SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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

For the period ended: March 31, 1997

Commission file number: 33-67268
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ARM FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 61-1244251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (502) 582-7900

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. /X/ Yes / / No

As of March 31, 1997, 23,796 and 1,000 shares of the registrant's Class A
and Class B common stock, respectively, were outstanding, all of which are
privately owned and not traded on a public market.

TABLE OF CONTENTS

Item Page
- ----- ------

PART I. FINANCIAL INFORMATION

1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--
March 31, 1997 and December 31, 1996 . . . . . . . . . 3
Condensed Consolidated Statements of Operations--
Three Months Ended March 31, 1997 and 1996 . . . . . . 5
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1997 and 1996 . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 13

PART II. OTHER INFORMATION

1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 25
4. Submission of Matters to a Vote of Security Holders . . . 25
6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 25

Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 27

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

Carrying Amount Fair Value
-------------------------------- --------------------------
March 31, December 31, March 31, December 31,
(IN THOUSANDS) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)

ASSETS
Cash and investments:
Fixed maturities available-for-sale, at fair
value (amortized cost: March 31, 1997-
$3,235,336; December 31, 1996-$3,048,834) $ 3,191,109 $3,054,513 $3,191,109 $3,054,513

Equity securities, at fair value (cost: March
31, 1997-$21,405; December 31, 1996-$21,268) 22,160 22,552 22,160 22,552
Mortgage loans on real estate 28,963 36,879 28,963 36,879
Policy loans 123,297 123,466 123,297 123,466
Cash and cash equivalents 133,471 110,067 133,471 110,067
-------------------------------- --------------------------

Total cash and investments 3,499,000 3,347,477 3,499,000 3,347,477

Assets held in separate accounts 1,201,621 1,135,048 1,201,621 1,135,048

Accrued investment income 35,694 36,233 35,694 36,233
Value of insurance in force 50,798 52,024 124,191 112,389
Deferred policy acquisition costs 64,747 59,001 -- --
Goodwill 7,448 7,636 7,448 7,636

Deferred federal income taxes 53,182 35,604 45,763 42,653
Other assets 30,731 28,641 30,731 28,641
-------------------------------- --------------------------

Total assets $4,943,221 $4,701,664 $4,944,448 $4,710,077
-------------------------------- --------------------------
-------------------------------- --------------------------

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $3,499,471 $3,294,174 $3,433,495 $3,260,253

Customer deposits in separate accounts 1,196,830 1,130,159 1,196,830 1,130,159
Long-term debt 38,000 40,000 38,000 40,000
Accounts payable and accrued expenses 17,325 22,684 17,325 22,684
Payable for investment securities
purchased 8,378 10,431 8,378 10,431

Payable to reinsurer 10,000 10,000 10,000 10,000
Other liabilities 15,243 12,274 15,243 12,274
-------------------------------- --------------------------
Total liabilities 4,785,247 4,519,722 4,719,271 4,485,801

Contingencies

Shareholders' equity:

Preferred stock, $25.00 stated value 50,000 50,000
Class A common stock, $.01 par value,
23,796 shares issued * *

Class B common stock, $.01 par value,
1,000 shares issued * *

Additional paid-in capital 124,609 124,609
Net unrealized gains (losses) on
available-for-sale securities (26,721) 3,669

Retained earnings 10,086 3,664
--------------------------------
Total shareholders' equity 157,974 181,942 225,177 224,276
-------------------------------- --------------------------

Total liabilities and shareholders' equity $4,943,221 $4,701,664 $4,944,448 $4,710,077
-------------------------------- --------------------------
-------------------------------- --------------------------

* LESS THAN $1,000.

SEE ACCOMPANYING NOTES.

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996

(IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE AMOUNTS) 1997 1996
- --------------------------------------------------------------------------------

Investment income $69,700 $55,353

Interest credited on customer deposits (51,325) (41,198)
--------- --------
Net investment spread 18,375 14,155

Fee income:
Variable annuity fees 3,239 2,362
Asset management fees 1,884 1,515
Other fee income 397 271
-------- -------

Total fee income 5,520 4,148
Other income and expenses:

Surrender charges 882 1,570
Operating expenses (8,156) (6,983)
Commissions, net of deferrals (638) (544)
Interest expense on debt (686) (787)

Amortization:
Deferred policy acquisition costs (2,175) (1,687)
Value of insurance in force (2,241) (2,057)
Acquisition-related deferred charges (126) (500)
Goodwill (122) (122)

Non-recurring charges (1,445) --
Other, net (995) (732)
--------- --------
Total other income and expenses (15,702) (11,842)

Realized investment gains (losses) 2,231 (403)
--------- --------
Income before federal income taxes 10,424 6,058
Federal income tax expense (2,814) (1,573)
--------- --------

Net income 7,610 4,485

Dividends on preferred stock (1,188) (1,188)
--------- --------
Net income applicable to common shareholders $6,422 $3,297
--------- --------
--------- --------
Net income per common share $258.99 $133.09
--------- --------
--------- --------
Average common shares outstanding 24,796 24,773
--------- --------
--------- --------

SEE ACCOMPANYING NOTES.

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996

(IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $46,677 $36,533

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:

Purchases (1,199,200) (767,864)
Maturities and redemptions 59,905 46,702
Sales 947,397 663,577
Other investments:
Purchases (10,489) (23,893)
Maturities and redemptions 8,029 1,011
Sales 10,892 2,827
Policy loans, net 169 (1,971)

Purchase of separate account assets (102,059) (59,616)
Proceeds from sale of separate account assets 20,383 22,272
--------- --------
Cash flows used in investing activities (264,973) (116,955)

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts received from customers 357,581 309,293
Amounts paid to customers (112,693) (115,687)
Change in repurchase agreement liability -- (12,008)

Principal payment on long-term debt (2,000) --
Dividends on preferred stock (1,188) (1,188)
--------- --------
Cash flows provided by financing activities 241,700 180,410
--------- --------
Net increase in cash and cash equivalents 23,404 99,988

Cash and cash equivalents at beginning of period 110,067 76,896
--------- --------

Cash and cash equivalents at end of period $133,471 $176,884
--------- --------
--------- --------

SEE ACCOMPANYING NOTES.

ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1997 are not necessarily indicative of those to be expected for the
year ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
annual report on Form 10-K of ARM Financial Group, Inc. (the "Company") for
the year ended December 31, 1996.

Certain amounts from prior years have been reclassified to conform to the
current year's presentation. Such reclassifications had no effect on
previously reported net income or shareholders' equity.

2. FAIR VALUE BALANCE SHEETS

The consolidated balance sheets include a dual presentation of carrying
amount and fair value balances. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," fixed maturities classified as
available-for-sale are reported at fair value in the carrying amount balance
sheets; however, corresponding customer deposits are reported at historical
values. In contrast, in the fair value balance sheets, both assets and
liabilities are reported at fair value. As permitted by SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," the fair value
balance sheets are presented as a supplemental disclosure to provide a more
meaningful picture of the Company's financial position.

SFAS No. 107 requires disclosure of fair value information about all
financial instruments, including insurance liabilities classified as
investment contracts, unless specifically exempted. The accompanying fair
value balance sheets reflect fair values for those financial instruments
specifically covered by SFAS No. 107, along with fair value amounts for other
assets and liabilities for which disclosure is permitted but not required.

The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. Accordingly, the

aggregate fair value amounts presented do not necessarily represent the
underlying value of the Company.

The Company's management of interest rate risk reduces its exposure to
changing interest rates through a close matching of duration, convexity and
cash flow characteristics of both assets and liabilities while maintaining
liquidity redundancies (i.e., sources of liquidity in excess of projected
liquidity needs). As a result, fair values of the Company's assets and
liabilities will tend to respond similarly to changes in interest rates.

The following methods and assumptions were used in estimating fair values:

FIXED MATURITIES AND EQUITY SECURITIES
Fair values for fixed maturities and equity securities are based on quoted
market prices, where available. For fixed maturities for which a quoted
market price is not available, fair values are estimated using internally
calculated estimates or quoted market prices of comparable instruments.

MORTGAGE LOANS ON REAL ESTATE
Pursuant to the terms of the acquisition of certain of the Company's
insurance operations, payments of principal and interest on substantially its
entire mortgage loan portfolio are guaranteed by The National Mutual Life
Association of Australasia Limited ("National Mutual"). Principal received in
excess of statutory book value is to be returned to National Mutual.
Accordingly, book value is deemed to be fair value for these mortgage loans.

POLICY LOANS
The carrying amount of policy loans approximates their fair value.

CASH AND CASH EQUIVALENTS AND ACCRUED INVESTMENT INCOME
The carrying amount of cash and cash equivalents and accrued investment
income approximates their fair value given the short-term nature of these
assets.

ASSETS HELD IN SEPARATE ACCOUNTS AND CUSTOMER DEPOSITS IN SEPARATE ACCOUNTS
Fair value of assets held in separate accounts is based on the quoted
market prices of the underlying mutual funds for assets invested in variable
options. The fair value of assets held in separate accounts invested in
guaranteed rate options is primarily based on quoted market prices of fixed
maturity securities. The fair value of customer deposits in separate accounts
is based on the account values of the underlying policies, plus or minus
market value adjustments applicable to certain customers who are guaranteed a
fixed rate of return.

GOODWILL
The carrying amount of goodwill approximates fair value.

DEFERRED FEDERAL INCOME TAXES
The deferred federal income tax asset and related valuation allowance were
adjusted for federal income tax which may be incurred as a result of the
differences between the estimated fair values and carrying amounts of the
assets and liabilities.

CUSTOMER DEPOSITS AND VALUE OF INSURANCE IN FORCE
The fair value of customer deposits for single premium immediate annuity
contracts is based on discounted cash flow calculations using a current
market yield rate for assets with similar durations (i.e., indexed to the
U.S. Treasury yield curve). The fair value of customer deposits for single
premium immediate annuity contracts represents the fair values of those
contracts as a whole which implicitly eliminates the corresponding value of
insurance in force. The fair value amounts of the remaining customer
deposits, primarily related to deferred annuity contracts, single premium
endowment contracts and guaranteed investment contracts ("GICs"), represent
the account values of the underlying contracts before applicable surrender
charges. The fair value of the value of insurance in force represents the
estimated present value of future profits for all customer deposits,
excluding single premium immediate annuity contracts, assuming a discount
rate of 13%. Deferred policy acquisition costs do not appear on the fair
value presentation because those values are implicitly considered in the
determination of the fair value of the corresponding customer deposits and
value of insurance in force.

LONG-TERM DEBT AND PAYABLE TO REINSURER
The carrying amounts of long-term debt and payable to reinsurer approximate
fair value.

OTHER ASSETS AND LIABILITIES
The fair values of other assets and liabilities are reported at their
financial statement carrying amounts.

3. FEDERAL INCOME TAXES

Federal income taxes are different from the amount determined by
multiplying pretax earnings by the expected federal income tax rate of 35%.
The differences are primarily attributable to changes in valuation allowances
related to deferred federal income tax assets.

4. STATUTORY INFORMATION

Following is a reconciliation of income based on statutory accounting
practices prescribed or permitted by insurance regulatory authorities for the
Company's insurance subsidiaries with GAAP net income reported in the
accompanying condensed consolidated statements of operations:

Three Months Ended
March 31,
(IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------

Insurance subsidiaries (statutory-basis)(1) $9,886 $8,258
Non-insurance companies(2) 527 133
-------- -------
Consolidated statutory-basis pretax operating income 10,413 8,391

Reconciling items:
Amortization of interest maintenance reserve (926) (1,112)
Adjustments to invested asset carrying values at (9) (158)
acquisition date
Adjustments to customer deposits (1,272) 146
Interest expense on debt (686) (787)
Deferred policy acquisition costs, net of 4,872 3,148
amortization
Amortization of value of insurance in force (2,241) (2,057)
Amortization of acquisition-related deferred charges (126) (500)
Amortization of goodwill (122) (122)
Non-recurring charges (1,445) --

Realized investment gains (losses) 2,231 (403)
Other (265) (488)
-------- -------
GAAP-basis:
Income before federal income taxes 10,424 6,058
Federal income tax expense (2,814) (1,573)
-------- -------
Net income 7,610 4,485
Dividends on preferred stock (1,188) (1,188)
-------- -------
Net income applicable to common shareholders 6,422 3,297
Exclude, net of tax:
Realized investment (gains) losses (1,450) 262
Non-recurring charges 1,445 --
-------- -------
Operating earnings(3) $6,417 $3,559
-------- -------
-------- -------

(1) Insurance company statutory-basis pretax income excluding realized gains
and losses.
(2) Non-insurance company pretax income excluding amortization of
acquisition-related deferred charges, interest expense on debt, realized
investment gains and losses, and non-recurring corporate costs and
charges related to acquisition, financing and restructuring activities.
(3) Net income applicable to common shareholders, excluding, net of tax,
realized investment gains and losses and non-recurring charges.

