For the quarterly period ended                                    June 30, 2002

or

For the transition period from                                                     to

Commission file numbers 33-3630, 333-1783 and 333-13609

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices)                                                (Zip Code)

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

     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

    There were 2,412,000 shares of the registrant's Common Stock, $1.25 par value, outstanding as of August 14, 2002.

2

CONSOLIDATED BALANCE SHEETS

(in thousands)

3

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

Unaudited

4

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Unaudited

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

The accompanying unaudited consolidated financial statements of Keyport Life Insurance Company (the Company) includes all adjustments, consisting of normal recurring accruals that management considers necessary for a fair presentation of the Company's financial position as of June 30, 2002 and December 31, 2001 and the related consolidated statements of operations and cash flows for the three and six month periods ended June 30, 2002 and 2001, respectively. Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's 2001 Form 10-K. The results of operations for the three and six months ended June 30, 2002 are not necessari ly indicative of the results to be expected for the full year.

Through October 31, 2001, Keyport Life Insurance Company ("the Company") was a wholly owned subsidiary of Liberty Financial Companies, Incorporated ("LFC"), which is a majority-owned, indirect subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").

On May 3, 2001, LFC announced that it had reached a definitive agreement to sell its annuity and bank marketing businesses to Sun Life Financial Services Inc. ("Sun Life Financial"), a Canadian holding company and parent of Sun Life Assurance Company of Canada ("Sun Life"). The transaction was subject to customary conditions to closing, including receipt of approvals by various state insurance regulators in the U.S., certain other regulatory authorities in the U.S. and Canada and LFC's shareholders.

Effective after the close of business on October 31, 2001, all required approvals had been obtained and Sun Life of Canada (U.S.) Holdings, Inc., an indirect subsidiary of Sun Life, acquired the Company for approximately $1.7 billion in cash. As part of the acquisition, Sun Life Financial (U.S.) Holdings, Inc., another indirect subsidiary of Sun Life, acquired Independent Financial Marketing Group ("IFMG"), an affiliate of the Company. The acquisition of the Company and IFMG complements both Sun Life Financial's product array and distribution capabilities and advances Sun Life Financial towards its strategic goal of reaching a top 10 position in target product markets in North America. Sun Life Financial also expects to reduce costs through economies of scale.

The acquisition was accounted for using the purchase method under Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". Under the purchase method of accounting, the assets acquired and liabilities assumed are recorded at estimated fair value at the date of acquisition. The Company is in the process of completing the valuations of a portion of the assets acquired; thus, the allocation of the purchase price is subject to refinement.

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of November 1, 2001 (in thousands):

Intangible assets acquired primarily consist of state insurance licenses ($10.1 million) that are not subject to amortization. The remaining $2.0 million of intangible assets relate to product rights that have a weighted-average useful life of 7 years. Most of the goodwill is expected to be deductible for tax purposes.

The value of business acquired represents the actuarially-determined present value of projected future gross profits from policies in force at the date of their acquisition. This amount is amortized in proportion to the projected emergence of profits. Amortization for the three and six month periods ended June 30, 2002 amounted to $7.1 million and $15.7 million respectively. Interest is accrued on the unamortized balance at the average interest crediting rate (5% for the three and six months ended June 30, 2002). The value of business acquired is also adjusted for amounts relating to the recognition of unrealized investment gains and losses. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to accumulated other comprehensive income. Value of business acquired was decreased by $7.3 million at June 30, 2002 due to this adjustment.

As a result of the acquisition, the financial statements for the period subsequent to the acquisition are presented on a different basis of accounting than those for the periods prior to the acquisition and, therefore, are not directly comparable. For periods prior to the date of the acquisition, the balances are referred to as "Predecessor Basis."

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

The cumulative effect of accounting change, net of tax, for the six months ended June 30, 2001 of $60.8 million includes a loss of $54.3 million relating to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133" (collectively hereafter referred to as the "Statement") in the quarter ended March 31, 2001 and a loss of $6.5 million relating to the adoption of Emerging Issues

Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" in the quarter ended June 30, 2001.

The Company adopted SFAS No. 133 on January 1, 2001. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset by the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in operations.

