LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
S-6/A, 1998-04-28
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     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1998
    
                                               1933 ACT REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
   
                        PRE-EFFECTIVE AMENDMENT NO. 1 TO
                             REGISTRATION STATEMENT
                                       ON
                                    FORM S-6
    
 
               FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
                    OF SECURITIES OF UNIT INVESTMENT TRUSTS
                           REGISTERED ON FORM N-8B-2
 
                  LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE
                                   ACCOUNT M
 
                           (EXACT NAME OF REGISTRANT)
 
                  THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
                              (NAME OF DEPOSITOR)
 
              1300 South Clinton Street, Fort Wayne, Indiana 46802
 
              (ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
 
               Depositor's Telephone Number, including Area Code
 
                                 (219) 455-2000
 
   
<TABLE>
<S>                                                <C>
             Jack D. Hunter, Esquire                              COPY TO:
   The Lincoln National Life Insurance Company           Kimberly J. Smith, Esquire
              200 East Berry Street                   Sutherland, Asbill & Brennan LLP
                  P.O. Box 1110                         1275 Pennsylvania Avenue, NW
            Fort Wayne, Indiana 46802                      Washington, D.C. 20004
     (NAME AND ADDRESS OF AGENT FOR SERVICE)
</TABLE>
    
 
                 APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
 As soon as practicable after the effective date of the registration statement.
 
             UNITS OF INTEREST IN VARIABLE LIFE INSURANCE CONTRACTS
                     (TITLE OF SECURITIES BEING REGISTERED)
 
    The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
<PAGE>
                             CROSS REFERENCE SHEET
                            (RECONCILIATION AND TIE)
                     REQUIRED BY INSTRUCTION 4 TO FORM S-6
 
<TABLE>
<CAPTION>
  ITEM OF FORM
     N-8B-2        LOCATION IN PROSPECTUS
- -----------------  --------------------------------------------------------------
<S>                <C>
             1     Cover Page Highlights
 
             2     Cover Page
 
             3     *
 
             4     Distribution of Policies
 
             5     Lincoln Life
 
          6(a)     The Variable Account
 
          6(b)     *
 
             9     Legal Proceedings
 
     10(a)-(c)     Short-Term Right to Cancel the Policy; Surrenders;
                   Accumulation Value; Reports to Policy Owners
 
         10(d)     Right to Exchange for a Fixed Benefit Policy; Policy Loans;
                   Surrenders; Allocation of Net Premium Payments
 
         10(e)     Lapse and Reinstatement
 
         10(f)     Voting Rights
 
     10(g)-(h)     Substitution of Securities
 
         10(i)     Premium Payments; Transfers; Death Benefit; Policy Values;
                   Settlement Options
 
            11     The Funds
 
            12     The Funds
 
            13     Charges; Fees
 
            14     Issuance
 
            15     Premium Payments; Transfers
 
            16     The Variable Account
 
            17     Surrenders
 
            18     The Variable Account
 
            19     Reports to Policy Owners
 
            20     *
 
            21     Policy Loans
 
            22     *
 
            23     Lincoln Life
 
            24     Incontestability; Suicide; Misstatement of Age or Sex
 
            25     Lincoln Life
 
            26     Fund Participation Agreements
 
            27     The Variable Account
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
  ITEM OF FORM
     N-8B-2        LOCATION IN PROSPECTUS
- -----------------  --------------------------------------------------------------
<S>                <C>
            28     Directors and Officers of Lincoln Life
 
            29     Lincoln Life
 
            30     *
 
            31     *
 
            32     *
 
            33     *
 
            34     *
 
            35     *
 
            37     *
 
            38     Distribution of Policies
 
            39     Distribution of Policies
 
            40     *
 
         41(a)     Distribution of Policies
 
            42     *
 
            43     *
 
            44     The Funds; Premium Payments
 
            45     *
 
            46     Surrenders
 
            47     The Variable Account; Surrenders, Transfers
 
            48     *
 
            49     *
 
            50     The Variable Account
 
            51     Cover Page; Highlights; Premium Payments; Right to Exchange
                   for a Fixed Benefit Policy
 
            52     Substitution of Securities
 
            53     Tax Matters
 
            54     *
 
            55     *
</TABLE>
 
* Not Applicable
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
 
   
<TABLE>
<S>                                                <C>
HOME OFFICE LOCATION:                              ADMINISTRATIVE OFFICE LOCATION:
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY        ANNUITY AND VARIABLE LIFE
1300 SOUTH CLINTON STREET                          SERVICES CENTER
FORT WAYNE, INDIANA 46801                          ROUTING S-249
219-455-2000                                       HARTFORD, CT 06152-2249
                                                   800-552-9898
</TABLE>
    
 
- --------------------------------------------------------------------------------
              THE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
- --------------------------------------------------------------------------------
 
    This prospectus describes a flexible premium variable life insurance
contract ("Policy") offered either in an individual or group form by The Lincoln
National Life Insurance Company ("Lincoln Life"). This Policy is intended to
provide life insurance benefits. It allows flexible premium payments, a choice
of underlying funding options, and a choice of two death benefit options. Its
value will vary with the investment performance of the underlying funding
options selected, as may the death benefit payable by Lincoln Life upon the
death of the Insured. Policy values may be used to continue the Policy in force,
may be borrowed within certain limits, and may be fully or partially
surrendered. Full surrenders are subject to a surrender charge. Annuity
settlement options equivalent to the Death Benefit are available for payment to
the Beneficiary upon the death of the Insured.
 
   
    Lincoln Life offers twenty funding vehicles under a Policy through the
Separate Account, each a diversified open-end management investment company
(commonly called a mutual fund) with a different investment objective:
    
 
   
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fund
AIM V.I. Diversified Income Fund
AIM V.I. Growth Fund
AIM V.I. Value Fund
    
 
   
BT INSURANCE FUNDS TRUST
BT Equity 500 Index Fund
    
 
   
DELAWARE GROUP PREMIUM FUND, INC.
Emerging Markets Series
Small Cap Value Series
Trend Series
    
 
   
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Equity-Income Portfolio
    
 
   
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio
Investment Grade Bond Portfolio
    
   
LINCOLN NATIONAL MONEY MARKET FUND, INC.
Money Market Fund
    
 
   
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
    
 
   
OCC ACCUMULATION TRUST
Global Equity Portfolio
Managed Portfolio
    
 
   
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Asset Allocation Fund Class 1
Templeton International Fund Class 1
Templeton Stock Fund Class 1
    
 
    The fixed interest option offered under the Policy is the Fixed Account.
Amounts held in the Fixed Account are guaranteed and will earn a minimum
interest rate of 4% per year. SPECIAL LIMITS APPLY TO WITHDRAWALS AND TRANSFERS
FROM THE FIXED ACCOUNT. Unless specifically mentioned, this prospectus only
describes the variable investment options.
 
    It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance policy with this Policy. This
entire Prospectus, and those of the Funds, should be read carefully to
understand the Policy being offered.
 
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE MUTUAL FUNDS AVAILABLE AS FUNDING OPTIONS FOR THE POLICIES OFFERED BY THIS
PROSPECTUS. ALL PROSPECTUSES SHOULD BE RETAINED FOR FUTURE REFERENCE.
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
   
                         PROSPECTUS DATED: MAY 1, 1998
    
<PAGE>
                               TABLE OF CONTENTS
   
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                                                   PAGE
                                                 ---------
<S>                                              <C>
Definitions....................................          3
Highlights.....................................          5
  Initial Choices to be Made...................          5
  Charges and Fees.............................          6
Lincoln Life...................................          6
The Variable Account...........................          7
The Funds......................................          7
  Substitution of Securities...................         10
  Voting Rights................................         11
  Fund Participation Agreements................         11
Death Benefit..................................         11
    Death Benefit Options......................         11
    Changes in Death Benefit Option............         12
    Guaranteed Death Benefit Provision.........         12
    Payment of Death Benefit...................         12
    Changes in Specified Amount................         13
Premium Payments; Transfers....................         14
    Premium Payments...........................         14
    Allocation of Net Premium Payments.........         15
    Transfers..................................         15
    Optional Variable Account Sub-Account
     Allocation Programs.......................         16
      Dollar Cost Averaging....................         16
      Automatic Rebalancing....................         17
Charges; Fees..................................         17
    Premium Load...............................         17
    Monthly Deductions.........................         18
    Transaction Fee for Excess Transfers.......         19
    Mortality and Expense Risk Charge and Fund
     Expenses..................................         20
    Surrender Charge...........................         22
The Fixed Account..............................         23
Policy Values..................................         23
    Accumulation Value.........................         23
    Variable Accumulation Unit Value...........         24
    Surrender Value............................         24
Surrenders.....................................         24
    Partial Surrenders.........................         24
    Full Surrenders............................         25
    Deferral of Payment and Transfers..........         25
Lapse and Reinstatement........................         25
    Lapse of a Policy; Effect of Guaranteed
     Death Benefit Provision...................         25
 
<CAPTION>
                                                   PAGE
                                                 ---------
<S>                                              <C>
    Reinstatement of a Lapsed Policy...........         26
Policy Loans...................................         26
Settlement Options.............................         27
Other Policy Provisions........................         27
    Issuance...................................         27
    Effective Date of Coverage.................         27
    Short-Term Right to Cancel the Policy......         27
    Policy Owner...............................         28
    Beneficiary................................         28
    Assignment.................................         28
    Right to Exchange for a Fixed Benefit
     Policy....................................         28
    Incontestability...........................         29
    Misstatement of Age or Sex.................         29
    Suicide....................................         29
    Nonparticipating Policies..................         29
Tax Matters....................................         29
    Policy Proceeds............................         29
    Taxation of Lincoln Life ..................         31
    Section 848 Charges........................         31
    Other Considerations.......................         31
Other Matters..................................         31
    Directors and Officers of the Company......         31
    Distribution of Policies...................         33
    Changes of Investment Policy...............         33
    Other Contracts Issued by Lincoln Life.....         34
    State Regulation...........................         34
    Reports to Policy Owners...................         34
    Advertising................................         34
    Year 2000 Issues...........................         35
    Legal Proceedings..........................         36
    Experts....................................         36
    Registration Statement.....................         36
Appendix 1.....................................         37
    Illustration of Surrender Charges..........         37
Appendix 2.....................................         39
    Illustration of Accumulation Values,
     Surrender Values, and Death Benefits......         39
Appendix 3.....................................         48
    Tax Information............................         48
Financial Statements...........................        S-1
</TABLE>
    
 
2
<PAGE>
DEFINITIONS
 
                    ACCUMULATION VALUE: The sum of the Fixed Account Value,
                    Variable Account Value and the Loan Account Value.
 
                    ACCUMULATION UNIT: A unit of measure used to calculate the
                    value of a Variable Account Sub-Account.
 
                    ADDITIONAL PREMIUMS: Any premium paid in addition to Planned
                    Premiums.
 
   
                    ADMINISTRATIVE OFFICE: The administrative office of The
                    Lincoln National Life Insurance Company, whose mailing
                    address is Annuity & Variable Life Services Center, Routing
                    S-249, Hartford, CT 06152-2249.
    
 
                    CERTIFICATE: The document which evidences the participation
                    of an Owner in a group policy.
 
                    CODE: The Internal Revenue Code of 1986, as amended.
 
                    CORRIDOR DEATH BENEFIT: The Death Benefit calculated as a
                    percentage of the Accumulation Value rather than by
                    reference to the Specified Amount to satisfy the Internal
                    Revenue Service definition of "life insurance."
 
                    COST OF INSURANCE: The portion of the Monthly Deduction
                    designed to compensate Lincoln Life for the anticipated cost
                    of paying Death Benefits in excess of the Accumulation
                    Value, not including riders, supplemental benefits or
                    monthly expense charges.
 
                    DEATH BENEFIT: The amount payable to the beneficiary upon
                    the death of the Insured in accordance with the Death
                    Benefit Option elected, before deduction of the amount
                    necessary to repay any loans in full, and overdue
                    deductions.
 
                    DEATH BENEFIT OPTION: Either of two methods for determining
                    the Death Benefit.
 
                    FIXED ACCOUNT: The account under which principal is
                    guaranteed and interest is credited at a rate of not less
                    than 4% per year. Fixed Account assets are general assets of
                    Lincoln Life held in Lincoln Life's General Account.
 
                    FIXED ACCOUNT VALUE: The portion of the Accumulation Value,
                    other than the Loan Account Value, held in Lincoln Life
                    General Account.
 
   
                    FUND(S): One or more of AIM Variable Insurance Funds, Inc.
                    -- AIM V.I. Capital Appreciation Fund, AIM V.I. Growth Fund,
                    AIM V.I. Value Fund, AIM V.I. Diversified Income Fund; BT
                    Insurance Funds Trust -- BT Equity 500 Index Fund; Delaware
                    Group Premium Fund, Inc. -- Emerging Markets Series, Small
                    Cap Value Series, Trend Series; Fidelity Variable Insurance
                    Products Fund -- Equity-Income Portfolio; Fidelity Variable
                    Insurance Products Fund II -- Asset Manager Portfolio,
                    Investment Grade Bond Portfolio; Lincoln National Money
                    Market Fund, Inc. -- Money Market Fund;
                    MFS-Registered Trademark- Variable Insurance Trust -- MFS
                    Emerging Growth Series; MFS Total Return Series, MFS
                    Utilities Series; Templeton Variable Products Series Fund
                    (Class 1) -- Templeton Asset Allocation Fund, Templeton
                    International Fund, Templeton Stock Fund; OCC Accumulation
                    Trust -- Global Equity Portfolio, Managed Portfolio. Each of
                    them is an open-end management investment company (mutual
                    fund) whose shares are available to fund the benefits
                    provided by the Policy.
    
 
                    GENERAL ACCOUNT: Lincoln Life's general asset account, in
                    which assets attributable to the non-variable portion of
                    Policies are held.
 
                    GRACE PERIOD: The 61-day period following a Monthly
                    Anniversary Day on which the Policy's Surrender Value is
                    insufficient to cover the current Monthly Deduction. Lincoln
                    Life will send notice at least 31 days before the end of the
                    Grace Period that the Policy will lapse without value unless
                    a sufficient payment (described in the notification letter)
                    is received by Lincoln Life.
 
                    GUARANTEED INITIAL DEATH BENEFIT PREMIUM: The Premium
                    Payment(s) which must be made to guarantee the Initial
                    Specified Amount for the first five Policy Years after
                    issue, regardless of investment performance, assuming there
                    will be no loans or partial surrenders.
 
                                                                               3
<PAGE>
                    GUIDELINE ANNUAL PREMIUM: The level amount required to
                    mature the Policy under guaranteed mortality and expense
                    charges and an annual interest rate of 5%.
 
                    HOME OFFICE: The Headquarters of Lincoln National Life
                    Insurance Company, located at 1300 South Clinton Street,
                    Fort Wayne, Indiana 46802.
 
                    INITIAL SPECIFIED AMOUNT: The amount (at least $100,000),
                    originally chosen by the Policy Owner, initially equal to
                    the Death Benefit. The Initial Specified Amount may be
                    increased or decreased as described in this Prospectus.
 
                    INSURED: The person on whose life the Policy is issued.
 
                    ISSUE AGE: The age of the Insured, to the nearest birthday,
                    on the Issue Date.
 
                    ISSUE DATE: The date on which the Policy becomes effective,
                    as shown in the Policy Specifications.
 
                    LINCOLN LIFE: The Lincoln National Life Insurance Company.
 
                    LOAN ACCOUNT: The account in which policy indebtedness
                    (outstanding loans and interest) accrues once it is
                    transferred out of the Fixed Account and Variable Account
                    Sub-Accounts. The Loan Account is part of Lincoln Life's
                    General Account.
 
                    LOAN ACCOUNT VALUE: An amount equal to the sum of all unpaid
                    Policy loans and loan interest.
 
                    MONTHLY ANNIVERSARY DAY: The day of the month as shown in
                    the Policy Specifications, or the next Valuation Day if that
                    day is not a Valuation Day or is nonexistent for that month,
                    when Lincoln Life makes the Monthly Deduction.
 
                    MONTHLY DEDUCTION: The monthly deduction made from the Net
                    Accumulation Value; this deduction includes the cost of
                    insurance, an administrative expense charge, and charges for
                    supplemental riders or benefits, if applicable.
 
                    NET ACCUMULATION VALUE: The Accumulation Value less the Loan
                    Account Value.
 
                    NET AMOUNT AT RISK: The Death Benefit before subtraction of
                    outstanding loans, if any, minus the Accumulation Value.
 
                    NET PREMIUM PAYMENT: The portion of a Premium Payment, after
                    deduction of 5.0% for the premium load, available for
                    allocation to the Fixed Account and the Variable Account
                    Sub-Accounts.
 
                    OWNER. The Owner on the Date of Issue will be the person
                    designated in the Policy Specifications as having all
                    ownership rights under the Policy; includes the Certificate
                    Owner under a group policy. If no person is designated as
                    Owner, the Insured will be the Owner.
 
                    PLANNED PREMIUMS: The amount of premium the Policy Owner
                    chooses to pay Lincoln Life on a scheduled basis. This is
                    the amount for which Lincoln Life sends a premium reminder
                    notice.
 
                    POLICY: The life insurance contract described in this
                    Prospectus, i.e., either an individual Policy or a
                    Certificate evidencing the Owner's participation in a group
                    policy, under which flexible premium payments are permitted
                    and the death benefit and contract values may vary with the
                    investment performance of the funding option(s) selected.
 
                    POLICY YEAR: Each twelve-month period, beginning on the
                    Issue Date, during which the Policy is in effect.
 
                    PREMIUM PAYMENT: A premium payment made under the Policy.
 
                    RIGHT-TO-EXAMINE PERIOD: The period of time following the
                    issuance of the Policy during which the Owner may return the
                    Policy and receive a refund of premiums paid, the latest of
                    (a) 10 days after the Policy is received, unless otherwise
                    stipulated by state law requirements, (b) 10 days after
                    Lincoln Life mails or personally delivers a Notice of
                    Withdrawal Right to the Owner, or (c) 45 days after the
                    application for the Policy is signed.
 
                    SETTLEMENT OPTION(S): Several ways in which the Beneficiary
                    may receive a Death Benefit, or in which the Owner may
                    choose to receive payments upon surrender of the Policy.
 
                    SUB-ACCOUNT: That portion of the Variable Account which is
                    invested in shares of a specific Fund.
 
4
<PAGE>
                    SURRENDER CHARGE: The amount retained by Lincoln Life upon
                    the full surrender of the Policy.
 
                    SURRENDER VALUE: The amount a Policy Owner can receive in
                    cash by surrendering the Policy. This equals the Net
                    Accumulation Value minus the applicable Surrender Charge.
                    All of the Surrender Value may be applied to one or more of
                    the Settlement Options.
 
                    VALUATION DAY: Every day on which Accumulation Units are
                    valued; any day on which the New York Stock Exchange is
                    open, except any day on which trading on the Exchange is
                    restricted, or on which an emergency exists, as determined
                    by the Securities and Exchange Commission, so that valuation
                    or disposal of securities is not practicable.
 
                    VALUATION PERIOD: The period of time beginning on the day
                    following a Valuation Day and ending on the next Valuation
                    Day. A Valuation Period may be more than one day in length.
 
                    VARIABLE ACCOUNT: Lincoln Life Flexible Premium Variable
                    Account M. Consists of all Sub-Accounts invested in shares
                    of the Funds. Variable Account assets are kept separate from
                    the general assets of Lincoln Life and are not chargeable
                    with the general liabilities of Lincoln Life.
 
                    VARIABLE ACCOUNT VALUE: The portion of the Accumulation
                    Value attributable to the Variable Account.
 
HIGHLIGHTS
                    The Policy is a flexible premium variable life insurance
                    policy. Its values may be accumulated on a fixed or variable
                    basis or a combination of fixed and variable bases. The
                    Policy's provisions may vary in some states.
INITIAL CHOICES
TO BE MADE
                    When purchasing a Policy, the Owner makes three important
                    choices:
 
                    1) Selecting one of the two Death Benefit Options;
                    2) Selecting the amount of Premium Payments to make; and
                    3) Selecting how Net Premium Payments will be allocated
                       among the available funding options.
LEVEL OR VARYING
DEATH BENEFIT
                    At the time of purchase, the Policy Owner (also called the
                    "Owner" in this Prospectus) must choose between the two
                    Death Benefit Options. The amount payable under either
                    option will be determined as of the date of the Insured's
                    death. Under the level Death Benefit Option, the Death
                    Benefit will be the greater of the Specified Amount, or the
                    Corridor Death Benefit. Under the varying Death Benefit
                    Option, the Death Benefit will be the greater of the
                    Specified Amount plus the Accumulation Value, or the
                    Corridor Death Benefit (See "Death Benefit").
 
   
                    The Policy also offers a Guaranteed Initial Death Benefit
                    Provision which ensures that for the first five Policy Years
                    the Death Benefit will not be less than the Initial
                    Specified Amount, regardless of market performance, assuming
                    there have been no loans or surrenders, even if the Net
                    Accumulation Value is insufficient to cover the current
                    Monthly Deductions (See "Guaranteed Death Benefit
                    Provision").
    
AMOUNT OF
PREMIUM PAYMENT
                    At the time of purchase, the Policy Owner must also choose
                    the amount of premium to be paid. The Owner may vary Premium
                    Payments to some extent and still keep the Policy in force.
                    Premium reminder notices will be sent for Planned Premiums
                    and for premiums required to continue this Policy in force.
                    If the Policy lapses it may be reinstated (See
                    "Reinstatement of a Lapsed Policy"). Premium Payments are
                    refundable during the Right-to-Examine Period.
SELECTION OF
FUNDING
VEHICLE(S)
                    The Policy Owner must choose how to allocate Net Premium
                    Payments. Net Premium Payments allocated to the Variable
                    Account may be allocated to one or more Sub-Accounts of the
                    Variable Account, each of which invests in shares of a
                    particular Fund. The Initial Premium Payment will not be
                    allocated to the Variable Account until three days following
                    the expiration of the Right-to-Examine Period (see
                    "Short-Term Right to Cancel the Policy"). The Fixed Account
                    may also be elected as an allocation option.
 
                                                                               5
<PAGE>
                    Allocations to any Sub-Account or to the Fixed Account must
                    be in whole percentages. No allocation can be made which
                    would result in a Sub-Account Value of less than $50 or a
                    Fixed Account value of less than $2,500. Further, at this
                    time, no more than 18 Sub-Accounts may be opened during the
                    life of the Policy. Lincoln Life may expand this number at a
                    future date. The variable portion of a Policy is supported
                    by the Fund(s) selected as funding vehicle(s). The portion
                    of the Variable Account Value attributable to a particular
                    Fund through the Sub-Account of the Variable Account is not
                    guaranteed and will vary with the investment performance of
                    that Fund.
CHARGES
AND FEES
                    There is a 5.0% premium load on all Premium Payments.
 
                    Monthly deductions are made for the Cost of Insurance and
                    any riders.
 
                    Monthly deductions ($15 per month during the first Policy
                    Year and, currently, $5 per month thereafter) are also made
                    for administrative expenses.
 
                    Daily deductions from Variable Account Value are made for
                    the mortality and expense risk, currently at the annual rate
                    of .80% during the first twelve Policy Years and .55%
                    thereafter.
 
                    Investment results for each Sub-Account are affected by each
                    Fund's daily charge for management fees; these charges vary
                    by Fund and are shown at pages 10-11 of this Prospectus.
 
                    A transaction fee of $25 is imposed for each partial
                    surrender and for certain transfers in excess of 12 per
                    Policy Year.
 
                    A surrender charge will be deducted upon full surrender of a
                    Policy within the first ten Policy Years or within ten years
                    after an increase in Specified Amount.
 
                    Interest is charged on Policy loans. The net interest spread
                    (the amount by which interest charged exceeds interest
                    credited) is currently 1% per year in the first ten Policy
                    Years and .25% per year thereafter.
 
                    Lincoln Life may derive a profit from its charges.
 
LINCOLN LIFE
                    THE LINCOLN NATIONAL LIFE INSURANCE COMPANY. Lincoln Life is
                    a stock life insurance company incorporated under the laws
                    of Indiana on June 12, 1905. Lincoln Life is principally
                    engaged in offering individual life insurance policies and
                    annuity contracts, and ranks among the largest United States
                    stock life insurance companies in terms of assets and life
                    insurance in force. Lincoln Life is also one of the leading
                    life reinsurers in the United States. Lincoln Life is
                    licensed in all states (except New York) and the District of
                    Columbia, Guam, and the Commonwealth of the Northern Mariana
                    Islands.
 
                    Lincoln Life is wholly owned by Lincoln National Corporation
                    ("LNC"), a publicly held insurance holding company
                    incorporated under Indiana law on January 5, 1968. The
                    principal office of Lincoln Life is located at 1300 South
                    Clinton Street, Fort Wayne, Indiana 46802. The principal
                    office of Lincoln National Corp. is located at 200 East
                    Berry Street, Fort Wayne, Ind. 46802. Through subsidiaries,
                    LNC engages primarily in the issuance of health-life
                    insurance and annuities, property-casualty insurance, and
                    other financial services.
 
                    Lincoln Life markets the Policies through independent
                    insurance brokers, general agents, and registered
                    representatives of broker-dealers which are members of the
                    National Association of Securities Dealers, Inc.
 
                    Lincoln Life, in common with other insurance companies, is
                    subject to regulation and supervision by the regulatory
                    authorities of the states in which it is licensed to do
                    business. A license from the state insurance department is a
                    prerequisite to the transaction of insurance business in
                    that state. In general, all states have statutory
                    administrative powers. Such regulation relates, among other
                    things, to licensing of insurers and their agents, the
                    approval of policy forms, the methods of computing reserves,
                    the form and content of statutory financial statements, the
                    amount of policyholders' and stockholders' dividends, and
                    the type of distribution of investments
 
6
<PAGE>
                    permitted. Additional protection is provided in the form of
                    a blanket fidelity bond which covers directors and employees
                    of Lincoln Life. The bond, which was issued by Fidelity and
                    Deposit Co. of Maryland, provides $25,000,000 of coverage.
 
THE VARIABLE ACCOUNT
 
                    Lincoln Life Flexible Premium Variable Life Account M was
                    established pursuant to a December 2, 1997 resolution of the
                    Board of Directors of Lincoln Life. Under Indiana insurance
                    law, the income, gains or losses of the Variable Account are
                    credited without regard to the other income, gains or losses
                    of Lincoln Life. Lincoln Life serves as the custodian of the
                    assets of the Variable Account. These assets are held for
                    the Policies. Although the assets maintained in the Variable
                    Account equal to its reserves and other liabilities will not
                    be charged with any liabilities arising out of any other
                    business conducted by Lincoln Life, all obligations arising
                    under the Policies are general corporate liabilities of
                    Lincoln Life. Any and all distributions made by the Funds
                    with respect to shares held by the Variable Account will be
                    reinvested in additional shares at net asset value.
                    Deductions and surrenders from the Variable Account will, in
                    effect, be made by surrendering shares of the Funds at net
                    asset value. On each Valuation Day of each Fund, the
                    Variable Account purchases or redeems Fund shares based on a
                    netting of all transactions for that day. Shares of the
                    Funds held in the Variable Account are held by Lincoln Life
                    through an open account system, which makes unnecessary the
                    issuance and delivery of stock certificates.
 
                    The Variable Account is registered with the Securities and
                    Exchange Commission ("Commission") as a unit investment
                    trust under the Investment Company Act of 1940 ("1940 Act").
                    Such registration does not involve supervision of the
                    Variable Account or Lincoln Life's management or investment
                    practices or policies by the Commission. Lincoln Life does
                    not guarantee the Variable Account's investment performance.
 
                    Lincoln Life has several other separate accounts registered
                    as unit investment trusts with the Commission for the
                    purpose of funding the variable annuity contracts and
                    variable life insurance policies of Lincoln Life.
THE FUNDS
   
                    Each of the twenty Sub-Accounts of the Variable Account is
                    invested solely in the shares of one of the twenty Funds
                    available as funding vehicles under the Policies. Each of
                    the Funds is a series of one of nine entities, all
                    Massachusetts business trusts, except for AIM Variable
                    Insurance Funds, Inc., Delaware Group Premium Fund, Inc. and
                    Lincoln National Money Market Fund, Inc., which are Maryland
                    Corporations. Each such entity is registered as an open-end,
                    diversified management investment company under the 1940
                    Act. These entities are collectively referred to herein as
                    the "Trusts."
    
 
                    The seven Trusts and their Investment advisers and
                    distributors are:
 
                        AIM Variable Insurance Funds, Inc. ("AIM V.I. Fund"),
                        managed by A I M Advisors, Inc., and distributed by
                        A I M Distributors, Inc., 11 Greenway Plaza, Suite 100,
                        Houston, TX 77046-1173;
 
   
                        BT Insurance Funds Trust ("BT Trust"), managed by
                        Bankers Trust Company, Bankers Trust Plaza, New York, NY
                        10006, and distributed by First Data Distributors, Inc.,
                        4400 Computer Drive, Westborough, MA 01581;
    
 
   
                        Delaware Group Premium Fund, Inc. ("Delaware Trust"),
                        managed by Delaware Management Company, Inc. and
                        distributed by Delaware Distributors, L.P., 1818 Market
                        Street, Philadelphia, PA 19103;
    
 
   
                        Fidelity Variable Insurance Products Fund ("Fidelity
                        VIP"), and Variable Insurance Products Fund II
                        ("Fidelity VIP II"), managed by Fidelity Management &
                        Research Company and distributed by Fidelity
                        Distributors Corporation, 82 Devonshire Street, Boston,
                        MA 02103;
    
 
   
                        Lincoln National Money Market Fund, Inc. ("Lincoln
                        Trust"), managed by Lincoln Investment Management, Inc.
                        and distributed by Lincoln Financial Advisors, Inc.,
                        1300 S. Clinton Street, Fort Wayne, IN 46802;
    
 
                                                                               7
<PAGE>
                        MFS-Registered Trademark- Variable Insurance Trust ("MFS
                        Trust"), managed by Massachusetts Financial Services
                        Company and distributed by MFS Fund Distributors, Inc.,
                        500 Boylston Street, Boston, MA 02116;
 
                        Templeton Variable Products Series Fund ("Templeton
                        Trust"), managed by Templeton Investment Counsel, Inc.
                        and its Templeton and Franklin affiliates and
                        distributed by Franklin/Templeton Distributors, Inc.,
                        700 Central Avenue, St. Petersburg, FL 33701;
 
                        OCC Accumulation Trust ("OCC Trust") (formerly Quest for
                        Value Accumulation Trust), managed by OpCap Advisors
                        (formerly Quest for Value Advisors) and distributed by
                        OCC Distributors (formerly Quest for Value
                        Distributors), One World Financial Center, New York, NY
                        10281.
 
                    Four Funds of AIM V.I. Fund are available under the
                    Policies:
 
                        AIM V.I. Capital Appreciation Fund;
                        AIM V.I. Diversified Income Fund;
                        AIM V.I. Growth Fund;
                        AIM V.I. Value Fund.
 
   
                    One Fund of BT Trust is available under the Policies:
    
 
   
                        Equity 500 Index Fund.
    
 
   
                    Three Funds of the DELAWARE Trust are available under the
                    Policies:
    
 
   
                        Emerging Markets Series;
                        Small Cap Value Series;
                        Trend Series.
    
 
                    One Fund of FIDELITY VIP is available under the Policies:
 
                        Equity-Income Portfolio ("Fidelity VIP Equity-Income
                        Portfolio").
 
                    Two Funds of FIDELITY VIP II are available under the
                    Policies:
 
                        Asset Manager Portfolio ("Fidelity VIP II Asset Manager
                    Portfolio");
                        Investment Grade Bond Portfolio ("Fidelity VIP II
                    Investment Grade Bond Portfolio").
 
   
                    One Fund of LINCOLN Trust is available under the Policies:
    
 
   
                        Money Market Fund.
    
 
   
                    Three Funds of MFS Trust are available under the Policies:
    
 
   
                        MFS Emerging Growth Series;
                        MFS Total Return Series;
                        MFS Utilities Series.
    
 
                    Three Funds of TEMPLETON Trust are available under the
                    Policies:
 
                        Templeton Asset Allocation Fund: Class 1;
                        Templeton International Fund: Class 1;
                        Templeton Stock Fund: Class 1.
 
   
                    Two Funds of OCC Accumulation Trust are available under the
                    Policies:
    
 
   
                        Global Equity Portfolio;
                        Managed Portfolio.
    
 
   
                    The investment advisory fees charged the Funds by their
                    advisers are shown on pages 20 and 21 of this Prospectus.
    
 
                    There follows a brief description of the investment
                    objective and program of each Fund. There can be no
                    assurance that any of the stated investment objectives will
                    be achieved.
 
   
                    The investment objectives and policies of certain Trusts are
                    similar to the investment objectives and policies of other
                    funds that may be managed by the same investment adviser.
                    The investment results of the Trusts, however, may be higher
                    or lower than the results of such other funds. There can be
                    no assurance, and no representation is made, that the
                    investment results of any of the Trusts will be comparable
                    to the investment results of any other fund, even if the
                    other fund has the same investment adviser.
    
 
8
<PAGE>
                    AIM V.I. CAPITAL APPRECIATION FUND (Small Cap Stocks): Seeks
                    to provide capital appreciation through investments in
                    common stocks, with emphasis on medium-sized and smaller
                    emerging growth companies.
 
                    AIM V.I. DIVERSIFIED INCOME FUND (Fixed
                    Income - Intermediate Term Bonds): Seeks to achieve a high
                    level of current income primarily by investing in a
                    diversified portfolio of foreign and U.S. government and
                    corporate debt securities, including lower rated high yield
                    debt securities (commonly known as "junk bonds").
 
                    AIM V.I. GROWTH FUND (Large Cap Stocks): Seeks to provide
                    growth of capital through investments primarily in common
                    stocks of leading U.S. companies considered by its adviser
                    to have strong earnings momentum.
 
                    AIM V.I. VALUE FUND (Large Cap Stocks): Seeks to achieve
                    long-term growth of capital by investing primarily in equity
                    securities judged by its adviser to be undervalued relative
                    to the current or projected earnings of the companies
                    issuing the securities, or relative to current market values
                    of assets owned by the companies issuing the securities or
                    relative to the equity markets generally. Income is a
                    secondary objective.
 
   
                    BT EQUITY 500 INDEX FUND (Large Cap Stocks): Seeks to
                    replicate as closely as possible the performance of the
                    Standard & Poor's 500 Composite Stock Price Index, an index
                    emphasizing large-capitalization stocks, before the
                    deduction of Fund expenses.
    
 
   
                    DELAWARE EMERGING MARKETS SERIES (International Stocks): An
                    international fund which seeks to achieve long-term capital
                    appreciation by investing primarily in equity securities of
                    issuers located or operating in emerging countries. Under
                    normal market conditions, at least 65% of the Series assets
                    will be invested in equity securities of issuers organized
                    or having a majority of their assets or deriving a majority
                    of their operating income in at least three countries that
                    are considered to be developing or emerging.
    
 
   
                    DELAWARE SMALL CAP VALUE SERIES (Small Cap Stocks): Seeks
                    capital appreciation by investing primarily in small- to
                    mid-cap common stocks whose market value appears low
                    relative to their underlying value or future earnings and
                    growth potential. Emphasis also will be placed on securities
                    of companies that may be temporarily out of favor or whose
                    value is not yet recognized by the market.
    
 
   
                    DELAWARE TREND SERIES (Small Cap Stocks): Seeks long-term
                    capital appreciation by investing primarily in small-cap
                    common stocks and convertible securities of emerging and
                    other growth-oriented companies. These securities will have
                    been judged to be responsive to changes in the marketplace
                    and to have fundamental characteristics to support growth.
                    Income is not an objective.
    
 
   
                    FIDELITY VIP II ASSET MANAGER PORTFOLIO (Balanced or Total
                    Return): Seeks high total return with reduced risk over the
                    long-term by allocating its assets among domestic and
                    foreign stocks, bonds and short-term money market
                    instruments.
    
 
                    FIDELITY VIP II INVESTMENT GRADE BOND PORTFOLIO (Fixed
                    Income - Intermediate Term Bonds): Seeks as high a level of
                    current income as is consistent with the preservation of
                    capital by investing in a broad range of investment-grade
                    fixed-income securities.
 
   
                    FIDELITY VIP EQUITY-INCOME PORTFOLIO (Large Cap Stocks):
                    Seeks reasonable income by investing primarily in
                    income-producing equity securities, with some potential for
                    capital appreciation, seeking a yield that exceeds the
                    composite yield on the securities comprising the Standard
                    and Poor's 500 Index (S&P 500).
    
 
   
                    LINCOLN MONEY MARKET FUND (Money Market): Seeks maximum
                    current income consistent with the preservation of capital,
                    by investing in a portfolio of short-term money market
                    instruments maturing within one year from date of purchase.
    
 
                    MFS EMERGING GROWTH SERIES (Large Cap Stocks): Seeks to
                    provide long-term growth of capital by investing primarily
                    in common stocks of foreign and domestic issuers.
 
                    MFS TOTAL RETURN SERIES (Balanced or Total Return): Seeks
                    primarily to obtain above-average income (compared to a
                    portfolio invested entirely in equity securities) consistent
                    with the prudent employment of capital, and secondarily to
                    provide a reasonable opportunity for growth of capital and
                    income.
 
                                                                               9
<PAGE>
                    MFS UTILITIES SERIES (Specialty): Seeks capital growth and
                    current income (income above that available from a portfolio
                    invested entirely in equity securities) by investing, under
                    normal circumstances, at least 65% of its assets in equity
                    and debt securities of utility companies.
 
   
                    TEMPLETON ASSET ALLOCATION FUND -- CLASS 1 (Balanced or
                    Total Return): Seeks a high level of total return through a
                    flexible policy of investing in stocks of companies in any
                    nation, debt securities of companies and governments of any
                    nation, and in money market instruments. Assets are
                    allocated among different investments depending upon
                    worldwide market and economic conditions.
    