5. NON-RECURRING CHARGES

The Company recorded non-recurring charges of $1.4 million in the first
quarter of 1997 including $1.0 million related to the relocation and
consolidation of the Company's main processing center from Columbus, Ohio to
Louisville, Kentucky and $0.4 million related to merger and acquisition
activities which did not result in a transaction. Additional costs associated
with the relocation and consolidation of approximately $4 million are
expected to be incurred through the end of the year.

6. SHAREHOLDERS' EQUITY

PUBLIC OFFERING OF COMMON STOCK

The Company filed a registration statement with the Securities and
Exchange Commission on October 23, 1996, and the amendments thereto on March
27, 1997 and May 7, 1997, with respect to the public offering (the
"Offering") of a yet to be determined number of shares of Class A common
stock, par value $.01 per share (the "New Class A Common Stock"). The
Company's decision to proceed with the Offering is subject to market and
other conditions. Prior to the consummation of the Offering, the Company
expects to amend and restate its Certificate of Incorporation and By-Laws to
effectuate a recapitalization such that (i) the common equity of the Company
will consist of New Class A Common Stock and Class B Common Stock, par value
of $.01 per share (the "New Class B Common Stock" and, together with the New
Class A Common Stock, the "New Common Stock"), (ii) each outstanding share of
common stock of the Company will be converted into one share of New Class A
Common Stock, (iii) certain shares of the New Class A Common Stock owned by
private equity funds sponsored by Morgan Stanley Group Inc. (the "Morgan
Stanley Stockholders," which at March 31, 1997 owned approximately 91% of the
outstanding shares of common stock of the Company) will be converted into New
Class B Common Stock such that, after giving effect to such conversion, but
not giving effect to the proposed Offering, the Morgan Stanley Stockholders
will own, in the aggregate, 49% of the outstanding New Class A Common Stock,
and (iv) each share of New Common Stock will be split into an as yet to be
determined number of shares of New Common Stock. Holders of New Class B
Common Stock will have no right to vote on matters submitted to a vote of
stockholders, except in certain circumstances. Shares of the New Class B
Common Stock will have no preemptive or other subscription rights and will be
convertible into an equal number of shares of New Class A Common Stock (1) at
the option of the holder thereof to the extent that, following such
conversion, the Morgan Stanley Stockholders will not, in the aggregate, own
more than 49% of the outstanding shares of New Class A Common Stock, and (2)
automatically upon the transfer of such shares by any Morgan Stanley
Stockholder to a person that is not a Morgan Stanley Stockholder or an
affiliate of a Morgan Stanley Stockholder. The registration statement has not
yet become effective.

STOCK OPTIONS

The Company's Stock Option Plan adopted in December 1993, as amended (the
"Plan"), provides for granting of options to purchase up to 3,445 shares of
Class A common stock. A total of 2,713 options were outstanding as of
March 31, 1997, of which 946 were exercisable. Each option

has an exercise price set initially at fair market value on the date of the
grant, as determined by the Board of Directors of the Company. The option
exercise price increases at the end of every three month period following the
date of grant at a rate of 12% per annum, compounded annually, while the
option remains issued but unexercised (or, if shorter, up to the date the
Plan is terminated or there are certain changes in the ownership of the
Company). Such options become exercisable in equal installments on the first
through fifth anniversaries of the date of grant. Upon certain events, such
as the Offering, options not previously granted will be automatically granted
on a pro rata basis to participants of the Plan.

The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its employee stock options. Under the
variable plan accounting requirements of APB No. 25, no stock-based
compensation expense has been recognized through March 31, 1997 for the Plan.
However, upon the effective date of the Offering, assuming it is consummated,
the Company will record a one-time stock-based compensation expense charge
related to the Plan equal to the aggregate difference between the initial
public offering price of the New Class A Common Stock and the exercise price
of the options.

Upon completion of the Offering, the Company will adopt the 1997 Equity
Incentive Plan (the "1997 Equity Plan"). The 1997 Equity Plan will be
administered by the Compensation Committee upon establishment thereof, and by
the Board of Directors prior to that time. The 1997 Equity Plan provides for
the granting of incentive stock options and nonqualified stock options, stock
appreciation rights, restricted stock, performance units, and performance
shares to those officers, and other key employees and consultants with
potential to contribute to the future success of the Company or its
subsidiaries; provided that only employees may be granted incentive stock
options.

EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which is required to be adopted by the Company on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
SFAS No. 128 on the calculation of fully diluted earnings per share is not
expected to be material.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The Company specializes in the asset accumulation business, providing
retail and institutional customers with products and services designed to
serve the growing long-term savings and retirement markets.

The Company's revenues are derived from its spread-based business and
its fee-based business. The products and services comprising the spread-based
and fee-based businesses are sold in two principal markets, the retail and
institutional markets, through a broad spectrum of distribution channels. In
the spread-based line of business the Company earns a spread between what is
earned on invested assets and what is credited to customer accounts. In the
fee-based line of business the Company receives a fee in exchange for
managing customers' deposits, and the customer accepts the investment risk.
The Company believes that market forces and population demographics are
producing and will continue to generate strong consumer demand for long-term
savings and retirement products, including variable, indexed and fixed
annuity products. Acquisitions by the Company have provided it with the
opportunity to leverage its resources and enter into new markets in order to
try to meet this demand. Although the Company's core business is developing
and managing spread-based investment products, it has also focused on the
development of its fee-based variable annuity business in addition to
exploring other alternatives to increase the size of the fee-based business
line. Fee-based business is less capital intensive than the spread-based
business and provides the Company with diversified sources of income.
Although the Company believes that it is desirable to achieve a reasonable
business mix between its spread-based and fee-based businesses, the business
mix may vary from time to time, due in part to opportunistic acquisitions and
market conditions.

