,050 250,000 4,000 7,724 250,000
3 13,903 4,717 9,440 250,000 5,997 10,719 250,000 7,384 12,107 250,000
4 19,008 7,830 12,364 250,000 9,953 14,487 250,000 12,351 16,884 250,000
5 24,368 10,923 15,174 250,000 14,104 18,355 250,000 17,847 22,097 250,000
6 29,996 13,886 17,853 250,000 18,344 22,311 250,000 23,808 27,775 250,000
7 35,906 16,734 20,418 250,000 22,691 26,374 250,000 30,301 33,985 250,000
8 42,112 19,464 22,864 250,000 27,146 30,546 250,000 37,384 40,784 250,000
9 48,627 22,075 25,192 250,000 31,717 34,834 250,000 45,123 48,239 250,000
10 55,469 24,556 27,389 250,000 36,396 39,230 250,000 53,581 56,414 250,000
11 62,652 27,358 29,625 250,000 41,657 43,924 250,000 63,328 65,595 250,000
12 70,195 30,034 31,734 250,000 47,057 48,757 250,000 74,010 75,710 250,000
13 78,114 32,566 33,700 250,000 52,590 53,723 250,000 85,723 86,857 250,000
14 86,430 34,944 35,511 250,000 58,255 58,822 250,000 98,589 99,156 250,000
15 95,161 37,152 37,152 250,000 64,049 64,049 250,000 112,742 112,742 250,000
16 104,330 38,640 38,640 250,000 69,430 69,430 250,000 127,790 127,790 250,000
17 113,956 39,952 39,952 250,000 74,961 74,961 250,000 144,479 144,479 250,000
18 124,064 41,071 41,071 250,000 80,642 80,642 250,000 163,016 163,016 250,000
19 134,677 41,953 41,953 250,000 86,453 86,453 250,000 183,636 183,636 250,000
20 145,821 42,624 42,624 250,000 92,433 92,433 250,000 206,641 206,641 252,102
Age 60 95,161 37,152 37,152 250,000 64,049 64,049 250,000 112,742 112,742 250,000
Age 65 145,821 42,624 42,624 250,000 92,433 92,433 250,000 206,641 206,641 252,102
Age 70 210,477 41,947 41,947 250,000 125,077 125,077 250,000 362,587 362,587 420,601
Age 75 292,995 31,958 31,958 250,000 164,097 164,097 250,000 616,513 616,513 659,669
</TABLE>

(1) Assumes a $4,200 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.

(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value

THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6%, AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.

C-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY

MALE NON-SMOKER AGE 45

SPECIFIED FACE AMOUNT = $250,000

SUM INSURED OPTION 1

GUARANTEED COST OF INSURANCE CHARGES

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,140 250,000 15 3,358 250,000 234 3,577 250,000
2 9,041 2,427 6,150 250,000 3,059 6,782 250,000 3,718 7,442 250,000
3 13,903 4,308 9,031 250,000 5,550 10,273 250,000 6,899 11,621 250,000
4 19,008 7,247 11,781 250,000 9,295 13,828 250,000 11,610 16,143 250,000
5 24,368 10,145 14,395 250,000 13,194 17,445 250,000 16,787 21,037 250,000
6 29,996 12,906 16,873 250,000 17,156 21,123 250,000 22,371 26,338 250,000
7 35,906 15,520 19,204 250,000 21,167 24,851 250,000 28,393 32,076 250,000
8 42,112 17,976 21,376 250,000 25,219 28,619 250,000 34,885 38,285 250,000
9 48,627 20,264 23,381 250,000 29,303 32,419 250,000 41,891 45,007 250,000
10 55,469 22,370 25,203 250,000 33,404 36,238 250,000 49,451 52,284 250,000
11 62,652 24,638 26,905 250,000 37,897 40,164 250,000 58,042 60,309 250,000
12 70,195 26,705 28,405 250,000 42,402 44,102 250,000 67,336 69,036 250,000
13 78,114 28,564 29,697 250,000 46,915 48,048 250,000 77,416 78,549 250,000
14 86,430 30,205 30,771 250,000 51,429 51,996 250,000 88,372 88,938 250,000
15 95,161 31,605 31,605 250,000 55,929 55,929 250,000 100,301 100,301 250,000
16 104,330 32,176 32,176 250,000 59,830 59,830 250,000 112,752 112,752 250,000
17 113,956 32,459 32,459 250,000 63,682 63,682 250,000 126,427 126,427 250,000
18 124,064 32,418 32,418 250,000 67,458 67,458 250,000 141,483 141,483 250,000
19 134,677 32,009 32,009 250,000 71,125 71,125 250,000 158,105 158,105 250,000
20 145,821 31,181 31,181 250,000 74,651 74,651 250,000 176,517 176,517 250,000
Age 60 95,161 31,605 31,605 250,000 55,929 55,929 250,000 100,301 100,301 250,000
Age 65 145,821 31,181 31,181 250,000 74,651 74,651 250,000 176,517 176,517 250,000
Age 70 210,477 19,065 19,065 250,000 89,089 89,089 250,000 301,874 301,874 350,174
Age 75 292,995 0 0 250,000 92,732 92,732 250,000 498,911 498,911 533,835
</TABLE>

(1) Assumes a $4,200 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.