 
   
                    TEMPLETON INTERNATIONAL FUND -- CLASS 1 (International
                    Stocks): Seeks long-term capital growth through a flexible
                    policy of investing in stocks and debt obligations of
                    companies and governments outside the United States.
    
 
   
                    TEMPLETON STOCK FUND -- CLASS 1 (Global Stocks): Seeks
                    capital growth through a policy of investing primarily in
                    common stocks issued by companies, large and small, in
                    various nations throughout the world, including the U.S.
    
 
   
                    OCC ACCUMULATION TRUST GLOBAL EQUITY PORTFOLIO
                    (International Stocks): Seeks long-term capital appreciation
                    through a global investment strategy primarily involving
                    equity securities.
    
 
   
                    OCC ACCUMULATION TRUST MANAGED PORTFOLIO (Balanced or Total
                    Return): Seeks growth of capital over time through
                    investment in a portfolio of common stocks, bonds and cash
                    equivalents, the percentage of which will vary based on
                    management's assessments of relative investment values.
    
 
   
                    The AIM Diversified Income Fund, Delaware Emerging Markets
                    Fund, Delaware Small Cap Value Fund, Fidelity VIP
                    Equity-Income Portfolio, Fidelity VIP II Asset Manager
                    Portfolio, MFS Total Return Series, MFS Utilities Series,
                    OCC Global Equity Portfolio, OCC Managed Portfolio,
                    Templeton Asset Allocation Fund, Templeton International
                    Fund and Templeton Stock Fund portfolios may invest in
                    non-investment grade, high yield, high-risk debt securities
                    (commonly referred to as "junk bonds"), as detailed in the
                    individual Fund prospectuses.
    
 
                    There is no assurance that the investment objective of any
                    of the Funds will be met. A Policy Owner bears the complete
                    investment risk for Accumulation Values allocated to a
                    Sub-Account. Each of the Sub-Accounts involves inherent
                    investment risk, and such risk varies significantly among
                    the Sub-Accounts. Policy Owners should read each Fund's
                    prospectus carefully and understand the Funds' relative
                    degrees of risk before making or changing investment
                    choices. Additional Funds may, from time to time, be made
                    available as investments to underlie the Policies. However,
                    the right to make such selections will be limited by the
                    terms and conditions imposed on such transactions by Lincoln
                    Life (See "Premium Payments").
 
                    Required premium levels will vary based on market
                    performance. In a prolonged market downturn, affecting all
                    Sub-Accounts, additional Premium Payments may be necessary
                    to maintain the level of coverage or to avoid lapsing of the
                    Policy. Review of periodic contract statements is strongly
                    suggested to determine appropriate premium requirements.
 
                    SUBSTITUTION OF SECURITIES
 
                    If the shares of any Fund should no longer be available for
                    investment by the Variable Account or if, in the judgment of
                    Lincoln Life, further investment in such shares should
                    become inappropriate in view of the purpose of the
                    investment objectives of the Policies or in view of legal,
                    regulatory or federal income tax restrictions, Lincoln Life
                    may
 
10
<PAGE>
                    substitute shares of another Fund. No substitution of
                    securities in any Sub-Account may take place without prior
                    approval of the Commission and under such requirements as it
                    may impose.
 
                    VOTING RIGHTS
 
                    In accordance with its view of present applicable law,
                    Lincoln Life will vote the shares of each Fund held in the
                    Variable Account at special meetings of the shareholders of
                    the particular Series Fund in accordance with written
                    instructions received from persons having the voting
                    interest in the Variable Account. Lincoln Life will vote
                    shares for which it has not received instructions, as well
                    as shares attributable to it, in the same proportion as it
                    votes shares for which it has received instructions. The
                    Series Funds do not hold regular meetings of shareholders.
 
                    The number of shares which a person has a right to vote will
                    be determined as of a date to be chosen by the appropriate
                    Series Fund not more than sixty (60) days prior to the
                    meeting of the particular Series Fund. Voting instructions
                    will be solicited by written communication at least fourteen
                    (14) days prior to the meeting.
 
                    The Funds' shares are issued and redeemed only in connection
                    with variable annuity contracts and variable life insurance
                    policies issued through separate accounts of Lincoln Life
                    and other life insurance companies. The Series Funds do not
                    foresee any disadvantage to Policy Owners arising out of the
                    fact that shares may be made available to separate accounts
                    which are used in connection with both variable annuity and
                    variable life insurance products. Nevertheless, the Series
                    Funds' Boards intend to monitor events in order to identify
                    any material irreconcilable conflicts which may possibly
                    arise and to determine what action, if any, should be taken
                    in response thereto. If such a conflict were to occur, one
                    of the separate accounts might withdraw its investment in a
                    Fund. This might force a Fund to sell portfolio securities
                    at disadvantageous prices.
 
                    FUND PARTICIPATION AGREEMENTS
 
                    With respect to a Trust, the adviser and/or the distributor,
                    or an affiliate thereof, may compensate Lincoln Life (or an
                    affiliate) for administration, distribution, or other
                    services. It is anticipated that such compensation would be
                    based on assets of the particular Trust attributable to the
                    Policies along with certain other variable contracts issued
                    or administered by Lincoln Life (or an affiliate).
 
DEATH BENEFIT
 
                    DEATH BENEFIT OPTIONS
 
                    Two different Death Benefit Options are available. The
                    amount payable under either option will be determined as of
                    the date of the Insured's death.
 
                    Under OPTION 1 the Death Benefit will be the greater of the
                    Specified Amount (a minimum of $100,000 as of the date of
                    this Prospectus), or the applicable percentage (the
                    "Corridor Percentage") of the Accumulation Value required to
                    maintain the Policy as a "life insurance contract" for tax
                    purposes (the "Corridor Death Benefit"). The Corridor
                    Percentage is 250% through the Insured's age 40 and
                    decreases in accordance with the table in "Payment of Death
                    Benefit" to 100% at the Insured's age 95. Option 1 provides
                    a level Death Benefit until the Corridor Death Benefit
                    exceeds the Specified Amount.
 
                    Under OPTION 2 the Death Benefit will be the greater of the
                    Specified Amount (a minimum of $100,000 as of the date of
                    this Prospectus), plus the Accumulation Value,
 
                                                                              11
<PAGE>
                    or the Corridor Death Benefit. Option 2 provides a varying
                    Death Benefit which increases or decreases over time,
                    depending on the amount of premium paid and the investment
                    performance of the underlying funding options chosen.
 
                    Under both Option 1 and Option 2, the proceeds payable upon
                    death will be the Death Benefit, reduced by partial
                    surrenders and by the amount necessary to repay any loans in
                    full. Option 1 will be in effect unless Option 2 has been
                    elected in the application for the Policy or unless a change
                    has been allowed.
 
                    CHANGES IN DEATH BENEFIT OPTION
 
                    A Death Benefit Option change will be allowed upon the
                    Owner's written request to Lincoln Life's Administrative
                    Office in form satisfactory to Lincoln Life, subject to the
                    following conditions:
 
                     - The change will take effect on the Monthly Anniversary
                       Day or on the next Valuation Day following the date of
                       receipt of the request.
 
                     - There will be no change in the Surrender Charge, and
                       evidence of insurability may be required.
 
                     - No change in the Death Benefit Option may reduce the
                       Specified Amount below $100,000.
 
                     - For changes from Option 1 to Option 2, the new Specified
                       Amount will equal the Specified Amount less the
                       Accumulation Value at the time of the change.
 
                     - For changes from Option 2 to Option 1, the new Specified
                       Amount will equal the Specified Amount plus the
                       Accumulation Value at the time of the change.
 
                    GUARANTEED DEATH BENEFIT PROVISION
 
   
                    The Guaranteed Death Benefit Provision assures that, as long
                    as the Guaranteed Initial Death Benefit Premium is paid, the
                    Death Benefit will not be less than the Initial Specified
                    Amount during the first five Policy Years even if the Net
                    Accumulation Value is insufficient to cover the current
                    Monthly Deductions, assuming there have been no loans or
                    partial surrenders.
    
 
                    Changes in Initial Specified Amount, partial surrenders, and
                    Death Benefit Option changes during the first five Policy
                    Years may affect the Guaranteed Death Benefit Premium. These
                    events and loans may also affect the Policy's ability to
                    remain in force.
 
                    PAYMENT OF DEATH BENEFIT
 
                    The Death Benefit under the Policy will be paid in a lump
                    sum within seven days after receipt at Lincoln Life's
                    Administrative Office of due proof of the Insured's death (a
                    certified copy of the death certificate), unless the Owner
                    or the Beneficiary has elected that it be paid under one or
                    more of the Settlement Options (See "Settlement Options").
                    Payment of the Death Benefit may be delayed if the Policy is
                    being contested.
 
                    While the Insured is living, the Owner may elect a
                    Settlement Option for the Beneficiary and deem it
                    irrevocable, and may revoke or change a prior election. The
                    Beneficiary may make or change an election within 90 days of
                    the death of the Insured, unless the Owner has made an
                    irrevocable election.
 
                    All or a part of the Death Benefit may be applied under one
                    or more of the Settlement Options, or such other options as
                    Lincoln Life may make available in the future.
 
                    If the Policy is assigned as collateral security, Lincoln
                    Life will pay any amount due the assignee in one lump sum.
                    Any excess Death Benefit due will be paid as elected.
 
12
<PAGE>
                    The Death Benefit under the Policy at any point in time must
                    be at least the following "Corridor Percentage" of the
                    Accumulation Value based on the Insured's attained age:
 
<TABLE>
<CAPTION>
                     INSURED'S     CORRIDOR       INSURED'S      CORRIDOR
                    ATTAINED AGE  PERCENTAGE    ATTAINED AGE    PERCENTAGE
                    ------------  -----------   -------------   -----------
                    <S>           <C>           <C>             <C>
                        0-40          250%            70            115%
                         41           243             71            113
                         42           236             72            111
                         43           229             73            109
                         44           222             74            107
                                    -----            ---          -----
                         45           215             75            105
                         46           209             76            105
                         47           203             77            105
                         48           197             78            105
                         49           191             79            105
                                    -----            ---          -----
                         50           185             80            105
                         51           178             81            105
                         52           171             82            105
                         53           164             83            105
                         54           157             84            105
                                    -----            ---          -----
                         55           150             85            105
                         56           146             86            105
                         57           142             87            105
                         58           138             88            105
                         59           134             89            105
                                    -----            ---          -----
                         60           130             90            105
                         61           128             91            104
                         62           126             92            103
                         63           124             93            102
                         64           122             94            101
                                    -----            ---          -----
                         65           120             95            100
                         66           119             96            100
                         67           118             97            100
                         68           117             98            100
                         69           116             99            100
                                    -----            ---          -----
</TABLE>
 
                    CHANGES IN SPECIFIED AMOUNT
 
                    Changes in the Specified Amount of a Policy can be made by
                    submitting a written request to Lincoln Life's
                    Administrative Office in form satisfactory to Lincoln Life.
 
                    Changes in the Specified Amount are subject to the following
                    conditions:
 
                     - Satisfactory evidence of insurability and a supplemental
                       application may be required for an increase in the
                       Specified Amount.
 
                     - An increase in the Specified Amount will increase the
                       Surrender Charge.
 
                     - As of the date of this Prospectus, the minimum allowable
                       increase in Specified Amount is $1,000.
 
                     - No decrease may reduce the Specified Amount to less than
                       $100,000.
 
                     - No decrease may reduce the Specified Amount below the
                       minimum required to maintain the Policy's status under
                       the Code as a life insurance policy.
 
                                                                              13
<PAGE>
                    Decreases in Specified Amount will be effective on the
                    Monthly Anniversary Day on or next following receipt of the
                    request at our Servicing Office, if all requirements have
                    been met. Decreases in Specified Amount will be applied to
                    reduce existing Specified Amount in the following order:
                    first, the most recent increase in Specified Amount; then,
                    the next most recent increases in Specified Amount
                    successively; and finally, against the Specified Amount
                    provided at issue.
 
   
                    Increases in Specified Amount, if approved by Lincoln Life
                    and provided the Insured is living, will be effective on (i)
                    the Monthly Anniversary Day on or next following receipt of
                    the request at our Servicing Office and (ii) the deduction
                    from the Accumulation Value of the first month's cost of
                    insurance for the increase. If the Specified Amount is
                    increased, a new Surrender Charge applies within ten years
                    following any increase in Specified Amount. (See "Charges;
                    Fees -- Surrender Charge".)
    
 
PREMIUM PAYMENTS; TRANSFERS
 
                    PREMIUM PAYMENTS
 
   
                    The Policies provide for flexible premium payments. Premium
                    Payments are payable in the frequency and in the amount
                    selected by the Policy Owner. The initial Premium Payment is
                    due on the Issue Date and is payable in advance. The minimum
                    payment is the amount necessary to maintain a positive Net
                    Accumulation Value or Guaranteed Minimum Death Benefit. Each
                    subsequent Premium Payment must be at least $100. Lincoln
                    Life reserves the right to decline any application or
                    Premium Payment.
    
 
                    After the initial Premium Payment, all Premium Payments must
                    be sent directly to Lincoln Life's Administrative Office and
                    will be deemed received when actually received there.
 
                    The Policy Owner may elect to increase, decrease or change
                    the frequency of Premium Payments.
 
                    PLANNED PREMIUMS are Premium Payments scheduled when a
                    Policy is applied for. They can be billed annually,
                    semiannually or quarterly. Pre-authorized automatic monthly
                    check payments may also be arranged.
 
                    ADDITIONAL PREMIUMS are any Premium Payments made ($100
                    minimum) in addition to Planned Premiums.
 
   
                    GUARANTEED INITIAL DEATH BENEFIT PREMIUM, if paid during
                    each of the first five Policy Years, enables the Policy to
                    remain in force regardless of investment performance,
                    assuming no surrenders or loans during that time. The
                    Guaranteed Initial Death Benefit Premium is stated in the
                    Policy Specifications. An increase in Specified Amount would
                    require a recalculation of the Guaranteed Initial Death
                    Benefit Premium. If this premium is not paid, or there are
                    partial surrenders or loans taken during the first five
                    Policy Years, the Policy will lapse during the first five
                    Policy Years if the Net Accumulation Value is less than the
                    next Monthly Deduction, just as it would after the first
                    five Policy Years at any time the Net Accumulation Value is
                    less than the next Monthly Deduction.
    
 
                    Payment of Planned Premiums or Additional Premiums in any
                    amount will not, except as noted above, guarantee that the
                    Policy will remain in force. Conversely, failure to pay
                    Planned Premiums or Additional Premiums will not necessarily
                    cause a Policy to lapse (See "Guaranteed Death Benefit
                    Provision").
 
                    PREMIUM INCREASES. At any time, the Owner may increase
                    Planned Premiums, or pay Additional Premiums, but:
 
                     - Evidence of insurability may be required if the
                       Additional Premium or the new Planned Premium during the
                       current Policy Year would increase the difference between
                       the Death Benefit and the Accumulation Value. If
                       satisfactory evidence of
 
14
<PAGE>
                       insurability is requested and not provided, the increase
                       in premium will be refunded without interest and without
                       participation of such amounts in any underlying funding
                       options.
 
                     - In no event may the total of all Premium Payments exceed
                       the then-current maximum premium limitations established
                       by federal law for a Policy to qualify as life insurance.
                       If, at any time, a Premium Payment would result in total
                       Premium Payments exceeding such maximum premium
                       limitation, Lincoln Life will only accept that portion of
                       the Premium Payment which will make total premiums equal
                       the maximum. Any part of the Premium Payment in excess of
                       that amount will be returned or applied as otherwise
                       agreed and no further Premium Payments will be accepted
                       until allowed by the then-current maximum premium
                       limitations prescribed by law.
 
                     - If there is any Policy indebtedness, any additional Net
                       Premium Payments will be used first as a loan repayment
                       with any excess applied as an additional Net Premium
                       Payment.
 
                    ALLOCATION OF NET PREMIUM PAYMENTS
 
                    At the time of purchase of the Policy, the Owner must decide
                    how to allocate Net Premium Payments among the Sub-Accounts
                    and the Fixed Account. Allocation to any one Variable
                    Account Sub-Account or to the Fixed Account must be in whole
                    percentages. No allocation can be made which would result in
                    a Sub-Account Value of less than $50 or a Fixed Account
                    value of less than $2,500. Further, at this time, no more
                    than 18 Sub-Accounts may be opened during the life of the
                    Policy. Lincoln Life may expand this number at a future
                    date. For each Variable Account Sub-Account, the Net Premium
                    Payments are converted into Accumulation Units. The number
                    of Accumulation Units credited to the Policy is determined
                    by dividing the Net Premium Payment allocated to the
                    Sub-Account by the value of the Accumulation Unit for the
                    Sub-Account.
 
                    During the Right-to-Examine Period, the Net Premium Payment
                    will be allocated to the Fixed Account, and interest
                    credited from the Issue Date if the Premium Payment was
                    received on or before the Issue Date. Lincoln Life will
                    allocate the initial Net Premium Payment directly to the
                    Sub-Account(s) selected by the Owner within three days after
                    expiration of the Right-to-Examine Period.
 
                    Unless Lincoln Life is directed otherwise by the Policy
                    Owner, subsequent Net Premium Payments will be allocated on
                    the same basis as the most recent previous Net Premium
                    Payment. Such allocation will occur as of the next Valuation
                    Period after each payment is received.
 
                    The allocation for future Net Premium Payments may be
                    changed at any time free of charge. Any new allocation will
                    apply to Premium Payments made more than one week after
                    Lincoln Life receives the notice of the new allocation at
                    its administrative office. Any new allocation is subject to
                    the same requirements as the initial allocation. Lincoln
                    Life may, at its sole discretion, waive minimum premium
                    allocation requirements.
 
                    TRANSFERS
 
                    Before the Insured attains age 100, values may, at any time,
                    be transferred ($500 minimum) from one Sub-Account to
                    another or from the Variable Account to the Fixed Account.
                    Within the 30 days after each Policy Anniversary, the Owner
                    may also transfer a portion of the Fixed Account Value to
                    one or more Sub-Accounts, until the Insured attains age 100.
                    Transfers from the Fixed Account are allowed in the 30-day
                    period after a Policy Anniversary and will be effective as
                    of the next Valuation Day after a request is
 
                                                                              15
<PAGE>
                    received in good order at Lincoln Life's Administrative
                    Office. The cumulative amount of transfers from the Fixed
                    Account within any such 30-day period cannot exceed 20% of
                    the Fixed Account Value on the most recent Policy
                    Anniversary. Lincoln Life may further limit transfers from
                    the Fixed Account at any time.
 
                    Subject to the above restrictions, up to 12 transfers may be
                    made in any Policy Year without charge, and any value
                    remaining in the Fixed Account or a Sub-Account after a
                    transfer must be at least $500. Transfers may be made in
                    writing or by telephone unless the Policy Owner has
                    indicated in writing in the application or otherwise that
                    telephone transfers are not to be permitted. To make a
                    telephone transfer, the Policy Owner must call Lincoln
                    Life's Administrative Office and provide, as identification,
                    his or her Policy Number and a requested portion of his or
                    her Social Security number. A customer service
                    representative will then come on the line and, upon
                    ascertaining that telephone transfers are permitted for that
                    Policy, take the transfer request, which will be processed
                    as of the next close of business and confirmed the day after
                    that. Lincoln Life disclaims all liability for losses
                    resulting from unauthorized or fraudulent telephone
                    transactions, but acknowledges that if it does not follow
                    these procedures, which it believes to be reasonable, it may
                    be liable for such losses.
 
                    Any transfer among the Sub-Accounts or to the Fixed Account
                    will result in the crediting and cancellation of
                    Accumulation Units based on the Accumulation Unit values
                    next determined after a written request is received by
                    Lincoln Life at its Administrative Office. Transfer requests
                    must be received by Lincoln Life at its Administrative
                    Office by the close of the New York Stock Exchange (usually,
                    4:00 pm ET) on each day the New York Stock Exchange is open,
                    in order to be effective that day. Any transfer made which
                    causes the remaining value of Accumulation Units for a
                    Sub-Account to be less than $500 will result in those
                    remaining Accumulation Units being cancelled and their
                    aggregate value reallocated proportionately among the other
                    funding options chosen. The Policy Owner should carefully
                    consider current market conditions and each Sub-Account's
                    investment policies and related risks before allocating
                    money to the Sub-Accounts. See pages 8-9 and 19-20 of this
                    Prospectus.
 
                    Lincoln Life, at its sole discretion, may waive minimum
                    balance requirements on the Sub-Accounts.
 
                    OPTIONAL VARIABLE ACCOUNT SUB-ACCOUNT ALLOCATION PROGRAMS
 
                    The Owner may elect to enroll in either of the following
                    programs. However, both programs cannot be in effect at the
                    same time.
 
                    DOLLAR COST AVERAGING
 
   
                    Dollar Cost Averaging is a program which, if elected by the
                    Owner, systematically allocates specified dollar amounts
                    from the Money Market Sub-Account to one or more of the
                    Contract's Variable Account Sub-Accounts at regular
                    intervals as selected by the Owner. By allocating on a
                    regularly scheduled basis as opposed to allocating the total
                    amount at one particular time, an Owner may be less
                    susceptible to the impact of market fluctuations. Dollar
                    cost averaging will not assure a profit or protect against a
                    declining market.
    
 
   
                    Dollar Cost Averaging may be elected by establishing a Money
                    Market Sub-Account value of at least $1,000. The minimum
                    amount per month to allocate is $100 (subject to the 18
                    Sub-Account limitation described under "Allocation of Net
                    Premium Payments" above). Enrollment in this program may
                    occur at any time by calling Lincoln Life's Administrative
                    Office or by providing the information requested on the
                    Dollar Cost Averaging election form to Lincoln Life,
                    provided that sufficient value is in the Money
    
 
16
<PAGE>
   
                    Market Sub-Account. Transfers to the Fixed Account are not
                    permitted under Dollar Cost Averaging. Lincoln Life may, at
                    its sole discretion, waive Dollar Cost Averaging minimum
                    deposit and transfer requirements.
    
 
   
                    Dollar Cost Averaging will terminate when any of the
                    following occurs: (1) the number of designated transfers has
                    been completed; (2) the value of the Money Market Sub-
                    Account is insufficient to complete the next transfer; (3)
                    the Owner requests termination by telephone or in writing
                    and such request is received at least one week prior to the
                    next scheduled transfer date to take effect that month; or
                    (4) the Policy is surrendered.
    
 
                    There is no current charge for Dollar Cost Averaging but
                    Lincoln Life reserves the right to charge for this program.
 
                    AUTOMATIC REBALANCING
 
                    Automatic Rebalancing is an option which, if elected by the
                    Owner on the initial application, or thereafter by calling
                    Lincoln Life's Administrative Office, periodically restores
                    to a pre-determined level the percentage of Policy Value
                    allocated to each Sub-Account (e.g. 20% Money Market, 50%
                    Growth, 30% Utilities). This pre-determined level will be
                    the allocation initially selected on the application, unless
                    subsequently changed. The Automatic Rebalancing allocation
                    may be changed at any time by submitting a written request
                    to Lincoln Life or by calling the Administrative Office.
 
                    If Automatic Rebalancing is elected, all Net Premium
                    Payments allocated to the Sub-Accounts must be subject to
                    Automatic Rebalancing. The Fixed Account is not available
                    for Automatic Rebalancing.
 
                    Automatic Rebalancing may take place on either a quarterly,
                    semi-annual or annual basis, as selected by the Owner. Once
                    Automatic Rebalancing is activated, any Sub-Account
                    transfers executed outside of the rebalancing option will
                    terminate the Automatic Rebalancing. Any subsequent premium
                    payment or withdrawal that modifies the net account balance
                    within each Sub-Account may also cause termination of
                    Automatic Rebalancing. Any such termination will be
                    confirmed to the Owner. The Owner may terminate Automatic
                    Rebalancing or re-enroll at any time by calling or writing
                    Lincoln Life's Administrative Office.
 
                    There is no current charge for Automatic Rebalancing but
                    Lincoln Life reserves the right to charge for this program.
 
CHARGES; FEES
 
   
                    Lincoln Life deducts the charges described below to cover
                    costs and expenses, services provided, and risks assumed
                    under the Policies. The amount of a charge may not
                    necessarily correspond to the costs associated with
                    providing the services or benefits indicated by the
                    designation of the charge or associated with the particular
                    Policy. For example, the Premium Load and Surrender Charge
                    may not fully cover all of the sales and distribution
                    expenses actually incurred by Lincoln Life, and proceeds
                    from other charges, including the mortality and expense risk
                    charge, may be used in part to cover such expenses.
    
 
                    PREMIUM LOAD
 
                    A deduction of 5.0% of each Premium Payment will be made to
                    cover the premium load. This load represents state taxes and
                    federal income tax liabilities and a portion of the sales
                    expenses incurred by Lincoln Life. The 2.35% portion of this
                    deduction for premium taxes may be higher or lower than the
                    actual tax imposed by the applicable jurisdiction; it is in
                    the mid-range of state premium taxes, which range from 1.75%
                    to
 
                                                                              17
<PAGE>
                    5.0%. Lincoln Life estimates 1.15% of each Premium Payment
                    will be used to meet federal income tax liabilities
                    attributable to the treatment of deferred acquisition costs.
                    The remaining 1.5% of the deduction is for sales expenses.
 
                    MONTHLY DEDUCTIONS
 
                    A Monthly Deduction is made from the Net Accumulation Value
                    for administrative expenses. The monthly administrative fee
                    is $15 during the first Policy Year and, currently, $5
                    during subsequent Policy Years. This charge is for items
                    such as premium billing and collection, policy value
                    calculation, confirmations and periodic reports. For
                    subsequent Policy Years, this monthly fee will never exceed
                    $10.
 
                    A Monthly Deduction is also made from the Net Accumulation
                    Value for the Cost of Insurance and any charges for
                    supplemental riders. The Cost of Insurance depends on the
                    attained age, risk class and gender classification (in
                    accordance with state law) of the Insured and the current
                    Net Amount at Risk.
 
                    The Cost of Insurance is determined by dividing the Death
                    Benefit at the previous Monthly Anniversary Day by
                    1.0032737, subtracting the Accumulation Value at the
                    previous Monthly Anniversary Day, and multiplying the result
                    (the Net Amount at Risk) by the applicable Cost of Insurance
                    Rate as determined by Lincoln Life. The Guaranteed Maximum
                    Cost of Insurance Rates, per $1,000 of Net Amount at Risk,
                    for standard risks are set forth in the following Table
                    based on the 1980 Commissioners Standard Ordinary Mortality
                    Tables, Age Nearest Birthday (1980 CSO); or, for unisex
                    rates, on the 1980 CSO-B Table.
<TABLE>
<CAPTION>
ATTAINED
AGE            MALE      FEMALE     UNISEX
(NEAREST      MONTHLY    MONTHLY    MONTHLY
BIRTHDAY)      RATE       RATE       RATE
- -----------  ---------  ---------  ---------
<S>          <C>        <C>        <C>
     0         0.34845    0.24089    0.32677
     1         0.08917    0.07251    0.08667
     2         0.08251    0.06750    0.07917
     3         0.08167    0.06584    0.07834
     4         0.07917    0.06417    0.07584
 
     5         0.07501    0.06334    0.07251
     6         0.07167    0.06084    0.06917
     7         0.06667    0.06000    0.06584
     8         0.06334    0.05834    0.06250
     9         0.06167    0.05750    0.06084
 
    10         0.06084    0.05667    0.06000
    11         0.06417    0.05750    0.06250
    12         0.07084    0.06000    0.06917
    13         0.08251    0.06250    0.07834
    14         0.09584    0.06887    0.09001
 
    15         0.11085    0.07084    0.10334
    16         0.12585    0.07601    0.11585
    17         0.13919    0.07917    0.12752
    18         0.14836    0.08167    0.13502
    19         0.15502    0.08501    0.14085
    20         0.15836    0.08751    0.14502
    21         0.15919    0.08917    0.14585
    22         0.15752    0.09084    0.14419
    23         0.15502    0.09251    0.14252
    24         0.15189    0.09501    0.14085
 
    25         0.14752    0.09668    0.13752
    26         0.11419    0.09918    0.13585
    27         0.14252    0.10168    0.13418
    28         0.14169    0.10501    0.13418
    29         0.14252    0.10635    0.13585
 
<CAPTION>
ATTAINED
AGE            MALE      FEMALE     UNISEX
(NEAREST      MONTHLY    MONTHLY    MONTHLY
BIRTHDAY)      RATE       RATE       RATE
- -----------  ---------  ---------  ---------
<S>          <C>        <C>        <C>
 
    30         0.14419    0.11251    0.13752
    31         0.14836    0.11668    0.14169
    32         0.15252    0.12085    0.14585
    33         0.15919    0.12502    0.15252
    34         0.16889    0.13168    0.15919
 
    35         0.17586    0.13752    0.16836
    36         0.18670    0.14669    0.17837
    37         0.20004    0.15752    0.19170
    38         0.21505    0.17003    0.20588
    39         0.23255    0.18503    0.22338
 
    40         0.25173    0.20171    0.24173
    41         0.27424    0.22005    0.26340
    42         0.29675    0.23922    0.28508
    43         0.32260    0.25757    0.31010
    44         0.34929    0.27674    0.33428
 
    45         0.37931    0.29675    0.36263
    46         0.41017    0.31677    0.39182
    47         0.44353    0.33761    0.42268
    48         0.47856    0.36096    0.45437
    49         0.51777    0.38598    0.49107
 
    50         0.55948    0.41350    0.53028
    51         0.60870    0.44270    0.57533
    52         0.66377    0.47523    0.62539
    53         0.72636    0.51276    0.68297
    54         0.79730    0.55114    0.74722
 
    55         0.87326    0.59118    0.81566
    56         0.95591    0.63123    0.88996
    57         1.04192    0.66961    0.96593
    58         1.13378    0.70633    1.04609
    59         1.23236    0.74556    1.13211
</TABLE>
 
18
<PAGE>
<TABLE>
<CAPTION>
ATTAINED
AGE            MALE      FEMALE     UNISEX
(NEAREST      MONTHLY    MONTHLY    MONTHLY
BIRTHDAY)      RATE       RATE       RATE
- -----------  ---------  ---------  ---------
<S>          <C>        <C>        <C>
    60         1.34180    0.78979    1.22817
    61         1.46381    0.84488    1.33511
    62         1.60173    0.91417    1.45796
    63         1.75809    1.00267    1.59922
    64         1.93206    1.10539    1.75725
 
    65         2.12283    1.21731    1.92955
    66         2.32623    1.33511    2.11195
    67         2.54312    1.45461    2.30614
    68         2.77350    1.57247    2.50878
    69         3.02328    1.69955    2.72909
 
    70         3.30338    1.84590    2.97466
    71         3.62140    2.02325    3.25640
    72         3.98666    2.24419    3.58279
    73         4.40599    2.51548    3.95978
    74         4.87280    2.83552    4.38330
 
    75         5.37793    3.19685    4.84334
    76         5.91225    3.59370    5.33245
    77         6.46824    4.01942    5.84227
    78         7.04089    4.47410    6.36948
    79         7.64551    4.97042    6.92851
<CAPTION>
ATTAINED
AGE            MALE      FEMALE     UNISEX
(NEAREST      MONTHLY    MONTHLY    MONTHLY
BIRTHDAY)      RATE       RATE       RATE
- -----------  ---------  ---------  ---------
<S>          <C>        <C>        <C>
 
    80         8.30507    5.52957    7.54229
    81         9.03761    6.17118    8.22883
    82         9.86724    6.91414    9.01216
    83        10.80381    7.77075    9.90124
    84        11.82571    8.72632   10.87533
 
    85        12.91039    9.76952   11.92213
    86        14.03509   10.89151   13.01471
    87        15.18978   12.08770   14.15507
    88        16.36948   13.35774   15.33494
    89        17.57781   14.70820   16.56493
 
    90        18.82881   16.15259   17.85746
    91        20.14619   17.71416   19.23699
    92        21.57655   19.43814   20.76665
    93        23.20196   21.40786   22.49837
    94        25.28174   23.63051   24.70915
 
    95        28.27411   27.16158   27.82758
    96        33.10577   32.32378   32.78845
    97        41.68476   41.21204   41.45783
    98        58.01259   57.81394   57.95663
    99        90.90909   90.90909   90.90909
</TABLE>
 
                    These Monthly Deductions are deducted proportionately from
                    the value of each funding option. This is accomplished for
                    the Sub-Accounts by canceling Accumulation Units and
                    withdrawing the value of the canceled Accumulation Units
                    from each funding option in the same proportion as their
                    respective values have to the Net Accumulation Value. The
                    Monthly Deductions are made on the Monthly Anniversary Day.
 
                    If the Insured is still living at age 100 and the Policy has
                    not been surrendered, no further Monthly Deductions are
                    taken and any Variable Account Value is transferred to the
                    Fixed Account. The Policy will then remain in force until
                    surrender or the Insured's death.
 
                    TRANSACTION FEE FOR EXCESS TRANSFERS
 
                    There will be a $25 transaction fee for each transfer
                    between funding options in excess of 12 during any Policy
                    Year.
 
                                                                              19
<PAGE>
                    MORTALITY AND EXPENSE RISK CHARGE AND FUND EXPENSES
 
The purpose of the following Table is to help purchasers and prospective
purchasers understand the costs and expenses that are borne, directly and
indirectly, by purchasers assuming that all Net Premium Payments are allocated
to the Variable Account. The table reflects expenses of the Variable Account as
well as of the individual Funds underlying the Variable Sub-Accounts. The
Mortality and Expense Risk Charge shown is the currently charged rate during the
first twelve Policy Years. It currently declines to .55% per year thereafter and
is guaranteed not to exceed .90% per year.
 
                                   FEE TABLE
   
<TABLE>
<CAPTION>
                                                      AIM VARIABLE INSURANCE FUNDS, INC.
                                          -----------------------------------------------------------     BT INSURANCE
                                             AIM V.L.                                                     FUNDS TRUST
                                             CAPITAL                                      AIM V.I.      ----------------
                                           APPRECIATION      AIM V.I.       AIM V.I.     DIVERSIFIED    EQUITY 500 INDEX
                                               FUND         GROWTH FUND    VALUE FUND    INCOME FUND          FUND
                                          --------------   -------------   ----------   -------------   ----------------
<S>                                       <C>              <C>             <C>          <C>             <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge.......           0.80%        0.80%           0.80%           0.80%           0.80%
Total Separate Account Annual
 Expenses...............................           0.80%        0.80%           0.80%           0.80%           0.80%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees.........................           0.63%        0.65%           0.62%           0.60%           0.20%
Other Expenses..........................           0.05%        0.08%           0.08%           0.20%           0.10%(2)
Total Fund Portfolio Annual Expenses....           0.68%(1)      0.73%(1)       0.70%(1)         0.80%(1)         0.30%(2)
 
<CAPTION>
                                                          DELAWARE GROUP
                                                           PREMIUM FUND                       LINCOLN
                                          ----------------------------------------------      NATIONAL
                                                                               SMALL          -------
                                             EMERGING                           CAP         MONEY MARKET
                                          MARKET SERIES     TREND SERIES    VALUE SERIES        FUND
                                          --------------      -------       ------------      -------
<S>                                       <C>              <C>              <C>            <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge.......        0.80%            0.80%            0.80%            0.80%
Total Separate Account Annual
 Expenses...............................        0.80%            0.80%            0.80%            0.80%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees.........................        0.30%            0.62%            0.60%            0.48%
Other Expenses..........................        1.20%            0.23%            0.25%            0.11%
Total Fund Portfolio Annual Expenses....        1.50%(3)         0.85%(3)         0.85%(3)         0.59%
</TABLE>
    
 
- ------------------------------
   
(1) A I M Advisors, Inc. ("AIM") may from time to time voluntarily waive or
    reduce its respective fees. Effective May 1, 1998, the Funds reimburse AIM
    in an amount up to 0.25% of the average net asset value of each Fund, for
    expenses incurred in providing, or assuring that participating insurance
    companies provide, certain administrative services. Currently, the fee only
    applies to the average net asset value of each Fund in excess of the net
    asset value of each Fund as calculated on April 30, 1998.
    
 
   
(2) Under the Advisory Agreement with the Advisor, the Funds will pay advisory
    fees at the annual percentage rate of .20% of the average daily net assets
    of the Equity 500 Index Fund. These fees are accrued daily and paid monthly.
    The Advisor has voluntarily undertaken to waive the fees and to reimburse
    the Fund for certain expenses so that the Equity 500 Index Fund total
    operating expenses will not exceed .30%. Such expense reimbursements may be
    terminated at the discretion of the Advisor. If this reimbursement were not
    in place, the total operating expenses would be 2.78%. For the year ended
    December 31, 1997, the Advisor waived and/or reimbursed expenses of $65,771
    for the Equity 500 Index Fund.
    
 
   
(3) The investment adviser for the Small Cap Value Series and Trend Series is
    Delaware Management Company, Inc. ("Delaware Management"). The investment
    adviser for the Emerging Markets Series is Delaware International Advisers
    Ltd. ("Delaware International"). Effective May 1, 1998 through October 31,
    1998, the investment advisers for the Series of DGPF have agreed voluntarily
    to waive their management fees and reimburse each Series for expenses to the
    extent that total expenses will not exceed 1.50% for the Emerging Markets
    Series and 0.85% for the Small Cap Value Series and Trend Series. The fee
    ratios shown above have been restated to assume that the new voluntary
    limitation took effect January 1, 1997. For the fiscal year ended December
    31, 1997, before waiver and/or reimbursement by the investment adviser,
    total Series expenses as a percentage of average daily net assets were 2.45%
    for the Emerging Market Series, 0.90% for Small Cap Value Series (formerly
    known as "Value Series"), and 0.88% for Trend Series.
    