The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of the Statement at January 1, 2001 decreased net income and stockholder's equity by $54.3 million. The adoption of the Statement may increase volatility in future reported income due, among other reasons, to the requirements of defining an effective hedging relationship under the Statement as opposed to certain hedges the Company believes are effective economic hedges. The Company anticipates that it will continue to utilize its current risk management philosophy, which includes the use of derivative instruments.

The Company adopted EITF Issue No. 99-20 on April 1, 2001. EITF Issue 99-20 governs the method of recognizing interest income and impairment on asset-backed investment securities. EITF Issue 99-20 requires the Company to update the estimate of cash flows over the life of certain retained beneficial interests in securitization transactions and purchased beneficial interests in securitized financial assets. Pursuant to EITF Issue No. 99-20, based on current information and events, if the Company estimates that the fair value of its beneficial interests is not greater than or equal to its carrying value and if there has been a decrease in the estimated cash flows since the last revised estimate, considering both timing and amount, then an other-than-temporary impairment should be recognized. The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of EITF Issue No. 99-20 on April 1, 2001 decreased net income by $6.5 million w ith a related increase to accumulated other comprehensive income of $1.8 million

All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the fair value of a recognized asset ("fair value hedge") or (2) utilizes the derivative as an economic hedge ("non-designated derivative"). Changes in the fair value of a derivative that are highly effective and are designated and qualify as a fair value hedge, along with the loss or gain on the hedged asset attributable to the hedged risk, are recorded in current period operations as a component of net derivative gains/(losses). Changes in the fair value of non-designated derivatives are reported in current period operations as a component of net derivative gains/(losses).

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract), is

carried at fair value, and is considered a non-designated derivative. The Company purchases call options and futures on the S&P 500 Index to economically hedge its obligation under the annuity contract to provide returns based upon this index. The call options and futures are non-designated derivatives. In addition, the Company utilizes non-designated total return swap agreements to hedge certain other contract obligations.

As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements. Interest rate swap agreements are agreements to exchange with a counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. Prior to October 31, 2001, the interest rate swap agreements were designated and qualified as fair value hedges. The ineffective portion of the fair value hedges, net of related effects on deferred policy acquisition costs, resulted in a gain of $2.6 and $1.9 million for the three and six months ended June 30, 2001.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedging transactions. This process included linking all fair value hedges to specific assets on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.

When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be carried on the balance sheet at its fair value and changes in fair value will be reported in operations. The subsequent fair value changes in the hedged asset will no longer be reported in current period operations.

Effective November 1, 2001, in conformity with Sun Life accounting policies, the Company discontinued hedge accounting and classified its interest rate swap agreements as non-designated derivatives. The Company believes that these derivatives provide economic hedges and the cost of formally documenting the effectiveness of the fair value of the hedged assets in accordance with the provisions of SFAS 133 was not justified. The decrease in the swap values, net of related effects on the value of business acquired and deferred acquisition costs, resulted in a decrease to income of $41.6 million, and $25.3 million for the three and six month periods ended June 30, 2002, respectively. The change in values of the call options, futures, and the embedded derivative, net of related effects on the value of business acquired, decreased income by $14.7 million and $10.0 million for the three and six month periods ended June 30, 2002.

Private limited partnerships ("partnerships"), which are included in other invested assets, are accounted for on either the cost method or equity method. The equity method of accounting is used for all partnerships in which the Company has an ownership interest in excess of 3%. Partnerships amounted to $255.4 million at June 30, 2002.

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

The equity income of private limited partnerships is accounted for on the equity method and represented primarily increases/(decreases) in the fair value of the underlying investments of the private equity limited partnerships for which the Company had ownership interests in excess of 3%. For the three months ended June 30, 2002 and 2001, the equity income/(loss) of partnerships of $11.0 and ($17.3) million is recorded net of the related amortization of value of business acquired and deferred acquisition costs of $1.4 million and ($32.1) million, respectively. For the six months ended June 30, 2002 and 2001, the equity loss of partnerships of ($10.2) and ($14.6) million is recorded net of the related amortization of value of business acquired and deferred policy acquisition costs of ($1.3) million and ($27.2) million. The financial information for these investments is obtained directly from the partnerships on a periodic basis. There can be no assurance that any unrealized and undistrib uted gains will ultimately be realized or that the Company will not incur losses in the future on such investments.

Total comprehensive income/(loss), net of tax, for the six months ended June 30, 2002 and 2001, was $51.7 million and $32.1 million, respectively.