The Company is negotiating to sell substantially all of the operations
of ARM Capital Advisors, Inc. ("ARM Capital Advisors"), a registered
investment adviser and wholly owned subsidiary of the Company that provides
asset management services to the Company's subsidiaries and certain
institutional clients, primarily defined benefit pension plans. Although
third-party assets managed by ARM Capital Advisors have grown since the
Company acquired this business in 1995, the Company believes that market
attitudes towards developing an asset management service for defined benefit
pension plans within a holding company structure consisting predominantly of
insurance companies has constrained ARM Capital Advisors' growth.
Accordingly, the Company intends to transfer substantially all of the assets
and operations of ARM Capital Advisors to a newly-formed and wholly owned
subsidiary, ARM Capital Advisors, LLC, and then sell an 80% interest in ARM
Capital Advisors, LLC to an entity controlled by Emad A. Zikry, President of
ARM Capital Advisors. The Company expects to recognize an immaterial gain on
the sale. Under the proposed terms of the sale, which are being negotiated,
ARM Capital Advisors, LLC will continue to provide the Company's subsidiaries
with investment management services through December 31, 1997 on the same
basis as in the past. The proposed terms of the sale further provide that
after December 31, 1997, the Company can continue to engage ARM Capital
Advisors, LLC as its investment adviser at agreed upon rates; but, the
Company may also consider retaining other investment management

firms. In connection with the proposed sale, Mr. Zikry will terminate his
employment with the Company. After consummation of the sale, ARM Capital
Advisors will be renamed Integrity Capital Advisors, Inc. ARM Capital
Advisors' management of defined benefit pension plan accounts generated asset
management fees of $1.9 million and $1.1 million during the first quarters of
1997 and 1996, respectively.

On December 13, 1996, the Company transferred its contracts to perform
management and advisory services for six mutual funds (the "State Bond Mutual
Funds") to Federated Investors because such funds were not considered a
strategic line of business for the Company. Asset management fee income during
the first quarter of 1996 included $0.4 million from the management of such
funds.

Had the sale of ARM Capital Advisors, LLC and the sale of the management
contracts for the State Bond Mutual Funds occurred on January 1, 1996, the pro
forma effects on the Company's net income for the three months ended March 31,
1997 and 1996 would have been immaterial.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1996

Net income during the first quarter of 1997 was $7.6 million compared to
$4.5 million for the first quarter of 1996. Operating earnings (net income
applicable to common shareholders, excluding, net of tax, realized investment
gains and losses and non-recurring charges) were $6.4 million and $3.6
million for the first quarters of 1997 and 1996, respectively. The increase
in operating earnings is primarily attributable to (i) an increase in net
investment spread due to ongoing asset/liability management and deposit
growth from sales of spread-based products and (ii) an increase in fee income
as a result of a growing base of variable annuity deposits. Such increases in
revenues were partially offset by an increase in operating expenses as a
result of increased marketing efforts.

Annualized spread-based operating earnings were 1.10% and 0.92% of
average spread-based assets under management of $3.65 billion and $2.92
billion during the first quarters of 1997 and 1996, respectively. This
increase in spread-based margins is primarily attributable to ongoing
asset/liability management, which generated higher net investment spreads.
Annualized fee-based operating earnings were 0.15% and 0.19% of average
fee-based assets under management of $4.27 billion and $2.75 billion during
the first quarters of 1997 and 1996, respectively. Fee-based margins for the
first quarter of 1997 decreased from the corresponding prior period due to
the growth of institutional fee-based assets under management which generate
lower margins than the Company's variable annuity deposits. Certain expenses
including federal income taxes and unallocated corporate overhead are not
reflected in annualized spread-based and fee-based operating earnings.

Net investment spread for the three months ended March 31, 1997 and 1996
was as follows:

Three Months Ended
March 31,
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------

Investment income $ 69,700 $ 55,353
Interest credited on customer deposits (51,325) (41,198)
---------------------------
Net investment spread $ 18,375 $ 14,155
---------------------------
---------------------------

Annualized investment yield 7.61% 7.58%
Annualized average credited rate 5.65% 5.64%
---------------------------
Investment spread 1.96% 1.94%
---------------------------
---------------------------

Average cash and investments $3,662,948 $2,922,814
Average spread-based customer deposits $3,634,028 $2,920,419

Changes in investment yield must be analyzed in relation to the liability
portfolios that they support. The annualized investment yield on cash and
investments, excluding assets supporting GIC deposits, was 7.98% for the first
quarter of 1997, up from 7.66% for the comparable 1996 period. This increase
reflects the benefits of ongoing investment portfolio management. In comparison,
the annualized investment yield on cash and investments supporting GIC deposits
was 6.61% and 6.47% for the first quarters of 1997 and 1996, respectively. GIC
deposits grew from $383.3 million at March 31, 1996 to $1,141.3 million at March
31, 1997. The proceeds from GIC sales are invested in securities of shorter
duration (which generally have lower investment yields) than the Company's other
investment portfolios. The average credited rate pattern is dependent upon the
general trend of interest rates, frequency of credited rate resets and business
mix. Crediting rates are reset monthly based on LIBOR for GICs and semi-annually
or annually for certain fixed annuities. To date, the Company has been able to
react to changes in market interest rates and maintain a desired investment
spread without a significant effect on surrender and withdrawal activity.

Fee income increased to $5.5 million in the first quarter of 1997 from $4.1
million in the first quarter of 1996. This increase is primarily attributable to
variable annuity fees, which are based on the market value of the mutual fund
assets supporting variable annuity customer deposits in separate accounts.
Variable annuity fees increased to $3.2 million in the first quarter of 1997
from $2.4 million in the first quarter of 1996 principally due to asset growth
from the receipt of variable annuity deposits and from a market-driven increase
in the value of existing variable annuity deposits invested in mutual funds.
Fee-based variable annuity deposits averaged $861.3 million in the first quarter
of 1997, an increase from $649.3 million in the first quarter of 1996. In
addition, asset management fees earned by ARM Capital Advisors on off-balance
sheet assets, primarily related to defined benefit pension plans (and, in 1996
only, fees from the State Bond Mutual Funds), increased to $1.9 million in the
first quarter of 1997 from $1.5 million in the first quarter of 1996, reflecting
a significant increase in the average fair value of off-balance sheet assets
managed, from $1.72 billion during the first quarter of 1996 to $3.04 billion
in the first quarter of 1997. As a result of the proposed sale of ARM Capital
Advisors' operations and the sale of the State Bond Mutual Funds, asset
management fee income is expected to decrease in the future.