 
   
Other Expenses of the Trusts shown in the table are based on expenses incurred
by each Trust for the year ending December 31, 1997. The table does not reflect
the monthly deductions for the cost of insurance and any riders, nor does it
reflect the monthly deduction of $15 during the first Policy Year, and
currently, $5 thereafter for administrative expenses. The information set forth
should be considered together with the information provided in this Prospectus
under the heading "Charges and Fees", and in each Fund's Prospectus. All
expenses are expressed as a percentage of average account value.
    
 
20
<PAGE>
 
   
<TABLE>
<CAPTION>
                                     MFS-REGISTERED TRADEMARK-
  FIDELITY VARIABLE INSURANCE                VARIABLE                 TEMPLETON VARIABLE PRODUCTS      OCC ACCUMULATION
         PRODUCTS FUNDS                   INSURANCE TRUST                SERIES FUND (CLASS 1)               TRUST
- --------------------------------  -------------------------------  ---------------------------------  -------------------
 VIP II      VIP I      VIP II       MFS        MFS                TEMPLETON
  ASSET     EQUITY-   INVESTMENT  EMERGING     TOTAL       MFS       ASSET     TEMPLETON    TEMPLETON  GLOBAL
 MANAGER    INCOME    GRADE BOND   GROWTH     RETURN    UTILITIES  ALLOCATION INTERNATIONAL  STOCK     EQUITY    MANAGED
PORTFOLIO  PORTFOLIO  PORTFOLIO    SERIES     SERIES     SERIES      FUND         FUND        FUND    PORTFOLIO  PORTFOLIO
- ---------  ---------  ----------  ---------  ---------  ---------  ---------  ------------  --------  ---------  --------
<S>        <C>        <C>         <C>        <C>        <C>        <C>        <C>           <C>       <C>        <C>
  0.80%      0.80%       0.80%      0.80%      0.80%      0.80%      0.80%         0.80%     0.80%      0.80%     0.80%
  0.80%      0.80%       0.80%      0.80%      0.80%      0.80%      0.80%         0.80%     0.80%      0.80%     0.80%
  0.55%      0.50%       0.44%      0.75%      0.75%      0.75%      0.60%(7)      0.69%(7)  0.69%(7)   0.79%(8)  0.80%(8)
  0.10%      0.08%       0.14%      0.12%(6)   0.25%(6)   0.25%(6)   0.18%(7)      0.19%(7)  0.19%(7)   0.40%(9)  0.07%(9)
  0.65%(4)   0.58%(4)    0.58%      0.87%      1.00%(5)   1.00%(5)   0.78%         0.88%     0.88%      1.19%(10)  0.87%(10)
</TABLE>
    
 
- ------------------------------
   
(4) A portion of the brokerage commissions that certain funds paid was used to
    reduce funds expenses. In addition, certain funds have entered into
    arrangements with their custodian whereby credits realized as a result of
    uninvested cash balances were used to reduce custodian expenses. Including
    these reductions, Total Fund Portfolio Annual Expenses would have been 0.64%
    for the VIP II Asset Manager Portfolio and 0.57% for the VIP Equity-Income
    Portfolio.
    
 
   
(5) The Adviser has agreed to bear expenses for each Series, subject to
    reimbursement by each Series, such that each Series' "Other Expenses" shall
    not exceed 0.25% of the average daily net assets of the Series during the
    current fiscal year. Otherwise, "Other Expenses" for the Total Return Series
    and Utilities Series would be 0.27% and 0.45% respectively, and "Total Fund
    Portfolio Annual Expenses" would be 1.02% and 1.20% respectively, for these
    Series. See "Information Concerning Shares of Each Series Expenses."
    
 
   
(6) Each Series has an expense offset arrangement which reduces the Series'
    custodian fee based upon the amount of cash maintained by the Series with
    its custodian and dividend disbursing agent, and may enter into other such
    arrangements and directed brokerage arrangements (which would also have the
    effect of reducing the Series' expenses). Any such fee reductions are not
    reflected under "Other Expenses".
    
 
   
(7) Management Fees and Total Operating Expenses have been restated to reflect
    the management fee schedule approved by shareholders and effective May 1,
    1997. See fund prospectus for details. Actual Management Fees and Total Fund
    Operating Expenses during 1997 were lower.
    
 
   
(8) Reflects management fees after taking into effect any waiver.
    
 
   
(9) Other Expenses are shown gross of expense offsets afforded the Portfolios
    which effectively lowered overall custody expenses.
    
 
   
(10) Total Portfolio Expenses for the Managed Portfolio are limited by OpCap
     Advisors so that their respective annualized operating expenses (net of any
     expense offsets) do not exceed 1.00% of average daily net assets. Total
     Portfolio Expenses for the Global Equity Portfolio are limited to 1.25% of
     average daily net assets. Without such limitation and without giving effect
     to any expense offsets, the Management Fees, Other Expenses and Total
     Portfolio Expenses incurred for the fiscal year ended December 31, 1997
     would have been .80%, .07%, and .87%, respectively, for the Managed
     Portfolio and .80%, .40%, and 1.20%, respectively, for the Global Equity
     Portfolio.
    
 
                                                                              21
<PAGE>
                    SURRENDER CHARGE
 
                    Upon surrender of a Policy, a surrender charge may apply, as
                    described below. This charge is in part a deferred sales
                    charge and in part a recovery of certain first year
                    administrative costs. (See "Appendix 1 -- Illustration of
                    Surrender Charges".)
 
                    The initial Surrender Charge, as specified in the Policy, is
                    based on the Initial Specified Amount and the amount of
                    Premium Payments during the first two Policy Years. Once
                    determined, the Surrender Charge will remain the same dollar
                    amount during the third through fifth Policy Years.
                    Thereafter, it declines monthly at a rate of 20% per year so
                    that after the end of the tenth Policy Year (assuming no
                    increases in the Specified Amount) the Surrender Charge will
                    be zero. Thus, the Surrender Charge at the end of the sixth
                    Policy Year would be 80% of the Surrender Charge at the end
                    of the fifth Policy Year, at the end of the seventh Policy
                    Year would be 60% of the Surrender Charge at the end of the
                    fifth Policy Year, and so forth. However, in no event will
                    the Surrender Charge exceed the maximum allowed by state or
                    federal law.
 
   
                    If the Specified Amount is increased, a new Surrender Charge
                    will be applicable, in addition to any existing Surrender
                    Charge. The Surrender Charge applicable to the increase
                    would be equal to the Surrender Charge on a new policy whose
                    Specified Amount was equal to the amount of the increase.
                    Supplemental Policy Specifications will be sent to the Owner
                    upon an increase in Specified Amount reflecting the maximum
                    additional Surrender Charge in the Table of Surrender
                    Charges. As of the date of this Prospectus, the minimum
                    allowable increase in Specified Amount is $1,000. Lincoln
                    Life may change this at any time.
    
 
                    If the Specified Amount is decreased while the Surrender
                    Charge applies, the Surrender Charge will remain the same.
 
                    No Surrender Charge is imposed on a partial surrender, but
                    an administrative fee of $25 is imposed, allocated pro-rata
                    among the Sub-Accounts (and, where applicable, the Fixed
                    Account) from which the partial surrender proceeds are taken
                    unless the Owner instructs Lincoln Life otherwise.
 
                    The portion of the Surrender Charge applied to reimburse
                    Lincoln Life for sales and promotional expense is at most
                    28.5% of the sum of Premium Payments in the first two Policy
                    Years up to one Guideline Annual Premium, plus 8.5% of
                    Premium Payments in the first two Policy Years between one
                    and two times one Guideline Annual Premium plus 7.5% of
                    Premium Payments in the first two Policy Years in excess of
                    two times one Guideline Annual Premium. The portion
                    applicable to administrative expense is $6.00 per $1,000 of
                    Initial Specified Amount. Under certain circumstances
                    involving the payment of very large premiums during the
                    first two Policy Years, a lesser portion of the Surrender
                    Charge will be applied to reimburse Lincoln Life for sales
                    and promotional expense, if and to the extent required by
                    state law. Any surrenders may result in tax implications.
                    (See "Tax Matters".)
 
                    Based on its actuarial determination, Lincoln Life does not
                    anticipate that the Surrender Charge will cover all sales
                    and administrative expenses which Lincoln Life will incur in
                    connection with the Policy. Any such shortfall, including
                    but not limited to payment of sales and distribution
                    expenses, would be available for recovery from the General
                    Account of Lincoln Life, which supports insurance and
                    annuity obligations.
 
22
<PAGE>
THE FIXED ACCOUNT
 
                    Premium Payments allocated to the Fixed Account become part
                    of Lincoln Life's General Account, and do not participate in
                    the investment experience of the Variable Account. The
                    General Account is subject to regulation and supervision by
                    the Indiana Insurance Department as well as the insurance
                    laws and regulations of the jurisdictions in which the
                    Policies are distributed.
 
                    IN RELIANCE ON CERTAIN EXEMPTIONS, EXCLUSIONS AND RULES,
                    LINCOLN LIFE HAS NOT REGISTERED INTERESTS IN THE FIXED
                    ACCOUNT AS A SECURITY UNDER THE SECURITIES ACT OF 1933 AND
                    HAS NOT REGISTERED THE GENERAL ACCOUNT AS AN INVESTMENT
                    COMPANY UNDER THE 1940 ACT. ACCORDINGLY, NEITHER THE GENERAL
                    ACCOUNT NOR ANY INTERESTS THEREIN ARE SUBJECT TO REGULATION
                    UNDER THE 1933 ACT OR THE 1940 ACT. LINCOLN LIFE HAS BEEN
                    ADVISED THAT THE STAFF OF THE SEC HAS NOT MADE A REVIEW OF
                    THE DISCLOSURES WHICH ARE INCLUDED IN THIS PROSPECTUS WHICH
                    RELATE TO OUR GENERAL ACCOUNT AND TO THE FIXED ACCOUNT UNDER
                    THE CONTRACT. THESE DISCLOSURES, HOWEVER, MAY BE SUBJECT TO
                    CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL
                    SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF
                    STATEMENTS MADE IN PROSPECTUSES. THIS PROSPECTUS IS
                    GENERALLY INTENDED TO SERVE AS A DISCLOSURE DOCUMENT ONLY
                    FOR ASPECTS OF THE POLICY INVOLVING THE VARIABLE ACCOUNT,
                    AND THEREFORE CONTAINS ONLY SELECTED INFORMATION REGARDING
                    THE FIXED ACCOUNT. COMPLETE DETAILS REGARDING THE FIXED
                    ACCOUNT ARE IN THE POLICY.
 
                    Premium Payments allocated to the Fixed Account are
                    guaranteed to be credited with a minimum interest rate,
                    specified in the Policy, of at least 4.0%. Interest in
                    excess of 4.0% may be credited in our sole discretion. Such
                    interest rate will be established on a prospective basis in
                    Lincoln Life's sole discretion and may vary by the Policy
                    issue year and duration. Lincoln Life may vary the way in
                    which it credits interest to the Fixed Account from time to
                    time.
 
                    ANY INTEREST IN EXCESS OF 4.0% WILL BE DECLARED IN ADVANCE
                    IN LINCOLN LIFE'S SOLE DISCRETION. POLICY OWNERS BEAR THE
                    RISK THAT NO INTEREST IN EXCESS OF 4.0% WILL BE DECLARED.
 
POLICY VALUES
 
                    ACCUMULATION VALUE
 
                    Once a Policy has been issued, each Net Premium Payment
                    allocated to a Sub-Account of the Variable Account is
                    credited in the form of Accumulation Units, representing the
                    Fund in which assets of that Sub-Account are invested. Each
                    Net Premium Payment will be credited to the Policy as of the
                    end of the Valuation Period in which it is received at
                    Lincoln Life's Administrative Office (or portion thereof
                    allocated to a particular Sub-Account). The number of
                    Accumulation Units credited is determined by dividing the
                    Net Premium Payment by the value of an Accumulation Unit
                    next computed after receipt. Since each Sub-Account has a
                    unique Accumulation Unit value, a Policy Owner who has
                    elected a combination of funding options will have
                    Accumulation Units credited from more than one source.
 
                    The Accumulation Value of a Policy is determined by: (a)
                    multiplying the total number of Accumulation Units credited
                    to the Policy for each applicable Sub-Account by its
                    appropriate current Accumulation Unit value; (b) if a
                    combination of Sub-Accounts is elected, totaling the
                    resulting values; and (c) adding any values attributable to
                    the General Account (i.e., the Fixed Account Value and the
                    Loan Account Value).
 
                    The number of Accumulation Units credited to a Policy will
                    not be changed by any subsequent change in the value of an
                    Accumulation Unit. Such value may vary from Valuation Period
                    to Valuation Period to reflect the investment experience of
                    the Fund used in a particular Sub-Account.
 
                                                                              23
<PAGE>
                    The Fixed Account Value reflects amounts allocated to the
                    General Account through payment of premiums or transfers
                    from the Variable Account. The Fixed Account Value is
                    guaranteed; however, there is no assurance that the Variable
                    Account Value of the Policy will equal or exceed the Net
                    Premium Payments allocated to the Variable Account.
 
                    Each Policy Owner will be advised at least annually as to
                    the number of Accumulation Units which remain credited to
                    the Policy, the current Accumulation Unit values, the
                    Variable Account Value, the Fixed Account Value and the Loan
                    Account Value.
 
                    Accumulation Value will be affected by Monthly Deductions.
 
                    VARIABLE ACCUMULATION UNIT VALUE
 
                    The Accumulation Unit value for each Sub-Account was or will
                    be arbitrarily established at the inception of the
                    Sub-Account. It may increase or decrease from Valuation
                    Period to Valuation Period. The Accumulation Unit value for
                    a Sub-Account for any later Valuation Period is determined
                    as follows:
                       (1)The total value of Fund shares held in the Sub-Account
                          is calculated by multiplying the number of Fund shares
                          owned by the Sub-Account at the beginning of the
                          Valuation Period by the net asset value per share of
                          the Fund at the end of the Valuation Period, and
                          adding any dividend or other distribution of the Fund
                          if an ex-dividend date occurs during the Valuation
                          Period; minus
                       (2)The liabilities of the Sub-Account at the end of the
                          Valuation Period; such liabilities include daily
                          charges imposed on the Sub-Account, and may include a
                          charge or credit with respect to any taxes paid or
                          reserved for by Lincoln Life that Lincoln Life
                          determines result from the operations of the Variable
                          Account; and
                       (3)The result of (2) is divided by the number of
                          Sub-Account units outstanding at the beginning of the
                          Valuation Period.
 
   
                    The daily charges imposed on a Sub-Account for any Valuation
                    Period are equal to the daily mortality and expense risk
                    charge plus any applicable daily administrative charge
                    multiplied by the number of calendar days in the Valuation
                    Period.
    
 
                    SURRENDER VALUE
 
                    The Surrender Value of a Policy is the amount the Owner can
                    receive in cash by surrendering the Policy. All or part of
                    the Surrender Value may be applied to one or more of the
                    Settlement Options. See "Surrender Charge."
 
SURRENDERS
 
   
                    There may be adverse tax consequences associated with
                    surrenders from the Policy. (See "Tax Matters--Policy
                    Proceeds.")
    
 
                    PARTIAL SURRENDERS
 
                    A partial surrender may be made at any time by written
                    request to Lincoln Life's Administrative Office during the
                    lifetime of the Insured and while the Policy is in force.
                    Such request may also be made by telephone if telephone
                    transfers have been previously authorized in writing. A $25
                    transaction fee is charged.
 
                    The amount of a partial surrender may not exceed 90% of the
                    Surrender Value at the end of the Valuation Period in which
                    the election becomes or would become effective, and may not
                    be less than $500.
 
24
<PAGE>
                    For an Option 1 Policy (See "Death Benefit"): A partial
                    surrender will reduce the Accumulation Value, Death Benefit,
                    and Specified Amount. The Specified Amount and Accumulation
                    Value will be reduced by equal amounts and will reduce any
                    past increases in the reverse order in which they occurred.
 
                    For an Option 2 Policy (See "Death Benefit"): A partial
                    surrender will reduce the Accumulation Value and the Death
                    Benefit, but it will not reduce the Specified Amount.
 
                    The Specified Amount remaining in force after a partial
                    surrender may not be less than $100,000. Any request for a
                    partial surrender that would reduce the Specified Amount
                    below this amount will not be granted. In addition, if,
                    following the partial surrender and the corresponding
                    decrease in the Specified Amount, the Policy would not
                    comply with the maximum premium limitations required by
                    federal tax law, the decrease may be limited to the extent
                    necessary to meet the federal tax law requirements.
 
                    If, at the time of a partial surrender, the Net Accumulation
                    Value is attributable to more than one funding option, the
                    $25 transaction charge and the amount paid upon the
                    surrender will be taken proportionately from the values in
                    each funding option, unless the Policy Owner and Lincoln
                    Life agree otherwise.
 
                    FULL SURRENDERS
 
                    A full surrender may be made at any time. Lincoln Life will
                    pay the Surrender Value next computed after receiving the
                    Owner's written request at Lincoln Life's Administrative
                    Office in a form satisfactory to Lincoln Life. Payment of
                    any amount from the Variable Account on a full surrender
                    will usually be made within seven calendar days thereafter.
                    All coverage under the Policy will automatically terminate
                    if the Owner makes a full surrender.
 
                    DEFERRAL OF PAYMENT AND TRANSFERS
 
                    Payment of loans or of the surrendered amount from the
                    Variable Account may be postponed when the New York Stock
                    Exchange is closed and for such other periods as the
                    Commission may require. Payment or transfer from the Fixed
                    Account may be deferred up to six months at Lincoln Life's
                    option. If Lincoln Life exercises its right to defer such
                    payment or transfer interest will be added as required by
                    law.
 
LAPSE AND REINSTATEMENT
 
                    LAPSE OF A POLICY; EFFECT OF GUARANTEED DEATH BENEFIT
                    PROVISION
 
   
                    A Policy will not lapse during the five-year period after
                    its Issue Date regardless of investment performance if, on
                    each Monthly Anniversary Day within that period the sum of
                    premiums paid equals or exceeds the required amount of the
                    Guaranteed Initial Death Benefit Premium for that period,
                    assuming there have been no loans or partial surrenders. If
                    there have been any loans or partial surrenders, the Policy
                    may lapse unless there is sufficient Net Accumulation Value
                    to cover the Monthly Deduction.
    
 
   
                    After the five-year period expires, and depending on the
                    investment performance of the funding options, the Net
                    Accumulation Value may be insufficient to keep this Policy
                    in force, and payment of an additional premium may be
                    necessary.
    
 
   
                    A lapse occurs, and all coverage under the Policy
                    automatically terminates, if a Monthly Deduction is greater
                    than the Net Accumulation Value and no payment to cover the
                    Monthly Deduction is made within the Grace Period. Lincoln
                    Life will send the Owner a lapse notice at least 31 days
                    before the Grace Period expires.
    
 
                                                                              25
<PAGE>
                    REINSTATEMENT OF A LAPSED POLICY
 
                    The Owner can apply for reinstatement at any time during the
                    Insured's lifetime if the Policy was not surrendered for
                    cash. To reinstate a Policy, Lincoln Life will require
                    satisfactory evidence of insurability and an amount
                    sufficient to pay for the current Monthly Deduction plus two
                    additional Monthly Deductions.
 
                    If the Policy is reinstated within five years of the Issue
                    Date, all values including the Loan Account Value will be
                    reinstated to the point they were on the date of lapse.
                    However, the Guaranteed Initial Death Benefit Option will
                    not be reinstated.
 
                    If the Policy is reinstated after five years following the
                    Issue Date, it will be reinstated on the Monthly Anniversary
                    Day following Lincoln Life approval. The Accumulation Value
                    at reinstatement will be the Net Premium Payment then made
                    less the Monthly Deduction due that day.
 
   
                    If the Accumulation Value is not sufficient to cover the
                    full Surrender Charge at the time of lapse, the remaining
                    portion of the Surrender Charge will also be reinstated at
                    the time of Policy reinstatement.
    
 
POLICY LOANS
 
                    A Policy loan requires that a loan agreement be executed and
                    that the Policy be assigned to Lincoln Life. The loan may be
                    for any amount up to 100% of the Surrender Value; however,
                    Lincoln Life may limit the amount of such loan so that total
                    Policy indebtedness will not exceed 90% of an amount equal
                    to the Accumulation Value less the Surrender Charge which
                    would be imposed on a full surrender. The minimum loan
                    amount is $500. The amount of a loan, together with
                    subsequent accrued but not paid interest on the loan,
                    becomes part of the Loan Account Value. If Policy values are
                    held in more than one funding option, withdrawals from each
                    funding option will be made in proportion to the assets in
                    each funding option at the time of the loan for transfer to
                    the Loan Account, unless Lincoln Life is instructed
                    otherwise in writing at its Administrative Office.
 
   
                    Interest on loans will accrue at an annual rate of 8%, and
                    loan interest is payable once a year in arrears on each
                    policy anniversary, or earlier upon full surrender or other
                    payment of proceeds of a Policy. Any interest not paid when
                    due becomes part of the loan and the interest will be
                    withdrawn proportionately from the values in each funding
                    option.
    
 
   
                    Lincoln Life will credit interest on the Loan Account Value.
                    During the first ten Policy Years, Lincoln Life's current
                    practice is that interest will be credited at an annual rate
                    equal to the interest rate charged on the loan minus 1%
                    (guaranteed not to exceed 2%). Beginning with the eleventh
                    Policy Year, Lincoln Life's current practice is that
                    interest will be credited at an annual rate equal to the
                    interest rate charged on the loan, less .25% annually
                    (guaranteed not to exceed 1%). In no case will the annual
                    credited interest rate be less than 6% in each of the first
                    ten Policy Years and 7% thereafter. Interest paid will be
                    allocated among the funding options according to current Net
                    Premium Payment allocations.
    
 
                    Repayments on the loan will be allocated among the funding
                    options according to current Net Premium Payment
                    allocations. The Loan Account Value will be reduced by the
                    amount of any loan repayment.
 
                    A Policy loan, whether or not repaid, will affect the
                    proceeds payable upon the Insured's death and the
                    Accumulation Value because the investment results of the
                    Variable Account or the Fixed Account will apply only to the
                    non-loaned portion of the
 
26
<PAGE>
                    Accumulation Value. The longer a loan is outstanding, the
                    greater the effect is likely to be. Depending on the
                    investment results of the Variable Account or the Fixed
                    Account while the loan is outstanding, the effect could be
                    favorable or unfavorable.
 
                    If at any time the total indebtedness against the Policy,
                    including interest accrued but not due, equals or exceeds
                    the then current Accumulation Value less surrender charge,
                    the Policy will terminate without Value subject to the
                    conditions in the Grace Period provision.
 
   
                    If a Policy lapses while a loan is outstanding, adverse tax
                    consequences may result. (See "Tax Matters -- Policy
                    Proceeds.")
    
 
SETTLEMENT OPTIONS
 
                    Proceeds in the form of Settlement Options are payable by
                    Lincoln Life at the Beneficiary's election upon the
                    Insured's death, or while the Insured is alive upon election
                    by the Owner of one of the Settlement Options.
 
                    A written request may be made to elect, change, or revoke a
                    Settlement Option before payments begin under any Settlement
                    Option. This request must be in form satisfactory to Lincoln
                    Life, and will take effect upon its receipt at Lincoln
                    Life's Administrative Office. The first payment under the
                    Settlement Option selected will become payable on the date
                    proceeds are settled under the option. Payments after the
                    first payment will be made on the first day of each month.
                    Once payments have begun, the Policy cannot be surrendered
                    and neither the payee nor the Settlement Option may be
                    changed.
 
                    FIRST OPTION -- Payments for the lifetime of the payee.
 
                    SECOND OPTION -- Payments for the lifetime of the payee,
                    guaranteed for 60, 120, 180, or 240 months;
 
                    THIRD OPTION -- Payment for a stated number of years, at
                    least five but no more than thirty;
 
                    FOURTH OPTION -- Payment of interest annually on the sum
                    left with Lincoln Life at a rate of at least 3% per year,
                    and upon the payee's death the amount on deposit will be
                    paid.
 
                    ADDITIONAL OPTIONS -- Policy proceeds may also be settled
                    under any other method of settlement offered by Lincoln Life
                    at the time the request is made.
 
OTHER POLICY PROVISIONS
 
                    ISSUANCE
 
                    A Policy may only be issued upon receipt of satisfactory
                    evidence of insurability, and generally only where the
                    Insured is below the age of 80.
 
                    EFFECTIVE DATE OF COVERAGE
 
                    The effective date of this Policy will be the Issue Date,
                    provided the initial premium has been paid while the Insured
                    is alive and prior to any change in the health and
                    insurability of the Insured as represented in the
                    application.
 
                    SHORT-TERM RIGHT TO CANCEL THE POLICY
 
                    A Policy may be returned for cancellation and a full refund
                    of premium within 10 days after the Policy is received,
                    unless otherwise stipulated by state law requirements,
                    within 10 days after Lincoln Life mails or personally
                    delivers a Notice of Withdrawal Right to the Owner, or
                    within 45 days after the application for the Policy is
                    signed, whichever occurs latest. The Initial Premium Payment
                    made when the Policy is issued will be held
 
                                                                              27
<PAGE>
                    in the Fixed Account and not allocated to the Variable
                    Account even if the Policy Owner may have so directed until
                    three business days following the expiration of the
                    Right-to-Examine Period. If the Policy is returned for
                    cancellation in a timely fashion, the refund of premiums
                    paid, without interest, will usually occur within seven days
                    of notice of cancellation, although a refund of premiums
                    paid by check may be delayed until the check clears.
 
                    POLICY OWNER
 
                    While the Insured is living, all rights in this Policy are
                    vested in the Policy Owner named in the application or as
                    subsequently changed, subject to assignment, if any.
 
                    The Policy Owner may name a new Policy Owner while the
                    Insured is living. Any such change in ownership must be in a
                    written form satisfactory to Lincoln Life and recorded at
                    its Administrative Office. Once recorded, the change will be
                    effective as of the date signed; however, the change will
                    not affect any payment made or action taken by Lincoln Life
                    before it was recorded. Lincoln Life may require that the
                    Policy be submitted for endorsement before making a change.
 
                    If the Policy Owner is other than the Insured, names no
                    contingent Policy Owner and dies before the Insured, the
                    Policy Owner's rights in this Policy belong to the Policy
                    Owner's estate.
 
                    BENEFICIARY
 
                    The Beneficiary(ies) shall be as named in the application or
                    as subsequently changed, subject to assignment, if any.
 
                    The Policy Owner may name a new Beneficiary while the
                    Insured is living. Any change must be in a written form
                    satisfactory to Lincoln Life and recorded at its
                    Administrative Office. Once recorded, the change will be
                    effective as of the date signed; however, the change will
                    not affect any payment made or action taken by Lincoln Life
                    before it was recorded.
 
                    If any Beneficiary predeceases the Insured, that
                    Beneficiary's interest passes to any surviving
                    Beneficiary(ies), unless otherwise provided. Multiple
                    Beneficiaries will be paid in equal shares, unless otherwise
                    provided. If no named Beneficiary survives the Insured, the
                    death proceeds shall be paid to the Policy Owner or the
                    Policy Owner's executor(s), administrator(s) or assigns.
 
                    ASSIGNMENT
 
                    While the Insured is living, the Policy Owner may assign his
                    or her rights in the Policy. The assignment must be in
                    writing, signed by the Policy Owner and recorded at Lincoln
                    Life's Administrative Office. No assignment will affect any
                    payment made or action taken by Lincoln Life before it was
                    recorded. Lincoln Life is not responsible for any assignment
                    not submitted for recording, nor is Lincoln Life responsible
                    for the sufficiency or validity of any assignment. The
                    assignment will be subject to any indebtedness owed to
                    Lincoln Life before it was recorded.
 
                    RIGHT TO EXCHANGE FOR A FIXED BENEFIT POLICY
 
                    The Policy Owner may, within the first two Policy Years,
                    exchange the Policy for a permanent life insurance policy
                    then being offered by Lincoln Life. The benefits for the new
                    policy will not vary with the investment experience of a
                    separate account. The exchange must be elected within 24
                    months from the Issue Date. No evidence of insurability will
                    be required.
 
28
<PAGE>
   
                    The Policy Owner, the Insured and the Beneficiary under the
                    new policy will be the same as those under the exchanged
                    Policy on the effective date of the exchange. The
                    Accumulation Value under the new Policy will be equal to the
                    Accumulation Value under the old Policy on the date the
                    exchange request is received. The new policy will have a
                    Death Benefit on the exchange date not more than the Death
                    Benefit of the original Policy immediately prior to the
                    exchange date. If the Accumulation Value is insufficient to
                    support the Death Benefit, the Policy Owner will be required
                    to make additional Premium Payments in order to effect the
                    exchange. The new policy will have the Issue Date and Issue
                    Age as of the exchange date. The initial Specified Amount
                    and any increases in Specified Amount will have the same
                    rate class as those of the original Policy. Any indebtedness
                    may be transferred to the new policy.
    
 
                    The exchange may be subject to an equitable adjustment in
                    rates and values to reflect variances, if any, in the rates
                    and values between the two Policies. After adjustment, if
                    any excess is owed the Policy Owner, Lincoln Life will pay
                    the excess to the Policy Owner in cash. The exchange may be
                    subject to federal income tax withholding.
 
                    INCONTESTABILITY
 
                    Lincoln Life will not contest payment of the death proceeds
                    based on the Initial Specified Amount after the Policy has
                    been in force during the Insured's lifetime for two years
                    from the Issue Date. For any increase in Specified Amount
                    requiring evidence of insurability, Lincoln Life will not
                    contest payment of the death proceeds based on such an
                    increase after it has been in force during the Insured's
                    lifetime for two years from its effective date.
 
                    MISSTATEMENT OF AGE OR SEX
 
                    If the age or sex of the Insured has been misstated, the
                    affected benefits will be adjusted. The amount of the Death
                    Benefit will be 1. multiplied by 2. and then the result
                    added to 3. where:
 
                    1. is the Net Amount at Risk at the time of the Insured's
                       death;
 
                    2. is the ratio of the monthly cost of insurance applied in
                       the policy month of death to the monthly cost of
                       insurance that should have been applied at the true age
                       and sex in the policy month of death; and
 
                    3. is the Accumulation Value at the time of the Insured's
                       death.
 
                    SUICIDE
 
                    If the Insured dies by suicide, while sane or insane, within
                    two years from the Issue Date, Lincoln Life will pay no more
                    than the sum of the premiums paid, less any indebtedness and
                    the amount of any partial surrenders. If the Insured dies by
                    suicide, while sane or insane, within two years from the
                    date an application is accepted for an increase in the
                    Specified Amount, Lincoln Life will pay no more than a
                    refund of the monthly charges for the cost of such
                    additional benefit.
 
                    NONPARTICIPATING POLICIES
 
                    These are nonparticipating Policies on which no dividends
                    are payable. These Policies do not share in the profits or
                    surplus earnings of Lincoln Life.
 
TAX MATTERS
 
                    POLICY PROCEEDS
 
                    Section 7702 of the Code provides that if certain tests are
                    met, a Policy will be treated as a life insurance policy for
                    federal tax purposes. Lincoln Life will monitor compliance
 
                                                                              29
<PAGE>
                    with these tests. Lincoln Life reserves the right to make
                    changes in this Policy or to make distributions from the
                    Policy to the extent it deems necessary, in its sole
                    discretion, to continue to qualify this Policy as life
                    insurance. The Policy should thus receive the same federal
                    income tax treatment as fixed benefit life insurance. As a
                    result, the death proceeds payable under a Policy are
                    excludable from gross income of the Beneficiary under
                    Section 101 of the Code.
 
                    Section 7702A of the Code defines modified endowment
                    contracts as those policies issued or materially changed on
                    or after June 21, 1988 on which the total premiums paid
                    during the first seven years exceed the amount that would
                    have been paid if the policy provided for paid up benefits
                    after seven level annual premiums. The Code provides for
                    taxation of surrenders, partial surrenders, loans,
                    collateral assignments and other pre-death distributions
                    from modified endowment contracts in the same way annuities
                    are taxed. Modified endowment contract distributions are
                    defined by the Code as amounts not received as an annuity
                    and are taxable to the extent the cash value of the policy
                    exceeds, at the time of distribution, the premiums paid into
                    the policy. A 10% tax penalty generally applies to the
                    taxable portion of such distributions unless the Policy
                    Owner is over age 59 1/2 or disabled.
 
                    It may not be advantageous to replace existing insurance
                    with Policies described in this Prospectus. It may also be
                    disadvantageous to purchase a Policy to obtain additional
                    insurance protection if the purchaser already owns another
                    variable life insurance policy.
 
                    The Policies offered by this Prospectus may or may not be
                    issued as modified endowment contracts. Lincoln Life will
                    monitor premiums paid and will notify the Policy Owner when
                    the Policy's non-modified endowment contract status is in
                    jeopardy. If a Policy is not a modified endowment contract,
                    a cash distribution during the first 15 years after a Policy
                    is issued which causes a reduction in death benefits may
                    still become fully or partially taxable to the Owner
                    pursuant to Section 7702(f)(7) of the Code. The Policy Owner
                    should carefully consider this potential effect and seek
                    further information before initiating any changes in the
                    terms of the Policy. Under certain conditions, a Policy may
                    become a modified endowment contract as a result of a
                    material change or a reduction in benefits as defined by
                    Section 7702A(c) of the Code.
 
                    In addition to meeting the tests required under Section 7702
                    and Section 7702A, Section 817(h) of the Code requires that
                    the investments of separate accounts such as the Variable
                    Account be adequately diversified. Regulations issued by the
                    Secretary of the Treasury set the standards for measuring
                    the adequacy of this diversification. A variable life
                    insurance policy that is not adequately diversified under
                    these regulations would not be treated as life insurance
                    under Section 7702 of the Code. To be adequately
                    diversified, each Sub-Account of the Variable Account must
                    meet certain tests. Lincoln Life believes the Variable
                    Account investments meet the applicable diversification
                    standards.
 
                    Should the Secretary of the Treasury issue additional rules
                    or regulations limiting the number of funds, transfers
                    between funds, exchanges of funds or changes in investment
                    objectives of funds such that the Policy would no longer
                    qualify as life insurance under Section 7702 of the Code,
                    Lincoln Life will take whatever steps are available to
                    remain in compliance.
 
                    Lincoln Life will monitor compliance with these regulations
                    and, to the extent necessary, will change the objectives or
                    assets of the Sub-Account investments to remain in
                    compliance.
 
                    A total surrender or termination of the Policy by lapse may
                    have adverse tax consequences. If the amount received by the
                    Policy Owner plus total Policy
 
30
<PAGE>
                    indebtedness exceeds the premiums paid into the Policy, the
                    excess will generally be treated as taxable income,
                    regardless of whether or not the Policy is a modified
                    endowment contract.
 
                    Federal estate and state and local estate, inheritance and
                    other tax consequences of ownership or receipt of Policy
                    proceeds depend on the circumstances of each Policy Owner or
                    Beneficiary.
 
                    TAXATION OF LINCOLN LIFE
 
                    Lincoln Life is taxed as a life insurance company under the
                    Code. Since the Variable Account is not a separate entity
                    from Lincoln Life and its operations form a part of Lincoln
                    Life, it will not be taxed separately as a "regulated
                    investment company" under Sub-chapter M of the Code.
                    Investment income and realized capital gains on the assets
                    of the Variable Account are reinvested and taken into
                    account in determining the value of Accumulation Units.
 
                    Lincoln Life does not initially expect to incur any Federal
                    income tax liability that would be chargeable to the
                    Variable Account. Based upon these expectations, no charge
                    is currently being made against the Variable Account for
                    federal income taxes. If, however, Lincoln Life determines
                    that on a separate company basis such taxes may be incurred,
                    it reserves the right to assess a charge for such taxes
                    against the Variable Account.
 
                    Lincoln Life may also incur state and local taxes in
                    addition to premium taxes in several states. At present,
                    these taxes are not significant. If they increase, however,
                    additional charges for such taxes may be made.
 
                    SECTION 848 CHARGES
 
                    The 5.0% premium load is assessed to cover state taxes,
                    federal income tax liabilities and a portion of the sales
                    expenses incurred by Lincoln Life. This load is made up of
                    2.35% for state taxes, 1.15% for the additional federal
                    income tax burden under Section 848 of the Code relating to
                    the tax treatment of deferred acquisition costs and a 1.5%
                    sales load.
 
                    OTHER CONSIDERATIONS
 
                    The foregoing discussion is general and is not intended as
                    tax advice. Counsel and other competent advisers should be
                    consulted for more complete information. This discussion is
                    based on Lincoln Life's understanding of Federal income tax
                    laws as they are currently interpreted by the Internal
                    Revenue Service. No representation is made as to the
                    likelihood of continuation of these current laws and
                    interpretations.
 
OTHER MATTERS
 
                    DIRECTORS AND OFFICERS OF THE COMPANY
 
<TABLE>
<CAPTION>
     NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT             PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- ----------------------------  ---------------------------------------------------------
<S>                           <C>
NANCY J. ALFORD               Vice President [4/96-present], (formerly Second Vice
VICE PRESIDENT                President [1/90-4/96]), Lincoln National Life Insurance
                              Co.
 
ROLAND C. BAKER               President [1/95-present], First Penn-Pacific Life
VICE PRESIDENT AND DIRECTOR   Insurance Co. Formerly: Chairman and CFO [7/88-1/95],
1801 S. Meyers Road           Baker, Ralish, Shipley & Politzer, Inc.
Oakbrook Terrace, Ill. 60181
</TABLE>
 
                                                                              31
<PAGE>
   
<TABLE>
<CAPTION>
     NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT             PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- ----------------------------  ---------------------------------------------------------
<S>                           <C>
JON A. BOSCIA                 President and Director, Lincoln National Corp.
DIRECTOR                      [1/98-present] (Formerly: President and Chief Executive
200 East Berry Street         Officer [10/96-1/98], Chief Operating Officer
Fort Wayne, Inc. 46802        [5/94-10/96]), Lincoln National Life Insurance Co.
                              President [7/91-5/94] Lincoln Investment Management Inc.
 