Effective January 1, 2002, essentially all employee and other operating expenses were transferred to Sun Life Assurance Company of Canada (U.S.) ("Sun Life (U.S.)"), a subsidiary of Sun Life. In accordance with a tri-party management service agreement among Sun Life (U.S.), Sun Life, and the Company, Sun Life (U.S.) allocates operating expenses back to the Company. Expenses under this agreement amounted to approximately $16.8 million and $31.8 for the three and six month periods ended June 30, 2002. Management believes intercompany expenses are calculated on a reasonable basis, however, these amounts may not necessarily be indicative of the costs that would be incurred if the Company operated on a standalone basis.

On May 29, 2002, the Company purchased a $100,000,000 note issued by Massachusetts Financial Services, an affiliate, for $107,000,000 from Sun Life Assurance Company of Canada (U.S.), another affiliate. The note, which matures on August 11, 2004, pays interest at a rate of 8.599%. The note is included in fixed maturities available for sale at June 30, 2002.

The Company has commitments to fund mortgage loans and private limited partnerships in the future. These outstanding commitments amounted to $53.6 million and $71.8 million on mortgages and private limited partnerships, respectively, at June 30, 2002.

As part of the Stock Purchase Agreement between Sun Life Financial and Liberty Financial, Liberty Financial is obligated to reimburse the Company for any federal, state or local taxes arising from certain tax elections under Section 338(h) of the Internal Revenue Code of 1986. Liberty Financial has given notice to the Company of certain objections it has with the calculation of these taxes. The amount in dispute is approximately $37.0 million. Under the agreement, if Sun Life Financial and Liberty Financial cannot agree on the amount of taxes due, the matter shall be submitted for arbitration. Arbitration is scheduled to begin in the third quarter of 2002.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

On July 25, 2002, the Company issued a $380,000,000 promissory note at 5.76% to an affiliate, Sun Life (Hungary) Group Financing Limited Liability Company ("Sun Life (Hungary) Ltd"), which matures on June 30, 2012. The Company will pay interest semi-annually beginning December 31, 2002. The proceeds of the note will be used to purchase fixed rate corporate and government bonds.

11

Through October 31, 2001, Keyport Life Insurance Company ("the Company") was a wholly owned subsidiary of Liberty Financial Companies, Incorporated ("Liberty Financial"), which is a majority-owned, indirect subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").

On May 3, 2001, Liberty Financial, the Company's parent, announced that it had reached a definitive agreement to sell its annuity and bank marketing businesses to Sun Life Financial Services Inc. ("Sun Life Financial"), a Canadian holding company and parent of Sun Life Assurance Company of Canada ("Sun Life"). The transaction was subject to customary conditions to closing, including receipt of approvals by various state insurance regulators in the U.S., certain other regulatory authorities in the U.S. and Canada and Liberty Financial's shareholders.

Effective after the close of business on October 31, 2001 all required approvals had been obtained and Sun Life of Canada (U.S.) Holdings, Inc., an indirect subsidiary of Sun Life, acquired the Company for approximately $1.7 billion in cash. As part of the acquisition, Sun Life Financial (U.S.) Holdings, Inc., another indirect subsidiary of Sun Life, acquired Independent Financial Marketing Group ("IFMG"), an affiliate of the Company. The acquisition of the Company and IFMG complements both Sun Life Financial's product array and distribution capabilities and advances Sun Life Financial towards its strategic goal of reaching a top 10 position in target product markets in North America. Sun Life Financial also expects to reduce costs through economies of scale.

The acquisition was accounted for using the purchase method under Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". Under the purchase method of accounting, the assets acquired and liabilities assumed are recorded at estimated fair value at the date of acquisition. The Company is in the process of completing the valuations of a portion of the assets acquired; thus, the allocation of the purchase price is subject to refinement.

12

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of November 1, 2001 (in thousands):

Intangible assets acquired primarily consist of state insurance licenses ($10.1 million) that are not subject to amortization. The remaining $2.0 million of intangible assets relate to product rights that have a weighted-average useful life of 7 years. Most of the goodwill is expected to be deductible for tax purposes.