(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value

THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.

C-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY

MALE NON-SMOKER AGE 30

SPECIFIED FACE AMOUNT = $75,000

SUM INSURED OPTION 2

CURRENT COST OF INSURANCE CHARGES

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 302 1,195 76,195 379 1,273 76,273 456 1,350 76,350
2 3,014 1,364 2,367 77,367 1,593 2,597 77,597 1,832 2,836 77,836
3 4,634 2,513 3,516 78,516 2,971 3,975 78,975 3,467 4,471 79,471
4 6,336 3,678 4,641 79,641 4,444 5,407 80,407 5,307 6,270 81,270
5 8,123 4,839 5,743 80,743 5,994 6,897 81,897 7,347 8,251 83,251
6 9,999 5,977 6,820 81,820 7,603 8,446 83,446 9,587 10,430 85,430
7 11,969 7,091 7,874 82,874 9,273 10,056 85,056 12,045 12,828 87,828
8 14,037 8,176 8,898 83,898 11,001 11,723 86,723 14,739 15,462 90,462
9 16,209 9,236 9,898 84,898 12,793 13,456 88,456 17,698 18,360 93,360
10 18,490 10,261 10,863 85,863 14,642 15,244 90,244 20,936 21,539 96,539
11 20,884 11,366 11,848 86,848 16,672 17,154 92,154 24,618 25,100 100,100
12 23,398 12,449 12,810 87,810 18,779 19,141 94,141 28,665 29,026 104,026
13 26,038 13,507 13,747 88,747 20,965 21,206 96,206 33,112 33,353 108,353
14 28,810 14,538 14,658 89,658 23,232 23,352 98,352 38,001 38,121 113,121
15 31,720 15,540 15,540 90,540 25,579 25,579 100,579 43,374 43,374 118,374
16 34,777 16,393 16,393 91,393 27,889 27,889 102,889 49,162 49,162 124,162
17 37,985 17,209 17,209 92,209 30,279 30,279 105,279 55,531 55,531 130,531
18 41,355 17,987 17,987 92,987 32,750 32,750 107,750 62,542 62,542 137,542
19 44,892 18,726 18,726 93,726 35,304 35,304 110,304 70,260 70,260 145,260
20 48,607 19,425 19,425 94,425 37,942 37,942 112,942 78,757 78,757 153,757
Age 60 97,665 24,042 24,042 99,042 69,600 69,600 144,600 229,263 229,263 307,212
Age 65 132,771 24,104 24,104 99,104 89,105 89,105 164,105 380,579 380,579 464,307
Age 70 177,576 21,796 21,796 96,796 110,681 110,681 185,681 625,389 625,389 725,452
Age 75 234,759 16,149 16,149 91,149 133,533 133,533 208,533 1,023,378 1,023,378 1,098,378
</TABLE>

(1) Assumes a $1,400 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.

(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value

THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.