JOHN GOTTA                    Vice President and General Manager [1/98-present]
VICE PRESIDENT                Formerly: Senior Vice President, CIGNA [3/96-12/97]; Vice
900 Cottage Grove Rd.         President, Connecticut Mutual Life Insurance Company
Bloomfield, CT 06152-2321     [8/94-3/96]; Vice President, CIGNA [3/93-8/94]; Regional
                              Director of Agencies, Phoenix-Home Life Mutual Insurance
                              Company [3/90-2/93]
 
MELANIE T. HALL               Vice President [1/96-Present] (formerly Second Vice
VICE PRESIDENT                President [6/95-1/96]), Lincoln National Life Insurance
                              Co. Formerly: Assistant Vice President [1/95-6/95], LNC
                              Equity Sales Corporation, Assistant Vice President
                              [12/93-1/95], Lincoln Investment Management, Inc.;
                              Assistant Vice President [12/92-12/93], Lincoln National
                              Life Insurance Co.
 
J. MICHAEL HEMP               President [11/96-Present], Lincoln Financial Advisors
VICE PRESIDENT                Corp.; Vice President [10/95-Present], Lincoln National
                              Life Insurance Co. Formerly: Regional Chief Executive
                              Officer [11/79-10/95], Lincoln Dallas RMO.
 
JACK D. HUNTER                Executive Vice President [5/86-Present] and General
EXECUTIVE VICE PRESIDENT,     Counsel [3/75-Present], Lincoln National Corporation and
GENERAL COUNSEL AND DIRECTOR  Executive Vice President [8/86-Present] and General
200 East Berry Street         Counsel [3/75-Present], The Lincoln National Life
Fort Wayne, Ind. 46802        Insurance Co.
 
STEPHEN H. LEWIS              Senior Vice President, [5/94-present] Lincoln National
VICE PRESIDENT                Life Insurance Co. Formerly: President [2/85-5/94], First
                              Penn-Pacific Life Insurance Co.
 
H. THOMAS MCMEEKIN            President [5/94-present], Lincoln Investment Management,
DIRECTOR                      Inc. (formerly Executive Vice President [2/92-11/92],
200 East Berry Street         Senior Vice President [11/87-2/92]; Executive Vice
Fort Wayne, Ind. 46802        President [5/94-Present], Lincoln National Corporation
                              (formerly Senior Vice President [11/92-5/94])
 
IAN M. ROLLAND                Chairman [1/92-present], Chief Executive Officer
DIRECTOR                      [5/77-present] and President [12/75-1/92], Lincoln
200 East Berry Street         National Corp. Formerly: Chairman [1/92-5/94], Chief
Fort Wayne, Ind. 46802        Executive Officer [7/77-5/94] and President [3/83-1/93],
                              Lincoln National Life Insurance Co.
 
ARTHUR S. ROSS                Vice President [8/91-present], Lincoln National Life
VICE PRESIDENT                Insurance Co.
 
LAWRENCE T. ROWLAND           Executive Vice President [10/96-present] (formerly Senior
EXECUTIVE VICE PRESIDENT AND  Vice President [1/93-10/96], Vice President
DIRECTOR                      [10/91-1/93]), Lincoln National Life Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
</TABLE>
    
 
32
<PAGE>
   
<TABLE>
<CAPTION>
     NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT             PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- ----------------------------  ---------------------------------------------------------
<S>                           <C>
KEITH J. RYAN                 Senior Vice President (formerly Vice President), Chief
SENIOR VICE PRESIDENT, CHIEF  Financial Officer and Assistant Treasurer [1/96-present].
FINANCIAL OFFICER AND         Formerly: Controller [6/95-12/95], Business Controls
ASSISTANT TREASURER           Director [11/90-6/95], Lincoln National Life Insurance
                              Co.
 
GABRIEL L. SHAHEEN            President and Chief Executive Officer [1/98-present]
PRESIDENT, CHIEF EXECUTIVE    Formerly: Chairman and Managing Director, Lincoln
OFFICER AND DIRECTOR          National (UK) PLC [12/96-1/98]; President, Lincoln
                              National Reassurance Company [7/95-12/96]; Senior Vice
                              President, Lincoln National Life Reinsurance Company
                              [1/93-7/95] Senior Vice President, Lincoln National Life
                              Insurance Company [5/91-1/93]
 
RICHARD C. VAUGHAN            Executive Vice President and Chief Financial Officer
DIRECTOR                      [1/95-present] (formerly Senior Vice President
200 East Berry Street         [6/92-1/95]), Lincoln National Corp.
Fort Wayne, Ind. 46802
 
MICHAEL R. WALKER             Vice President [1/96-present], Lincoln National Life
VICE PRESIDENT                Insurance Co. Formerly: Vice President [3/96-1/96],
                              Employers Health Insurance Co.; Vice President
                              [7/85-3/93], Baker Hughes, Inc.
 
ROY V. WASHINGTON             Vice President [7/96-present], Lincoln National Life
VICE PRESIDENT                Insurance Co. (formerly, Associate Counsel [2/95-7/96]).
                              Formerly: Director of Compliance [8/94-2/95], Lincoln
                              Investment Management, Inc.; Compliance Consultant
                              [8/89-8/94], Lincoln National Corp.
 
MICHAEL L. WRIGHT             Senior Vice President [3/95-present], Lincoln National
SENIOR VICE PRESIDENT         Life Insurance Co. Formerly: Executive Vice President and
                              Chief Operating Officer [11/88-3/95], The Associate
                              Group.
</TABLE>
    
 
                    DISTRIBUTION OF POLICIES
 
                    PRINCIPAL UNDERWRITER
 
                    Lincoln Life intends to offer the Policies in all
                    jurisdictions where it is licensed to do business. Lincoln
                    Life, the principal underwriter for the Policies, is
                    registered with the Securities and Exchange Commission under
                    the Securities Exchange Act of 1934 as a broker-dealer and
                    is a member of the National Association of Securities
                    Dealers. The principal business address of Lincoln Life is
                    1300 South Clinton Street, Fort Wayne, Indiana 46802.
 
   
                    The Policy will be sold by individuals who, in addition to
                    being licensed as life insurance agents for Lincoln Life,
                    are also its registered representatives. Gross first year
                    commissions paid by Lincoln Life, including expense
                    reimbursement allowances, on the sale of these Policies are
                    not more than 95% of Premium Payments. Gross renewal
                    commissions paid by Lincoln Life will not exceed 10% of
                    Premium Payments. The local agency receives additional
                    compensation on the first year required premium and all
                    additional premiums. In some situations, the local agency
                    may elect to share its commission with the registered
                    representative. Selling representatives are also eligible
                    for bonuses and non-cash compensation if certain production
                    levels are reached. All compensation is paid from Lincoln
                    Life's resources, which include certain charges made under
                    the Policy.
    
 
                                                                              33
<PAGE>
                    CHANGES OF INVESTMENT POLICY
 
                    Lincoln Life may materially change the investment policy of
                    the Variable Account. Lincoln Life must inform the Policy
                    Owners and obtain all necessary regulatory approvals. Any
                    change must be submitted to the various state insurance
                    departments which shall disapprove it if deemed detrimental
                    to the interests of the Policy Owners or if it renders
                    Lincoln Life's operations hazardous to the public. If a
                    Policy Owner objects, the Policy may be converted to a
                    substantially comparable fixed benefit life insurance policy
                    offered by Lincoln Life on the life of the Insured. The
                    Policy Owner has the later of 60 days (6 months in
                    Pennsylvania) from the date of the investment policy change
                    or 60 days (6 months in Pennsylvania) from being informed of
                    such change to make this conversion. Lincoln Life will not
                    require evidence of insurability for this conversion.
 
                    The new policy will not be affected by the investment
                    experience of any separate account. The new policy will be
                    for an amount of insurance not exceeding the Death Benefit
                    of the Policy converted on the date of such conversion.
 
                    OTHER CONTRACTS ISSUED BY LINCOLN LIFE
 
                    Lincoln Life does presently and will, from time to time,
                    offer other variable annuity contracts and variable life
                    insurance policies with benefits which vary in accordance
                    with the investment experience of a separate account of
                    Lincoln Life.
 
                    STATE REGULATION
 
                    Lincoln Life is subject to the laws of Indiana governing
                    insurance companies and to regulation by the Indiana
                    Insurance Department. An annual statement in a prescribed
                    form is filed with the Insurance Department each year
                    covering the operation of Lincoln Life for the preceding
                    year and its financial condition as of the end of such year.
                    Regulation by the Insurance Department includes periodic
                    examination to determine Lincoln Life's contract liabilities
                    and reserves so that the Insurance Department may certify
                    the items are correct. Lincoln Life's books and accounts are
                    subject to review by the Insurance Department at all times
                    and a full examination of its operations is conducted
                    periodically by the Indiana Department of Insurance. Such
                    regulation does not, however, involve any supervision of
                    management or investment practices or policies.
 
                    REPORTS TO POLICY OWNERS
 
                    Lincoln Life maintains Policy records and will mail to each
                    Policy Owner, at the last known address of record, an annual
                    statement showing the amount of the current Death Benefit,
                    the Accumulation Value, and Surrender Value, premiums paid
                    and monthly charges deducted since the last report, the
                    amounts invested in the Fixed Account and in the Variable
                    Account and in each Sub-Account of the Variable Account, and
                    any Loan Account Value.
 
                    Policy Owners will also be sent annual reports containing
                    financial statements for the Variable Account and annual and
                    semi-annual reports of the Funds as required by the 1940
                    Act.
 
                    In addition, Policy Owners will receive statements of
                    significant transactions, such as changes in Specified
                    Amount, changes in Death Benefit Option, changes in future
                    premium allocation, transfers among Sub-Accounts, Premium
                    Payments, loans, loan repayments, reinstatement and
                    termination.
 
                    ADVERTISING
 
                    Lincoln Life is also ranked and rated by independent
                    financial rating services, including Moody's, Standard &
                    Poor's, Duff & Phelps and A.M. Best Company. The purpose of
                    these ratings is to reflect the financial strength or
                    claims-paying ability of Lincoln Life.
 
34
<PAGE>
                    The ratings are not intended to reflect the investment
                    experience or financial strength of the Variable Account.
                    Lincoln Life may advertise these ratings from time to time.
                    In addition, Lincoln Life may include in certain
                    advertisements, endorsements in the form of a list of
                    organizations, individuals or other parties which recommend
                    Lincoln Life or the Policies. Furthermore, Lincoln Life may
                    occasionally include in advertisements comparisons of
                    currently taxable and tax deferred investment programs,
                    based on selected tax brackets, or discussions of
                    alternative investment vehicles and general economic
                    conditions.
 
   
                    YEAR 2000 ISSUES
    
 
   
                    Variable Life Account M is a Lincoln Life "separate account"
                    established under Indiana insurance law; thus, Lincoln Life
                    is responsible, as part of its year 2000 updating process,
                    for the updating of its Account M-related computer systems.
                    An affiliate of Lincoln Life, Delaware Service Company
                    (Delaware), provides substantially all of the necessary
                    accounting and valuation services for Account M. Delaware,
                    for its part, is responsible for updating all of its
                    computer systems, including those which service Account M,
                    to accommodate the year 2000. Lincoln Life and Delaware have
                    begun formal discussions with each other to assess the
                    requirements for their respective systems to interface
                    properly in order to facilitate the accurate and orderly
                    operation of Account M beginning in the year 2000.
    
 
   
                    Many existing computer programs use only two digits to
                    identify a year in the date field. These programs were
                    designed and developed without considering the impact of the
                    upcoming change in the century. If not corrected, many
                    computer applications could fail or create erroneous results
                    by or at the year 2000. The Year 2000 issue is pervasive and
                    complex and affects virtually every aspect of the businesses
                    of both Lincoln Life and Delaware (the Companies). The
                    computer systems of the Companies and their interfaces with
                    the computer systems of vendors, suppliers, customers and
                    other business partners are particularly vulnerable. The
                    inability to properly recognize date-sensitive electronic
                    information and to transfer data between systems could cause
                    errors or even complete failure of systems, which would
                    result in a temporary inability to process transactions
                    correctly and engage in normal business activities for
                    Account M. The Companies respectively are redirecting
                    significant portions of their internal information
                    technology efforts and are contracting, as needed, with
                    outside consultants to help update their systems to
                    accommodate the year 2000. Also, in addition to the
                    discussions with each other noted above, the Companies have
                    respectively initiated formal discussions with other
                    critical parties that interface with their systems to gain
                    an understanding of the progress by those parties in
                    addressing Year 2000 issues. While the Companies are making
                    substantial efforts to address their own systems and the
                    systems with which they interface, it is not possible to
                    provide assurance that operational problems will not occur.
                    The Companies presently believe that, assuming the
                    modification of existing computer systems, updates by
                    vendors and conversion to new software and hardware, the
                    Year 2000 issue will not pose significant operations
                    problems for their respective computer systems. In addition,
                    the Companies are incorporating potential issues surrounding
                    year 2000 into their contingency planning process, to
                    address the probability that, despite these substantial
                    efforts, there are unresolved year 2000 problems. If the
                    remediation efforts noted above are not completed timely or
                    properly, the Year 2000 issue could have a material adverse
                    impact on the operation of the businesses of Lincoln Life or
                    Delaware, or both.
    
 
   
                    The cost of addressing Year 2000 issues and the timeliness
                    of completion is being monitored by management of the
                    respective Companies. Nevertheless, there can be no
                    guarantee either by Lincoln Life or by Delaware that
                    estimated costs will be achieved, and actual results could
                    differ significantly from those anticipated. Specific
                    factors that
    
 
                                                                              35
<PAGE>
   
                    might cause such differences include, but are not limited
                    to, the availability and cost of personnel trained in this
                    area, the ability to locate and correct all relevant
                    computer problems, and other uncertainties.
    
 
                    LEGAL PROCEEDINGS
 
   
                    Lincoln Life is involved in various pending or threatened
                    legal proceedings arising from the conduct of its business.
                    Most of these proceedings are routine and in the ordinary
                    course of business. In some instances these proceedings
                    include claims for unspecified or substantial punitive
                    damages and similar types of relief in addition to amounts
                    for alleged contractual liability or requests for equitable
                    relief. After consultation with legal counsel and a review
                    of available facts, it is management's opinion that the
                    ultimate liability, if any, under these suits will not have
                    a material adverse effect on the financial position of
                    Lincoln Life.
    
 
   
                    During the 1990's, class action lawsuits alleging sales
                    practices fraud have been filed against many life insurance
                    companies, and Lincoln Life has not been immune. Two
                    lawsuits alleging fraud in the sale of interest-sensitive
                    universal and whole life insurance policies have been filed
                    against Lincoln Life. These two suits have been filed as
                    class actions, although as of the date of this Prospectus
                    the court had not certified a class in either case.
                    Plaintiffs seek unspecified damages and penalties for
                    themselves and on behalf of the putative class. Although the
                    relief sought in these cases is substantial, the cases are
                    in the early stages of litigation, and it is premature to
                    make assessments about potential loss, if any. Management
                    denies the allegations and intends to defend these suits
                    vigorously. The amount of liability, if any, which may arise
                    as a result of these suits (exclusive of any indemnification
                    from professional liability insurers) cannot be reasonably
                    estimated at this time.
    
 
                    EXPERTS
 
   
                    The statutory-basis financial statements and schedules of
                    Lincoln Life appearing in this prospectus and registration
                    statement have been audited by Ernst & Young LLP,
                    independent auditors, as set forth in their report which
                    also appears elsewhere in this document and in the
                    registration statement. The statutory-basis financial
                    statements and schedules audited by Ernst & Young LLP have
                    been included in this document in reliance on their report
                    given on their authority as experts in accounting and
                    auditing.
    
 
   
                    Actuarial matters included in this prospectus have been
                    examined by Michael J. Roscoe, FSA as stated in the opinion
                    filed as an exhibit to the registration statement.
    
 
   
                    Legal matters in connection with the Policies described
                    herein are being passed upon by Brian Burke, as stated in
                    the opinion filed as an exhibit to the registration
                    statement.
    
 
                    REGISTRATION STATEMENT
 
   
                    A Registration Statement has been filed with the Securities
                    and Exchange Commission under the Securities Act of 1933, as
                    amended, with respect to the Policies offered hereby. This
                    Prospectus does not contain all the information set forth in
                    the Registration Statement and amendments thereto and
                    exhibits filed as a part thereof, to all of which reference
                    is hereby made for further information concerning the
                    Variable Account, Lincoln Life, and the Policies offered
                    hereby. Statements contained in this Prospectus as to the
                    content of Policies and other legal instruments are
                    summaries. For a complete statement of the terms thereof,
                    reference is made to such instruments as filed.
    
 
36
<PAGE>
APPENDIX 1
 
                    ILLUSTRATION OF SURRENDER CHARGES
 
                    The Surrender Charge is calculated as (a) times (b), where
                    (a) is the sum of (i) a Deferred Sales Charge and (ii) a
                    Deferred Administrative Charge and (b) is the applicable
                    Surrender Charge Grading Factor. If the Specified Amount is
                    increased, a new Surrender Charge will be applicable, in
                    addition to any existing Surrender Charge.
 
                    Below are examples of Surrender Charge calculations, one
                    involving a level Specified Amount and one involving an
                    increase in the Specified Amount, followed by Definitions
                    and Tables used in the calculations.
 
                    EXAMPLE 1: A male nonsmoker, age 35, purchases a Policy with
                    a Specified Amount of $100,000 and a scheduled annual
                    premium of $1100. He now wants to surrender the Policy at
                    the end of the sixth Policy Year.
 
                    The Surrender Charge computed is as follows:
 
                    Sum of the premiums paid through the end of the second
                    Policy Year = $2200.00
 
                    Guideline Annual Premium Amount (Male, Age 35, $100,000
                    Specified Amount) = $1195.63
 
                    Surrender Charge =
 
<TABLE>
                    <S>                                                                  <C>
                    (.285X$1195.63) + (.085X($2200-$1195.63)) = $340.75 + $85.37 =       $ 426.12(i)
                    $6.00 per $1000 of Specified Amount                                  $ 600.00(ii)
                                                                                         --------
                                                                                         $1026.12(a)
</TABLE>
 
                    The total Surrender Charge is $1026.12(a), times the
                    surrender charge grading factor,(b): ($1026.12 X 80%) =
                    $820.90.
 
                    EXAMPLE 2: A female nonsmoker, age 45, purchases a Policy
                    with an Initial Specified Amount of $200,000 and a scheduled
                    annual premium of $1500. She pays the scheduled annual
                    premium for the first five Policy Years. At the start of the
                    sixth Policy Year, she increases the Specified Amount to
                    $250,000 and continues to pay the scheduled annual premium
                    of $1500. She now wants to surrender the Policy at the end
                    of the eighth Policy Year. Separate Surrender Charges must
                    be calculated for the Initial Specified Amount and for the
                    increase in Specified Amount.
 
                    The Surrender Charges are computed as follows:
 
                    For the Initial Specified Amount,
                    Sum of the premiums paid through the end of the second
                    Policy Year = $3000.00
 
                    Guideline Annual Premium Amount (Female, Age 45, $200,000
                    Specified Amount = $2966.81
 
<TABLE>
                    <S>                                                                  <C>
                    Surrender Charge for Initial Specified Amount =
                    (.285X$2966.81) +(.085X($3000.00-$2966.81)) = $845.54 + $2.82 =      $ 848.36(i)
                    $6.00 per $1000 of Initial Specified Amount                          $1200.00(ii)
                                                                                         --------
                                                                                         $2048.36(a)
</TABLE>
 
                    The total Surrender Charge for the Initial Specified Amount
                    is $2048.36,(a), times the applicable surrender charge
                    grading factor,(b): ($2048.36 X 40%) = $819.34.
 
                                                                              37
<PAGE>
                    For the increase in Specified Amount;
                    Sum of the premiums in the first two years following the
                    increase in Specified Amount, applicable to the increase in
                    Specified Amount =
                    ($1500 X 2) X ($50,000 / $250,000) = $600.00.
 
                    Guideline Annual Premium Amount (Female, Age 50, $50,000
                    Specified Amount) = $993.68.
 
<TABLE>
                    <S>                                                                  <C>
                    Surrender Charge for the increase in Specified Amount =
                    (.285 X $600.00)                                                     $ 171.00(i)
                    $6.00 per $1000 of increase in Specified Amount                      $ 300.00(ii)
                                                                                         --------
                                                                                         $ 471.00(a)
</TABLE>
 
                    The total Surrender Charge for the increase in the Specified
                    Amount is $471.00,(a), times the applicable surrender charge
                    grading factor,(b): ($471.00 X 100%) = $471.00
 
                    The overall Surrender Charge for the Policy is ($819.34 +
                    $471.00) = $1290.34.
 
                    DEFINITIONS AND TABLES
 
                    (a)(i) The Deferred Sales Charge is based on the actual
                           premium paid and the applicable Guideline Annual
                           Premium Amount, and is calculated assuming the
                           following:
 
<TABLE>
                           <S>           <C>
                           DURING POLICY YEAR:
                           1 and 2       28.5% of the sum of the premiums
                                         paid up to an amount equal to the
                                         Guideline Annual Premium Amount,*
                                         plus 8.5% of the sum of the
                                         premiums paid between one and two
                                         times the Guideline Annual Premium
                                         Amount, plus 7.5% of the sum of the
                                         premiums paid in excess of two
                                         times the Guideline Annual Premium
                                         Amount.
                           3 through 10  same dollar amount as of the end of
                                         Policy Year 2.
</TABLE>
 
                    In no event will the Deferred Sales Charge exceed the
                    maximum permitted under federal or state law.
 
                      (ii) The Deferred Administrative Charge is $6.00 per
                           $1,000 of Specified Amount.
 
                    (b) SURRENDER CHARGE GRADING FACTORS
 
<TABLE>
                    <S>              <C>
                    Policy Years**
                    1-5              100%
                    Policy Year 6     80%
                    Policy Year 7     60%
                    Policy Year 8     40%
                    Policy Year 9     20%
                    Policy Year 10     0%
</TABLE>
 
                    If  a Surrender Charge  becomes effective at  other than the
                    end of  a  Policy  Year,  any  applicable  Surrender  Charge
                    grading  factor will  be applied on  a pro rata  basis as of
                    such effective date.
 
                     * Guideline Annual Premium Amount is the level annual
                       amount that would be payable through the latest maturity
                       date permitted under the Policy but not less than 20
                       years after date of issue or (if earlier) age 95 for the
                       future benefits under the Policy, subject to the
                       following provisions: (A) the payments were fixed by the
                       Life Insurer as to both timing and amount; and (B) the
                       payments were based on the 1980 Commissioners Standard
                       Ordinary Mortality Table, net investment earnings at the
                       greater of an annual effective of 5% or rate or rates
                       guaranteed at issue of the policy, the sales load under
                       the policy, and the fees and charges specified in the
                       policy. A new Guideline Annual Premium Amount is
                       determined for each increase in Specified Amount under
                       the policy; in such event, "Policy Years" are measured
                       from the effective date(s) of such increase(s).
 
                    ** Number of Policy Years elapsed since the Date of Issue or
                       since the effective date(s) of any increase(s) in
                       Specified Amount.
 
38
<PAGE>
   
APPENDIX 2
    
 
   
                    ILLUSTRATIONS OF ACCUMULATION VALUES, SURRENDER VALUES,
                    AND DEATH BENEFITS
    
 
   
                    The illustrations in this Prospectus have been prepared to
                    help show how values under the Policies change with
                    investment performance. The illustrations illustrate how
                    Accumulation Values, Surrender Values and Death Benefits
                    under a Policy would vary over time if the hypothetical
                    gross investment rates of return were a uniform annual
                    effective rate of either 0%, 6% or 12%. If the hypothetical
                    gross investment rate of return averages 0%, 6%, or 12% over
                    a period of years, but fluctuates above or below those
                    averages for individual years, the Accumulation Values,
                    Surrender Values and Death Benefits may be different. The
                    illustrations also assume there are no Policy loans or
                    partial surrenders, no additional Premium Payments are made
                    other than shown, no Accumulation Values are allocated to
                    the Fixed Account, and there are no changes in the Specified
                    Amount or Death Benefit Option.
    
 
   
                    The amounts shown for the Accumulation Value, Surrender
                    Value and Death Benefit as of each Policy Anniversary
                    reflect the fact that charges are made and expenses applied
                    which lower investment return on the assets held in the
                    Sub-Accounts. Daily charges are made against the assets of
                    the Sub-Accounts for assuming mortality and expense risks.
                    The current mortality and expense risk charges are
                    equivalent to an annual effective rate of 0.80% of the daily
                    net asset value of the Variable Account. On each Policy
                    Anniversary beginning with the 13th, the mortality and
                    expense risk charge is reduced to 0.55% on an annual basis
                    of the daily net assets of the Variable Account. The
                    mortality and expense risk charge is guaranteed never to
                    exceed an annual effective rate of 0.90% of the daily net
                    asset value of the Variable Account. In addition, the
                    amounts shown also reflect the deduction of Fund investment
                    advisory fees and other expenses which will vary depending
                    on which funding vehicle is chosen but which are assumed for
                    purposes of these illustrations to be equivalent to an
                    annual effective rate of 0.80% of the daily net asset value
                    of the Variable Account.
    
 
   
                    Considering guaranteed charges for mortality and expense
                    risks and the assumed Fund expenses, gross annual rates of
                    0%, 6% and 12% correspond to net investment experience at
                    constant annual rates of -1.70%, 4.30% and 10.30%.
    
 
   
                    The illustrations also reflect the fact that the Company
                    makes monthly charges for providing insurance protection.
                    Current values reflect current Cost of Insurance charges and
                    guaranteed values reflect the maximum Cost of Insurance
                    charges guaranteed in the Policy. The values shown are for
                    Policies which are issued as standard. Policies issued on a
                    substandard basis would result in lower Accumulation Values
                    and Death Benefits than those illustrated.
    
 
   
                    The illustrations also reflect the fact that the Company
                    deducts a premium load from each Premium Payment. Current
                    and guaranteed values reflect a deduction of 5.0% of each
                    Premium Payment.
    
 
   
                    The Surrender Values shown in the illustrations reflect the
                    fact that the Company will deduct a Surrender Charge from
                    the Policy's Accumulation Value for any Policy surrendered
                    in full during the first ten years.
    
 
   
                    In addition, the illustrations reflect the fact that the
                    Company deducts a monthly administrative charge at the
                    beginning of each Policy Month. This monthly administrative
                    expense charge is $15 per month in the first year. Current
                    values reflect a current monthly administrative expense
                    charge of $5 in renewal years, and guaranteed values reflect
                    the $10 maximum monthly administrative charge under the
                    Policy in renewal years.
    
 
   
                    Upon request, the Company will furnish a comparable
                    illustration based on the proposed insured's age, gender
                    classification, smoking classification, risk classification
                    and premium payment requested.
    
 
                                                                              39
<PAGE>
   
                                  FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
                                  POLICY
                                  MALE    NONSMOKER    ISSUE AGE 45
                                  PREFERRED -- $6,576 ANNUAL PREMIUM
                                  FACE AMOUNT $500,000
                                  DEATH BENEFIT OPTION 1
    
 
   
                                  GUARANTEED BASIS
    
 
   
<TABLE>
<CAPTION>
          PREMIUMS
         ACCUMULATED
END OF       AT                 DEATH BENEFIT               TOTAL ACCUMULATION VALUE               SURRENDER VALUE
POLICY   5% INTEREST     ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF
 YEAR     PER YEAR     GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%
- ------   -----------   --------   --------   ---------   --------   --------   ---------   --------   --------   ---------
<S>      <C>           <C>        <C>        <C>         <C>        <C>        <C>         <C>        <C>        <C>
 
   1         6,905     500,000    500,000     500,000      3,739      4,033       4,329          0          0           0
   2        14,155     500,000    500,000     500,000      7,311      8,133       8,994      1,306      2,128       2,989
   3        21,767     500,000    500,000     500,000     10,647     12,230      13,956      4,642      6,225       7,951
   4        29,761     500,000    500,000     500,000     13,743     16,317      19,241      7,738     10,312      13,236
   5        38,153     500,000    500,000     500,000     16,579     20,373      24,863     10,574     14,368      18,858
 
   6        46,966     500,000    500,000     500,000     19,148     24,385      30,851     14,344     19,581      26,047
   7        56,219     500,000    500,000     500,000     21,412     28,312      37,206     17,809     24,709      33,603
   8        65,935     500,000    500,000     500,000     23,344     32,121      43,943     20,942     29,719      41,541
   9        76,136     500,000    500,000     500,000     24,906     35,769      51,072     23,705     34,568      49,871
  10        86,848     500,000    500,000     500,000     26,058     39,205      58,600     26,058     39,205      58,600
 
  15       148,996     500,000    500,000     500,000     24,755     51,917     103,491     24,755     51,917     103,491
  20       228,314     500,000    500,000     500,000      7,229     51,307     164,869      7,229     51,307     164,869
  25       329,546           0    500,000     500,000          0     20,650     252,858          0     20,650     252,858
  30       458,747           0          0     500,000          0          0     397,809          0          0     397,809
</TABLE>
    
 
   
All Amounts are in Dollars
    
 
   
                                  If Premiums are paid more frequently than
                                  annually, the Death Benefits, Accumulation
                                  Values and Surrender Values would be less than
                                  those illustrated.
    
 
   
                                  Assumes no policy loans or partial surrenders
                                  have been made. Guaranteed cost of insurance
                                  rates, mortality and expense risk charges,
                                  administrative fees and premium load assumed.
    
 
   
                                  These investment results are illustrative only
                                  and should not be considered a representation
                                  of past or future investment results. Actual
                                  investment results may be more or less than
                                  those shown and will depend on a number of
                                  factors, including the Policy Owner's
                                  allocations and the Funds' rates of return.
                                  Accumulation Values and Surrender Values for a
                                  Policy would be different from those shown if
                                  the actual investment rates of return averaged
                                  0%, 6% and 12% over a period of years, but
                                  fluctuated above or below those averages for
                                  individual Policy Years. No representations
                                  can be made that these rates of return will in
                                  fact be achieved for any one year or sustained
                                  over a period of time.
    
 
   
                                  The amounts shown in these illustrations
                                  reflect (1) the deduction of guaranteed
                                  mortality and expense risk charges and (2)
                                  assumed Fund total expenses of 0.80% per year.
                                  See "Expense Data" at pages 20-21 of this
                                  Prospectus.
    
 
40
<PAGE>
   
                                  FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
                                  POLICY
                                  MALE    NONSMOKER    ISSUE AGE 45
                                  PREFERRED -- $6,576 ANNUAL PREMIUM
                                  FACE AMOUNT $500,000
                                  DEATH BENEFIT OPTION 1
    
 
   
                                  CURRENT BASIS
    
 
   
<TABLE>
<CAPTION>
          PREMIUMS
         ACCUMULATED
END OF       AT                 DEATH BENEFIT               TOTAL ACCUMULATION VALUE               SURRENDER VALUE
POLICY   5% INTEREST     ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF
 YEAR     PER YEAR     GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%
- ------   -----------   --------   --------   ---------   --------   --------   ---------   --------   --------   ---------
 
<S>      <C>           <C>        <C>        <C>         <C>        <C>        <C>         <C>        <C>        <C>
   1         6,905     500,000    500,000     500,000      4,552      4,873       5,194          0          0         319
   2        14,155     500,000    500,000     500,000      9,067      9,996      10,965      3,072      4,001       4,970
   3        21,767     500,000    500,000     500,000     13,404     15,236      17,224      7,409      9,241      11,229
   4        29,761     500,000    500,000     500,000     17,591     20,625      24,051     11,596     14,630      18,056
   5        38,153     500,000    500,000     500,000     21,656     26,196      31,535     15,661     20,201      25,540
 
   6        46,966     500,000    500,000     500,000     25,624     31,985      39,774     20,828     27,189      34,978
   7        56,219     500,000    500,000     500,000     29,474     37,978      48,825     25,877     34,381      45,228
   8        65,935     500,000    500,000     500,000     33,093     44,071      58,664     30,695     41,673      56,266
   9        76,136     500,000    500,000     500,000     36,648     50,435      69,541     35,449     49,236      68,342
  10        86,848     500,000    500,000     500,000     40,071     57,016      81,505     40,071     57,016      81,505
 
  15       148,996     500,000    500,000     500,000     53,086     91,607     160,940     53,086     91,607     160,940
  20       228,314     500,000    500,000     500,000     58,168    128,923     290,734     58,168    128,923     290,734
  25       329,546     500,000    500,000     594,583     55,611    171,143     512,572     55,611    171,143     512,572
  30       458,747     500,000    500,000     942,899     38,079    216,205     881,214     38,079    216,205     881,214
</TABLE>
    
 
   
All Amounts are in Dollars
    
 
   
                                  If Premiums are paid more frequently than
                                  annually, the Death Benefits, Accumulation
                                  Values and Surrender Values would be less than
                                  those illustrated.
    
 
   
                                  Assumes no policy loans or partial surrenders
                                  have been made. Current cost of insurance
                                  rates assumed. Current mortality and expense
                                  risk charges, administrative fees and premium
                                  load assumed.
    
 
   
                                  These investment results are illustrative only
                                  and should not be considered a representation
                                  of past or future investment results. Actual
                                  investment results may be more or less than
                                  those shown and will depend on a number of
                                  factors, including the Policy Owner's
                                  allocations and the Funds' rates of return.
                                  Accumulation Values and Surrender Values for a
                                  Policy would be different from those shown if
                                  the actual investment rates of return averaged
                                  0%, 6% and 12% over a period of years, but
                                  fluctuated above or below those averages for
                                  individual Policy Years. No representations
                                  can be made that these rates of return will in
                                  fact be achieved for any one year or sustained
                                  over a period of time.
    
 
   
                                  The amounts shown in these illustrations
                                  reflect (1) the deduction of current mortality
                                  and expense risk charges and (2) assumed Fund
                                  total expenses of 0.80% per year. See "Expense
                                  Data" at pages 20-21 of this Prospectus.
    
 
                                                                              41
<PAGE>
   
                                  FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
                                  POLICY
                                  MALE    NONSMOKER    ISSUE AGE 55
                                  PREFERRED -- $10,465 ANNUAL PREMIUM
                                  FACE AMOUNT $500,000
                                  DEATH BENEFIT OPTION 1
    
 
   
                                  GUARANTEED BASIS
    
 
   
<TABLE>
<CAPTION>
          PREMIUMS
         ACCUMULATED
END OF       AT                  DEATH BENEFIT                   TOTAL ACCUMULATION VALUE                 SURRENDER VALUE
POLICY   5% INTEREST      ANNUAL INVESTMENT RETURN OF          ANNUAL INVESTMENT RETURN OF          ANNUAL INVESTMENT RETURN OF
 YEAR     PER YEAR     GROSS 0%   GROSS 6%    GROSS 12%     GROSS 0%   GROSS 6%    GROSS 12%     GROSS 0%   GROSS 6%    GROSS 12%
- ------   -----------   --------   --------   ------------   --------   --------   ------------   --------   --------   ------------
<S>      <C>           <C>        <C>        <C>            <C>        <C>        <C>            <C>        <C>        <C>
 
   1        10,988     500,000    500,000        500,000      4,498      4,921          5,347          0          0              0
   2        22,526     500,000    500,000        500,000      8,547      9,673         10,856        577      1,703          2,886
   3        34,640     500,000    500,000        500,000     12,076     14,173         16,473      4,106      6,203          8,503
   4        47,361     500,000    500,000        500,000     15,063     18,383         22,187      7,093     10,413         14,217
   5        60,717     500,000    500,000        500,000     17,478     22,257         27,983      9,508     14,287         20,013
 
   6        74,741     500,000    500,000        500,000     19,265     25,722         33,821     12,889     19,346         27,445
   7        89,466     500,000    500,000        500,000     20,359     28,690         39,649     15,577     23,908         34,867
   8       104,928     500,000    500,000        500,000     20,673     31,049         45,393     17,485     27,861         42,205
   9       121,163     500,000    500,000        500,000     20,100     32,663         50,958     18,506     31,069         49,364
  10       138,209     500,000    500,000        500,000     18,537     33,391         56,245     18,537     33,391         56,245
 
  15       237,111           0    500,000        500,000          0     18,113         74,694          0     18,133         74,694
  20       363,337           0          0        500,000          0          0         58,366          0          0         58,366
  25       524,437           0          0              0          0          0              0          0          0              0
  30       730,047           0          0              0          0          0              0          0          0              0
</TABLE>
    
 
   
All Amounts are in Dollars
    
 
   
                                  If Premiums are paid more frequently than
                                  annually, the Death Benefits, Accumulation
                                  Values and Surrender Values would be less than
                                  those illustrated.
    
 
   
                                  Assumes no policy loans or partial surrenders
                                  have been made. Guaranteed cost of insurance
                                  rates, mortality and expense risk charges,
                                  administrative fees and premium load assumed.
    
 
   
                                  These investment results are illustrative only
                                  and should not be considered a representation
                                  of past or future investment results. Actual
                                  investment results may be more or less than
                                  those shown and will depend on a number of
                                  factors, including the Policy Owner's
                                  allocations and the Funds' rates of return.
                                  Accumulation Values and Surrender Values for a
                                  Policy would be different from those shown if
                                  the actual investment rates of return averaged
                                  0%, 6% and 12% over a period of years, but
                                  fluctuated above or below those averages for
                                  individual Policy Years. No representations
                                  can be made that these rates of return will in
                                  fact be achieved for any one year or sustained
                                  over a period of time.
    
 
   
                                  The amounts shown in these illustrations
                                  reflect (1) the deduction of guaranteed
                                  mortality and expense risk charges and (2)
                                  assumed Fund total expenses of 0.80% per year.
                                  See "Expense Data" at pages 20-21 of this
                                  Prospectus.
    