Assets under management by type of product and service as of March 31, 1997
and 1996 were as follows:

March 31,
--------------------------------------
1997 1996
--------------------------------------
(DOLLARS IN MILLIONS) Percent of Percent of
Amount Total Amount Total
- ------------------------------------------------------------------------------------------------------

Spread-based:
Retail (fixed and indexed annuity and face-amount
certificate deposits) $2,653.5 52% $2,662.7 64%
Institutional (GIC deposits) 1,141.3 22 383.3 9
-------------------------------------
Total spread-based 3,794.8 74 3,046.0 73
Fee-based:

Retail (variable annuity deposits invested in mutual funds) 859.5 17 681.2 16

Institutional (off-balance sheet deposits under marketing
partnership arrangements) 368.7 7 385.3 9
-------------------------------------
Total fee-based* 1,228.2 24 1,066.5 25
Corporate and other (primarily cash and investments in
excess of customer deposits) 75.1 2 52.8 2
-------------------------------------
Total assets under management* $5,098.1 100% $4,165.3 100%
-------------------------------------
-------------------------------------

* Does not include off-balance sheet assets managed by ARM Capital Advisors for
institutional clients and, for 1996 only, off-balance sheet assets in the
State Bond Mutual Funds. Including such assets, total fee-based assets under
management at March 31, 1997 and 1996 were $4,520.1 million and $2,903.3
million, respectively, and total assets under management at March 31, 1997
and 1996 were $8,390.0 million and $6,002.1 million, respectively.

The increase in spread-based deposits was attributable to sales of GICs to
institutional customers. The increase in the fee-based line of business is
attributable to variable annuity sales. The Company continues to focus on its
fee-based variable annuity business to diversify its spread-based and fee-based
products and their associated channels of distribution.

Sales of spread-based products include premiums and deposits received for
products issued by the Company's insurance and face-amount certificate
subsidiaries. Sales of fee-based products include premiums for the investment
portfolio options of variable annuity products issued by the Company's insurance
subsidiaries.

Sales by market and type of business for the three months ended March 31,
1997 and 1996 were as follows:

Three Months Ended
March 31,
------------------
(IN MILLIONS) 1997 1996
- -------------------------------------------------------------------------------

Retail:
Spread-based $68.8 $11.9
Fee-based 36.3 57.0
-------------------
Total retail 105.1 68.9

Institutional:
Spread-based 248.6 239.6
-------------------
Total sales* $353.7 $308.5
-------------------
-------------------

* Does not include new deposits related to off-balance sheet assets managed by
ARM Capital Advisors for institutional clients and, for 1996 only, new
deposits in the State Bond Mutual Funds. Including such deposits, total
retail sales for the three months ended March 31, 1997 and 1996 were $105.1
million and $72.7 million, respectively, and total institutional sales for
the three months ended March 31, 1997 and 1996 were $881.9 million and $669.4
million, respectively.

The increase in retail sales was attributable to an increase in marketing
efforts surrounding the Company's spread-based guaranteed rate option annuity
product, partially offset by a decrease in fee-based variable annuity sales as a
result of weakening stock market returns. The Company's efforts to diversify
sales across distribution channels has increased its sales activity through
independent agents and stockbrokers. The Company's sales strategy is to broaden
its mix of products, services and distribution channels to enable it to achieve
its target sales within different interest rate environments.

Net surrenders of annuity products issued by the Company's insurance
subsidiaries were $76.1 million in the first quarter of 1997 compared to $88.6
million in the first quarter of 1996. Surrender charge income decreased to $0.9
million in the first quarter of 1997 from $1.6 million in the first quarter of
1996. The decrease in surrender charge income is primarily attributable to an
increase in partial surrenders which did not result in a surrender charge
penalty. Policies issued by the Company's insurance subsidiaries generally
include lapse protection provisions that provide a deterrent to surrenders when
interest rates rise. These provisions can include surrender charges and market
value adjustments on annuity withdrawals. During the period that surrender
charges are assessable, generally the first five to seven years after a policy
is issued, surrenders are relatively low. The surrender and withdrawal activity
during the first quarters of 1996 and 1997 was generally expected by the Company
due to the level of customer deposits written several years ago that were
subject to declining or expiring surrender charges, and the Company's strategy
of maintaining investment spreads. The Company has programs designed to reduce
surrender activity and improve persistency.

Operating expenses increased to $8.2 million in the first quarter of 1997
from $7.0 million in the first quarter of 1996. The increase is primarily
attributable to increased marketing efforts (including an increase in marketing
staff and additional investments in technology) to expand and enhance the
support of distribution channels in the retail and institutional markets. The
Company is actively pursuing and retaining producers within these distribution
channels to market its products.

Commissions, net of deferrals were $0.6 million and $0.5 million for the
three months ended March 31, 1997 and 1996, respectively, and represent renewal
and trailer commissions under certain deferred annuity contracts acquired
through the acquisition of substantially all of the assets and business
operations of SBM Company ("SBM").

Amortization of deferred policy acquisition costs related to operations was
$2.2 million and $1.7 million during the three months ended March 31, 1997 and
1996, respectively. This increase was the result of growth in the deferred
policy acquisition cost asset due to additional sales of fixed and variable
annuity products. Variable costs of selling and issuing the Company's insurance
subsidiaries' products (primarily first-year commissions) are deferred and then
amortized over the expected life of the contract.

Amortization of value of insurance in force related to operations of $2.2
million and $2.1 million for the three months ended March 31, 1997 and 1996,
respectively, primarily reflects the amortization of the value of insurance in
force established as an asset by the Company in connection with the acquisition
of SBM's insurance subsidiary.