C-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY

MALE NON-SMOKER AGE 30

SPECIFIED FACE AMOUNT = $75,000

SUM INSURED OPTION 2

GUARANTEED COST OF INSURANCE CHARGES

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 276 1,170 76,170 353 1,247 76,247 430 1,323 76,323
2 3,014 1,307 2,310 77,310 1,533 2,536 77,536 1,769 2,772 77,772
3 4,634 2,417 3,421 78,421 2,867 3,870 78,870 3,354 4,358 79,358
4 6,336 3,538 4,502 79,502 4,286 5,249 80,249 5,128 6,092 81,092
5 8,123 4,649 5,552 80,552 5,770 6,673 81,673 7,085 7,988 82,988
6 9,999 5,729 6,572 81,572 7,300 8,143 83,143 9,218 10,061 85,061
7 11,969 6,779 7,561 82,561 8,876 9,659 84,659 11,544 12,327 87,327
8 14,037 7,797 8,519 83,519 10,500 11,222 86,222 14,079 14,802 89,802
9 16,209 8,783 9,445 84,445 12,171 12,833 87,833 16,843 17,506 92,506
10 18,490 9,737 10,339 85,339 13,889 14,491 89,491 19,857 20,459 95,459
11 20,884 10,748 11,230 86,230 15,756 16,238 91,238 23,257 23,739 98,739
12 23,398 11,727 12,088 87,088 17,676 18,038 93,038 26,967 27,328 102,328
13 26,038 12,674 12,914 87,914 19,653 19,894 94,894 31,017 31,257 106,257
14 28,810 13,587 13,708 88,708 21,685 21,806 96,806 35,438 35,558 110,558
15 31,720 14,469 14,469 89,469 23,775 23,775 98,775 40,268 40,268 115,268
16 34,777 15,195 15,195 90,195 25,802 25,802 100,802 45,422 45,422 120,422
17 37,985 15,885 15,885 90,885 27,887 27,887 102,887 51,064 51,064 126,064
18 41,355 16,539 16,539 91,539 30,030 30,030 105,030 57,240 57,240 132,240
19 44,892 17,157 17,157 92,157 32,233 32,233 107,233 64,001 64,001 139,001
20 48,607 17,735 17,735 92,735 34,494 34,494 109,494 71,402 71,402 146,402
Age 60 97,665 20,615 20,615 95,615 59,782 59,782 134,782 196,884 196,884 271,884
Age 65 132,771 19,026 19,026 94,026 73,177 73,177 148,177 316,625 316,625 391,625
Age 70 177,576 13,791 13,791 88,791 84,994 84,994 159,994 503,253 503,253 583,773
Age 75 234,759 2,689 2,689 77,689 91,935 91,935 166,935 793,519 793,519 868,519
</TABLE>

(1) Assumes a $1,400 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.

(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value

THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE VALUE
OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%, 6% AND 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.

C-6
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES

A separate surrender charge is calculated upon issuance of the Policy and upon
each increase in the Face Amount. The maximum surrender charge is equal to the
sum of (a) plus (b), where (a) is a deferred administrative charge equal to
$8.50 per $1,000 of the initial Face Amount (or Face Amount increase), and (b)
is a deferred sales charge of 49% of premiums received up to a maximum number of
Guideline Annual Premiums (GAPs) subject to the deferred sales charge that
varies by issue Age or Age at time of increase as applicable:

<TABLE>
<CAPTION>
APPLICABLE AGE MAXIMUM GAPS APPLICABLE AGE MAXIMUM GAPS
- -------------- --------------- -------------- ---------------
<S> <C> <C> <C>
0-55 1.660714 68 1.290612
56 1.632245 69 1.262143
57 1.603776 70 1.233673
58 1.575306 71 1.205204
59 1.546837 72 1.176735
60 1.518367 73 1.148265
61 1.489898 74 1.119796
62 1.461429 75 1.091327
63 1.432959 76 1.062857
64 1.404490 77 1.034388
65 1.376020 78 1.005918
66 1.347551 79 0.977449
67 1.319082 80 0.948980
</TABLE>

A further limitation is imposed based on the Standard Nonforfeiture Law of each
state. The maximum surrender charges upon issuance of the Policy and upon each
increase in the Face Amount are shown in the table below. During the first two
Policy years following issue or an increase in the Face Amount, the actual
surrender charge may be less than the maximum. See CHARGES AND
DEDUCTIONS--"Surrender Charge."

The maximum surrender charge initially remains level and then grades down
according to the following schedule:

<TABLE>
<CAPTION>
AGES
- ---------
<S> <C>
0-50 The maximum surrender charge remains level for the first 40 Policy months, reduces by 0.5% for the next
80 Policy months, then decreases by 1% per month to zero at the end of 180 Policy months (15 Policy
years).

51 and The maximum surrender charge remains level for 40 Policy months and decreases per month by the
above percentages below:

age 51 - 0.78% per month for 128 months
age 52 - 0.86% per month for 116 months
age 53 - 0.96% per month for 104 months
age 54 - 1.09% per month for 92 months
age 55 and over - 1.25% per month for 80 months
</TABLE>

D-1
<PAGE>
The Factors used in calculating the maximum surrender charges vary with the
issue Age, sex and Premium Class (Smoker) as indicated in the table below.

MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT

<TABLE>
<CAPTION>
Age at
issue or Male Male Female Female
increase Nonsmoker Smoker Nonsmoker Smoker
- --------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>

0 8.63 7.68
1 8.63 7.70
2 8.78 7.81
3 8.94 7.93
4 9.10 8.05
5 9.27 8.18
6 9.46 8.32
7 9.65 8.47
8 9.86 8.62
9 10.08 8.78
10 10.31 8.95
11 10.55 9.13
12 10.81 9.32
13 11.07 9.51
14 11.34 9.71
15 11.62 9.92
16 11.89 10.14
17 12.16 10.36
18 10.65 12.44 9.73 10.59
19 10.87 12.73 9.93 10.83
20 11.10 13.02 10.15 11.09
21 11.34 13.33 10.37 11.35
22 11.59 13.66 10.60 11.63
23 11.85 14.01 10.85 11.92
24 12.14 14.38 11.10 12.22
25 12.44 14.77 11.37 12.54
26 12.75 15.19 11.66 12.88
27 13.09 15.64 11.95 13.23
28 13.45 16.11 12.26 13.60
29 13.83 16.62 12.59 13.99
30 14.23 17.15 12.93 14.40
31 14.66 17.72 13.29 14.83
32 15.10 18.32 13.67 15.28
33 15.58 18.96 14.07 15.75
34 16.08 19.63 14.49 16.25
35 16.60 20.35 14.93 16.77
36 17.16 21.10 15.39 17.33
37 17.75 21.89 15.88 17.91
38 18.37 22.73 16.39 18.51
39 19.02 23.55 16.93 19.15
40 19.71 24.28 17.50 19.81
41 20.44 25.04 18.09 20.51
42 21.20 25.85 18.71 21.23
43 22.02 26.71 19.36 21.98
</TABLE>

D-2
<PAGE>
<TABLE>
<CAPTION>
Age at
issue or Male Male Female Female
increase Nonsmoker Smoker Nonsmoker Smoker
- --------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
44 22.87 27.61 20.04 22.77
45 23.61 28.56 20.76 23.56
46 24.36 29.57 21.52 24.23
47 25.15 30.63 22.33 24.94
48 26.00 31.16 23.14 24.69
49 26.90 32.95 23.83 26.47
50 27.85 34.21 24.57 27.31
51 28.87 35.56 25.35 28.18
52 29.96 36.99 26.17 29.11
53 31.12 38.25 27.05 30.09
54 32.56 38.25 27.95 31.12
55 33.67 38.25 28.97 32.21
56 34.62 38.25 29.65 32.94
57 35.61 38.25 30.36 33.70
58 36.65 38.25 31.11 34.49
59 37.73 38.25 32.74 36.23
60 38.25 38.25 32.74 36.23
61 38.25 38.25 33.63 37.18
62 38.25 38.25 34.57 38.18
63 38.25 38.25 35.56 38.25
64 38.25 38.25 36.60 38.25
65 38.25 38.25 37.68 38.25
66 38.25 38.25 38.25 38.25
67 38.25 38.25 38.25 38.25
68 38.25 38.25 38.25 38.25
69 38.25 38.25 38.25 38.25
70 38.25 38.25 38.25 38.25
71 38.25 38.25 38.25 38.25
72 38.25 38.25 38.25 38.25
73 38.25 38.25 38.25 38.25
74 38.25 38.25 38.25 38.25
75 38.25 38.25 38.25 38.25
76 38.25 38.25 38.25 38.25
77 38.25 38.25 38.25 38.25
78 38.25 38.25 38.25 38.25
79 38.25 38.25 38.25 38.25
80 38.25 38.25 38.25 38.25
</TABLE>

D-3
<PAGE>
EXAMPLES

For the purposes of these examples, assume that a male, Age 35, non-smoker,
purchases a $100,000 Policy. In this example the Guideline Annual Premium
("GAP") equals $1,118.22. His maximum surrender charge is calculated as follows:

(a) Deferred administrative charge $850.00
($8.50/$1,000 of Face Amount)

(b) Deferred sales charge $909.95
(49% X 1.660714 GAPs)

-----------

TOTAL $1,759.95

Maximum surrender charge per table on page 84 (16.60 X 100) $1,660.00

During the first two Policy years after the Date of Issue, the actual surrender
charge is the smaller of the maximum surrender charge and the following sum:

(a) Deferred administrative charge $850.00
($8.50/$1,000 of Face Amount)

(b) Deferred sales charge Varies
(not to exceed 29% of Premiums received,
up to one GAP, plus 9% of premiums
received in excess of one GAP, but
less than the maximum number of GAPs
subject to the deferred sales charge)

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

Sum of (a) and (b)

The maximum surrender charge is $1,660. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.

Example 1:

Assume the Policyowner surrenders the Policy in the tenth Policy month, having
paid total premiums of $900. The actual surrender charge would be $1,111.

Example 2:

Assume the Policyowner surrenders the Policy in the 120th month. After the 40th
Policy month, the maximum surrender charge decreases by 0.5% per month ($8.30
per month in this example). In this example, the maximum surrender charge would
be $996.

D-4