The value of business acquired represents the actuarially-determined present value of projected future gross profits from policies in force at the date of their acquisition. This amount is amortized in proportion to the projected emergence of profits. Amortization for the three and six month periods ended June 30, 2002 amounted to $7.1 million and $15.7 million. Interest is accrued on the unamortized balance at the average interest crediting rate (5% for the six months ended June 30, 2002). The value of business acquired is also adjusted for amounts relating to the recognition of unrealized investment gains and losses. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to accumulated other comprehensive income. Value of business acquired was decreased by $7.3 million at June 30, 2002 relating to this adjustment.

As a result of the acquisition, the financial statements for the period subsequent to the acquisition are presented on a different basis of accounting than those for the periods prior to the acquisition and, therefore, are not directly comparable. For periods prior to the date of the acquisition, the balances are referred to as "Predecessor Basis."

The cumulative effect of accounting changes, net of tax, for the six months ended June 30, 2001 of $60.8 million includes a loss of $54.3 million relating to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133" (collectively hereafter referred to as the "Statement") in the quarter ended March 31, 2001 and a loss of $6.5 million relating to the adoption of Emerging Issues Task Force ("EITF") Issue 99-20, "Recognition of Interest Income on Impairment of Purchased and Retained Beneficial Interests in Securitized Financial Assets" in the quarter ending June 30, 2001.

13

The Company adopted SFAS No. 133 on January 1, 2001. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset by the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in operations.

The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of the Statement at January 1, 2001 decreased net income and stockholder's equity by $54.3 million. The adoption of the Statement may increase volatility in future reported income due, among other reasons, to the requirements of defining an effective hedging relationship under the Statement as opposed to certain hedges the Company believes are effective economic hedges. The Company anticipates that it will continue to utilize its current risk management philosophy, which includes the use of derivative instruments.

The Company adopted EITF Issue No. 99-20 on April 1, 2001. EITF Issue 99-20 governs the method of recognizing interest income and impairment on asset-backed investment securities. EITF Issue 99-20 requires the Company to update the estimate of cash flows over the life of certain retained beneficial interests in securitization transactions and purchased beneficial interests in securitized financial assets. Pursuant to EITF Issue No. 99-20, based on current information and events, if the Company estimates that the fair value of its beneficial interests is not greater than or equal to its carrying value and if there has been a decrease in the estimated cash flows since the last revised estimate, considering both timing and amount, then an other-than-temporary impairment should be recognized. The cumulative effect, reported after tax and net of related effects on deferred policy acquisition costs, upon adoption of EITF Issue No. 99-20 on April 1, 2001 decreased net income by $6.5 million w ith a related increase to accumulated other comprehensive income of $1.8 million.

Keyport's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.

All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the fair value of a recognized asset ("fair value hedge") or (2) utilizes the derivative as an economic hedge ("non-designated derivative"). Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset attributable to the hedged risk, are recorded in current period operations as a component of net derivative gains. Changes in the fair value of non-designated derivatives are reported in current period operations as a component of net derivative gains.

The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract), is carried at fair value, and is considered a non-designated derivative.

Fair values are based upon either dealer price quotations or are derived from pricing models that consider current market and contractual prices for the underlying financial instrument, as well as time value and yield curve or volatility factors underlying the positions. Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and losses recognized. Changes in the fixed income and equity markets will affect the Company's estimate of fair value in the future, which will affect reported derivative income.

14

The value of business acquired represents the actuarially-determined present value of projected future gross profits from policies in force at the date of their acquisition. This amount is amortized in proportion to the projected emergence of profits. Interest is accrued on the unamortized balance at the average interest crediting rate (5% for the three and six months ended June 30, 2002).

The value of business acquired is also adjusted for amounts relating to the recognition of unrealized investment gains and losses. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to accumulated other comprehensive income/(loss).

Deferred policy acquisition costs relate to the costs of acquiring new business, which vary with, and are primarily related to, the production of new annuity business. Such acquisition costs include commissions, costs of policy issuance, and underwriting and selling expenses. These costs are deferred and amortized with interest in relation to the present value of estimated gross profits from mortality, investment spread and expense margins. This amortization is reviewed annually and adjusted retrospectively when the Company revises its estimate of current or future gross profits to be realized, including realized and unrealized gains and losses from investments.

Deferred policy acquisition costs are adjusted for amounts relating to unrealized gains and losses on available for sale fixed-maturity securities. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to accumulated other comprehensive income/(loss).