Amortization of acquisition-related deferred charges of $0.1 million and
$0.5 million for the three months ended March 31, 1997 and 1996, respectively,
reflects amortization of certain costs incurred in connection with the Company's
acquisitions. The decrease was primarily attributable to certain deferred
charges related to the SBM acquisition being fully amortized at December 31,
1996.

The Company recorded non-recurring charges of $1.4 million in the first
quarter of 1997 including $1.0 million related to relocating the Company's main
processing center from Columbus, Ohio to Louisville, Kentucky and costs of $0.4
million for mergers and acquisitions activities that did not result in a
transaction. Costs associated with the relocation are expected to continue
through the end of the year.

Other expenses, net include premiums paid on agreements to reinsure
substantially all mortality risks associated with single premium endowment and
variable annuity deposits and benefits paid or provided to contract holders.

Realized investment gains, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $2.2
million in the first quarter of 1997 compared to realized investment losses of
$0.4 million in the first quarter of 1996. Such realized investment gains and
losses were interest-rate related and attributable to the ongoing management of
the Company's fixed maturity securities classified as available-for-sale which
can result in period-to-period swings in realized investment gains and losses
since securities are sold during both rising and falling interest rate
environments. The ongoing management of securities is a significant

component of the Company's asset/liability management strategy. The ongoing
portfolio management process involves evaluating the various asset sectors
(i.e., security types and industry classes) and individual securities
comprising the Company's investment portfolios and, based on market yield
rates, repositioning holdings from sectors perceived to be relatively
overvalued to sectors perceived to be undervalued with the aim of improving
cash flows. The Company endeavors to accomplish this repositioning without
materially changing the overall credit, asset duration, convexity, and
liquidity characteristics of its investment portfolios.

Federal income tax expense was $2.8 million and $1.6 million for the
quarters ended March 31, 1997 and 1996, respectively, reflecting effective
tax rates of 27.0% and 26.0%.

ASSET PORTFOLIO REVIEW

The Company primarily invests in fixed maturities with the objective of
earning reasonable returns while limiting credit and liquidity risks. The
amortized cost of fixed maturities at March 31, 1997 totaled $3.24 billion,
compared with $3.05 billion at December 31, 1996, representing 91% of total cash
and investments at both dates. This increase in fixed maturities is primarily
attributable to the investment of the proceeds from the sales of GICs.

The Company's cash and investments as of March 31, 1997 are detailed as
follows:

Amortized Cost
----------------------
Percent of Estimated
(DOLLARS IN MILLIONS) Amount Total Fair Value
- -------------------------------------------------------------------------------

Fixed maturities:
Corporate securities $1,114.1 31.5% $1,088.0
U.S. Treasury securities and obligations
of U.S. government agencies 169.7 4.8 169.0
Other government securities 49.8 1.4 46.9

Asset-backed securities 380.0 10.7 376.4
Mortgage-backed securities ("MBSs"):
Agency pass-throughs 262.7 7.4 262.3
Collateralized mortgage obligations
("CMOs"):
Agency 326.0 9.2 323.1
Non-agency 914.3 25.8 906.3
Interest only 18.7 0.5 19.1
----------------------------------
Total fixed maturities 3,235.3 91.3 3,191.1

Equity securities (i.e., non-redeemable 21.4 0.6 22.2
preferred stocks)

Mortgage loans on real estate 29.0 0.8 29.0
Policy loans 123.3 3.5 123.3
Cash and cash equivalents 133.4 3.8 133.4
----------------------------------
Total cash and investments $3,542.4 100.0% $3,499.0
----------------------------------
----------------------------------

Agency pass-through certificates are MBSs which represent an undivided
interest in a specific pool of residential mortgages. The payment of principal
and interest is guaranteed by the U.S. government or U.S. government agencies.
CMOs are pools of mortgages that are segregated into sections, or tranches,
which provide prioritized retirement of bonds rather than a pro rata share of
principal return as in the pass-through structure. The underlying mortgages of
agency CMOs are guaranteed by the U.S. government or U.S. government agencies.
Of the Company's non-agency CMOs (on an amortized cost basis), 67.3% use
mortgage loans or mortgage loan pools, letters of credit, agency mortgage pass-
through securities and other types of credit enhancement as collateral. The
remaining 32.7% of the non-agency CMOs use commercial mortgage loans as
collateral.

The Company manages prepayment exposure on CMO holdings by diversifying not
only within the more stable CMO tranches, but across alternative collateral
classes such as commercial mortgages and Federal Housing Administration project
loans, which are generally less volatile than agency-backed, residential
mortgages. Additionally, prepayment sensitivity is evaluated and monitored,
giving full consideration to the collateral characteristics such as weighted
average coupon rate, weighted average maturity and the prepayment history of the
specific collateral. MBSs are subject to risks associated with prepayments of
the underlying collateral pools. Prepayments cause these securities to have
actual maturities different from those projected at the time of purchase.
Securities that have an amortized cost that is greater than par (i.e., purchased
at a premium) that are backed by mortgages that prepay faster than expected will
incur a reduction in yield or a loss, versus an increase in yield or a gain if
the mortgages prepay slower than expected. Those securities that have an
amortized cost that is less than par (i.e., purchased at a discount) that are
backed by mortgages that prepay faster than expected will generate an increase
in yield or a gain, versus a decrease in yield or a loss if the mortgages prepay
slower than expected. The reduction or increase in yields is partially offset as
funds from prepayments are reinvested at current interest rates. The degree to
which a security is susceptible to either gains or losses is influenced by the
difference between its amortized cost and par, the relative sensitivity of the
underlying mortgages backing the assets to prepayments in a changing interest
rate environment and the repayment priority of the securities in the overall
securitization structure. The Company had gross unamortized premiums and
unaccreted discounts of MBSs of $32.7 million and $39.0 million, respectively,
at March 31, 1997. Although the interest rate environment has experienced
significant volatility during 1996 and the first quarter of 1997, prepayments
and extensions of cash flows from MBSs have not materially affected investment
income of the Company.

Asset-backed securities ("ABSs") are securitized bonds which can be backed
by, but not limited to, collateral such as home equity loans, second mortgages,
automobile loans, and credit card receivables. Home equity loan collateral
represents 61.7% of the Company's investments in the ABS market. The typical
structure of an ABS provides for favorable yields, high credit ratings and
stable prepayments.