 
42
<PAGE>
   
                                  FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
                                  POLICY
                                  MALE    NONSMOKER    ISSUE AGE 55
                                  PREFERRED -- $10,465 ANNUAL PREMIUM
                                  FACE AMOUNT $500,000
                                  DEATH BENEFIT OPTION 1
    
 
   
                                  CURRENT BASIS
    
 
   
<TABLE>
<CAPTION>
          PREMIUMS
         ACCUMULATED
END OF       AT                  DEATH BENEFIT                   TOTAL ACCUMULATION VALUE                 SURRENDER VALUE
POLICY   5% INTEREST      ANNUAL INVESTMENT RETURN OF          ANNUAL INVESTMENT RETURN OF          ANNUAL INVESTMENT RETURN OF
 YEAR     PER YEAR     GROSS 0%   GROSS 6%    GROSS 12%     GROSS 0%   GROSS 6%    GROSS 12%     GROSS 0%   GROSS 6%    GROSS 12%
- ------   -----------   --------   --------   ------------   --------   --------   ------------   --------   --------   ------------
 
<S>      <C>           <C>        <C>        <C>            <C>        <C>        <C>            <C>        <C>        <C>
   1        10,988     500,000    500,000         500,000     7,075      7,580           8,087     1,090      1,595           2,102
   2        22,526     500,000    500,000         500,000    13,861     15,314          16,831     5,901      7,354           8,871
   3        34,640     500,000    500,000         500,000    20,272     23,117          26,209    12,312     15,157          18,249
   4        47,361     500,000    500,000         500,000    26,402     31,089          36,393    18,442     23,129          28,433
   5        60,717     500,000    500,000         500,000    32,210     39,194          47,429    24,250     31,234          39,469
 
   6        74,741     500,000    500,000         500,000    37,832     47,579          59,557    31,464     41,211          53,189
   7        89,466     500,000    500,000         500,000    43,296     56,286          72,928    38,520     51,510          68,152
   8       104,928     500,000    500,000         500,000    48,584     65,313          87,669    45,400     62,129          84,485
   9       121,163     500,000    500,000         500,000    53,537     74,523         103,786    51,945     72,931         102,194
  10       138,209     500,000    500,000         500,000    58,080     83,856         121,381    58,080     83,856         121,381
 
  15       237,111     500,000    500,000         500,000    74,329    133,079         240,424    74,329    133,079         240,424
  20       363,337     500,000    500,000         500,000    74,728    184,873         443,862    74,728    184,873         443,862
  25       524,437     500,000    500,000         834,837    43,148    232,413         795,083    43,148    232,413         795,083
  30       730,047           0    500,000       1,434,246         0    276,787       1,365,949         0    276,787       1,365,949
</TABLE>
    
 
   
All Amounts are in Dollars
    
 
   
                                  If Premiums are paid more frequently than
                                  annually, the Death Benefits, Accumulation
                                  Values and Surrender Values would be less than
                                  those illustrated.
    
 
   
                                  Assumes no policy loans or partial surrenders
                                  have been made. Current cost of insurance
                                  rates assumed. Current mortality and expense
                                  risk charges, administrative fees and premium
                                  load assumed.
    
 
   
                                  These investment results are illustrative only
                                  and should not be considered a representation
                                  of past or future investment results. Actual
                                  investment results may be more or less than
                                  those shown and will depend on a number of
                                  factors, including the Policy Owner's
                                  allocations and the Funds' rates of return.
                                  Accumulation Values and Surrender Values for a
                                  Policy would be different from those shown if
                                  the actual investment rates of return averaged
                                  0%, 6% and 12% over a period of years, but
                                  fluctuated above or below those averages for
                                  individual Policy Years. No representations
                                  can be made that these rates of return will in
                                  fact be achieved for any one year or sustained
                                  over a period of time.
    
 
   
                                  The amounts shown in these illustrations
                                  reflect (1) the deduction of current mortality
                                  and expense risk charges and (2) assumed Fund
                                  total expenses of 0.80% per year. See "Expense
                                  Data" at pages 20-21 of this Prospectus.
    
 
                                                                              43
<PAGE>
   
                                  FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
                                  POLICY
                                  FEMALE    NONSMOKER    ISSUE AGE 45
                                  PREFERRED -- $5,242 ANNUAL PREMIUM
                                  FACE AMOUNT $500,000
                                  DEATH BENEFIT OPTION 1
    
 
   
                                  GUARANTEED BASIS
    
 
   
<TABLE>
<CAPTION>
          PREMIUMS
         ACCUMULATED
END OF       AT                 DEATH BENEFIT               TOTAL ACCUMULATION VALUE               SURRENDER VALUE
POLICY   5% INTEREST     ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF
 YEAR     PER YEAR     GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%
- ------   -----------   --------   --------   ---------   --------   --------   ---------   --------   --------   ---------
<S>      <C>           <C>        <C>        <C>         <C>        <C>        <C>         <C>        <C>        <C>
 
   1         5,504     500,000    500,000     500,000      2,973      3,208       3,443          0          0           0
   2        11,283     500,000    500,000     500,000      5,850      6,505       7,190        485      1,140       1,825
   3        17,352     500,000    500,000     500,000      8,567      9,831      11,207      3,202      4,466       5,842
   4        23,723     500,000    500,000     500,000     11,114     13,173      15,509      5,749      7,808      10,144
   5        30,414     500,000    500,000     500,000     13,485     16,525      20,119      8,120     11,160      14,754
 
   6        37,438     500,000    500,000     500,000     15,669     19,874      25,059     11,377     15,582      20,767
   7        44,814     500,000    500,000     500,000     17,660     23,213      30,356     14,441     19,994      27,137
   8        52,559     500,000    500,000     500,000     19,443     26,525      36,033     17,297     24,379      33,887
   9        60,691     500,000    500,000     500,000     20,993     29,781      42,109     19,920     28,708      41,036
  10        69,230     500,000    500,000     500,000     22,310     32,978      48,627     22,310     32,978      48,627
 
  15       118,771     500,000    500,000     500,000     25,433     47,987      89,931     25,433     47,987      89,931
  20       181,998     500,000    500,000     500,000     21,132     59,449     152,250     21,132     59,449     152,250
  25       262,695     500,000    500,000     500,000      1,943     58,787     246,940      1,943     58,787     246,940
  30       365,686           0    500,000     500,000          0     32,109     403,276          0     32,109     403,276
</TABLE>
    
 
   
All Amounts are in Dollars
    
 
   
                                  If Premiums are paid more frequently than
                                  annually, the Death Benefits, Accumulation
                                  Values and Surrender Values would be less than
                                  those illustrated.
    
 
   
                                  Assumes no policy loans or partial surrenders
                                  have been made. Guaranteed cost of insurance
                                  rates, mortality and expense risk charges,
                                  administrative fees and premium load assumed.
    
 
   
                                  These investment results are illustrative only
                                  and should not be considered a representation
                                  of past or future investment results. Actual
                                  investment results may be more or less than
                                  those shown and will depend on a number of
                                  factors, including the Policy Owner's
                                  allocations and the Funds' rates of return.
                                  Accumulation Values and Surrender Values for a
                                  Policy would be different from those shown if
                                  the actual investment rates of return averaged
                                  0%, 6% and 12% over a period of years, but
                                  fluctuated above or below those averages for
                                  individual Policy Years. No representations
                                  can be made that these rates of return will in
                                  fact be achieved for any one year or sustained
                                  over a period of time.
    
 
   
                                  The amounts shown in these illustrations
                                  reflect (1) the deduction of guaranteed
                                  mortality and expense risk charges and (2)
                                  assumed Fund total expenses of 0.80% per year.
                                  See "Expense Data" at pages 20-21 of this
                                  Prospectus.
    
 
44
<PAGE>
   
                                  FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
                                  POLICY
                                  FEMALE    NONSMOKER    ISSUE AGE 45
                                  PREFERRED -- $5,242 ANNUAL PREMIUM
                                  FACE AMOUNT $500,000
                                  DEATH BENEFIT OPTION 1
    
 
   
                                  CURRENT BASIS
    
 
   
<TABLE>
<CAPTION>
          PREMIUMS
         ACCUMULATED
END OF       AT                 DEATH BENEFIT               TOTAL ACCUMULATION VALUE               SURRENDER VALUE
POLICY   5% INTEREST     ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF
 YEAR     PER YEAR     GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%
- ------   -----------   --------   --------   ---------   --------   --------   ---------   --------   --------   ---------
 
<S>      <C>           <C>        <C>        <C>         <C>        <C>        <C>         <C>        <C>        <C>
   1         5,504     500,000    500,000     500,000      3,645      3,901       4,157          0          0           0
   2        11,283     500,000    500,000     500,000      7,310      8,054       8,829      1,955      2,699       3,474
   3        17,352     500,000    500,000     500,000     10,877     12,348      13,943      5,522      6,993       8,588
   4        23,723     500,000    500,000     500,000     14,348     16,791      19,548      8,993     11,436      14,193
   5        30,414     500,000    500,000     500,000     17,724     21,391      25,697     12,369     16,036      20,342
 
   6        37,438     500,000    500,000     500,000     20,962     26,107      32,399     16,678     21,823      28,115
   7        44,814     500,000    500,000     500,000     24,062     30,947      39,716     20,849     27,734      36,503
   8        52,559     500,000    500,000     500,000     27,029     35,919      47,717     24,887     33,777      45,575
   9        60,691     500,000    500,000     500,000     29,912     41,077      56,524     28,841     40,006      55,453
  10        69,230     500,000    500,000     500,000     32,713     46,433      66,226     32,713     46,433      66,226
 
  15       118,771     500,000    500,000     500,000     44,491     75,674     131,539     44,491     75,674     131,539
  20       181,998     500,000    500,000     500,000     51,174    108,472     237,960     51,174    108,472     237,960
  25       262,695     500,000    500,000     500,000     53,593    146,997     417,469     53,593    146,997     417,469
  30       365,686     500,000    500,000     770,434     49,311    191,765     720,032     49,311    191,765     720,032
</TABLE>
    
 
   
All Amounts are in Dollars
    
 
   
                                  If Premiums are paid more frequently than
                                  annually, the Death Benefits, Accumulation
                                  Values and Surrender Values would be less than
                                  those illustrated.
    
 
   
                                  Assumes no policy loans or partial surrenders
                                  have been made. Current cost of insurance
                                  rates assumed. Current mortality and expense
                                  risk charges, administrative fees and premium
                                  load assumed.
    
 
   
                                  These investment results are illustrative only
                                  and should not be considered a representation
                                  of past or future investment results. Actual
                                  investment results may be more or less than
                                  those shown and will depend on a number of
                                  factors, including the Policy Owner's
                                  allocations and the Funds' rates of return.
                                  Accumulation Values and Surrender Values for a
                                  Policy would be different from those shown if
                                  the actual investment rates of return averaged
                                  0%, 6% and 12% over a period of years, but
                                  fluctuated above or below those averages for
                                  individual Policy Years. No representations
                                  can be made that these rates of return will in
                                  fact be achieved for any one year or sustained
                                  over a period of time.
    
 
   
                                  The amounts shown in these illustrations
                                  reflect (1) the deduction of current mortality
                                  and expense risk charges and (2) assumed Fund
                                  total expenses of 0.80% per year. See "Expense
                                  Data" at pages 20-21 of this Prospectus.
    
 
                                                                              45
<PAGE>
   
                                  FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
                                  POLICY
                                  FEMALE    NONSMOKER    ISSUE AGE 55
                                  PREFERRED -- $8,225 ANNUAL PREMIUM
                                  FACE AMOUNT $500,000
                                  DEATH BENEFIT OPTION 1
    
 
   
                                  GUARANTEED BASIS
    
 
   
<TABLE>
<CAPTION>
          PREMIUMS
         ACCUMULATED
END OF       AT                 DEATH BENEFIT               TOTAL ACCUMULATION VALUE               SURRENDER VALUE
POLICY   5% INTEREST     ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF
 YEAR     PER YEAR     GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%
- ------   -----------   --------   --------   ---------   --------   --------   ---------   --------   --------   ---------
<S>      <C>           <C>        <C>        <C>         <C>        <C>        <C>         <C>        <C>        <C>
 
   1         8,636     500,000    500,000     500,000      4,043      4,391       4,742          0          0           0
   2        17,704     500,000    500,000     500,000      7,873      8,824       9,821      1,073      2,024       3,021
   3        27,226     500,000    500,000     500,000     11,445     13,251      15,226      4,645      6,451       8,426
   4        37,223     500,000    500,000     500,000     14,774     17,688      21,008      7,974     10,888      14,208
   5        47,721     500,000    500,000     500,000     17,851     22,125      27,201     11,051     15,325      20,401
 
   6        58,743     500,000    500,000     500,000     20,653     26,535      33,827     15,213     21,095      28,387
   7        70,316     500,000    500,000     500,000     23,123     30,861      40,878     19,043     26,781      36,798
   8        82,468     500,000    500,000     500,000     25,187     35,023      48,333     22,467     32,303      45,613
   9        95,228     500,000    500,000     500,000     26,743     38,911      56,141     25,383     37,551      54,781
  10       108,626     500,000    500,000     500,000     27,718     42,439      64,282     27,718     42,439      64,282
 
  15       186,358     500,000    500,000     500,000     22,774     52,948     111,181     22,774     52,948     111,181
  20       285,566           0    500,000     500,000          0     41,478     171,077          0     41,478     171,077
  25       412,183           0          0     500,000          0          0     241,140          0          0     241,140
  30       573,782           0          0     500,000          0          0     331,895          0          0     331,895
</TABLE>
    
 
   
All Amounts are in Dollars
    
 
   
                                  If Premiums are paid more frequently than
                                  annually, the Death Benefits, Accumulation
                                  Values and Surrender Values would be less than
                                  those illustrated.
    
 
   
                                  Assumes no policy loans or partial surrenders
                                  have been made. Guaranteed cost of insurance
                                  rates, mortality and expense risk charges,
                                  administrative fees and premium load assumed.
    
 
   
                                  These investment results are illustrative only
                                  and should not be considered a representation
                                  of past or future investment results. Actual
                                  investment results may be more or less than
                                  those shown and will depend on a number of
                                  factors, including the Policy Owner's
                                  allocations and the Funds' rates of return.
                                  Accumulation Values and Surrender Values for a
                                  Policy would be different from those shown if
                                  the actual investment rates of return averaged
                                  0%, 6% and 12% over a period of years, but
                                  fluctuated above or below those averages for
                                  individual Policy Years. No representations
                                  can be made that these rates of return will in
                                  fact be achieved for any one year or sustained
                                  over a period of time.
    
 
   
                                  The amounts shown in these illustrations
                                  reflect (1) the deduction of guaranteed
                                  mortality and expense risk charges and (2)
                                  assumed Fund total expenses of 0.80% per year.
                                  See "Expense Data" at pages 20-21 of this
                                  Prospectus.
    
 
46
<PAGE>
   
                                  FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
                                  POLICY
                                  FEMALE    NONSMOKER    ISSUE AGE 55
                                  PREFERRED -- $8,225 ANNUAL PREMIUM
                                  FACE AMOUNT $500,000
                                  DEATH BENEFIT OPTION 1
    
 
   
                                  CURRENT BASIS
    
 
   
<TABLE>
<CAPTION>
          PREMIUMS
         ACCUMULATED
END OF       AT                 DEATH BENEFIT               TOTAL ACCUMULATION VALUE               SURRENDER VALUE
POLICY   5% INTEREST     ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF       ANNUAL INVESTMENT RETURN OF
 YEAR     PER YEAR     GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%   GROSS 0%   GROSS 6%   GROSS 12%
- ------   -----------   --------   --------   ---------   --------   --------   ---------   --------   --------   ---------
 
<S>      <C>           <C>        <C>        <C>         <C>        <C>        <C>         <C>        <C>        <C>
   1         8,636     500,000    500,000      500,000     5,722      6,124        6,528       377        779        1,183
   2        17,704     500,000    500,000      500,000    11,291     12,454       13,667     4,501      5,664        6,877
   3        27,226     500,000    500,000      500,000    16,612     18,900       21,384     9,822     12,110       14,594
   4        37,223     500,000    500,000      500,000    21,750     25,532       29,806    14,960     18,742       23,016
   5        47,721     500,000    500,000      500,000    26,675     32,328       38,980    19,885     25,538       32,190
 
   6        58,743     500,000    500,000      500,000    31,478     39,386       49,081    26,046     33,954       43,649
   7        70,316     500,000    500,000      500,000    36,165     46,726       60,217    32,091     42,652       56,143
   8        82,468     500,000    500,000      500,000    40,734     54,359       72,500    38,018     51,643       69,784
   9        95,228     500,000    500,000      500,000    45,072     62,186       85,944    43,714     60,828       84,586
  10       108,626     500,000    500,000      500,000    49,143     70,182      100,651    49,143     70,182      100,651
 
  15       186,358     500,000    500,000      500,000    65,719    113,700      200,316    65,719    113,700      200,316
  20       285,566     500,000    500,000      500,000    74,524    163,746      367,908    74,524    163,746      367,908
  25       412,183     500,000    500,000      688,180    65,584    215,687      655,410    65,584    215,687      655,410
  30       573,782     500,000    500,000    1,184,469    21,798    265,203    1,128,066    21,798    265,203    1,128,066
</TABLE>
    
 
   
All Amounts are in Dollars
    
 
   
                                  If Premiums are paid more frequently than
                                  annually, the Death Benefits, Accumulation
                                  Values and Surrender Values would be less than
                                  those illustrated.
    
 
   
                                  Assumes no policy loans or partial surrenders
                                  have been made. Current cost of insurance
                                  rates assumed. Current mortality and expense
                                  risk charges, administrative fees and premium
                                  load assumed.
    
 
   
                                  These investment results are illustrative only
                                  and should not be considered a representation
                                  of past or future investment results. Actual
                                  investment results may be more or less than
                                  those shown and will depend on a number of
                                  factors, including the Policy Owner's
                                  allocations and the Funds' rates of return.
                                  Accumulation Values and Surrender Values for a
                                  Policy would be different from those shown if
                                  the actual investment rates of return averaged
                                  0%, 6% and 12% over a period of years, but
                                  fluctuated above or below those averages for
                                  individual Policy Years. No representations
                                  can be made that these rates of return will in
                                  fact be achieved for any one year or sustained
                                  over a period of time.
    
 
   
                                  The amounts shown in these illustrations
                                  reflect (1) the deduction of current mortality
                                  and expense risk charges and (2) assumed Fund
                                  total expenses of 0.80% per year. See "Expense
                                  Data" at pages 20-21 of this Prospectus.
    
 
                                                                              47
<PAGE>
APPENDIX 3
 
                    TAX INFORMATION
 
                    The Office of Tax Analysis of the U.S. Department of the
                    Treasury published a "Report to the Congress on the Taxation
                    of Life Insurance Company Products" in March 1990. Page 4 of
                    this report is Table 1.1, a "Comparison of Tax Treatment of
                    Life Insurance Products and Other Retirement Savings Plans".
                    Because it is a convenient summary of the relevant tax
                    characteristics of these products and plans, it is reprinted
                    here, with footnotes to reflect exceptions to the general
                    rules.
                            ------------------------
 
                                   TABLE 1.1
           COMPARISON OF TAX TREATMENT OF LIFE INSURANCE PRODUCTS AND
                         OTHER RETIREMENT SAVINGS PLANS
 
<TABLE>
<CAPTION>
                                                              CASH-VALUE
                                                                 LIFE          NON-QUALIFIED                     QUALIFIED
                                                               INSURANCE         ANNUITIES          IRA'S         PENSION
                                                            ---------------  -----------------  --------------  -----------
<S>                                                         <C>              <C>                <C>             <C>
Annual Contribution Limits                                            No                No           Yes            Yes
Income Eligibility Limits                                             No                No          Yes**           No
Borrowing Treated as Distributions                                    No*              Yes        Loans not        Yes,
                                                                                                   allowed        beyond
                                                                                                   $50,000
Income Ordering Rules (Income included in First                       No*              Yes           Yes            Yes
 Distribution)
Early Withdrawal Penalties                                            No*              Yes***       Yes***        Yes***
Minimum Distribution Rules by Age 70 1/2                              No                No           Yes            Yes
Maximum Annual Distribution Rules                                     No                No           Yes            Yes
Anti-discrimination Rules                                             No                No            No            Yes
</TABLE>
 
- ------------------------
Department of the Treasury                                            March 1990
  Office of Tax Analysis
  *If the Policy is not a modified endowment contract.
 **If  amounts paid  in to  fund the  IRA are  deductible; once  over the income
   eligibility limits amounts paid into an IRA are permitted but not deductible.
***There are  several exceptions  to  the application  of the  early  withdrawal
   penalties for annuities, IRAs and qualified pensions.
 
                    The foregoing information is not intended as tax advice. You
                    should consult with your own tax advisor for more complete
                    information.
 
48
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
BALANCE SHEETS -- STATUTORY BASIS
 
<TABLE>
<CAPTION>
                                                                                      DECEMBER 31
                                                                                      1997       1996
                                                                                      ---------  ---------
                                                                                      (IN MILLIONS)
                                                                                      --------------------
<S>                                                                                   <C>        <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds                                                                                 $18,560.7  $19,389.6
- ------------------------------------------------------------------------------------
Preferred stocks                                                                          257.3      239.7
- ------------------------------------------------------------------------------------
Unaffiliated common stocks                                                                436.0      358.3
- ------------------------------------------------------------------------------------
Affiliated common stocks                                                                  412.1      241.5
- ------------------------------------------------------------------------------------
Mortgage loans on real estate                                                           3,012.7    2,976.7
- ------------------------------------------------------------------------------------
Real estate                                                                               584.4      621.3
- ------------------------------------------------------------------------------------
Policy loans                                                                              660.5      626.5
- ------------------------------------------------------------------------------------
Other investments                                                                         335.5      282.7
- ------------------------------------------------------------------------------------
Cash and short-term investments                                                         2,133.0      759.2
- ------------------------------------------------------------------------------------  ---------  ---------
Total cash and investments                                                             26,392.2   25,495.5
- ------------------------------------------------------------------------------------
 
Premiums and fees in course of collection                                                  42.4       60.9
- ------------------------------------------------------------------------------------
Accrued investment income                                                                 343.5      343.6
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies                                                         44.1       25.8
- ------------------------------------------------------------------------------------
Other admitted assets                                                                     216.0      355.7
- ------------------------------------------------------------------------------------
Separate account assets                                                                31,330.9   23,735.1
- ------------------------------------------------------------------------------------  ---------  ---------
Total admitted assets                                                                 $58,369.1  $50,016.6
- ------------------------------------------------------------------------------------  ---------  ---------
                                                                                      ---------  ---------
 
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims                                                     $ 5,872.9  $ 5,954.0
- ------------------------------------------------------------------------------------
Other policyholder funds                                                               16,360.1   17,262.4
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee                               878.2      250.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties                                                     720.4      564.6
- ------------------------------------------------------------------------------------
Asset valuation reserve                                                                   450.0      375.5
- ------------------------------------------------------------------------------------
Interest maintenance reserve                                                              135.4       76.7
- ------------------------------------------------------------------------------------
Other liabilities                                                                         413.9      490.9
- ------------------------------------------------------------------------------------
Federal income taxes                                                                        0.8        4.3
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts                                                 (761.9)    (659.7)
- ------------------------------------------------------------------------------------
Separate account liabilities                                                           31,330.9   23,735.1
- ------------------------------------------------------------------------------------  ---------  ---------
Total liabilities                                                                      55,400.7   48,054.0
- ------------------------------------------------------------------------------------
 
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
  Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
  Corporation)                                                                             25.0       25.0
- ------------------------------------------------------------------------------------
Paid-in surplus                                                                         1,821.8      883.4
- ------------------------------------------------------------------------------------
Unassigned surplus                                                                      1,121.6    1,054.2
- ------------------------------------------------------------------------------------  ---------  ---------
Total capital and surplus                                                               2,968.4    1,962.6
- ------------------------------------------------------------------------------------  ---------  ---------
Total liabilities and capital and surplus                                             $58,369.1  $50,016.6
- ------------------------------------------------------------------------------------  ---------  ---------
                                                                                      ---------  ---------
</TABLE>
 
See accompanying notes.                                                      S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
STATEMENTS OF INCOME -- STATUTORY BASIS
 
<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31
                                                                               1997       1996       1995
                                                                               ---------  ---------  ---------
                                                                               (IN MILLIONS)
                                                                               -------------------------------
<S>                                                                            <C>        <C>        <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits                                                          $ 5,589.0  $ 7,268.5  $ 4,899.1
- -----------------------------------------------------------------------------
Net investment income                                                            1,847.1    1,756.3    1,772.2
- -----------------------------------------------------------------------------
Amortization of interest maintenance reserve                                        41.5       27.2       34.0
- -----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded                             99.7       90.9       98.3
- -----------------------------------------------------------------------------
Expense charges on deposit funds                                                   119.3      100.7       83.2
- -----------------------------------------------------------------------------
Other income                                                                        21.3       16.8       14.5
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Total revenues                                                                   7,717.9    9,260.4    6,901.3
- -----------------------------------------------------------------------------
 
BENEFITS AND EXPENSES:
Benefits and settlement expenses                                                 4,522.1    5,989.9    4,184.0
- -----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses                          2,728.4    2,878.5    2,345.7
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Total benefits and expenses                                                      7,250.5    8,868.4    6,529.7
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Gain from operations before dividends to policyholders, income taxes and net
realized gain on investments                                                       467.4      392.0      371.6
- -----------------------------------------------------------------------------
Dividends to policyholders                                                          27.5       27.3       27.3
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Gain from operations before federal income taxes and net realized gain on
investments                                                                        439.9      364.7      344.3
- -----------------------------------------------------------------------------
Federal income taxes                                                                78.3       83.6      103.7
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Gain from operations before net realized gain on investments                       361.6      281.1      240.6
- -----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding net
transfers to the interest maintenance reserve                                       31.3       53.3       43.9
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Net income                                                                     $   392.9  $   334.4  $   284.5
- -----------------------------------------------------------------------------  ---------  ---------  ---------
                                                                               ---------  ---------  ---------
</TABLE>
 
See accompanying notes.
 
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
 
<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31
                                                                               1997       1996       1995
                                                                               ---------  ---------  ---------
                                                                               (IN MILLIONS)
                                                                               -------------------------------
<S>                                                                            <C>        <C>        <C>
Capital and surplus at beginning of year                                       $ 1,962.6  $ 1,732.9  $ 1,679.6
- -----------------------------------------------------------------------------
Correction of prior years' asset valuation reserve (Note 15)                       (37.6)        --         --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets (Note 15)                               (57.0)        --         --
- -----------------------------------------------------------------------------  ---------  ---------  ---------
                                                                                 1,868.0    1,732.9    1,679.6
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income                                                                         392.9      334.4      284.5
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts                                 (36.2)      38.6      143.2
- -----------------------------------------------------------------------------
Nonadmitted assets                                                                  (0.4)      (3.0)       2.9
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance                                                (3.9)       0.6       (2.0)
- -----------------------------------------------------------------------------
Life policy reserve valuation basis                                                 (0.9)      (0.4)       2.9
- -----------------------------------------------------------------------------
Asset valuation reserve                                                            (36.9)    (105.5)    (112.5)
- -----------------------------------------------------------------------------
Mortgage loan, real estate and other investment reserves                              --         --        2.2
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997                                                                    938.4      100.0       15.1
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation                              (2.6)        --       27.0
- -----------------------------------------------------------------------------
Dividends to shareholder                                                          (150.0)    (135.0)    (310.0)
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Capital and surplus at end of year                                             $ 2,968.4  $ 1,962.6  $ 1,732.9
- -----------------------------------------------------------------------------  ---------  ---------  ---------
                                                                               ---------  ---------  ---------
</TABLE>
 
See accompanying notes.                                                      S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
 
<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31
                                                                         1997        1996        1995
                                                                         ----------  ----------  ----------
                                                                         (IN MILLIONS)
                                                                         ----------------------------------
<S>                                                                      <C>         <C>         <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received              $  6,364.3  $  8,059.4  $  5,430.9
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded                 (649.2)     (767.5)     (383.6)
- -----------------------------------------------------------------------
Investment income received                                                  1,798.8     1,700.6     1,713.2
- -----------------------------------------------------------------------
Benefits paid                                                              (5,345.2)   (4,050.4)   (3,239.6)
- -----------------------------------------------------------------------
Insurance expenses paid                                                    (2,867.5)   (2,972.2)   (2,513.5)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid)                                         (87.0)      (72.3)       38.4
- -----------------------------------------------------------------------
Dividends to policyholders                                                    (28.4)      (27.7)      (16.5)
- -----------------------------------------------------------------------
Other income received and expenses paid, net                                  (42.7)        6.3        14.4
- -----------------------------------------------------------------------  ----------  ----------  ----------
Net cash provided by (used in) operating activities                          (856.9)    1,876.2     1,043.7
- -----------------------------------------------------------------------
 
INVESTING ACTIVITIES
Sale, maturity or repayment of investments                                 12,142.6    12,542.0    13,183.9
- -----------------------------------------------------------------------
Purchase of investments                                                   (10,345.0)  (14,175.4)  (14,049.6)
- -----------------------------------------------------------------------
Other sources (uses)                                                          563.1      (266.5)      (64.0)
- -----------------------------------------------------------------------  ----------  ----------  ----------
Net cash provided by (used in) investing activities                         2,360.7    (1,899.9)     (929.7)
- -----------------------------------------------------------------------
 
FINANCING ACTIVITIES
Surplus paid-in                                                                  --       100.0        15.1
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder                                     120.0       100.0        63.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder                                     (100.0)      (63.0)      (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder                                                (150.0)     (135.0)     (310.0)
- -----------------------------------------------------------------------  ----------  ----------  ----------
Net cash provided by (used in) financing activities                          (130.0)        2.0      (294.9)
- -----------------------------------------------------------------------  ----------  ----------  ----------
Net increase (decrease) in cash and short-term investments                  1,373.8       (21.7)     (180.9)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year                          759.2       780.9       961.8
- -----------------------------------------------------------------------  ----------  ----------  ----------
Cash and short-term investments at end of year                           $  2,133.0  $    759.2  $    780.9
- -----------------------------------------------------------------------  ----------  ----------  ----------
                                                                         ----------  ----------  ----------
</TABLE>
 
See accompanying notes.
 
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES
 
    ORGANIZATION AND OPERATIONS
    The Lincoln National Life Insurance Company ("Company") is a wholly owned
    subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
    Indiana. As of December 31, 1997, the Company owns 100% of the outstanding
    common stock of four insurance company subsidiaries: First Penn-Pacific Life
    Insurance Company ("First Penn"), Lincoln National Health & Casualty
    Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
    and Lincoln Life & Annuity Company of New York ("LLANY").
 
    The Company's principal businesses consist of underwriting annuities,
    deposit-type contracts and life and health insurance through multiple
    distribution channels and the reinsurance of individual and group life and
    health business. The Company is licensed and sells its products in 49
    states, Canada and several U.S. territories.
 
    USE OF ESTIMATES
    The nature of the insurance and investment management businesses requires
    management to make estimates and assumptions that affect the amounts
    reported in the statutory-basis financial statements and accompanying notes.
    Actual results could differ from those estimates.
 
    BASIS OF PRESENTATION
    The accompanying financial statements have been prepared in conformity with
    accounting practices prescribed or permitted by the Indiana Department of
    Insurance ("Department"), which practices differ from generally accepted
    accounting principles ("GAAP"). The more significant variances from GAAP are
    as follows:
 
    INVESTMENTS
    Bonds are reported at cost or amortized cost or fair value based on their
    National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
    the Company's bonds are classified as available-for-sale and, accordingly,
    are reported at fair value with changes in the fair values reported directly
    in shareholder's equity after adjustments for related amortization of
    deferred acquisition costs, additional policyholder commitments and deferred
    income taxes.
 
    Investments in real estate are reported net of related obligations rather
    than on a gross basis.
 
    Changes between cost and admitted asset investment amounts are credited or
    charged directly to unassigned surplus rather than to a separate surplus
    account.
 
    Under a formula prescribed by the NAIC, the Company defers the portion of
    realized capital gains and losses on sales of fixed income investments,
    principally bonds and mortgage loans, attributable to changes in the general
    level of interest rates and amortizes those deferrals over the remaining
    period to maturity of the individual security sold. The net deferral is
    reported as the Interest Maintenance Reserve ("IMR") in the accompanying
    balance sheets. Realized capital gains and losses are reported in income net
    of federal income tax and transfers to the IMR. The asset valuation reserve
    ("AVR") is determined by an NAIC prescribed formula and is reported as a
    liability rather than unassigned surplus. Under GAAP, realized capital gains
    and losses are reported in the income statement on a pre-tax basis in the
    period that the asset giving rise to the gain or loss is sold and valuation
    allowances are provided when there has been a decline in value deemed other
    than temporary, in which case, the provision for such declines are charged
    to income.
 
    SUBSIDIARIES
    The accounts and operations of the Company's subsidiaries are not
    consolidated with the accounts and operations of the Company as would be
    required by GAAP. Under statutory accounting principles, the Company's
    subsidiaries are carried at their statutory basis net equity and presented
    in the balance sheet as affiliated common stocks.
 
    POLICY ACQUISITION COSTS
    The costs of acquiring and renewing business are expensed when incurred.
    Under GAAP, acquisition costs related to traditional life insurance, to the
    extent recoverable from future policy revenues, are deferred and amortized
    over the premium-paying period of the related policies using assumptions
    consistent with those used in computing policy benefit reserves. For
    universal life insurance, annuity and other investment-type products,
    deferred
 
                                                                             S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES (CONTINUED)
    policy acquisition costs, to the extent recoverable from future gross
    profits, are amortized generally in proportion to the present value of
    expected gross profits from surrender charges and investment, mortality and
    expense margins.
 
    NONADMITTED ASSETS
    Certain assets designated as "nonadmitted," principally furniture and
    equipment and certain receivables, are excluded from the accompanying
    balance sheets and are charged directly to unassigned surplus.
 
    PREMIUMS
    Premiums and deposits with respect to universal life policies and annuity
    and other investment-type contracts are reported as premium revenues;
    whereas, under GAAP, such premiums and deposits are treated as liabilities
    and policy charges represent revenues.
 
    BENEFIT RESERVES
    Certain policy reserves are calculated based on statutorily required
    interest and mortality assumptions rather than on estimated expected
    experience or actual account balances as would be required under GAAP.
 
    Death benefits paid, policy and contract withdrawals, and the change in
    policy reserves on universal life policies, annuity and other
    investment-type contracts are reported as benefits and settlement expenses
    in the accompanying statements of income; whereas, under GAAP, withdrawals
    are treated as a reduction of the policy or contract liabilities and
    benefits would represent the excess of benefits paid over the policy account
    value and interest credited to the account values.
 
    REINSURANCE
    Premiums, claims and policy benefits and contract liabilities are reported
    in the accompanying financial statements net of reinsurance amounts. For
    GAAP, all assets and liabilities related to reinsurance ceded contracts are
    reported on a gross basis.
 
    A liability for reinsurance balances has been provided for unsecured policy
    and contract liabilities and unearned premiums ceded to reinsurers not
    authorized by the Department to assume such business. Changes to those
    amounts are credited or charged directly to unassigned surplus. Under GAAP,
    an allowance for amounts deemed uncollectible is established through a
    charge to income.
 
    Commissions on business ceded are reported as income when received rather
    than deferred and amortized with deferred policy acquisition costs.
 
    Certain reinsurance contracts meeting risk transfer requirements under
    statutory-basis accounting practices have been accounted for using
    traditional reinsurance accounting whereas such contracts would be accounted
    for using deposit accounting under GAAP.
 
    INCOME TAXES
    Deferred income taxes are not provided for differences between financial
    statement amounts and tax bases of assets and liabilities.
 
    POLICYHOLDER DIVIDENDS
    Policyholder dividends are recognized when declared rather than over the
    term of the related policies.
 
    STATEMENTS OF CASH FLOWS
    Cash and short-term investments in the statements of cash flows represent
    cash balances and investments with initial maturities of one year or less.
    Under GAAP, the corresponding captions of cash and cash equivalents include
    cash balances and investments with initial maturities of three months or
    less.
 
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES (CONTINUED)
    A reconciliation of the Company's net income and capital and surplus
    determined on a statutory accounting basis with amounts determined in
    accordance with GAAP is as follows:
 
<TABLE>
<CAPTION>
                                               -----------------------------------------------------
 
                                               CAPITAL AND SURPLUS   NET INCOME
                                               DECEMBER 31           YEAR ENDED DECEMBER 31
                                               1997       1996       1997       1996       1995
                                               -----------------------------------------------------
                                               (IN MILLIONS)
                                               -----------------------------------------------------
<S>                                            <C>        <C>        <C>        <C>        <C>
Amounts reported on a statutory basis          $ 2,968.4  $ 1,962.6  $   392.9  $   334.4  $   284.5
- ---------------------------------------------
GAAP adjustments:
  Deferred policy acquisition costs and
    present value of future profits                958.3    1,119.1      (98.9)      66.7      (63.0)
   ------------------------------------------
  Policy and contract reserves                  (1,672.9)  (1,405.3)     (48.6)     (57.1)     (55.3)
   ------------------------------------------
  Interest maintenance reserve                     135.4       76.7       58.7      (39.7)      60.9
   ------------------------------------------
  Deferred income taxes                            (13.0)     (27.4)      70.3        1.8       38.3
   ------------------------------------------
  Policyholders' share of earnings and
    surplus on participating business              (79.8)     (81.9)       5.3        (.3)        .2
   ------------------------------------------
  Asset valuation reserve                          450.0      375.5         --         --         --
   ------------------------------------------
  Net realized gain (loss) on investments          (91.5)     (72.0)     (20.4)      78.7       30.0
   ------------------------------------------
  Unrealized gain on investments                 1,245.5      825.2         --         --         --
   ------------------------------------------
  Nonadmitted assets, including nonadmitted
    investments                                     61.0       (7.1)        --         --         --
   ------------------------------------------
  Investments in subsidiary companies              188.8      156.6      (80.5)      29.9       34.3
   ------------------------------------------
  Other, net                                      (162.5)     (99.0)     (35.0)     (82.6)      (7.3)
   ------------------------------------------  ---------  ---------  ---------  ---------  ---------
Net increase (decrease)                          1,019.3      860.4     (149.1)      (2.6)      38.1
- ---------------------------------------------  ---------  ---------  ---------  ---------  ---------
Amounts on a GAAP basis                        $ 3,987.7  $ 2,823.0  $   243.8  $   331.8  $   322.6
- ---------------------------------------------  ---------  ---------  ---------  ---------  ---------
                                               ---------  ---------  ---------  ---------  ---------
</TABLE>
 
                                                                             S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES (CONTINUED)
    Other significant accounting practices are as follows:
 
    INVESTMENTS
    The discount or premium on bonds is amortized using the interest method. For
    mortgage-backed bonds, the Company recognizes income using a constant
    effective yield based on anticipated prepayments and the estimated economic
    life of the securities. When actual prepayments differ significantly from
    anticipated prepayments, the effective yield is recalculated to reflect
    actual payments to date and anticipated future payments. The net investment
    in the securities is adjusted to the amount that would have existed had the
    new effective yield been applied since the acquisition of the securities.
 