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the net deferred tax asset will not be realized.

The carrying value of the Company's net deferred tax asset assumes that the Company will be able to generate sufficient future taxable income based upon estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record a valuation allowance against its net deferred tax asset resulting in additional income tax expense in the Company's consolidated statement of operations. Management evaluates the recoverability of the deferred tax asset on a quarterly basis.

As part of the Stock Purchase Agreement between Sun Life Financial and Liberty Financial, Liberty Financial is obligated to reimburse the Company for any federal, state or local taxes arising from certain tax elections under Section 338(h) of the Internal Revenue Code of 1986. Liberty Financial has given notice to the Company of certain objections it has with the calculation of these taxes. The amount in dispute is approximately $37.0 million. Under the agreement, if Sun Life Financial and Liberty Financial cannot agree on the amount of taxes due, the matter shall be submitted for arbitration. Arbitration is scheduled to begin in the third quarter of 2002.

15

The Company routinely reviews its portfolio of investment securities. The Company identifies any investments that require additional monitoring on a monthly basis, and carefully reviews the carrying value of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews, the Company principally considers the adequacy of collateral (if any), compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded investments, management also considers market value quotations, if available.

Net (loss)/income was $(21.8) million and $21.2 million for the three months ended June 30, 2002 and 2001, respectively, and $9.7 million and $(2.6) million for the six months ended June 30, 2002 and 2001, respectively. Income/(loss) from operations (income before cumulative effect of accounting changes, income taxes, equity income of private limited partnerships, and net realized investment gains/(losses)) was $(19.8) million and $62.6 million for the three months ended June 30, 2002 and 2001, respectively, and $42.5 million and $112.5 million for the six months ended June 30, 2002 and 2001, respectively. The decrease in income from operations, in the second quarter, is primarily attributable to a decrease in investment spread of $16.4 million, a decrease in derivative income of $79.2 million, a decrease in fee income of $4.5 million, an increase in operating expenses of $3.8 million offset by a decrease in amortization of deferred acquisition expenses and the value of business ac quired of $22.4 million. For the six months ended June 30, 2002 the decrease in income from operations is primarily attributable to a decrease in investment spread of $36.0 million, a decrease in derivative income of $65.4 million, a decrease in fee income of $7.6 million, an increase in operating expenses of $4.3 million offset by a decrease in amortization of deferred acquisition expenses and the value of business acquired of $45.2 million.

Investment spread is the amount by which investment income earned on the Company's investments exceeds interest credited to policyholder balances. Investment spread was $66.0 million and $82.4 million for the three months ended June 30, 2002 and 2001, respectively. The amount by which the average yield on investments exceeds the average interest credited rate on policyholder balances is the investment spread percentage. The investment spread percentage was 1.35% and 2.43% for the three months ended June 30, 2002 and 2001, respectively. The investment spread was $132.8 million and $168.8 million for the six months ended June 30, 2002 and 2001, respectively. The investment spread percentage was 1.34% and 2.46% for the six months ended June 30, 2002 and 2001, respectively. The decline in the yield is a result of the purchase accounting valuation of the bond portfolio at values in excess of historical amortized cost.

Investment income was $204.2 million and $235.8 million for the three months ended June 30, 2002 and 2001, respectively. The decrease of $31.6 million in 2002 compared to 2001 is the result of a lower average investment yield ($51.9 million), offset by an increase in average invested assets ($5.3 million) and a classification adjustment relating to institutional investments that were classified as separate account assets in the prior year ($15.0 million). The average investment yield was 5.89 % and 7.56% for the three months ended June 30, 2002 and 2001, respectively. Investment income was $413.7 million and $470.7 for the six months ended June 30, 2002 and 2001. The decrease of $57.0 million in 2002 is the result of lower average investment yield ($96.7 million) offset by an increase in average invested assets

($.1 million) and the classification adjustment pertaining to the institutional investments ($39.6 million). The average investment yield was 5.95% and 7.49% for the six months ended June 30, 2002 and 2001, respectively.