Total cash and investments (on an amortized cost basis) were 93% and 96%
investment grade or equivalent as of March 31, 1997 and December 31, 1996,
respectively. Investment grade securities are those classified as 1 or 2 by
the NAIC or, where such classifications are not available, having a rating on
the scale used by Standard & Poor's Corporation ("S&P") of BBB- or above.
Yields available on non-investment grade securities are generally higher than
are available on investment grade securities. However,

credit risk is greater with respect to such non-investment grade securities.
The Company attempts to reduce the risks associated with non-investment grade
securities by limiting the exposure to any one issuer and by closely
monitoring the creditworthiness of such issuers. Additionally, the Company's
investment portfolio has minimal exposure to real estate, non-indemnified
mortgage loans and common equity securities, which represented less than 0.1%
of cash and investments as of March 31, 1997.

The Company continually monitors and analyzes its investment portfolio,
including below investment grade securities, in order to determine if its
ability to realize its carrying value on any investment has been impaired. For
fixed maturity and equity securities, if impairment in value is determined to be
other than temporary (i.e., if it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the security), the
cost basis of the impaired security is written down to fair value, which becomes
the security's new cost basis. The amount of the write-down is included in
earnings as a realized loss. Future events may occur, or additional or updated
information may be received, which may necessitate future write-downs of
securities in the Company's portfolio. Significant write-downs in the carrying
value of investments could materially adversely affect the Company's net income
in future periods.

At March 31, 1997 the ratings assigned by the NAIC and comparable S&P
ratings on the Company's fixed maturity portfolio, and the percentage of
total fixed maturity investments classified in each category, were as follows:

Amortized Cost
---------------------
Percent Estimated
NAIC Designation (Comparable S&P Rating) Amount of Total Fair Value
- -------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)

1 (AAA, AA, A) $2,263.1 70% $2,237.3
2 (BBB) 730.6 23 722.0
3 (BB) 165.9 5 157.8

4 (B) 71.0 2 69.3
5 (CCC, CC, C) 4.7 * 4.7
6 (CI, D) -- -- --
------------------------------
Total fixed maturities $3,235.3 100% $3,191.1
------------------------------
------------------------------

* Less than 1%.

Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company classifies its entire fixed maturities portfolio
as available-for-sale. Fixed maturities classified as available-for-sale are
carried at fair value and changes in fair value, net of related value of
insurance in force and deferred policy acquisition cost amortization and
deferred income taxes, are charged or credited directly to shareholders' equity.

The rise in interest rates during the first quarter of 1997 resulted in net
unrealized losses on available-for-sale securities which totaled $26.7 million
(net of $2.4 million of related amortization and $14.4 million in deferred
income taxes) at March 31, 1997, compared to net unrealized gains of $3.7
million (net of $1.3 million of related amortization and $2.0 million in
deferred income taxes) at December 31, 1996. This volatility in reported
shareholders' equity occurs as a result of SFAS No. 115 which requires that
available-for-sale securities be carried at fair value while corresponding
customer deposit liabilities are carried at historical values. At March 31, 1997
and December 31, 1996, shareholders' equity excluding the effects of SFAS No.
115 was $184.7 million and $178.3 million, respectively.

The Company manages assets and liabilities in a closely integrated manner,
with the aim of reducing the volatility of investment spreads during a changing
interest rate environment. As a result, adjusting shareholders' equity for
changes in the fair value of the Company's fixed maturities and equity
securities without reflecting offsetting changes in the value of the Company's
liabilities creates volatility in reported shareholders' equity but does not
fully reflect the underlying economics of the Company's business. The Company's
accompanying consolidated financial statements include fair value balance sheets
which demonstrate that the general rise in interest rates during 1997 do not
have a material effect on the financial position of the Company when all assets
and liabilities are adjusted to estimated fair values.

Mortgage loans on real estate represented approximately 1% of total cash
and investments at March 31, 1997 and December 31, 1996. Pursuant to the
terms of the acquisition of certain of the Company's insurance operations,
National Mutual has indemnified the Company with respect to principal (up to
100% of the investments' year-end 1992 statutory book value) and interest
with respect to approximately 99% of these loans at March 31, 1997. In
support of its indemnification obligations, National Mutual placed $23.0
million into escrow in favor of the Company's insurance subsidiaries, which
will remain available until the subject commercial and agricultural loans
have been paid in full.

LIQUIDITY AND FINANCIAL RESOURCES

HOLDING COMPANY OPERATIONS

The Company's principal need for liquidity has historically consisted of
debt service obligations under its bank financing agreement, dividend
payments on its preferred stock, operating expenses, and corporate
development expenditures. The Company is dependent on dividends from
Integrity Life Insurance Company ("Integrity") and management and service fee
income from the Company's subsidiaries to meet ongoing cash needs, including
amounts required to pay dividends on its preferred stock.

The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates is limited by state insurance laws. In
March 1997, the Company received a dividend of $7.0 million from Integrity. The
maximum dividend payments that may be made by Integrity to the Company during
1997 without prior approval of the Ohio Insurance Director are $26.0 million.

The Company had cash and investments at the holding company level of $8.8
million at March 31, 1997. In addition, $20.0 million was available on unused
bank lines of credit at March 31, 1997.

On October 23, 1996, as amended on March 27, 1997 and May 7, 1997, the
Company filed a registration statement with the Securities and Exchange
Commission with respect to the public offering of a yet to be determined
number of shares of New Class A Common Stock. The Company's decision to
proceed with the Offering is subject to market and other conditions.

INSURANCE SUBSIDIARIES OPERATIONS

The primary sources of liquidity of the Company's insurance subsidiaries
are investment income and proceeds from maturities and redemptions of
investments. The principal uses of such funds are benefits, withdrawals and
loans associated with customer deposits, commissions, operating expenses, and
the purchase of new investments.

The Company develops cash flow projections under a variety of interest rate
scenarios generated by the Company. The Company attempts to structure asset
portfolios so that the interest and principal payments, along with other fee
income, are more than sufficient to cover the cash outflows for benefits,
withdrawals and expenses under the expected scenarios developed by the Company.
In addition, the Company maintains other liquid assets and aims to meet
unexpected cash requirements without exposure to material realized losses during
a higher interest rate environment. These other liquid assets include cash and
cash equivalents and high-grade floating-rate securities held by both the
Company and its insurance subsidiaries. The Company also has $20.0 million
available on unused bank lines of credit as mentioned above.