    Short-term investments include investments with maturities of less than one
    year at the date of acquisition. The carrying amounts for these investments
    approximate their fair values.
 
    Preferred stocks are reported at cost or amortized cost.
 
    Unaffiliated common stocks are reported at fair value as determined by the
    Securities Valuation Office of the NAIC and the related unrealized gains
    (losses) are reported in unassigned surplus without adjustment for federal
    income taxes.
 
    Policy loans are reported at unpaid balances.
 
    The Company uses various derivative instruments as part of its overall
    liability-asset management program for certain investments and life
    insurance and annuity products. The Company values all derivative
    instruments on a basis consistent with that of the hedged item. Upon
    termination, gains and losses on those instruments are included in the
    carrying values of the underlying hedged items and are amortized over the
    remaining lives of the hedged items as adjustments to investment income or
    benefits from the hedged items through the IMR. Any unamortized gains or
    losses are recognized when the underlying hedged items are sold. The
    premiums paid for interest rate caps and swaptions are deferred and
    amoritized to net investment income on a straight-line basis over the term
    of the respective derivative.
 
    Hedge accounting is applied as indicated above after the Company determines
    that the items to be hedged expose the Company to interest rate
    fluctuations, the widening of bond yield spreads over comparable maturity
    U.S. Government obligations, increased liabilities associated with certain
    reinsurance agreements and foreign exchange risk. Moreover, the derivatives
    used are designated as a hedge and reduce the indicated risk by having a
    high correlation between changes in the value of the derivatives and the
    items being hedged at both the inception of the hedge and throughout the
    hedge period. Should such criteria not be met or if the hedged items have
    been sold, terminated or matured, the change in value of the derivatives is
    included in net income.
 
    Mortgage loans on real estate are reported at unpaid balances, less
    allowances for impairments. Real estate is reported at depreciated cost.
 
    Realized investment gains and losses on investments sold are determined
    using the specific identification method. Changes in admitted asset carrying
    amounts of bonds, mortgage loans and common and preferred stocks are
    credited or charged directly in unassigned surplus.
 
    LOANED SECURITIES
    Securities loaned are treated as collateralized financing transactions and a
    liability is recorded equal to the amount to be paid to reacquire the
    security. It is the Company's policy to take possession of securities with a
    market value at least equal to the value of the securities loaned.
    Securities loaned are recorded at amortized cost as long as the value of the
    related collateral is sufficient. The Company's agreements with third
    parties generally contain contractual provisions to allow for additional
    collateral to be obtained when necessary. The Company values collateral
    daily and obtains additional collateral when deemed appropriate.
 
    GOODWILL
    Goodwill, which represents the excess of the ceding commission over
    statutory-basis net assets of business purchased under an assumption
    reinsurance agreement, is amortized on a straight-line basis over ten years.
 
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES (CONTINUED)
    PREMIUMS
    Life insurance and annuity premiums are recognized as revenue when due.
    Accident and health premiums are earned pro rata over the contract term of
    the policies.
 
    BENEFITS
    Life, annuity and accident and health benefit reserves are developed by
    actuarial methods and are determined based on published tables using
    statutorily specified interest rates and valuation methods that will
    provide, in the aggregate, reserves that are greater than or equal to the
    minimum or guaranteed policy cash values or the amounts required by the
    Department. The Company waives deduction of deferred fractional premiums on
    the death of life and annuity policy insureds and returns any premium beyond
    the date of death, except for policies issued prior to March 1977. Surrender
    values on policies do not exceed the corresponding benefit reserves.
    Additional reserves are established when the results of cash flow testing
    under various interest rate scenerios indicate the need for such reserves.
    If net premiums exceed the gross premiums on any insurance in-force,
    additional reserves are established. Benefit reserves for policies
    underwritten on a substandard basis are determined using the multiple table
    reserve method.
 
    The tabular interest, tabular less actual reserve released and the tabular
    cost have been determined by formula or from the basic data for such items.
    Tabular interest funds not involving life contingencies were determined
    using the actual interest credited to the funds plus the change in accrued
    interest.
 
    Liabilities related to guaranteed investment contracts and policyholder
    funds left on deposit with the Company generally are equal to fund balances
    less applicable surrender charges.
 
    CLAIMS AND CLAIM ADJUSTMENT EXPENSES
    Unpaid claims and claim adjustment expenses on accident and health policies
    represent the estimated ultimate net cost of all reported and unreported
    claims incurred during the year. The Company does not discount claims and
    claim adjustment expense reserves. The reserves for unpaid claims and claim
    adjustment expenses are estimated using individual case-basis valuations and
    statistical analyses. Those estimates are subject to the effects of trends
    in claim severity and frequency. Although considerable variability is
    inherent in such estimates, management believes that the reserves for claims
    and claim adjustment expenses are adequate. The estimates are continually
    reviewed and adjusted as necessary as experience develops or new information
    becomes known; such adjustments are included in current operations.
 
    REINSURANCE CEDED AND ASSUMED
    Reinsurance premiums and claims and claim adjustment expenses are accounted
    for on bases consistent with those used in accounting for the original
    policies issued and the terms of the reinsurance contracts. Certain business
    is transacted on a funds withheld basis and investment income on funds
    withheld are reported in net investment income.
 
    PENSION BENEFITS
    Costs associated with the Company's defined benefit pension plans is
    systematically accrued during the expected period of active service of the
    covered employees.
 
    INCOME TAXES
    The Company and eligible subsidiaries have elected to file consolidated
    federal and state income tax returns with LNC. Pursuant to an intercompany
    tax sharing agreement with LNC, the Company provides for income taxes on a
    separate return filing basis. The tax sharing agreement also provides that
    the Company will receive benefit for net operating losses, capital losses
    and tax credits which are not usable on a separate return basis to the
    extent such items may be utilized in the consolidated income tax returns of
    LNC.
 
    STOCK OPTIONS
    The Company recognizes compensation expense for its stock option incentive
    plans using the intrinsic value method of accounting. Under the terms of the
    intrinsic value method, compensation cost is the excess, if any, of the
    quoted market price of LNC's common stock at the grant date, or other
 
                                                                             S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES (CONTINUED)
    measurement date, over the amount an employee must pay to acquire the stock.
 
    ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
    ACCOUNTS
    These assets and liabilities represent segregated funds administered and
    invested by the Company for the exclusive benefit of pension and variable
    life and annuity contractholders. The fees received by the Company for
    administrative and contractholder maintenance services performed for these
    separate accounts are included in the Company's statements of income.
 
2.  PERMITTED STATUTORY ACCOUNTING PRACTICES
    The Company's statutory-basis financial statements are prepared in
    accordance with accounting practices prescribed or permitted by the
    Department. "Prescribed" statutory accounting practices include state laws,
    regulations and general administrative rules, as well as a variety of
    publications of the NAIC. "Permitted" statutory accounting practices
    encompass all accounting practices that are not prescribed; such practices
    may differ from state to state, may differ from company to company within a
    state and may change in the future. The NAIC currently is in the process of
    recodifying statutory accounting practices ("Codification"). Codification
    will likely change, to some extent, prescribed statutory accounting
    practices and may result in changes to the accounting practices that the
    Company uses to prepare its statutory-basis financial statements.
    Codification, which is expected to be approved by the NAIC in 1998, will
    require adoption by the various states before it becomes the prescribed
    statutory-basis of accounting for insurance companies domesticated within
    those states. Accordingly, before Codification becomes effective for the
    Company, the state of Indiana must adopt Codification as the prescribed
    basis of accounting on which domestic insurers must report their
    statutory-basis results to the Department. At this time, it is unclear
    whether Indiana will adopt Codification. However, based on the current draft
    guidance, management believes that the impact of Codification will not be
    material to the Company's statutory-basis financial statements.
 
    The Company has received written approval from the Department to record
    surrender charges applicable to separate account liabilities for variable
    life and annuity products as a liability in the separate account financial
    statements payable to the Company's general account. In the accompanying
    financial statements, a corresponding receivable is recorded with the
    related income impact recorded in the accompanying statement of operations
    as a change in reserves or change in premium and other deposit funds.
 
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
3.  INVESTMENTS
    The major categories of net investment income are as
    follows:
 
<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                                     1997       1996       1995
                                                                     -------------------------------
                                                                     (IN MILLIONS)
                                                                     -------------------------------
<S>                                                                  <C>        <C>        <C>
Income:
  Bonds                                                              $ 1,524.4  $ 1,442.2  $ 1,457.4
   ----------------------------------------------------------------
  Preferred stocks                                                        23.5        9.6        6.4
   ----------------------------------------------------------------
  Unaffiliated common stocks                                               8.3        6.5        5.2
   ----------------------------------------------------------------
  Affiliated common stocks                                                15.0        9.5       12.6
   ----------------------------------------------------------------
  Mortgage loans on real estate                                          257.2      269.3      252.0
   ----------------------------------------------------------------
  Real estate                                                             92.2      114.4      110.0
   ----------------------------------------------------------------
  Policy loans                                                            37.5       35.0       32.1
   ----------------------------------------------------------------
  Other investments                                                       28.2       22.4       62.6
   ----------------------------------------------------------------
  Cash and short-term investments                                         70.3       48.9       53.2
   ----------------------------------------------------------------  ---------  ---------  ---------
Total investment income                                                2,056.6    1,957.8    1,991.5
- -------------------------------------------------------------------
Expenses:
  Depreciation                                                            21.0       25.0       25.9
   ----------------------------------------------------------------
  Other                                                                  188.5      176.5      193.4
   ----------------------------------------------------------------  ---------  ---------  ---------
Total investment expenses                                                209.5      201.5      219.3
- -------------------------------------------------------------------  ---------  ---------  ---------
Net investment income                                                $ 1,847.1  $ 1,756.3  $ 1,772.2
- -------------------------------------------------------------------  ---------  ---------  ---------
                                                                     ---------  ---------  ---------
</TABLE>
 
    Nonadmitted accrued investment income at December 31, 1997
    and 1996 amounted to $2,600,000 and $2,500,000,
    respectively, consisting principally of interest on bonds in
    default and mortgage loans.
 
                                                                            S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
3.  INVESTMENTS (CONTINUED)
    The cost or amortized cost, gross unrealized gains and
    losses and the fair value of investments in bonds are
    summarized as follows:
 
<TABLE>
<CAPTION>
                                                     COST OR    GROSS        GROSS
                                                     AMORTIZED  UNREALIZED   UNREALIZED   FAIR
                                                     COST       GAINS        LOSSES       VALUE
                                                     ----------------------------------------------
                                                     (IN MILLIONS)
                                                     ----------------------------------------------
<S>                                                  <C>        <C>          <C>          <C>
At December 31, 1997:
  Corporate                                          $13,003.8   $   942.2    $    60.1   $13,885.9
   ------------------------------------------------
  U.S. government                                        436.3        67.9           --       504.2
   ------------------------------------------------
  Foreign government                                   1,202.1       104.9          5.4     1,301.6
   ------------------------------------------------
  Mortgage-backed                                      3,874.3       215.2         27.1     4,062.4
   ------------------------------------------------
  State and municipal                                     44.2          .3           --        44.5
   ------------------------------------------------  ---------  -----------  -----------  ---------
                                                     $18,560.7   $ 1,330.5    $    92.6   $19,798.6
                                                     ---------  -----------  -----------  ---------
                                                     ---------  -----------  -----------  ---------
 
At December 31, 1996:
  Corporate                                          $12,548.1   $   586.5    $    66.6   $13,068.0
   ------------------------------------------------
  U.S. government                                      1,088.7        43.2         18.0     1,113.9
   ------------------------------------------------
  Foreign government                                   1,234.0       105.1          1.4     1,337.7
   ------------------------------------------------
  Mortgage-backed                                      4,478.4       183.3         27.4     4,634.3
   ------------------------------------------------
  State and municipal                                     40.4          .1           --        40.5
   ------------------------------------------------  ---------  -----------  -----------  ---------
                                                     $19,389.6   $   918.2    $   113.4   $20,194.4
                                                     ---------  -----------  -----------  ---------
                                                     ---------  -----------  -----------  ---------
</TABLE>
 
    The carrying amount of bonds in the balance sheets at
    December 31, 1997 and 1996 reflects NAIC adjustments of
    $5,500,000 and $2,700,000, respectively, to decrease
    amortized cost.
 
    Fair values for bonds are based on quoted market prices,
    where available. For bonds not actively traded, fair values
    are estimated using values obtained from independent pricing
    services or, in the case of private placements, are
    estimated by discounting expected future cash flows using a
    current market rate applicable to the coupon rate, credit
    quality and maturity of the investments.
 
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
3.  INVESTMENTS (CONTINUED)
    A summary of the cost or amortized cost and fair value of
    investments in bonds at December 31, 1997, by contractual
    maturity, is as follows:
 
<TABLE>
<CAPTION>
                                                                               COST OR
                                                                               AMORTIZED  FAIR
                                                                               COST       VALUE
                                                                               --------------------
                                                                               (IN MILLIONS)
                                                                               --------------------
<S>                                                                            <C>        <C>
Maturity:
  In 1998                                                                      $   490.1  $   494.9
   --------------------------------------------------------------------------
  In 1999-2002                                                                   3,088.7    3,185.4
   --------------------------------------------------------------------------
  In 2003-2007                                                                   4,762.7    4,971.0
   --------------------------------------------------------------------------
  After 2007                                                                     6,344.9    7,084.9
   --------------------------------------------------------------------------
  Mortgage-backed securities                                                     3,874.3    4,062.4
   --------------------------------------------------------------------------  ---------  ---------
Total                                                                          $18,560.7  $19,798.6
- -----------------------------------------------------------------------------  ---------  ---------
                                                                               ---------  ---------
</TABLE>
 
    The expected maturities may differ from the contractual
    maturities in the foregoing table because certain borrowers
    may have the right to call or prepay obligations with or
    without call or prepayment penalties.
 
    At December 31, 1997, the Company did not have a material
    concentration of financial instruments in a single investee,
    industry or geographic location.
 
    Proceeds from sales of investments in bonds during 1997,
    1996 and 1995 were $9,715,000,000, $10,996,900,000 and
    $12,234,100,000, respectively. Gross gains during 1997, 1996
    and 1995 of $218,100,000, $169,700,000 and $225,600,000,
    respectively, and gross losses of $78,000,000, $177,000,000
    and $83,100,000, respectively, were realized on those sales.
 
    At December 31, 1997 and 1996, investments in bonds, with an
    admitted asset value of $76,200,000 and $70,700,000,
    respectively, were on deposit with state insurance
    departments to satisfy regulatory requirements.
 
    The cost or amortized cost, gross unrealized gains and
    losses and the fair value of investments in unaffiliated
    common stocks and preferred stocks are as follows:
 
<TABLE>
<CAPTION>
                                          COST OR     GROSS        GROSS
                                          AMORTIZED   UNREALIZED   UNREALIZED   FAIR
                                          COST        GAINS        LOSSES       VALUE
                                          --------------------------------------------
                                          (IN MILLIONS)
                                          --------------------------------------------
<S>                                       <C>         <C>          <C>          <C>
At December 31, 1997:
  Preferred stocks                         $257.3       $12.1        $  .7      $268.7
- ----------------------------------------
  Unaffiliated common stocks                357.0        98.5         19.5       436.0
- ----------------------------------------
At December 31, 1996:
  Preferred stocks                         $239.7       $10.5        $ 1.7      $248.5
- ----------------------------------------
  Unaffiliated common stocks                289.9        84.6         16.2       358.3
- ----------------------------------------
</TABLE>
 
    The carrying amount of preferred stocks in the balance
    sheets at December 31, 1997 and 1996 reflects NAIC
    adjustments of $4,000,000 and $700,000, respectively, to
    decrease amortized cost.
 
                                                                            S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
3.  INVESTMENTS (CONTINUED)
    During 1997, the minimum and maximum lending rates for
    mortgage loans were 7.09% and 9.25%, respectively. At the
    issuance of a loan, the percentage of loan to value on any
    one loan does not exceed 75%. At December 31, 1997, the
    Company did not hold any mortgages with interest overdue
    beyond one year. All properties covered by mortgage loans
    have fire insurance at least equal to the excess of the loan
    over the maximum loan that would be allowed on the land
    without the building.
 
    Realized capital gains are reported net of federal income
    taxes and amounts transferred to the IMR as follows:
 
<TABLE>
<CAPTION>
                                                                          1997       1996       1995
                                                                          -------------------------------
                                                                          (IN MILLIONS)
                                                                          -------------------------------
<S>                                                                       <C>        <C>        <C>
Realized capital gains                                                    $   209.3  $    69.3  $   186.8
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $54.0,
$(6.7) and $51.1 in 1997, 1996 and 1995, respectively)                        100.2      (12.4)      94.8
- ------------------------------------------------------------------------  ---------  ---------  ---------
                                                                              109.1       81.7       92.0
Less federal income taxes on realized gains                                    77.8       28.4       48.1
- ------------------------------------------------------------------------  ---------  ---------  ---------
Net realized capital gains                                                $    31.3  $    53.3  $    43.9
- ------------------------------------------------------------------------  ---------  ---------  ---------
                                                                          ---------  ---------  ---------
</TABLE>
 
4.  SUBSIDIARIES
    Statutory-basis financial information related to the
    Company's four wholly-owned subsidiaries is summarized as
    follows (in millions):
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1997
                                                             --------------------------------------------
                                                             FIRST
                                                             PENN       LNH&C        LNRAC      LLANY
                                                             --------------------------------------------
<S>                                                          <C>        <C>          <C>        <C>
Cash and invested assets                                     $ 1,154.4   $   284.8   $   399.0  $   796.3
- -----------------------------------------------------------
Other assets                                                      36.9        77.3       481.6      130.8
- -----------------------------------------------------------  ---------  -----------  ---------  ---------
Total admitted assets                                        $ 1,191.3   $   362.1   $   880.6  $   972.1
- -----------------------------------------------------------  ---------  -----------  ---------  ---------
                                                             ---------  -----------  ---------  ---------
 
Insurance reserves                                           $ 1,072.2   $   266.7   $   279.3  $   588.7
- -----------------------------------------------------------
Other liabilities                                                 48.4        21.7       546.4        5.8
- -----------------------------------------------------------
Liabilities related to separate accounts                            --          --          --      164.7
- -----------------------------------------------------------
Capital and surplus                                               70.7        73.7        54.9      212.9
- -----------------------------------------------------------  ---------  -----------  ---------  ---------
Total liabilities and capital and surplus                    $ 1,191.3   $   362.1   $   880.6  $   972.1
- -----------------------------------------------------------  ---------  -----------  ---------  ---------
                                                             ---------  -----------  ---------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31, 1997
                                                              ------------------------------------------
                                                              FIRST
                                                              PENN       LNH&C      LNRAC      LLANY
                                                              ------------------------------------------
<S>                                                           <C>        <C>        <C>        <C>
Revenues                                                      $   267.6  $   135.4  $   125.3  $   230.0
- ------------------------------------------------------------
Expenses                                                          262.6      244.2      114.6      224.4
- ------------------------------------------------------------
Net realized gains (losses)                                          .1         .6        (.1)       (.1)
- ------------------------------------------------------------  ---------  ---------  ---------  ---------
Net income                                                    $     5.1  $  (108.2) $    10.6  $     5.5
- ------------------------------------------------------------  ---------  ---------  ---------  ---------
                                                              ---------  ---------  ---------  ---------
</TABLE>
 
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
4.  SUBSIDIARIES (CONTINUED)
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1996
                                                             ------------------------------------------------
                                                             FIRST
                                                             PENN       LNH&C        LNRAC        LLANY
                                                             ------------------------------------------------
<S>                                                          <C>        <C>          <C>          <C>
Cash and invested assets                                     $ 1,090.7   $   146.4    $   406.7    $   664.3
- -----------------------------------------------------------
Other assets                                                      31.8        17.7        503.1          9.1
- -----------------------------------------------------------  ---------  -----------  -----------  -----------
Total admitted assets                                        $ 1,122.5   $   164.1    $   909.8    $   673.4
- -----------------------------------------------------------  ---------  -----------  -----------  -----------
                                                             ---------  -----------  -----------  -----------
 
Insurance reserves                                           $ 1,013.5   $    72.7    $   261.8    $   601.1
- -----------------------------------------------------------
Other liabilities                                                 41.3        18.7        597.2         22.1
- -----------------------------------------------------------
Capital and surplus                                               67.7        72.7         50.8         50.2
- -----------------------------------------------------------  ---------  -----------  -----------  -----------
Total liabilities and capital and surplus                    $ 1,122.5   $   164.1    $   909.8    $   673.4
- -----------------------------------------------------------  ---------  -----------  -----------  -----------
                                                             ---------  -----------  -----------  -----------
</TABLE>
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1996
                                                               ------------------------------------------------
                                                               FIRST
                                                               PENN       LNH&C        LNRAC        LLANY
                                                               ------------------------------------------------
<S>                                                            <C>        <C>          <C>          <C>
Revenues                                                       $   246.5   $   104.9    $   120.8    $   642.7
- -------------------------------------------------------------
Expenses                                                           247.1        97.1        114.1        661.3
- -------------------------------------------------------------
Net realized gains (losses)                                          (.6)         --           --           --
- -------------------------------------------------------------  ---------  -----------  -----------  -----------
Net income (loss)                                              $    (1.2)  $     7.8    $     6.7    $   (18.6)
- -------------------------------------------------------------  ---------  -----------  -----------  -----------
                                                               ---------  -----------  -----------  -----------
</TABLE>
 
    The carrying value of affiliated common stocks, representing
    their statutory-basis net equity, was $412,100,000 and
    $241,500,000 at December 31, 1997 and 1996, respectively.
    The cost basis of investments in subsidiaries as of December
    31, 1997 and 1996 was $466,200,000 and $194,000,000,
    respectively.
 
    During 1997 and 1996, the Company's insurance subsidiaries
    paid dividends of $15,000,000 and $10,500,000, respectively.
 
5.  FEDERAL INCOME TAXES
    The effective federal income tax rate for financial
    reporting purposes differs from the prevailing statutory tax
    rate principally due to tax-exempt investment income,
    dividends-received tax deductions, differences in policy
    acquisition costs and policy and contract liabilities for
    tax return and financial statement purposes.
 
    Federal income taxes incurred of $78,300,000, $83,600,000
    and $103,700,000 in 1997, 1996 and 1995, respectively, would
    be subject to recovery in the event that the Company incurs
    net operating losses within three years of the years for
    which such taxes were paid.
 
    Prior to 1984, a portion of the Company's current income was
    not subject to current income tax, but was accumulated for
    income tax purposes in a memorandum account designated as
    "policyholders' surplus." The Company's balance in the
    "policyholders' surplus" account at December 31, 1983 of
    $187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
    accordingly, there have been no additions to the accounts
    after that date. That portion of current income on which
    income taxes have been paid will continue to be accumulated
    in a memorandum account designated as "shareholder's
    surplus," and is available for dividends to the shareholder
    without additional payment of tax by the Company. The
    December 31, 1997 memorandum account balance for
    "shareholder's surplus"
 
                                                                            S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
5.  FEDERAL INCOME TAXES (CONTINUED)
    was $1,905,000,000. Should dividends to the shareholder
    exceed its respective "shareholder's surplus," amounts would
    need to be transferred from the "policyholders' surplus" and
    would be subject to federal income tax at that time. Under
    existing or foreseeable circumstances, the Company neither
    expects nor intends that distributions will be made that
    will result in any such tax.
 
6.  SUPPLEMENTAL FINANCIAL DATA
    The balance sheet caption, "Other Admitted Assets", includes
    amounts recoverable from other insurers for claims paid by
    the Company, and the balance sheet caption, "Future Policy
    Benefits and Claims," has been reduced for insurance ceded
    as follows:
 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31
                                                                                 1997       1996
                                                                                 --------------------
                                                                                 (IN MILLIONS)
                                                                                 --------------------
<S>                                                                              <C>        <C>
Insurance ceded                                                                  $ 1,431.0  $ 1,154.5
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers                                               35.9       16.0
- -------------------------------------------------------------------------------
</TABLE>
 
    Reinsurance transactions included in the income statement
    caption, "Premiums and Deposits," are as follows:
 
<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31
                                                                          1997       1996       1995
                                                                          -------------------------------
                                                                          (IN MILLIONS)
                                                                          -------------------------------
<S>                                                                       <C>        <C>        <C>
Insurance assumed                                                         $   727.2  $   241.3  $   667.7
- ------------------------------------------------------------------------
Insurance ceded                                                               302.9      193.3      453.1
- ------------------------------------------------------------------------  ---------  ---------  ---------
Net amount included in premiums                                           $   424.3  $    48.0  $   214.6
- ------------------------------------------------------------------------  ---------  ---------  ---------
                                                                          ---------  ---------  ---------
</TABLE>
 
    The income statement caption, "Benefits and Settlement
    Expenses," is net of reinsurance recoveries of
    $1,240,500,000, $787,900,000 and $1,407,000,000 for 1997,
    1996 and 1995, respectively.
 
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
6.  SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
    Deferred and uncollected life insurance premiums and annuity
    considerations included in the balance sheet caption,
    "Premiums and Fees in Course of Collection," are as follows:
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31, 1997
                                                                          -----------------------------------
                                                                                                  NET OF
                                                                          GROSS      LOADING      LOADING
                                                                          -----------------------------------
                                                                          (IN MILLIONS)
                                                                          -----------------------------------
<S>                                                                       <C>        <C>          <C>
Ordinary new business                                                     $     3.2   $     2.4    $      .8
- ------------------------------------------------------------------------
Ordinary renewal                                                               17.8         3.2         14.6
- ------------------------------------------------------------------------
Group life                                                                     10.6          .2         10.4
- ------------------------------------------------------------------------  ---------         ---        -----
                                                                          $    31.6   $     5.8    $    25.8
                                                                          ---------         ---        -----
                                                                          ---------         ---        -----
</TABLE>
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31, 1996
                                                                          -----------------------------------
                                                                                                  NET OF
                                                                          GROSS      LOADING      LOADING
                                                                          -----------------------------------
                                                                          (IN MILLIONS)
                                                                          -----------------------------------
<S>                                                                       <C>        <C>          <C>
Ordinary new business                                                     $     3.9   $     1.9    $     2.0
- ------------------------------------------------------------------------
Ordinary renewal                                                               35.1         3.0         32.1
- ------------------------------------------------------------------------
Group life                                                                      9.4         (.1)         9.5
- ------------------------------------------------------------------------  ---------         ---        -----
                                                                          $    48.4   $     4.8    $    43.6
                                                                          ---------         ---        -----
                                                                          ---------         ---        -----
</TABLE>
 
    The Company has entered into non-exclusive managing general
    agent agreements with International Benefit Services Corp.,
    HRM Claim Management, Inc. and Pediatrics Insurance
    Consultants, Inc. to write group life and health business.
    Direct premiums written related to the agreements amounted
    to $2,000,000, $2,600,000 and $8,800,000 in 1997 and
    $26,200,000, $3,800,000 and $8,600,000 in 1996,
    respectively. During 1996, LNC Administrative Services
    Corporation entered into a similar agreement with the
    Company with direct premiums written amounting to $7,200,000
    and 6,200,000 in 1997 and 1996, respectively. Authority
    granted by the managing general agents agreements include
    underwriting, claims adjustment and claims payment services.
 
7.  ANNUITY RESERVES
    At December 31, 1997, the Company's annuity reserves and
    deposit fund liabilities, including separate accounts, that
    are subject to discretionary withdrawal with adjustment,
 
                                                                            S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
7.  ANNUITY RESERVES (CONTINUED)
    subject to discretionary withdrawal without adjustment and
    not subject to discretionary withdrawal provisions are
    summarized as follows:
 
<TABLE>
<CAPTION>
                                                                                  AMOUNT     PERCENT
                                                                                  ----------------------
                                                                                  (IN MILLIONS)
                                                                                  ----------------------
<S>                                                                               <C>        <C>
Subject to discretionary withdrawal with adjustment:
  With market value adjustment                                                    $ 2,426.3           5%
   -----------------------------------------------------------------------------
  At book value, less surrender charge                                              4,225.8           8
   -----------------------------------------------------------------------------
  At market value                                                                  30,064.7          59
   -----------------------------------------------------------------------------  ---------         ---
                                                                                   36,716.8          72
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment                                                 11,657.7          23
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal                                             2,531.1           5
- --------------------------------------------------------------------------------  ---------         ---
Total annuity reserves and deposit fund liabilities -- before reinsurance          50,905.6         100%
- --------------------------------------------------------------------------------                    ---
                                                                                                    ---
Less reinsurance                                                                    1,797.5
- --------------------------------------------------------------------------------  ---------
Net annuity reserves and deposit fund liabilities, including separate accounts    $49,108.1
- --------------------------------------------------------------------------------  ---------
                                                                                  ---------
</TABLE>
 
8.  CAPITAL AND SURPLUS
    Life insurance companies are subject to certain Risk-Based Capital ("RBC")
    requirements as specified by the NAIC. Under those requirements, the amount
    of capital and surplus maintained by a life insurance company is to be
    determined based on the various risk factors related to it. At December 31,
    1997, the Company exceeds the RBC requirements.
 
    The payment of dividends by the Company is limited and cannot be made except
    from earned profits. The maximum amount of dividends that may be paid by
    life insurance companies without prior approval of the Indiana Insurance
    Commissioner is subject to restrictions relating to statutory surplus and
    net gain from operations. In 1998, the Company can pay dividends of
    $361,600,000 without prior approval of the Indiana Insurance Commissioner.
 
9.  EMPLOYEE BENEFIT PLANS
    LNC maintains defined benefit pension plans for its employees (including
    Company employees) and a defined contribution plan for the Company's agents.
    LNC also maintains 401(k) plans, deferred compensation plans and
    postretirement medical and life insurance plans for its employees and agents
    (including the Company's employees and agents). The aggregate expenses and
    accumulated obligations for the Company's portion of these plans are not
    material to the Company's statutory-basis financial statements of income or
    financial position for any of the periods shown.
 
    LNC has various incentive plans for key employees, agents and directors of
    LNC and its subsidiaries that provide for the issuance of stock options,
    stock appreciation rights, restricted stock awards and stock incentive
    awards. These plans are comprised primarily of stock option incentive plans.
    Stock options granted under the stock option incentive plans are at the
    market value at the date of grants and, subject to termination of
    employment, expire ten years from the date of grant. Such options are
    transferable only upon death and are exercisable one year from the date of
    grant for options issued prior to 1992. Option issued subsequent to 1991 are
    exercisable in 25% increments on the option issuance anniversary in the four
    years following issuance.
 
    As of December 31, 1997, 716,211 shares of LNC common stock were subject to
    options granted to Company employees and agents under the stock option
    incentive plans of which 370,239 were exercisable on that date. The exercise
    prices of the outstanding options range from $23.50 to $75.66. During 1997,
    1996 and 1995, 170,789, 72,405 and
 
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
9.  EMPLOYEE BENEFIT PLANS (CONTINUED)
    117,806 options were exercised, respectively, and 1,846, 10,950 and 11,473
    options were forfeited, respectively.
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
    DISABILITY INCOME CLAIMS
    The liability for disability income claims net of the related asset for
    amounts recoverable from reinsurers at December 31, 1997 and 1996 is a net
    liability of $516,900,000 and $572,000,000, respectively. This liability is
    based on the assumption that the recent experience will continue in the
    future. If incidence levels or claim termination rates fluctuate
    significantly from the assumptions underlying reserves, adjustments to
    reserves may be required in the future. Accordingly, this liability may
    prove to be deficient or excessive. However, it is management's opinion that
    such future development will not materially affect the financial position of
    the Company. The Company reviews reserve levels on an ongoing basis.
 
    During 1995, the Company completed an in-depth review of the experience of
    its disability income business. As a result of this study, and based on the
    assumption that recent experience will continue in the future, net income
    decreased by $15,200,000 as a result of strengthening the disability income
    reserve.
 
    Because of continuing adverse experience and worsening projections of future
    experience, the Company conducted an additional in-depth review of loss
    experience on its disability income business during 1997. As a result of
    this study, the reserve level was deemed to be inadequate to meet future
    obligations if current incident levels were to continue in the future. In
    order to address this situation, the Company strengthened its disability
    income reserve by $80,000,000 (pre-tax).
 
    MARKETING AND COMPLIANCE ISSUES
    Regulators continue to focus on market conduct and compliance issues. Under
    certain circumstances companies operating in the insurance and financial
    services markets have been held responsible for providing incomplete or
    misleading sales materials and for replacing existing policies with policies
    that were less advantageous to the policyholder. The Company's management
    continues to monitor the Company's sales materials and compliance procedures
    and is making an extensive effort to minimize any potential liability. Due
    to the uncertainty surrounding such matters, it is not possible to provide a
    meaningful estimate of the range of potential outcomes at this time;
    however, it is management's opinion that such future development will not
    materially affect the financial position of the Company.
 
    GROUP PENSION ANNUITIES
    The liabilities for guaranteed interest and group pension annuity contracts,
    which are no longer being sold by the Company, are supported by a single
    portfolio of assets that attempts to match the duration of these
    liabilities. Due to the long-term nature of group pension annuities and the
    resulting inability to exactly match cash flows, a risk exists that future
    cash flows from investments will not be reinvested at rates as high as
    currently earned by the portfolio.
 
    Accordingly, these liabilities may prove to be deficient or excessive.
    However, it is management's opinion that such future development will not
    materially affect the financial position of the Company.
 
    LEASES
    The Company leases its home office properties through sale-leaseback
    agreements. The agreements provide for a 25 year lease period with options
    to renew for six additional terms of five years each. The agreements also
    provide the Company with the right of first refusal to purchase the
    properties during the term of the lease, including renewal periods, at a
    price as defined in the agreements. The Company also has the option to
    purchase the leased properties at fair market value as defined in the
    agreements on the last day of the initial 25-year lease ending in 2009 or on
    the last day of any of the renewal periods.
 
    Total rental expense on operating leases in 1997, 1996 and 1995 was
    $29,300,000, $26,400,000 and
 
                                                                            S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
    $22,500,000, respectively. Future minimum rental commitments are as follows
    (in millions):
 
<TABLE>
<S>                                     <C>
1998                                    $    18.5
- --------------------------------------
1999                                         18.9
- --------------------------------------
2000                                         20.1
- --------------------------------------
2001                                         20.4
- --------------------------------------
2002                                         20.7
- --------------------------------------
Thereafter                                  152.2
- --------------------------------------  ---------
                                        $   250.8
                                        ---------
                                        ---------
</TABLE>
 
    The future commitments include amounts for space and equipment to be used by
    the personnel that were added on January 2, 1998 as a result of the purchase
    of a block of individual life and annuity business (see NOTE 12).
 
    INFORMATION TECHNOLOGY COMMITMENT
    In February 1998, the Company signed a seven-year contract with IBM Global
    Services for providing information technology services for the Fort Wayne
    operations. Annual costs are estimated to range from $33,600,000 to
    $56,800,000.
 
    INSURANCE CEDED AND ASSUMED
    The Company cedes insurance to other companies, including certain
    affiliates. The portion of risks exceeding the Company's retention limit is
    reinsured with other insurers. Industry regulations prescribe the maximum
    coverage that the Company can retain on an individual insured. Prior to
    December 31, 1997, the Company limited its maximum coverage that it retained
    on an individual to $3,000,000. Based on a review of the capital and
    business in-force (including the addition of the block of business described
    in NOTE 12), effective in January 1998, the Company changed the amount it
    will retain on an individual to $10,000,000. Portions of the Company's
    deferred annuity business have also been reinsured with other companies to
    limit its exposure to interest rate risks. At December 31, 1997, the
    reserves associated with these reinsurance arrangements totaled
    $1,760,000,000. To cover products other than life insurance, the Company
    acquires other insurance coverages with retentions and limits that
    management believes are appropriate for the circumstances. The Company
    remains liable if its reinsurers are unable to meet their contractual
    obligations under the applicable reinsurance agreements.
 
    The Company assumes insurance from other companies, including certain
    affiliates. At December 31, 1997, the Company has provided $12,400,000 of
    statutory surplus relief to other insurance companies under reinsurance
    transactions. Generally, such amounts are offset by corresponding
    receivables from the ceding company, which are secured by future profits on
    the reinsured business. However, the Company is subject to the risk that the
    ceding company may become insolvent and the right of offset would not be
    permitted.
 
    The regulatory required liability for unsecured reserves ceded to
    unauthorized reinsurers was $8,200,000 and $4,300,000 at December 31, 1997
    and 1996, respectively.
 
    VULNERABILITY FROM CONCENTRATIONS
    At December 31, 1997, the Company did not have a concentration of: 1)
    business transactions with a particular customer, lender or distributor; 2)
    revenues from a particular product or service; 3) sources of supply of labor
    or services used in the business; or 4) a market or geographic area in which
    business is conducted that makes it vulnerable to an event that is at least
    reasonably possible to occur in the near term and which could cause a severe
    impact to the Company's financial condition.
 