Interest credited to policyholders was $138.2 million and $153.4 million for the three months ended June 30, 2002 and 2001, respectively. The decrease of $15.2 million in 2002 compared to 2001 is the result of a lower average interest credited rate ($19.5 million) offset by increased average policyholder balances ($4.3 million). Policyholder balances (excluding institutional account balances) averaged $12.3 billion ($11.2 billion of fixed products, consisting of fixed annuities and the closed block of single premium whole life insurance, and $1.1 billion of equity-indexed annuities) and $11.9 billion ($10.0 billion of fixed products and $1.9 billion of equity-indexed annuities) for the three months ended

16

June 30, 2002 and 2001, respectively. Interest credited to policyholders was $280.9 million and $301.8 million for the six months ended June 30, 2002 and 2001, repectively. The decrease of $20.9 million in 2002 as compared to 2001 is the result of a lower average interest credited rate ($27.3 million) offset by increased average policyholder balances ($6.4 million). Policyholder balances (excluding institutional account balances) averaged $12.3 billion ($11.1 billion of fixed products, consisting of fixed annuities and the closed block of single premium whole life insurance, and $1.2 billion of equity-indexed annuities) and $12.0 billion ($10.0 billion of fixed products and $2.0 billion of equity-indexed annuities) for the six months ended June 30, 2002 and 2001, respectively.

The average interest credited rate was 4.54% and 5.13% for the three months ended June 30, 2002 and 2001, respectively. The average interest credited rate for the six months ended June 30, 2002 and 2001 was 4.61% and 5.03%, respectively. The Company's equity-indexed annuities credit interest to the policyholder at a "participation rate" equal to a portion (ranging for existing policies from 25% to 120%) of the change in value of the S&P 500 Index. The Company's equity-indexed annuities also provide full guarantee of principal if held to term, plus interest at 0.85% annually. Under FAS 133, the index annuities are deemed to contain an embedded derivative (the change in value attributable to the change in the S&P 500 index) and a host contract. The host contracts' interest rate is derived at the inception of the contract and an effective interest rate is utilized that will result in a liability equal to the guaranteed minimum account value at the end of the term. The embedded derivative is a non-designated derivative and the changes in fair value are reported as a component of derivative income (loss).

Average investments in the Company's general account (computed without giving to effect to SFAS 115), including a portion of the Company's cash and cash equivalents, were $12.8 billion and $12.5 billion for the three months ended June 30, 2002 and 2001, respectively. Average investments were $12.6 billion and $12.6 billion for the six months ended June 30, 2002 and 2001, respectively.

Net realized investment losses were $24.8 million and $3.4 million for the three months ended June 30, 2002 and 2001, respectively and $17.3 million and $17.8 million for the six months ended June 30, 2002 and 2001, respectively. Sales of investments generally are made to maximize total return and to take advantage of prevailing market conditions. Net realized investment losses included $18.4 million and $5.2 million for the three months ended June 30, 2002 and 2001, respectively and $18.4 million and $23.6 million for the six months ended June 30, 2002 and 2001, respectively, for certain fixed maturity investments where the decline in value was determined to be other than temporary.

Net derivative gains/(losses) of $(70.6) million and $8.5 million for the three months ended June 30, 2002 and 2001, respectively, and $(60.7) million and $4.7 million for the six months ended June 30, 2002 and 2001 respectively, represent fair value changes of non-designated derivatives and the ineffective portion of fair value hedges, net of related effects on deferred policy acquisition costs and value of business acquired.

All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the fair value of a recognized asset ("fair value hedge") or (2) utilizes the derivative as an economic hedge ("non-designated derivative"). Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset attributable to the hedged risk, are recorded in current period operations as a component of net derivative gains. Changes in the fair value of non-designated derivatives are reported in current period operations as a component of net derivative gains/(losses).

The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract), is carried at fair value, and is considered a non-designated derivative. The Company purchases call options and futures on the S&P 500 Index to economically hedge its obligation under the annuity contract to provide returns based upon this index. The call options and futures are non-designated derivatives. In addition, the Company utilizes non-designated total return swap agreements to hedge certain policyholder obligations (classified as separate account liabilities through October 31, 2001).

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As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements. Interest rate swap agreements are agreements to exchange with a counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. Prior to October 31, 2001, the interest rate swap agreements were designated and qualified as fair value hedges. The ineffective portion of the fair value hedges, net of related effects on deferred policy acquisition costs, resulted in a gain of $2.6 million and $1.9 million for the three and six months ended June 30, 2001, respectively.