During the quarters ended March 31, 1997 and 1996, the Company met its
liquidity needs entirely by cash flows from operating activities and principal
payments on and redemptions of investments. At March 31, 1997, cash and cash
equivalents totaled $133.5 million compared to $110.1 million at December 31,
1996. The Company's aim is to manage its cash and cash equivalents position in
order to satisfy short-term liquidity needs. In connection with this management
of cash and cash equivalents, the Company may invest idle cash in short-duration
fixed maturities to capture additional yield when short-term liquidity
requirements permit.

The Company generated cash flows of $46.7 million and $36.5 million from
operating activities during the quarters ended March 31, 1997 and 1996,
respectively. These cash flows resulted principally from investment income, less
commissions and operating expenses. Proceeds from sales, maturities and
redemptions of investments generated $1,026.2 million and $714.1 million in cash
flows during the quarters ended March 31, 1997 and 1996, respectively, which
were offset by purchases of investments of $1,209.7 million and $791.8 million,
respectively. An increase in investment purchases and sales activity during the
first quarter of 1997 reflects the Company's ongoing management of its fixed
maturity portfolio which has increased in size due to sales of spread-based
products.

FORWARD-LOOKING STATEMENTS

The Company has made a number of forward-looking statements in this
document that are subject to risks and uncertainties. Forward-looking
statements include the information concerning possible or assumed future
results of operations and those preceded by, followed by or that include the
words "believes," "expects," "anticipates" or similar expressions. Such
forward-looking statements are based on the Company's beliefs as to its
competitive position in its industry and the factors affecting its business.
In particular, the statements of the Company's belief as to the stimulation
of future demand for long-term savings and retirement products, including
variable, indexed and fixed annuity products under the heading "General" are
forward-looking statements. Factors that could cause actual results to differ
materially from the forward-looking statements related to the demand for
variable, indexed and fixed annuity products include, but are not limited to,
a change in population demographics, development of alternative investment
products, a change in economic conditions, and changes in current federal
income tax laws. In addition, there can be no assurance that (i) the Company
has correctly identified and assessed all of the factors affecting its
business; (ii) the publicly available and other information on which the
Company has based its analyses is complete or correct; (iii) the Company's
analyses are correct; or (iv) the Company's strategy, which is based in part
on these analyses, will be successful.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As a consequence of the acquisition of State Bond and Mortgage Life
Insurance Company and its merger with and into Integrity, Integrity became a
party to a marketing agreement with Multico Marketing Corporation
("Multico"). In reliance upon the marketing agreement, Integrity eliminated
commissions to Multico on new product sales on a prospective basis effective
July 1, 1995. Multico filed a lawsuit in the United States District Court for
the Western District of Kentucky against Integrity on February 23, 1996,
alleging breach of contract and breach of the covenant of good faith and fair
dealing, and seeking a trial by jury and compensatory and punitive damages of
approximately $61 million. Integrity filed a counterclaim against Multico
seeking a declaration that Integrity's actions in revising commissions did
not constitute a breach of contract, and the recovery of commissions, fees,
trailers, overwrites, and bonuses paid to Multico in the amount of
approximately $9.3 million. Discovery is proceeding between the parties. On
May 23, 1996, Integrity filed a motion for summary judgement in the
litigation; this motion was denied by the court on March 10, 1997. It is
anticipated that the parties will proceed with further discovery. Company
management believes that the ultimate resolution of this litigation will not
result in any material adverse impact to the financial position of the
Company.

Except as described above, the Company is currently involved in no
material legal or administrative proceedings that could result in a material
adverse impact to the financial position of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On January 28, 1997, a majority of the stockholders of the Company, by
written consent in lieu of a special meeting, approved the election of Colin F.
Raymond as a director of the Company to fill the vacancy on the Board created by
the resignation of David R. Ramsey.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

REPORTS ON FORM 8-K

The Company did not file any reports on Form 8-K during the three months
ended March 31, 1997.

EXHIBITS

10.1 Engagement Agreement, dated March 12, 1993, between Analytical
Risk Management, Ltd. and General American Life Insurance
Company-Group Pension (incorporated by reference to Exhibit 10.27
to Form S-1 (file no. 333-14693) filed by the Registrant on
October 23, 1996. Portion of the exhibit have been omitted
pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission under Rule 406 of the
Securities Act of 1933, as amended. The omitted material has
been filed separately with the Securities and Exchange
Commission).

10.2 Consent to Assignment of Engagement Agreement, dated September 8,
1993, by General American Life Insurance Company-Group Pension
(incorporated by reference to Exhibit 10.28 to Form S-1 (file no.
333-14693) filed by the Registrant on October 23, 1996).

10.3 Amendment #1 to Engagement Agreement, dated as of August 14,
1995, General American Life Insurance Company and ARM Financial
Group, Inc. (incorporated by reference to Exhibit 10.29 to Form
S-1 (file no. 333-14693) filed by the Registrant on October 23,
1996).

10.4 Amendment #2 to Engagement Agreement, dated September 1, 1995,
between General American Life Insurance Company and ARM Financial
Group, Inc. (incorporated by reference to Exhibit 10.30 to Form
S-1 (file no. 333-14693) filed by the Registrant on October 23,
1996).

10.5 Reinsurance Agreement between General American Life Insurance
Company and Integrity Life Insurance Company (incorporated by
reference to Exhibit 10.31 to Form S-1 (file no. 333-14693)
filed by the Registrant on October 23, 1996. Portions of the
exhibit have been omitted pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission under
Rule 406 of the Securities Act of 1933, as amended. The omitted
material has been filed separately with the Securities and
Exchange Commission).

27 Financial Data Schedule (ELECTRONIC FILING ONLY).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 14, 1997.

ARM FINANCIAL GROUP, INC.

By: /S/ EDWARD L. ZEMAN
------------------------------
Edward L. Zeman
Executive Vice President-Chief
Financial Officer (Principal
Financial Officer)

By: /S/ BARRY G. WARD
------------------------------
Barry G. Ward
Controller (Principal Accounting
Officer)