    OTHER CONTINGENCY MATTERS
    The Company is involved in various pending or threatened legal proceedings
    arising from the conduct of business. Most of these proceedings are routine
    in the ordinary course of business. The Company maintains professional
    liability insurance coverage for claims in excess of $5,000,000. The degree
    of applicability of this coverage depends on the specific facts of each
    proceeding. In some instances, these proceedings include claims for
    compensatory and punitive damages and similar types of relief in addition to
    amounts for alleged contractual liability or requests for equitable relief.
    After consultation with legal counsel and a review of available facts, it is
    management's opinion that the ultimate liability, if any, under these suits
    will
 
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
    not have a material adverse affect on the financial position or results of
    operations of the Company.
 
    Two lawsuits involve alleged fraud in the sale of interest sensitive
    universal life and whole life insurance policies. These two suits have been
    filed as class actions against the Company, although the court has not
    certified a class in either case. Plaintiffs seek unspecified damages and
    penalties for themselves and on behalf of the putative class while the
    relief sought in these cases in substantial, the cases are in the early
    stages of litigation, and it is premature to make assessments about
    potential loss, if any. Management intends to defend these suits vigorously.
    The amount of liability, if any, which may arise as a result of these suits
    cannot be reasonably estimated at this time.
 
    The number of insurance companies that are under regulatory supervision has
    resulted, and is expected to continue to result, in assessments by state
    guaranty funds to cover losses to policyholders of insolvent or
    rehabilitated companies. Mandatory assessments may be partially recovered
    through a reduction in future premium taxes in some states. The Company has
    accrued for expected assessments net of estimated future premium tax
    deductions.
 
    GUARANTEES
    The Company has guarantees with off-balance-sheet risks whose contractual
    amounts represent credit exposure. Outstanding guarantees with off-
    balance-sheet risks, shown in notional or contract amounts, are as follows:
 
<TABLE>
<CAPTION>
                                NOTIONAL OR
                                CONTRACT AMOUNTS
                                --------------------
 
                                DECEMBER 31
                                --------------------
                                1997       1996
                                --------------------
                                (IN MILLIONS)
                                --------------------
<S>                             <C>        <C>
Mortgage loan pass-through
certificates                    $    41.6  $    50.3
- ------------------------------
Real estate partnerships               --         .5
- ------------------------------  ---------  ---------
                                $    41.6  $    50.8
                                ---------  ---------
                                ---------  ---------
</TABLE>
 
    The Company has invested in real estate partnerships that use conventional
    mortgage loans to finance their projects. In some cases, the terms of these
    arrangements involve guarantees by each of the partners to indemnify the
    mortgagor in the event a partner is unable to pay its principal and interest
    payments. In addition, the Company has sold commercial mortgage loans
    through grantor trusts which issued pass-through certificates. The Company
    has agreed to repurchase any mortgage loans which remain delinquent for 90
    days at a repurchase price substantially equal to the outstanding principal
    balance plus accrued interest thereon to the date of repurchase. It is
    management's opinion that the value of the properties underlying these
    commitments is sufficient that in the event of default the impact would not
    be material to the Company. Accordingly, both the carrying value and fair
    value of these guarantees is zero at December 31, 1997 and 1996.
 
    DERIVATIVES
    The Company has derivatives with off-balance-sheet risks whose notional or
    contract amounts exceed the credit exposure. The Company has entered into
    derivative transactions to reduce its exposure to fluctuations in interest
    rates, the widening of bond yield spreads over comparable maturity U.S.
    Government obligations, increased liabilities associated with reinsurance
    agreements and foreign exchange risks. In addition, the Company is subject
    to the risks associated with changes in the value of its derivatives;
    however, such changes in value generally are offset by changes in the value
    of the items being hedged by such contracts. Outstanding derivatives with
    off-balance-sheet risks, shown in notional or contract amounts along with
    their carrying value and estimated fair values, are as follows:
 
                                                                            S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
 
<TABLE>
<CAPTION>
                                                              ASSETS (LIABILITIES)
                                                              -----------------------------------
                                          NOTIONAL OR         CARRYING   FAIR   CARRYING   FAIR
                                          CONTRACT AMOUNTS    VALUE      VALUE  VALUE      VALUE
                                          -------------------------------------------------------
                                          DECEMBER 31         DECEMBER 31       DECEMBER 31
                                          1997      1996      1997       1997   1996       1996
                                          -------------------------------------------------------
                                          (IN MILLIONS)
                                          -------------------------------------------------------
<S>                                       <C>       <C>       <C>        <C>    <C>        <C>
Interest rate derivatives:
  Interest rate cap agreements            $4,900.0  $5,500.0   $13.9     $  .9   $20.8     $  8.2
       ---------------------------------
  Swaptions                                1,752.0     672.0     6.9       6.9    11.0       10.6
       ---------------------------------
  Financial futures contracts                   --     147.7      --        --    (2.4)      (2.4)
       ---------------------------------
  Interest rate swaps                         10.0        --      --      (1.8)     --         --
       ---------------------------------  --------  --------  --------   -----  --------   ------
                                           6,662.0   6,319.7    20.8       6.0    29.4       16.4
Foreign currency derivatives:
  Forward contracts                          163.1     251.5     5.4       5.4      .2        (.2)
       ---------------------------------
  Foreign currency options                      --      43.9      --        --      .6         .4
       ---------------------------------
  Foreign currency swaps                      15.0      15.0      --      (2.1)     --       (2.1)
       ---------------------------------  --------  --------  --------   -----  --------   ------
                                             178.1     310.4     5.4       3.3      .8       (1.9)
                                          --------  --------  --------   -----  --------   ------
                                          $6,840.1  $6,630.1   $26.2     $ 9.3   $30.2     $ 14.5
                                          --------  --------  --------   -----  --------   ------
                                          --------  --------  --------   -----  --------   ------
</TABLE>
 
    A reconciliation and discussion of the notional or contract amounts for the
    significant programs using derivative agreements and contracts at December
    31 is a follows:
 
<TABLE>
<CAPTION>
                                     ----------------------------------------------------------------
                                     INTEREST RATE CAPS    SPREAD LOCKS          SWAPTIONS
                                     1997       1996       1997       1996       1997       1996
                                     ----------------------------------------------------------------
                                     (IN MILLIONS)
                                     ----------------------------------------------------------------
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>
Balance at beginning of year         $ 5,500.0  $ 5,110.0  $      --  $   600.0  $   672.0  $      --
- -----------------------------------
New contracts                               --      390.0       50.0       15.0    1,080.0      672.0
- -----------------------------------
Terminations and maturities             (600.0)        --      (50.0)    (615.0)        --         --
- -----------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
Balance at end of year               $ 4,900.0  $ 5,500.0  $      --  $      --  $ 1,752.0  $   672.0
- -----------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
                                     ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                              FINANCIAL FUTURES     INTEREST RATE
                                                              ------------------------------------------
                                                              CONTRACTS             SWAPS
                                                              1997       1996       1997       1996
                                                              ------------------------------------------
<S>                                                           <C>        <C>        <C>        <C>
Balance at beginning of year                                  $   147.7  $      --  $      --  $     5.0
- ------------------------------------------------------------
New contracts                                                      88.3    7,918.8       10.0         --
- ------------------------------------------------------------
Terminations and maturities                                      (236.0)  (7,771.1)        --       (5.0)
- ------------------------------------------------------------  ---------  ---------  ---------  ---------
Balance at end of year                                        $      --  $   147.7  $    10.0  $      --
- ------------------------------------------------------------  ---------  ---------  ---------  ---------
                                                              ---------  ---------  ---------  ---------
</TABLE>
 
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
 
<TABLE>
<CAPTION>
                                        FOREIGN CURRENCY DERIVATIVES
                                        ----------------------------------------------------------------
                                        FOREIGN EXCHANGE      FOREIGN CURRENCY      FOREIGN CURRENCY
                                        FORWARD CONTRACTS     OPTIONS               SWAPS
                                        ----------------------------------------------------------------
                                        1997       1996       1997       1996       1997       1996
                                        ----------------------------------------------------------------
                                        (IN MILLIONS)
                                        ----------------------------------------------------------------
<S>                                     <C>        <C>        <C>        <C>        <C>        <C>
Balance at beginning of year            $   251.5  $    15.7  $    43.9  $    99.2  $    15.0  $    15.0
- --------------------------------------
New contracts                               833.1      406.9         --    1,168.8         --         --
- --------------------------------------
Terminations and maturities                (921.6)    (171.1)     (43.9)  (1,224.1)        --         --
- --------------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
Balance at end of year                  $   163.1  $   251.5  $      --  $    43.9  $    15.0  $    15.0
- --------------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
                                        ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>
 
    INTEREST RATE CAPS
    The interest rate cap agreements, which expire in 1998 through 2003, entitle
    the Company to receive quarterly payments from the counterparties on
    specified future reset dates, contingent on future interest rates. For each
    cap, the amount of such payments, if any, is determined by the excess of a
    market interest rate over a specified cap rate multiplied by the notional
    amount divided by four. The purpose of the Company's interest rate cap
    agreement program is to protect its annuity line of business from the effect
    of rising interest rates. The premium paid for the interest rate caps is
    included in other assets ($13,900,000 as of December 31, 1997) and is being
    amortized over the terms of the agreements. This amortization is included in
    net investment income.
 
    SWAPTIONS
    Swaptions, which expire in 2002 and 2003, entitle the Company to receive
    settlement payments from the counterparties on specified expiration dates,
    contingent on future interest rates. For each swaption, the amount of such
    settlement payments, if any, is determined by the present value of the
    difference between the fixed rate on a market rate swap and the strike rate
    multiplied by the notional amount. The purpose of the Company's swaption
    program is to protect its annuity line of business from the effect of
    fluctuating interest rates. The premium paid for the swaptions is included
    in other assets ($6,900,000 as of December 31, 1997) and is being amortized
    over the terms of the agreements. This amortization is included in net
    investment income.
 
    SPREAD LOCKS
    Spread-lock agreements provide for a lump sum payment to or by the Company,
    depending on whether the spread between the swap rate and a specified
    Government note is larger or smaller than a contractually specified spread.
    Cash payments are based on the product of the notional amount, the spread
    between the swap rate and the yield of an equivalent maturity Government
    security and the price sensitivity of the swap at that time. The purpose of
    the Company's spread-lock program is to protect a portion of its fixed
    maturity securities against widening of spreads.
 
    FINANCIAL FUTURES
    The Company uses exchange-traded financial futures contracts to hedge
    against interest rate risks and to manage duration of a portion of its fixed
    maturity securities. Financial futures contracts obligate the Company to buy
    or sell a financial instrument at a specified future date for a specified
    price. They may be settled in cash or through delivery of the financial
    instrument. Cash settlements on the change in market values of financial
    futures contracts are made daily.
 
    INTEREST RATE SWAPS
    The Company uses interest rate swap agreements to hedge its exposure to
    floating rate bond coupon payments, replicating a fixed rate bond. An
    interest rate swap is a contractual agreement to exchange payments at one or
    more times based on the actual or expected price, level, performance or
    value of one or more underlying interest rates. The Company is required to
    pay the counterparty to the agreements the stream of variable coupon
    payments generated from the bonds, and in turn,
 
                                                                            S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
    receives a fixed payment from the counterparty at a predetermined interest
    rate. The net receipts/payments from interest rate swaps are recorded in net
    investment income.
 
    FOREIGN CURRENCY DERIVATIVES
    The Company uses a combination of foreign exchange forward contracts,
    foreign currency options and foreign currency swaps, all of which are traded
    over-the-counter, to hedge some of the foreign exchange risk of investments
    in fixed maturity securities denominated in foreign currencies. The foreign
    currency forward contracts obligate the Company to deliver a specified
    amount of currency at a future date at a specified exchange rate. Foreign
    currency options give the Company the right, but not the obligation, to buy
    or sell a foreign currency at a specific exchange rate during a specified
    time period. A foreign currency swap is a contractual agreement to exchange
    the currencies of two different countries pursuant to an agreement to
    re-exchange the two currencies at the same rate of exchange at a specified
    future date.
 
    ADDITIONAL DERIVATIVE INFORMATION
    Expenses for the agreements and contracts described above amounted to
    $7,000,000, $6,900,000 and $5,600,000 in 1997, 1996 and 1995, respectively.
    Deferred losses of $2,600,000 as of December 31, 1997, were the result of:
    1) terminated and expired spread-lock agreements and; 2) financial futures
    contracts. These losses are included with the related fixed maturity
    securities to which the hedge applied and are being amortized over the life
    of such securities.
 
    The Company is exposed to credit loss in the event of nonperformance by
    counterparties on interest rate cap agreements, swaptions, spread-lock
    agreements, interest rate swaps, foreign exchange forward contracts, foreign
    currency options and foreign currency swaps. However, the Company does not
    anticipate nonperformance by any of the counterparties. The credit risk
    associated with such agreements is minimized by purchasing such agreements
    from financial institutions with long-standing, superior performance
    records. The amount of such exposure is essentially the net replacement cost
    or market value for such agreements with each counterparty if the net market
    value is in the Company's favor. At December 31, 1997, the exposure was
    $11,700,000.
 
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
    The following discussion outlines the methodologies and assumptions used to
    determine the estimated fair values of the Company's financial instruments.
    Considerable judgment is required to develop these fair values. Accordingly,
    the estimates shown are not necessarily indicative of the amounts that would
    be realized in a one-time, current market exchange of all of the Company's
    financial instruments.
 
    BONDS AND UNAFFILIATED COMMON STOCK
    Fair values of bonds are based on quoted market prices, where available. For
    bonds not actively traded, fair values are estimated using values obtained
    from independent pricing services. In the case of private placements, fair
    values are estimated by discounting expected future cash flows using a
    current market rate applicable to the coupon rate, credit quality and
    maturity of the investments. The fair values of unaffiliated common stocks
    are based on quoted market prices.
 
    MORTGAGE LOANS ON REAL ESTATE
    The estimated fair values of mortgage loans on real estate are established
    using a discounted cash flow method based on credit rating, maturity and
    future income. The rating for mortgages in good standing are based on
    property type, location, market conditions, occupancy, debt service
    coverage, loan to value, caliber of tenancy, borrower and payment record.
    Fair values for impaired mortgage loans are based on: 1) the present value
    of expected future cash flows discounted at the loan's effective interest
    rate; 2) the loan's market price; or 3) the fair value of the collateral if
    the loan is collateral dependent.
 
    POLICY LOANS
    The estimated fair values of investments in policy loans are calculated on a
    composite discounted cash flow basis using Treasury interest rates
    consistent with the maturity durations assumed. These durations are based on
    historical experience.
 
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
    The carrying values for assets classified as other investments and cash and
    short-term investments in the accompanying statutory-basis balance sheets
    approximate their fair value.
 
    INVESTMENT-TYPE INSURANCE CONTRACTS
    The balance sheet captions, "Future Policy Benefits and Claims" and "Other
    Policyholder Funds," include investment type insurance contracts (i.e.,
    deposit contracts and guaranteed interest contracts). The fair values for
    the deposit contracts and certain guaranteed interest contracts are based on
    their approximate surrender values. The fair values for the remaining
    guaranteed interest and similar contracts are estimated using discounted
    cash flow calculations. These calculations are based on interest rates
    currently offered on similar contracts with maturities that are consistent
    with those remaining for the contracts being valued.
 
    The remainder of the balance sheet captions "Future Policy Benefits and
    Claims" and "Other Policyholder Funds," that do not fit the definition of
    "investment-type insurance contracts" are considered insurance contracts.
    Fair value disclosures are not required for these insurance contracts and
    have not been determined by the Company. It is the Company's position that
    the disclosure of the fair value of these insurance contracts is important
    because readers of these financial statements could draw inappropriate
    conclusions about the Company's capital and surplus determined on a fair
    value basis. It could be misleading if only the fair value of assets and
    liabilities defined as financial instruments are disclosed. The Company and
    other companies in the insurance industry are monitoring the related actions
    of the various rule-making bodies and attempting to determine an appropriate
    methodology for estimating and disclosing the "fair value" of their
    insurance contract liabilities.
 
    SHORT-TERM DEBT
    Fair values of short-term debt approximates carrying values.
 
    GUARANTEES
    The Company's guarantees include guarantees related to real estate
    partnerships and mortgage loan pass-through certificates. Based on
    historical performance where repurchases have been negligible and the
    current status, which indicates none of the loans are delinquent, the fair
    value liability for the guarantees related to the mortgage loan pass-through
    certificates is insignificant.
 
    DERIVATIVES
    The Company's derivatives include interest rate cap agreements, swaptions,
    spread-lock agreements, foreign currency exchange contracts, financial
    futures contracts, interest rate swaps, foreign currency options and foreign
    currency swaps. Fair values for these contracts are based on current
    settlement values. These values are based on: 1) quoted market prices for
    the foreign currency exchange contracts and financial future contracts and;
    2) brokerage quotes that utilize pricing models or formulas using current
    assumptions for all other swaps and agreements.
 
    INVESTMENT COMMITMENTS
    Fair values for commitments to make investment in fixed maturity securities
    (primarily private placements), mortgage loans on real estate and real
    estate are based on the difference between the value of the committed
    investments as of the date of the accompanying balance sheets and the
    commitment date. These estimates would take into account changes in interest
    rates, the counterparties' credit standing and the remaining terms of the
    commitments.
 
                                                                            S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    The carrying values and estimated fair values of the Company's financial
    instruments are as follows:
 
<TABLE>
<CAPTION>
                                                 DECEMBER 31
                                                 ----------------------------------------------
                                                 1997                    1996
                                                 ----------------------------------------------
                                                 CARRYING                CARRYING
ASSETS (LIABILITIES)                             VALUE       FAIR VALUE  VALUE       FAIR VALUE
- -----------------------------------------------------------------------------------------------
                                                 (IN MILLIONS)
                                                 ----------------------------------------------
<S>                                              <C>         <C>         <C>         <C>
Bonds                                            $ 18,560.7  $ 19,798.6  $ 19,389.6  $ 20,194.4
- -----------------------------------------------
Preferred stock                                       257.3       268.7       239.7       248.5
- -----------------------------------------------
Unaffiliated common stock                             436.0       436.0       358.3       358.3
- -----------------------------------------------
Mortgage loans on real estate                       3,012.7     3,179.2     2,976.7     3,070.9
- -----------------------------------------------
Policy loans                                          660.5       648.3       626.5       612.7
- -----------------------------------------------
Other investments                                     335.5       335.5       282.7       282.7
- -----------------------------------------------
Cash and short-term investments                     2,133.0     2,133.0       759.2       759.2
- -----------------------------------------------
Investment-type insurance contracts:
  Deposit contracts and certain guaranteed
    interest contracts                            (17,324.2)  (16,887.6)  (17,871.6)  (17,333.0)
   --------------------------------------------
  Remaining guaranteed interest and similar
    contracts                                      (1,267.0)   (1,294.6)   (1,799.7)   (1,835.4)
   --------------------------------------------
Short-term debt                                      (120.0)     (120.0)     (100.0)     (100.0)
- -----------------------------------------------
Derivatives                                            26.2         9.3        26.5        13.8
- -----------------------------------------------
Investment commitments                                   --         (.5)         --         (.6)
- -----------------------------------------------
</TABLE>
 
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
    In October 1996, the Company and LLANY purchased a block of group
    tax-qualified annuity business from UNUM Corporation's affiliate. The
    transaction was completed in the form of a reinsurance transaction, which
    resulted in a ceding commission of $71,800,000. The ceding commission has
    been recorded as admissible goodwill of $62,300,000, which is to be
    amortized on a straight-line basis over 10 years. LLANY was required by the
    New York Department of Insurance to expense its portion of the ceding
    commission in 1996. Policy liabilities and related accruals of the Company
    and its wholly owned subsidiary increased by $3,200,000,000 as a result of
    this transaction.
 
    In 1997, LNC contributed 25,000,000 shares of common stock of American
    States Financial Corporation ("American States") to the Company. American
    States is a property casualty insurance holding company of which LNC owned
    83.3%. The contributed common stock was accounted for as a capital
    contribution equal to the fair value of the common stock received by the
    Company. Subsequently, the American States common stock owned by the
    Company, along with all other American States common stock owned by LNC and
    its affiliates, was sold. The Company received proceeds from the sale in the
    amount of $1,175,000,000. The Company recognized no gain or loss on the sale
    of its portion of the common stock due to the receipt of such stock at fair
    value.
 
    On January 2, 1998, the Company issued a surplus note to LNC in return for
    $500,000,000 in cash. The note calls for the Company to pay, on or before
    March 31, 2028, the principal amount of the note and interest quarterly at a
    6.56% annual rate. LNC also has a right to redeem the note for immediate
    repayment in total or in part once per year on the
 
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
12. ACQUISITIONS AND SALES OF SUBSIDIARIES (CONTINUED)
    anniversary date of the note, but not before January 2, 2003. Any payment of
    interest or repayment of principal may be paid only out of excess surplus
    (as defined in the note) and is subject to the approval of the Commissioner
    of the Indiana Department of Insurance.
 
    Proceeds from the sale of the Company's American States common stock, as
    well as proceeds from the surplus note, were used to finance an indemnity
    reinsurance transaction whereby the Company reinsured 100% of a block of
    individual life insurance and annuity business from CIGNA Corporation. The
    Company paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of
    the reinsurance agreement, which will result in a decrease to surplus in
    1998 of approximately $1,000,000,000. Operating results generated by this
    block of business after the closing date will be included in the Company
    financial statements from the closing date. At the time of closing, this
    block of business had statutory liabilities of $4,658,200,000 that became
    the Company's obligation. The company also received assets, measured on a
    historical statutory basis, equal to the liabilities. During 1997, this
    block produced premiums, fees and deposits of $1,051,000,000 and earnings of
    $87,200,000 on a statutory basis. The Company also expects to pay
    $30,000,000 to cover expenses associated with the reinsurance agreement and
    to record a charge of approximately $12,000,000 during 1998 to cover certain
    costs of integrating the existing operations with the new block of business.
 
13. TRANSACTIONS WITH AFFILIATES
    A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
    has a nearly exclusive general agents contract with the Company under which
    it sells the Company's products and provides the service that otherwise
    would be provided by a home office marketing department and regional
    offices. For providing these selling and marketing services, the Company
    paid LFGI override commissions and operating expense allowances of
    $61,600,000, $56,300,000 and $43,300,000 in 1997, 1996 and 1995,
    respectively. LFGI incurred expenses of $5,500,000, $15,700,000 and
    $10,400,000 in 1997, 1996 and 1995, respectively, in excess of the override
    commissions and operating expense allowances received from the Company,
    which the Company is not required to reimburse. Effective in January 1998,
    the Company and LFGI agreed to increase the override commission expense and
    eliminate the operating expense allowance.
 
    Cash and short-term investments at December 31, 1997 and 1996 include the
    Company's participation in a short-term investment pool with LNC of
    $325,600,000 and $175,100,000, respectively. Related investment income
    amounted to $15,500,000, $15,300,000 and $21,100,000 in 1997, 1996 and 1995,
    respectively. Other liabilities at December 31, 1997 and 1996 include
    $120,000,000 and $100,000,000, respectively, of notes payable to LNC.
 
    The Company provides services to and receives services from affiliated
    companies which resulted in a net payment of $48,500,000, $34,100,000 and
    $24,900,000 in 1997, 1996 and 1995, respectively.
 
    The Company cedes and accepts reinsurance from affiliated companies.
    Premiums in the accompanying statements of income include premiums on
    insurance business accepted under reinsurance contracts and exclude premiums
    ceded to other affiliated companies, as follows:
 
<TABLE>
<CAPTION>
                        YEAR ENDED DECEMBER 31
                        1997       1996       1995
                        -------------------------------
                        (IN MILLIONS)
                        -------------------------------
<S>                     <C>        <C>        <C>
Insurance assumed       $    11.9  $    17.9  $    17.6
- ----------------------
Insurance ceded             100.3      302.8      214.4
- ----------------------
</TABLE>
 
                                                                            S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
    The balance sheets include reinsurance balances with affiliated companies as
    follows:
 
<TABLE>
<CAPTION>
                          DECEMBER 31
                          1997       1996
                          --------------------
                          (IN MILLIONS)
                          --------------------
<S>                       <C>        <C>
Future policy benefits
and claims assumed        $   245.5  $   312.7
- ------------------------
Future policy benefits
and claims ceded              997.2      891.8
- ------------------------
Amounts recoverable on
paid and unpaid losses         30.4       31.2
- ------------------------
Reinsurance payable on
paid losses                     5.3        2.7
- ------------------------
Funds held under
reinsurance treaties --
net liability               1,115.4    1,062.4
- ------------------------
</TABLE>
 
    Substantially all reinsurance ceded to affiliated companies is with
    unauthorized companies. To take a reserve credit for such reinsurance, the
    Company holds assets from the reinsurer, including funds held under
    reinsurance treaties, and is the beneficiary on letters of credit
    aggregating $280,900,000 and $314,200,000 at December 31, 1997 and 1996,
    respectively. The letters of credit are issued by banks and represent
    guarantees of performance under the reinsurance agreement. At December 31,
    1997 and 1996, LNC had guaranteed $229,100,000 and $239,200,000,
    respectively, of these letters of credit. At December 31, 1997, the Company
    has a receivable (included in the foregoing amounts) from affiliated
    insurance companies in the amount of $130,700,000 for statutory surplus
    relief received under financial reinsurance ceded agreements.
 
14. SEPARATE ACCOUNTS
    Separate account assets and liabilities reported in the accompanying balance
    sheets represent funds that are separately administered, principally for
    annuity contracts, and for which the contractholder, rather than the
    Company, bears the investment risk. Separate account contractholders have no
    claim against the assets of the general account of the Company. Separate
    account assets are reported at fair value and consist primarily of long-term
    bonds, common stocks, short-term investments and mutual funds. The detailed
    operations of the separate accounts are not included in the accompanying
    financial statements. Fees charged on separate account policyholder deposits
    are included in other income.
 
    Separate account premiums, deposits and other considerations amounted to
    $4,821,800,000, $4,148,700,000 and $3,068,200,000 in 1997, 1996 and 1995,
    respectively. Reserves for separate accounts with assets at fair value were
    $30,560,700,000 and $23,047,800,000 at December 31, 1997 and 1996,
    respectively. All reserves are subject to discretionary withdrawal at market
    value. Substantially all of the Company's separate accounts are
    nonguaranteed.
 
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
14. SEPARATE ACCOUNTS (CONTINUED)
 
    A reconciliation of transfers to (from) separate accounts are as follows:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
                                                              1997           1996
                                                              ------------------------
                                                              (IN MILLIONS)
                                                              ------------------------
<S>                                                           <C>            <C>
Transfers as reported in the Summary of Operations of
various Separate Accounts:
  Transfers to separate accounts                              $ 4,824.0      $ 4,149.6
- ------------------------------------------------------------
  Transfers from separate accounts                             (2,943.8)      (2,058.5)
- ------------------------------------------------------------  ---------      ---------
Net transfer to separate accounts as reported in the
Company's NAIC Annual Statement -- Summary of Operations      $ 1,880.2      $ 2,091.1
- ------------------------------------------------------------  ---------      ---------
                                                              ---------      ---------
</TABLE>
 
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
    In 1997, certain errors were identified by the Illinois
    Insurance Department in the calculation of the AVR as of
    December 31, 1996 and 1995. The effects of the AVR errors
    also resulted in the need for revisions in the calculation
    of certain investment limitation thresholds, the results of
    which indicated that additional assets should have been
    nonadmitted as of December 31, 1996. As discussed by the
    Company with the Indiana and Illinois Insurance Departments,
    corrections were made to affected pages of the Company's
    NAIC Annual Statement which were refiled with various state
    insurance departments. However, due to immateriality of the
    corrections in relation to the financial statements taken as
    a whole, the audited 1996 and 1995 statutory-basis financial
    statements were not corrected and re-issued.
 
    The Company's 1997 NAIC Annual Statement, as filed with
    various state insurance departments, also includes the
    corrected balances for 1996 and 1995. The following is a
    reconciliation of total admitted assets, total liabilities
    and capital and surplus as of December 31, 1996 as presented
    in the 1997 NAIC Annual Statement (as corrected) to the
    accompanying audited financial statements.
 
<TABLE>
<CAPTION>
                                          TOTAL                    CAPITAL
                                          ADMITTED   TOTAL         AND
                                          ASSETS     LIABILITIES   SURPLUS
                                          ---------------------------------
<S>                                       <C>        <C>           <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements                      $50,016.6   $ 48,054.0   $ 1962.6
- ----------------------------------------
Effect of AVR errors                             --         37.6      (37.6)
- ----------------------------------------
Effect of change in investment
limitations                                   (57.0)          --      (57.0)
- ----------------------------------------  ---------  -----------   --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement                                 $49,959.6   $ 48,091.6   $1,868.0
- ----------------------------------------  ---------  -----------   --------
                                          ---------  -----------   --------
</TABLE>
 
16. IMPACT OF YEAR 2000 (UNAUDITED)
    The Year 2000 Issue is pervasive and complex and affects virtually every
    aspect of the Company's business. The Company's computer systems and
    interfaces with the computer systems of vendors, suppliers, customers and
    business partners are particularly vulnerable. The inability to properly
    recognize date sensitive electronic information and transfer data between
    systems could cause errors or even a complete systems failure which would
    result in a temporary inability to process transactions correctly and engage
    in normal business
 
                                                                            S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
16. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
    activities. The Company is redirecting a large portion of its internal
    information technology efforts and contracting with outside consultants to
    update its systems to accommodate the year 2000. Also, the Company has
    initiated formal communications with critical parties that interface with
    the Company's systems to gain an understanding of their progress in
    addressing Year 2000 Issues. While the Company is making every effort to
    address its own systems and the systems with which it interfaces, it is not
    possible to provide assurance that operational problems will not occur. The
    Company presently believes that with the modification of existing computer
    systems, updates by vendors and conversion to new software and hardware, the
    Year 2000 Issue will not pose significant operational problems for its
    computer systems. In addition, the Company is developing contingency plans
    in the event that, despite its best efforts, there are unresolved year 2000
    problems. If the remediation efforts noted above are not completed timely or
    properly, the Year 2000 Issue could have a material adverse impact on the
    operation of the Company's business.
 
    During 1997 and 1996, the Company incurred expenditures of approximately
    $5,500,000 ($3,600,000 after-tax) to address this issue. The Company's
    financial plans for 1998 through 2000 include expected expenditures of an
    additional $20,000,000 ($13,000,000 after-tax) on this issue. The cost of
    addressing Year 2000 Issues and the timeliness of completion will be closely
    monitored by management and are based on managements's current best
    estimates which were derived utilizing numerous assumptions of future
    events, including the continued availability of certain resources, third
    party modification plans and other factors. Nevertheless, there can be no
    guarantee that these estimated costs will be achieved and actual results
    could differ significantly from those anticipated. Specific factors that
    might cause such differences include, but are not limited to, the
    availability and cost of personnel trained in this area, the ability to
    locate and correct all relevant computer problems and other uncertainties.
 
S-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
The Lincoln National Life Insurance Company
 
We have audited the accompanying statutory-basis balance sheets
of The Lincoln National Life Insurance Company (a wholly owned
subsidiary of Lincoln National Corporation) as of December 31,
1997 and 1996, and the related statutory-basis statements of
income, changes in capital and surplus and cash flows for each
of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
 
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
 
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1997.
 
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
 
                                       [LOGO]
 
February 5, 1998
 
                                                                            S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
 
DECEMBER 31, 1997 (IN MILLIONS)
 
<TABLE>
<S>        <C>                                                                                        <C>
Investment income earned:
           Government bonds                                                                           $    52.8
           -----------------------------------------------------------------------------------------
           Other bonds (unaffiliated)                                                                   1,471.6
           -----------------------------------------------------------------------------------------
           Preferred stocks (unaffiliated)                                                                 23.5
           -----------------------------------------------------------------------------------------
           Common stocks (unaffiliated)                                                                     8.3
           -----------------------------------------------------------------------------------------
           Common stocks of affiliates                                                                     15.0
           -----------------------------------------------------------------------------------------
           Mortgage loans                                                                                 257.2
           -----------------------------------------------------------------------------------------
           Real estate                                                                                     92.2
           -----------------------------------------------------------------------------------------
           Premium notes, policy loans and liens                                                           37.5
           -----------------------------------------------------------------------------------------
           Cash on hand and on deposit                                                                      1.0
           -----------------------------------------------------------------------------------------
           Short-term investments                                                                          69.3
           -----------------------------------------------------------------------------------------
           Other invested assets                                                                           21.9
           -----------------------------------------------------------------------------------------
           Derivative instruments                                                                         (10.0)
           -----------------------------------------------------------------------------------------
           Aggregate write-ins for investment income                                                       16.3
           -----------------------------------------------------------------------------------------  ---------
Gross investment income                                                                               $ 2,056.6
- ----------------------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
 
Real estate owned (cost, less encumbrances)                                                           $   585.2
- ----------------------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
 
Mortgage loans (unpaid balance):
           Farm mortgages                                                                             $     0.1
           -----------------------------------------------------------------------------------------
           Residential mortgages                                                                            3.1
           -----------------------------------------------------------------------------------------
           Commercial mortgages                                                                         3,009.5
           -----------------------------------------------------------------------------------------  ---------
Total mortgage loans                                                                                  $ 3,012.7
- ----------------------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
 
Mortgage loans by standing (unpaid balance):
           Good standing                                                                              $ 2,974.1
           -----------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
           Good standing with restructured terms                                                      $    38.5
           -----------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
           Interest overdue more than three months, not in foreclosure                                $      --
           -----------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
           Foreclosure in process                                                                     $     0.1
           -----------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
Other long-term assets (statement value)                                                              $   281.5
- ----------------------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
</TABLE>
 
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
 
DECEMBER 31, 1997 (IN MILLIONS)
 
<TABLE>
<S>                                                                                              <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
    Common stocks of subsidiaries                                                                $   466.2
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Bonds and short-term investments by class and maturity:
  Bonds by maturity (statement value):
    Due within one year or less                                                                  $ 3,140.1
     ------------------------------------------------------------------------------------------
    Over 1 year through 5 years                                                                    5,182.8
     ------------------------------------------------------------------------------------------
    Over 5 years through 10 years                                                                  5,772.8
     ------------------------------------------------------------------------------------------
    Over 10 years through 20 years                                                                 3,275.3
     ------------------------------------------------------------------------------------------
    Over 20 years                                                                                  3,270.6
     ------------------------------------------------------------------------------------------  ---------
  Total by maturity                                                                              $20,641.6
   --------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
  Bonds by class (statement value):
    Class 1                                                                                      $13,879.0
     ------------------------------------------------------------------------------------------
    Class 2                                                                                        5,215.6
     ------------------------------------------------------------------------------------------
    Class 3                                                                                          848.0
     ------------------------------------------------------------------------------------------
    Class 4                                                                                          668.8
     ------------------------------------------------------------------------------------------
    Class 5                                                                                           23.6
     ------------------------------------------------------------------------------------------
    Class 6                                                                                            6.6
     ------------------------------------------------------------------------------------------  ---------
  Total by class                                                                                 $20,641.6
   --------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
 
Total bonds publicly traded                                                                      $16,457.1
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Total bonds privately placed                                                                     $ 4,184.5
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Preferred stocks (statement value)                                                               $   257.3
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
 
Unaffiliated common stocks (market value)                                                        $   436.0
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Short-term investments (cost or amortized cost)                                                  $ 2,080.9
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Financial options and caps owned (statement value)                                               $    20.8
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
 
Financial options and caps written (statement value)                                             $      --
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Swap and forward agreements open (statement value)                                               $     5.4
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Futures contracts open (current value)                                                           $      --
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Cash on deposit                                                                                  $    52.1
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
 
Life insurance in-force:
    Ordinary                                                                                     $   108.6
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group life                                                                                   $    31.2
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
</TABLE>
 
                                                                            S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
 
DECEMBER 31, 1997 (IN MILLIONS)
 
<TABLE>
<S>                                                                                              <C>
Amount of accidental death insurance in-force under ordinary policies                            $     5.3
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Life insurance policies with disability provisions in-force:
    Ordinary                                                                                     $     5.5
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group life                                                                                   $      --
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Supplementary contracts in-force:
    Ordinary -- not involving life contingencies:
      Amount on deposit                                                                          $      --
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
      Income payable                                                                             $     0.8
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Ordinary -- involving life contingencies:
      Income payable                                                                             $     3.0
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group -- not involving life contingencies:
      Income payable                                                                             $     1.1
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group -- involving life contingencies:
      Income payable                                                                             $      --
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Annuities:
    Ordinary:
      Immediate -- amount of income payable                                                      $    71.8
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
      Deferred -- fully paid account balance                                                     $     0.7
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
      Deferred -- not fully paid account balance                                                 $   264.0
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group:
      Amount of income payable                                                                   $     0.3
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
      Fully paid account balance                                                                 $     0.1
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
      Not fully paid account balance                                                             $    72.3
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Accident and health insurance -- premiums in-force:
    Ordinary                                                                                     $   166.0
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group                                                                                        $    77.7
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Deposit funds and dividend accumulations:
    Deposit funds account balance                                                                $16,507.3
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Dividend accumulations -- account balance                                                    $   114.4
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
</TABLE>
 
S-34
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
 
NOTE -- BASIS OF PRESENTATION
 
The accompanying schedule presents selected statutory-basis
financial data as of December 31, 1997 and for the year then
ended for purposes of complying with paragraph 9 of the Annual
Audited Financial Reports in the General Section of the National
Association of Insurance Commissioners' Annual Statement
Instructions and agrees to or is included in the amounts
reported in The Lincoln National Life Insurance Company's 1997
Statutory Annual Statement as filed with the Indiana Department
of Insurance.
 
                                                                            S-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
 
Board of Directors
The Lincoln National Life Insurance Company
 
Our audits were conducted for the purpose of forming an opinion
on the statutory-basis financial statements taken as a whole.
The accompanying supplemental schedule of selected statutory
basis financial data is presented to comply with the National
Association of Insurance Commissioners' Annual Statement
Instructions and is not a required part of the statutory-basis
financial statements. Such information has been subjected to the
auditing procedures applied in our audit of the statutory-basis
financial statements and, in our opinion, is fairly stated in
all material respects in relation to the statutory-basis
financial statements taken as a whole.
 