Effective November 1, 2001, in conformity with Sun Life accounting policies, the Company discontinued hedge accounting and classified its interest rate swap agreements as non-designated derivatives. The Company believes that these derivatives provide economic hedges and the cost of formally documenting the effectiveness of the fair value of the hedged assets in accordance with the provisions of SFAS 133 was not justified. The decrease in the swap values, net of related effects on the value of business acquired and deferred acquisition costs, resulted in a decrease to income of $41.6 and $25.3 million for the three and six month periods ended June 30, 2002, respectively. The change in values of the call options, futures, and the embedded derivative, net of related effects on the value of business acquired, decreased income by $14.7 and $10.0 million for the three and six months ended June 30, 2002.

Equity income of private limited partnerships primarily represents increases/(decreases) in the fair value of the underlying investments of the private equity limited partnerships for which the Company has ownership interests in excess of 3%. Private equity limited partnerships ("partnerships"), which are included in other invested assets, are accounted for on either the cost method or equity method. The equity method of accounting is used for all partnerships in which the Company has an ownership interest in excess of 3%. Partnerships amounted to $255.4 million at June 30, 2002.

For the three months ended June 30, 2002 and 2001, the net change in equity of partnerships of $11.0 million and $(17.3) million is recorded net of the related amortization of value of business acquired and deferred acquisition costs amortization of $1.4 million and $(32.1) million. For the six months ended June 30, 2002 and 2001, the net change in equity of partnerships of $(10.2) million and $(14.6) million is recorded net of the related amortization of deferred policy acquisition costs of ($1.3) million and ($27.2) million. The financial information for these investments is obtained directly from the private equity limited partnerships on a periodic basis. There can be no assurance that any unrealized and undistributed gains will ultimately be realized or that the Company will not incur losses in the future on such investments.

Surrender charges are revenues earned on the early withdrawal of fixed, equity-indexed and variable annuity policyholder balances. Surrender charges on fixed, equity-indexed and variable annuity withdrawals generally are assessed at declining rates applied to policyholder withdrawals during the first five to seven years of the contract. Total surrender charges were $3.4 million and $3.8 million for the three months ended June 30, 2002 and 2001, respectively and $5.8 million and $7.5 million for the six months ended June 30, 2002 and 2001, respectively.

On an annualized basis, total annuity withdrawals represented 19.5% and 21.1% of the total average annuity policyholder and separate account balances for the three months ended June 30, 2002 and 2001, respectively, and 19.4% and 19.3% of the total average annuity policyholder and separate account balances for the six months ended June 30, 2002 and 2001, respectively.

Separate account income is primarily mortality and expense charges earned on variable annuity and variable life policyholder balances. These charges, which are based on the market values of the assets in the separate accounts supporting the contracts, were $10.1 million and $14.4 million for the three months ended June 30, 2002 and 2001, respectively and $21.4 million and $27.2 million for the six months ended June 30, 2002 and 2001, respectively. Variable product fees represented 1.48% and 1.44% of the average variable annuity and variable life separate account balances for the three months ended June 30, 2002 and 2001, respectively and 1.46% and 1.38% for the six months ended June 30, 2002 and 2001, respectively. Prior to November 1, 2001, net spread from institutional contracts was included in separate account income. The amount included in separate account income for three and six months ended June 30, 2001 was immaterial.

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Management fees are primarily investment advisory fees related to the separate account assets. The fees are based on the level of assets under management, which are affected by product sales, redemptions and changes in the fair values of the investments managed. Management fees were $1.8 million and $1.7 million for the three months ended June 30, 2002 and 2001, respectively and $3.4 million and $3.6 million for the six months ended June 30, 2002 and 2001, respectively. Average separate account assets, subject to management fees, were $2.4 billion and $2.8 billion for the three months ended June 30, 2002 and 2001, respectively, and $2.5 billion and $2.9 billion for the six months ended June 30, 2002 and 2001, respectivley.

Operating expenses primarily represent compensation and general and administrative expenses. These expenses were $19.3 million and $15.5 million for the three months ended June 30, 2002 and 2001, respectively and $36.8 million and $32.4 million for the six months ended June 30, 2002 and 2001, respectively. Effective January 1, 2002, essentially all employee and other operating expenses were transferred to Sun Life Assurance