                                         /s/ Ernst & Young LLP
 
February 5, 1998
 
S-36

<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
BALANCE SHEETS -- STATUTORY BASIS
 
<TABLE>
<CAPTION>
                                                                                      DECEMBER 31
                                                                                      1997       1996
                                                                                      ---------  ---------
                                                                                      (IN MILLIONS)
                                                                                      --------------------
<S>                                                                                   <C>        <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds                                                                                 $18,560.7  $19,389.6
- ------------------------------------------------------------------------------------
Preferred stocks                                                                          257.3      239.7
- ------------------------------------------------------------------------------------
Unaffiliated common stocks                                                                436.0      358.3
- ------------------------------------------------------------------------------------
Affiliated common stocks                                                                  412.1      241.5
- ------------------------------------------------------------------------------------
Mortgage loans on real estate                                                           3,012.7    2,976.7
- ------------------------------------------------------------------------------------
Real estate                                                                               584.4      621.3
- ------------------------------------------------------------------------------------
Policy loans                                                                              660.5      626.5
- ------------------------------------------------------------------------------------
Other investments                                                                         335.5      282.7
- ------------------------------------------------------------------------------------
Cash and short-term investments                                                         2,133.0      759.2
- ------------------------------------------------------------------------------------  ---------  ---------
Total cash and investments                                                             26,392.2   25,495.5
- ------------------------------------------------------------------------------------
 
Premiums and fees in course of collection                                                  42.4       60.9
- ------------------------------------------------------------------------------------
Accrued investment income                                                                 343.5      343.6
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies                                                         44.1       25.8
- ------------------------------------------------------------------------------------
Other admitted assets                                                                     216.0      355.7
- ------------------------------------------------------------------------------------
Separate account assets                                                                31,330.9   23,735.1
- ------------------------------------------------------------------------------------  ---------  ---------
Total admitted assets                                                                 $58,369.1  $50,016.6
- ------------------------------------------------------------------------------------  ---------  ---------
                                                                                      ---------  ---------
 
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims                                                     $ 5,872.9  $ 5,954.0
- ------------------------------------------------------------------------------------
Other policyholder funds                                                               16,360.1   17,262.4
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee                               878.2      250.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties                                                     720.4      564.6
- ------------------------------------------------------------------------------------
Asset valuation reserve                                                                   450.0      375.5
- ------------------------------------------------------------------------------------
Interest maintenance reserve                                                              135.4       76.7
- ------------------------------------------------------------------------------------
Other liabilities                                                                         413.9      490.9
- ------------------------------------------------------------------------------------
Federal income taxes                                                                        0.8        4.3
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts                                                 (761.9)    (659.7)
- ------------------------------------------------------------------------------------
Separate account liabilities                                                           31,330.9   23,735.1
- ------------------------------------------------------------------------------------  ---------  ---------
Total liabilities                                                                      55,400.7   48,054.0
- ------------------------------------------------------------------------------------
 
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
  Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
  Corporation)                                                                             25.0       25.0
- ------------------------------------------------------------------------------------
Paid-in surplus                                                                         1,821.8      883.4
- ------------------------------------------------------------------------------------
Unassigned surplus                                                                      1,121.6    1,054.2
- ------------------------------------------------------------------------------------  ---------  ---------
Total capital and surplus                                                               2,968.4    1,962.6
- ------------------------------------------------------------------------------------  ---------  ---------
Total liabilities and capital and surplus                                             $58,369.1  $50,016.6
- ------------------------------------------------------------------------------------  ---------  ---------
                                                                                      ---------  ---------
</TABLE>
 
See accompanying notes.                                                      S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
STATEMENTS OF INCOME -- STATUTORY BASIS
 
<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31
                                                                               1997       1996       1995
                                                                               ---------  ---------  ---------
                                                                               (IN MILLIONS)
                                                                               -------------------------------
<S>                                                                            <C>        <C>        <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits                                                          $ 5,589.0  $ 7,268.5  $ 4,899.1
- -----------------------------------------------------------------------------
Net investment income                                                            1,847.1    1,756.3    1,772.2
- -----------------------------------------------------------------------------
Amortization of interest maintenance reserve                                        41.5       27.2       34.0
- -----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded                             99.7       90.9       98.3
- -----------------------------------------------------------------------------
Expense charges on deposit funds                                                   119.3      100.7       83.2
- -----------------------------------------------------------------------------
Other income                                                                        21.3       16.8       14.5
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Total revenues                                                                   7,717.9    9,260.4    6,901.3
- -----------------------------------------------------------------------------
 
BENEFITS AND EXPENSES:
Benefits and settlement expenses                                                 4,522.1    5,989.9    4,184.0
- -----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses                          2,728.4    2,878.5    2,345.7
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Total benefits and expenses                                                      7,250.5    8,868.4    6,529.7
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Gain from operations before dividends to policyholders, income taxes and net
realized gain on investments                                                       467.4      392.0      371.6
- -----------------------------------------------------------------------------
Dividends to policyholders                                                          27.5       27.3       27.3
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Gain from operations before federal income taxes and net realized gain on
investments                                                                        439.9      364.7      344.3
- -----------------------------------------------------------------------------
Federal income taxes                                                                78.3       83.6      103.7
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Gain from operations before net realized gain on investments                       361.6      281.1      240.6
- -----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding net
transfers to the interest maintenance reserve                                       31.3       53.3       43.9
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Net income                                                                     $   392.9  $   334.4  $   284.5
- -----------------------------------------------------------------------------  ---------  ---------  ---------
                                                                               ---------  ---------  ---------
</TABLE>
 
See accompanying notes.
 
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
 
<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31
                                                                               1997       1996       1995
                                                                               ---------  ---------  ---------
                                                                               (IN MILLIONS)
                                                                               -------------------------------
<S>                                                                            <C>        <C>        <C>
Capital and surplus at beginning of year                                       $ 1,962.6  $ 1,732.9  $ 1,679.6
- -----------------------------------------------------------------------------
Correction of prior years' asset valuation reserve (Note 15)                       (37.6)        --         --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets (Note 15)                               (57.0)        --         --
- -----------------------------------------------------------------------------  ---------  ---------  ---------
                                                                                 1,868.0    1,732.9    1,679.6
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income                                                                         392.9      334.4      284.5
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts                                 (36.2)      38.6      143.2
- -----------------------------------------------------------------------------
Nonadmitted assets                                                                  (0.4)      (3.0)       2.9
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance                                                (3.9)       0.6       (2.0)
- -----------------------------------------------------------------------------
Life policy reserve valuation basis                                                 (0.9)      (0.4)       2.9
- -----------------------------------------------------------------------------
Asset valuation reserve                                                            (36.9)    (105.5)    (112.5)
- -----------------------------------------------------------------------------
Mortgage loan, real estate and other investment reserves                              --         --        2.2
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997                                                                    938.4      100.0       15.1
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation                              (2.6)        --       27.0
- -----------------------------------------------------------------------------
Dividends to shareholder                                                          (150.0)    (135.0)    (310.0)
- -----------------------------------------------------------------------------  ---------  ---------  ---------
Capital and surplus at end of year                                             $ 2,968.4  $ 1,962.6  $ 1,732.9
- -----------------------------------------------------------------------------  ---------  ---------  ---------
                                                                               ---------  ---------  ---------
</TABLE>
 
See accompanying notes.                                                      S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
 
<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31
                                                                         1997        1996        1995
                                                                         ----------  ----------  ----------
                                                                         (IN MILLIONS)
                                                                         ----------------------------------
<S>                                                                      <C>         <C>         <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received              $  6,364.3  $  8,059.4  $  5,430.9
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded                 (649.2)     (767.5)     (383.6)
- -----------------------------------------------------------------------
Investment income received                                                  1,798.8     1,700.6     1,713.2
- -----------------------------------------------------------------------
Benefits paid                                                              (5,345.2)   (4,050.4)   (3,239.6)
- -----------------------------------------------------------------------
Insurance expenses paid                                                    (2,867.5)   (2,972.2)   (2,513.5)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid)                                         (87.0)      (72.3)       38.4
- -----------------------------------------------------------------------
Dividends to policyholders                                                    (28.4)      (27.7)      (16.5)
- -----------------------------------------------------------------------
Other income received and expenses paid, net                                  (42.7)        6.3        14.4
- -----------------------------------------------------------------------  ----------  ----------  ----------
Net cash provided by (used in) operating activities                          (856.9)    1,876.2     1,043.7
- -----------------------------------------------------------------------
 
INVESTING ACTIVITIES
Sale, maturity or repayment of investments                                 12,142.6    12,542.0    13,183.9
- -----------------------------------------------------------------------
Purchase of investments                                                   (10,345.0)  (14,175.4)  (14,049.6)
- -----------------------------------------------------------------------
Other sources (uses)                                                          563.1      (266.5)      (64.0)
- -----------------------------------------------------------------------  ----------  ----------  ----------
Net cash provided by (used in) investing activities                         2,360.7    (1,899.9)     (929.7)
- -----------------------------------------------------------------------
 
FINANCING ACTIVITIES
Surplus paid-in                                                                  --       100.0        15.1
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder                                     120.0       100.0        63.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder                                     (100.0)      (63.0)      (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder                                                (150.0)     (135.0)     (310.0)
- -----------------------------------------------------------------------  ----------  ----------  ----------
Net cash provided by (used in) financing activities                          (130.0)        2.0      (294.9)
- -----------------------------------------------------------------------  ----------  ----------  ----------
Net increase (decrease) in cash and short-term investments                  1,373.8       (21.7)     (180.9)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year                          759.2       780.9       961.8
- -----------------------------------------------------------------------  ----------  ----------  ----------
Cash and short-term investments at end of year                           $  2,133.0  $    759.2  $    780.9
- -----------------------------------------------------------------------  ----------  ----------  ----------
                                                                         ----------  ----------  ----------
</TABLE>
 
See accompanying notes.
 
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES
 
    ORGANIZATION AND OPERATIONS
    The Lincoln National Life Insurance Company ("Company") is a wholly owned
    subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
    Indiana. As of December 31, 1997, the Company owns 100% of the outstanding
    common stock of four insurance company subsidiaries: First Penn-Pacific Life
    Insurance Company ("First Penn"), Lincoln National Health & Casualty
    Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
    and Lincoln Life & Annuity Company of New York ("LLANY").
 
    The Company's principal businesses consist of underwriting annuities,
    deposit-type contracts and life and health insurance through multiple
    distribution channels and the reinsurance of individual and group life and
    health business. The Company is licensed and sells its products in 49
    states, Canada and several U.S. territories.
 
    USE OF ESTIMATES
    The nature of the insurance and investment management businesses requires
    management to make estimates and assumptions that affect the amounts
    reported in the statutory-basis financial statements and accompanying notes.
    Actual results could differ from those estimates.
 
    BASIS OF PRESENTATION
    The accompanying financial statements have been prepared in conformity with
    accounting practices prescribed or permitted by the Indiana Department of
    Insurance ("Department"), which practices differ from generally accepted
    accounting principles ("GAAP"). The more significant variances from GAAP are
    as follows:
 
    INVESTMENTS
    Bonds are reported at cost or amortized cost or fair value based on their
    National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
    the Company's bonds are classified as available-for-sale and, accordingly,
    are reported at fair value with changes in the fair values reported directly
    in shareholder's equity after adjustments for related amortization of
    deferred acquisition costs, additional policyholder commitments and deferred
    income taxes.
 
    Investments in real estate are reported net of related obligations rather
    than on a gross basis.
 
    Changes between cost and admitted asset investment amounts are credited or
    charged directly to unassigned surplus rather than to a separate surplus
    account.
 
    Under a formula prescribed by the NAIC, the Company defers the portion of
    realized capital gains and losses on sales of fixed income investments,
    principally bonds and mortgage loans, attributable to changes in the general
    level of interest rates and amortizes those deferrals over the remaining
    period to maturity of the individual security sold. The net deferral is
    reported as the Interest Maintenance Reserve ("IMR") in the accompanying
    balance sheets. Realized capital gains and losses are reported in income net
    of federal income tax and transfers to the IMR. The asset valuation reserve
    ("AVR") is determined by an NAIC prescribed formula and is reported as a
    liability rather than unassigned surplus. Under GAAP, realized capital gains
    and losses are reported in the income statement on a pre-tax basis in the
    period that the asset giving rise to the gain or loss is sold and valuation
    allowances are provided when there has been a decline in value deemed other
    than temporary, in which case, the provision for such declines are charged
    to income.
 
    SUBSIDIARIES
    The accounts and operations of the Company's subsidiaries are not
    consolidated with the accounts and operations of the Company as would be
    required by GAAP. Under statutory accounting principles, the Company's
    subsidiaries are carried at their statutory basis net equity and presented
    in the balance sheet as affiliated common stocks.
 
    POLICY ACQUISITION COSTS
    The costs of acquiring and renewing business are expensed when incurred.
    Under GAAP, acquisition costs related to traditional life insurance, to the
    extent recoverable from future policy revenues, are deferred and amortized
    over the premium-paying period of the related policies using assumptions
    consistent with those used in computing policy benefit reserves. For
    universal life insurance, annuity and other investment-type products,
    deferred
 
                                                                             S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES (CONTINUED)
    policy acquisition costs, to the extent recoverable from future gross
    profits, are amortized generally in proportion to the present value of
    expected gross profits from surrender charges and investment, mortality and
    expense margins.
 
    NONADMITTED ASSETS
    Certain assets designated as "nonadmitted," principally furniture and
    equipment and certain receivables, are excluded from the accompanying
    balance sheets and are charged directly to unassigned surplus.
 
    PREMIUMS
    Premiums and deposits with respect to universal life policies and annuity
    and other investment-type contracts are reported as premium revenues;
    whereas, under GAAP, such premiums and deposits are treated as liabilities
    and policy charges represent revenues.
 
    BENEFIT RESERVES
    Certain policy reserves are calculated based on statutorily required
    interest and mortality assumptions rather than on estimated expected
    experience or actual account balances as would be required under GAAP.
 
    Death benefits paid, policy and contract withdrawals, and the change in
    policy reserves on universal life policies, annuity and other
    investment-type contracts are reported as benefits and settlement expenses
    in the accompanying statements of income; whereas, under GAAP, withdrawals
    are treated as a reduction of the policy or contract liabilities and
    benefits would represent the excess of benefits paid over the policy account
    value and interest credited to the account values.
 
    REINSURANCE
    Premiums, claims and policy benefits and contract liabilities are reported
    in the accompanying financial statements net of reinsurance amounts. For
    GAAP, all assets and liabilities related to reinsurance ceded contracts are
    reported on a gross basis.
 
    A liability for reinsurance balances has been provided for unsecured policy
    and contract liabilities and unearned premiums ceded to reinsurers not
    authorized by the Department to assume such business. Changes to those
    amounts are credited or charged directly to unassigned surplus. Under GAAP,
    an allowance for amounts deemed uncollectible is established through a
    charge to income.
 
    Commissions on business ceded are reported as income when received rather
    than deferred and amortized with deferred policy acquisition costs.
 
    Certain reinsurance contracts meeting risk transfer requirements under
    statutory-basis accounting practices have been accounted for using
    traditional reinsurance accounting whereas such contracts would be accounted
    for using deposit accounting under GAAP.
 
    INCOME TAXES
    Deferred income taxes are not provided for differences between financial
    statement amounts and tax bases of assets and liabilities.
 
    POLICYHOLDER DIVIDENDS
    Policyholder dividends are recognized when declared rather than over the
    term of the related policies.
 
    STATEMENTS OF CASH FLOWS
    Cash and short-term investments in the statements of cash flows represent
    cash balances and investments with initial maturities of one year or less.
    Under GAAP, the corresponding captions of cash and cash equivalents include
    cash balances and investments with initial maturities of three months or
    less.
 
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES (CONTINUED)
    A reconciliation of the Company's net income and capital and surplus
    determined on a statutory accounting basis with amounts determined in
    accordance with GAAP is as follows:
 
<TABLE>
<CAPTION>
                                               CAPITAL AND SURPLUS   NET INCOME
                                               -----------------------------------------------------
 
                                               DECEMBER 31           YEAR ENDED DECEMBER 31
                                               1997       1996       1997       1996       1995
                                               -----------------------------------------------------
                                               (IN MILLIONS)
                                               -----------------------------------------------------
<S>                                            <C>        <C>        <C>        <C>        <C>
Amounts reported on a statutory basis          $ 2,968.4  $ 1,962.6  $   392.9  $   334.4  $   284.5
- ---------------------------------------------
GAAP adjustments:
  Deferred policy acquisition costs and
    present value of future profits                958.3    1,119.1      (98.9)      66.7      (63.0)
   ------------------------------------------
  Policy and contract reserves                  (1,672.9)  (1,405.3)     (48.6)     (57.1)     (55.3)
   ------------------------------------------
  Interest maintenance reserve                     135.4       76.7       58.7      (39.7)      60.9
   ------------------------------------------
  Deferred income taxes                            (13.0)     (27.4)      70.3        1.8       38.3
   ------------------------------------------
  Policyholders' share of earnings and
    surplus on participating business              (79.8)     (81.9)       5.3        (.3)        .2
   ------------------------------------------
  Asset valuation reserve                          450.0      375.5         --         --         --
   ------------------------------------------
  Net realized gain (loss) on investments          (91.5)     (72.0)     (20.4)      78.7       30.0
   ------------------------------------------
  Unrealized gain on investments                 1,245.5      825.2         --         --         --
   ------------------------------------------
  Nonadmitted assets, including nonadmitted
    investments                                     61.0       (7.1)        --         --         --
   ------------------------------------------
  Investments in subsidiary companies              188.8      156.6      (80.5)      29.9       34.3
   ------------------------------------------
  Other, net                                      (162.5)     (99.0)     (35.0)     (82.6)      (7.3)
   ------------------------------------------  ---------  ---------  ---------  ---------  ---------
Net increase (decrease)                          1,019.3      860.4     (149.1)      (2.6)      38.1
- ---------------------------------------------  ---------  ---------  ---------  ---------  ---------
Amounts on a GAAP basis                        $ 3,987.7  $ 2,823.0  $   243.8  $   331.8  $   322.6
- ---------------------------------------------  ---------  ---------  ---------  ---------  ---------
                                               ---------  ---------  ---------  ---------  ---------
</TABLE>
 
                                                                             S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES (CONTINUED)
    Other significant accounting practices are as follows:
 
    INVESTMENTS
    The discount or premium on bonds is amortized using the interest method. For
    mortgage-backed bonds, the Company recognizes income using a constant
    effective yield based on anticipated prepayments and the estimated economic
    life of the securities. When actual prepayments differ significantly from
    anticipated prepayments, the effective yield is recalculated to reflect
    actual payments to date and anticipated future payments. The net investment
    in the securities is adjusted to the amount that would have existed had the
    new effective yield been applied since the acquisition of the securities.
 
    Short-term investments include investments with maturities of less than one
    year at the date of acquisition. The carrying amounts for these investments
    approximate their fair values.
 
    Preferred stocks are reported at cost or amortized cost.
 
    Unaffiliated common stocks are reported at fair value as determined by the
    Securities Valuation Office of the NAIC and the related unrealized gains
    (losses) are reported in unassigned surplus without adjustment for federal
    income taxes.
 
    Policy loans are reported at unpaid balances.
 
    The Company uses various derivative instruments as part of its overall
    liability-asset management program for certain investments and life
    insurance and annuity products. The Company values all derivative
    instruments on a basis consistent with that of the hedged item. Upon
    termination, gains and losses on those instruments are included in the
    carrying values of the underlying hedged items and are amortized over the
    remaining lives of the hedged items as adjustments to investment income or
    benefits from the hedged items through the IMR. Any unamortized gains or
    losses are recognized when the underlying hedged items are sold. The
    premiums paid for interest rate caps and swaptions are deferred and
    amoritized to net investment income on a straight-line basis over the term
    of the respective derivative.
 
    Hedge accounting is applied as indicated above after the Company determines
    that the items to be hedged expose the Company to interest rate
    fluctuations, the widening of bond yield spreads over comparable maturity
    U.S. Government obligations, increased liabilities associated with certain
    reinsurance agreements and foreign exchange risk. Moreover, the derivatives
    used are designated as a hedge and reduce the indicated risk by having a
    high correlation between changes in the value of the derivatives and the
    items being hedged at both the inception of the hedge and throughout the
    hedge period. Should such criteria not be met or if the hedged items have
    been sold, terminated or matured, the change in value of the derivatives is
    included in net income.
 
    Mortgage loans on real estate are reported at unpaid balances, less
    allowances for impairments. Real estate is reported at depreciated cost.
 
    Realized investment gains and losses on investments sold are determined
    using the specific identification method. Changes in admitted asset carrying
    amounts of bonds, mortgage loans and common and preferred stocks are
    credited or charged directly in unassigned surplus.
 
    LOANED SECURITIES
    Securities loaned are treated as collateralized financing transactions and a
    liability is recorded equal to the amount to be paid to reacquire the
    security. It is the Company's policy to take possession of securities with a
    market value at least equal to the value of the securities loaned.
    Securities loaned are recorded at amortized cost as long as the value of the
    related collateral is sufficient. The Company's agreements with third
    parties generally contain contractual provisions to allow for additional
    collateral to be obtained when necessary. The Company values collateral
    daily and obtains additional collateral when deemed appropriate.
 
    GOODWILL
    Goodwill, which represents the excess of the ceding commission over
    statutory-basis net assets of business purchased under an assumption
    reinsurance agreement, is amortized on a straight-line basis over ten years.
 
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES (CONTINUED)
    PREMIUMS
    Life insurance and annuity premiums are recognized as revenue when due.
    Accident and health premiums are earned pro rata over the contract term of
    the policies.
 
    BENEFITS
    Life, annuity and accident and health benefit reserves are developed by
    actuarial methods and are determined based on published tables using
    statutorily specified interest rates and valuation methods that will
    provide, in the aggregate, reserves that are greater than or equal to the
    minimum or guaranteed policy cash values or the amounts required by the
    Department. The Company waives deduction of deferred fractional premiums on
    the death of life and annuity policy insureds and returns any premium beyond
    the date of death, except for policies issued prior to March 1977. Surrender
    values on policies do not exceed the corresponding benefit reserves.
    Additional reserves are established when the results of cash flow testing
    under various interest rate scenerios indicate the need for such reserves.
    If net premiums exceed the gross premiums on any insurance in-force,
    additional reserves are established. Benefit reserves for policies
    underwritten on a substandard basis are determined using the multiple table
    reserve method.
 
    The tabular interest, tabular less actual reserve released and the tabular
    cost have been determined by formula or from the basic data for such items.
    Tabular interest funds not involving life contingencies were determined
    using the actual interest credited to the funds plus the change in accrued
    interest.
 
    Liabilities related to guaranteed investment contracts and policyholder
    funds left on deposit with the Company generally are equal to fund balances
    less applicable surrender charges.
 
    CLAIMS AND CLAIM ADJUSTMENT EXPENSES
    Unpaid claims and claim adjustment expenses on accident and health policies
    represent the estimated ultimate net cost of all reported and unreported
    claims incurred during the year. The Company does not discount claims and
    claim adjustment expense reserves. The reserves for unpaid claims and claim
    adjustment expenses are estimated using individual case-basis valuations and
    statistical analyses. Those estimates are subject to the effects of trends
    in claim severity and frequency. Although considerable variability is
    inherent in such estimates, management believes that the reserves for claims
    and claim adjustment expenses are adequate. The estimates are continually
    reviewed and adjusted as necessary as experience develops or new information
    becomes known; such adjustments are included in current operations.
 
    REINSURANCE CEDED AND ASSUMED
    Reinsurance premiums and claims and claim adjustment expenses are accounted
    for on bases consistent with those used in accounting for the original
    policies issued and the terms of the reinsurance contracts. Certain business
    is transacted on a funds withheld basis and investment income on funds
    withheld are reported in net investment income.
 
    PENSION BENEFITS
    Costs associated with the Company's defined benefit pension plans is
    systematically accrued during the expected period of active service of the
    covered employees.
 
    INCOME TAXES
    The Company and eligible subsidiaries have elected to file consolidated
    federal and state income tax returns with LNC. Pursuant to an intercompany
    tax sharing agreement with LNC, the Company provides for income taxes on a
    separate return filing basis. The tax sharing agreement also provides that
    the Company will receive benefit for net operating losses, capital losses
    and tax credits which are not usable on a separate return basis to the
    extent such items may be utilized in the consolidated income tax returns of
    LNC.
 
    STOCK OPTIONS
    The Company recognizes compensation expense for its stock option incentive
    plans using the intrinsic value method of accounting. Under the terms of the
    intrinsic value method, compensation cost is the excess, if any, of the
    quoted market price of LNC's common stock at the grant date, or other
 
                                                                             S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES (CONTINUED)
    measurement date, over the amount an employee must pay to acquire the stock.
 
    ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
    ACCOUNTS
    These assets and liabilities represent segregated funds administered and
    invested by the Company for the exclusive benefit of pension and variable
    life and annuity contractholders. The fees received by the Company for
    administrative and contractholder maintenance services performed for these
    separate accounts are included in the Company's statements of income.
 
2.  PERMITTED STATUTORY ACCOUNTING PRACTICES
    The Company's statutory-basis financial statements are prepared in
    accordance with accounting practices prescribed or permitted by the
    Department. "Prescribed" statutory accounting practices include state laws,
    regulations and general administrative rules, as well as a variety of
    publications of the NAIC. "Permitted" statutory accounting practices
    encompass all accounting practices that are not prescribed; such practices
    may differ from state to state, may differ from company to company within a
    state and may change in the future. The NAIC currently is in the process of
    recodifying statutory accounting practices ("Codification"). Codification
    will likely change, to some extent, prescribed statutory accounting
    practices and may result in changes to the accounting practices that the
    Company uses to prepare its statutory-basis financial statements.
    Codification, which is expected to be approved by the NAIC in 1998, will
    require adoption by the various states before it becomes the prescribed
    statutory-basis of accounting for insurance companies domesticated within
    those states. Accordingly, before Codification becomes effective for the
    Company, the state of Indiana must adopt Codification as the prescribed
    basis of accounting on which domestic insurers must report their
    statutory-basis results to the Department. At this time, it is unclear
    whether Indiana will adopt Codification. However, based on the current draft
    guidance, management believes that the impact of Codification will not be
    material to the Company's statutory-basis financial statements.
 
    The Company has received written approval from the Department to record
    surrender charges applicable to separate account liabilities for variable
    life and annuity products as a liability in the separate account financial
    statements payable to the Company's general account. In the accompanying
    financial statements, a corresponding receivable is recorded with the
    related income impact recorded in the accompanying statement of operations
    as a change in reserves or change in premium and other deposit funds.
 
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
3.  INVESTMENTS
    The major categories of net investment income are as
    follows:
 
<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                                     1997       1996       1995
                                                                     -------------------------------
                                                                     (IN MILLIONS)
                                                                     -------------------------------
<S>                                                                  <C>        <C>        <C>
Income:
  Bonds                                                              $ 1,524.4  $ 1,442.2  $ 1,457.4
   ----------------------------------------------------------------
  Preferred stocks                                                        23.5        9.6        6.4
   ----------------------------------------------------------------
  Unaffiliated common stocks                                               8.3        6.5        5.2
   ----------------------------------------------------------------
  Affiliated common stocks                                                15.0        9.5       12.6
   ----------------------------------------------------------------
  Mortgage loans on real estate                                          257.2      269.3      252.0
   ----------------------------------------------------------------
  Real estate                                                             92.2      114.4      110.0
   ----------------------------------------------------------------
  Policy loans                                                            37.5       35.0       32.1
   ----------------------------------------------------------------
  Other investments                                                       28.2       22.4       62.6
   ----------------------------------------------------------------
  Cash and short-term investments                                         70.3       48.9       53.2
   ----------------------------------------------------------------  ---------  ---------  ---------
Total investment income                                                2,056.6    1,957.8    1,991.5
- -------------------------------------------------------------------
Expenses:
  Depreciation                                                            21.0       25.0       25.9
   ----------------------------------------------------------------
  Other                                                                  188.5      176.5      193.4
   ----------------------------------------------------------------  ---------  ---------  ---------
Total investment expenses                                                209.5      201.5      219.3
- -------------------------------------------------------------------  ---------  ---------  ---------
Net investment income                                                $ 1,847.1  $ 1,756.3  $ 1,772.2
- -------------------------------------------------------------------  ---------  ---------  ---------
                                                                     ---------  ---------  ---------
</TABLE>
 
    Nonadmitted accrued investment income at December 31, 1997
    and 1996 amounted to $2,600,000 and $2,500,000,
    respectively, consisting principally of interest on bonds in
    default and mortgage loans.
 
                                                                            S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
3.  INVESTMENTS (CONTINUED)
    The cost or amortized cost, gross unrealized gains and
    losses and the fair value of investments in bonds are
    summarized as follows:
 
<TABLE>
<CAPTION>
                                                     COST OR    GROSS        GROSS
                                                     AMORTIZED  UNREALIZED   UNREALIZED   FAIR
                                                     COST       GAINS        LOSSES       VALUE
                                                     ----------------------------------------------
                                                     (IN MILLIONS)
                                                     ----------------------------------------------
<S>                                                  <C>        <C>          <C>          <C>
At December 31, 1997:
  Corporate                                          $13,003.8   $   942.2    $    60.1   $13,885.9
   ------------------------------------------------
  U.S. government                                        436.3        67.9           --       504.2
   ------------------------------------------------
  Foreign government                                   1,202.1       104.9          5.4     1,301.6
   ------------------------------------------------
  Mortgage-backed                                      3,874.3       215.2         27.1     4,062.4
   ------------------------------------------------
  State and municipal                                     44.2          .3           --        44.5
   ------------------------------------------------  ---------  -----------  -----------  ---------
                                                     $18,560.7   $ 1,330.5    $    92.6   $19,798.6
                                                     ---------  -----------  -----------  ---------
                                                     ---------  -----------  -----------  ---------
 
At December 31, 1996:
  Corporate                                          $12,548.1   $   586.5    $    66.6   $13,068.0
   ------------------------------------------------
  U.S. government                                      1,088.7        43.2         18.0     1,113.9
   ------------------------------------------------
  Foreign government                                   1,234.0       105.1          1.4     1,337.7
   ------------------------------------------------
  Mortgage-backed                                      4,478.4       183.3         27.4     4,634.3
   ------------------------------------------------
  State and municipal                                     40.4          .1           --        40.5
   ------------------------------------------------  ---------  -----------  -----------  ---------
                                                     $19,389.6   $   918.2    $   113.4   $20,194.4
                                                     ---------  -----------  -----------  ---------
                                                     ---------  -----------  -----------  ---------
</TABLE>
 
    The carrying amount of bonds in the balance sheets at
    December 31, 1997 and 1996 reflects NAIC adjustments of
    $5,500,000 and $2,700,000, respectively, to decrease
    amortized cost.
 
    Fair values for bonds are based on quoted market prices,
    where available. For bonds not actively traded, fair values
    are estimated using values obtained from independent pricing
    services or, in the case of private placements, are
    estimated by discounting expected future cash flows using a
    current market rate applicable to the coupon rate, credit
    quality and maturity of the investments.
 
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
3.  INVESTMENTS (CONTINUED)
    A summary of the cost or amortized cost and fair value of
    investments in bonds at December 31, 1997, by contractual
    maturity, is as follows:
 
<TABLE>
<CAPTION>
                                                                               COST OR
                                                                               AMORTIZED  FAIR
                                                                               COST       VALUE
                                                                               --------------------
                                                                               (IN MILLIONS)
                                                                               --------------------
<S>                                                                            <C>        <C>
Maturity:
  In 1998                                                                      $   490.1  $   494.9
   --------------------------------------------------------------------------
  In 1999-2002                                                                   3,088.7    3,185.4
   --------------------------------------------------------------------------
  In 2003-2007                                                                   4,762.7    4,971.0
   --------------------------------------------------------------------------
  After 2007                                                                     6,344.9    7,084.9
   --------------------------------------------------------------------------
  Mortgage-backed securities                                                     3,874.3    4,062.4
   --------------------------------------------------------------------------  ---------  ---------
Total                                                                          $18,560.7  $19,798.6
- -----------------------------------------------------------------------------  ---------  ---------
                                                                               ---------  ---------
</TABLE>
 
    The expected maturities may differ from the contractual
    maturities in the foregoing table because certain borrowers
    may have the right to call or prepay obligations with or
    without call or prepayment penalties.
 
    At December 31, 1997, the Company did not have a material
    concentration of financial instruments in a single investee,
    industry or geographic location.
 
    Proceeds from sales of investments in bonds during 1997,
    1996 and 1995 were $9,715,000,000, $10,996,900,000 and
    $12,234,100,000, respectively. Gross gains during 1997, 1996
    and 1995 of $218,100,000, $169,700,000 and $225,600,000,
    respectively, and gross losses of $78,000,000, $177,000,000
    and $83,100,000, respectively, were realized on those sales.
 
    At December 31, 1997 and 1996, investments in bonds, with an
    admitted asset value of $76,200,000 and $70,700,000,
    respectively, were on deposit with state insurance
    departments to satisfy regulatory requirements.
 
    The cost or amortized cost, gross unrealized gains and
    losses and the fair value of investments in unaffiliated
    common stocks and preferred stocks are as follows:
 
<TABLE>
<CAPTION>
                                          COST OR     GROSS        GROSS
                                          AMORTIZED   UNREALIZED   UNREALIZED   FAIR
                                          COST        GAINS        LOSSES       VALUE
                                          --------------------------------------------
                                          (IN MILLIONS)
                                          --------------------------------------------
<S>                                       <C>         <C>          <C>          <C>
At December 31, 1997:
  Preferred stocks                         $257.3       $12.1        $  .7      $268.7
- ----------------------------------------
  Unaffiliated common stocks                357.0        98.5         19.5       436.0
- ----------------------------------------
At December 31, 1996:
  Preferred stocks                         $239.7       $10.5        $ 1.7      $248.5
- ----------------------------------------
  Unaffiliated common stocks                289.9        84.6         16.2       358.3
- ----------------------------------------
</TABLE>
 
    The carrying amount of preferred stocks in the balance
    sheets at December 31, 1997 and 1996 reflects NAIC
    adjustments of $4,000,000 and $700,000, respectively, to
    decrease amortized cost.
 
                                                                            S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
3.  INVESTMENTS (CONTINUED)
    During 1997, the minimum and maximum lending rates for
    mortgage loans were 7.09% and 9.25%, respectively. At the
    issuance of a loan, the percentage of loan to value on any
    one loan does not exceed 75%. At December 31, 1997, the
    Company did not hold any mortgages with interest overdue
    beyond one year. All properties covered by mortgage loans
    have fire insurance at least equal to the excess of the loan
    over the maximum loan that would be allowed on the land
    without the building.
 
    Realized capital gains are reported net of federal income
    taxes and amounts transferred to the IMR as follows:
 
<TABLE>
<CAPTION>
                                                                          1997       1996       1995
                                                                          -------------------------------
                                                                          (IN MILLIONS)
                                                                          -------------------------------
<S>                                                                       <C>        <C>        <C>
Realized capital gains                                                    $   209.3  $    69.3  $   186.8
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $54.0,
$(6.7) and $51.1 in 1997, 1996 and 1995, respectively)                        100.2      (12.4)      94.8
- ------------------------------------------------------------------------  ---------  ---------  ---------
                                                                              109.1       81.7       92.0
Less federal income taxes on realized gains                                    77.8       28.4       48.1
- ------------------------------------------------------------------------  ---------  ---------  ---------
Net realized capital gains                                                $    31.3  $    53.3  $    43.9
- ------------------------------------------------------------------------  ---------  ---------  ---------
                                                                          ---------  ---------  ---------
</TABLE>
 
4.  SUBSIDIARIES
    Statutory-basis financial information related to the
    Company's four wholly-owned subsidiaries is summarized as
    follows (in millions):
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1997
                                                             --------------------------------------------
                                                             FIRST
                                                             PENN       LNH&C        LNRAC      LLANY
                                                             --------------------------------------------
<S>                                                          <C>        <C>          <C>        <C>
Cash and invested assets                                     $ 1,154.4   $   284.8   $   399.0  $   796.3
- -----------------------------------------------------------
Other assets                                                      36.9        77.3       481.6      130.8
- -----------------------------------------------------------  ---------  -----------  ---------  ---------
Total admitted assets                                        $ 1,191.3   $   362.1   $   880.6  $   972.1
- -----------------------------------------------------------  ---------  -----------  ---------  ---------
                                                             ---------  -----------  ---------  ---------
 
Insurance reserves                                           $ 1,072.2   $   266.7   $   279.3  $   588.7
- -----------------------------------------------------------
Other liabilities                                                 48.4        21.7       546.4        5.8
- -----------------------------------------------------------
Liabilities related to separate accounts                            --          --          --      164.7
- -----------------------------------------------------------
Capital and surplus                                               70.7        73.7        54.9      212.9
- -----------------------------------------------------------  ---------  -----------  ---------  ---------
Total liabilities and capital and surplus                    $ 1,191.3   $   362.1   $   880.6  $   972.1
- -----------------------------------------------------------  ---------  -----------  ---------  ---------
                                                             ---------  -----------  ---------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31, 1997
                                                              ------------------------------------------
                                                              FIRST
                                                              PENN       LNH&C      LNRAC      LLANY
                                                              ------------------------------------------
<S>                                                           <C>        <C>        <C>        <C>
Revenues                                                      $   267.6  $   135.4  $   125.3  $   230.0
- ------------------------------------------------------------
Expenses                                                          262.6      244.2      114.6      224.4
- ------------------------------------------------------------
Net realized gains (losses)                                          .1         .6        (.1)       (.1)
- ------------------------------------------------------------  ---------  ---------  ---------  ---------
Net income                                                    $     5.1  $  (108.2) $    10.6  $     5.5
- ------------------------------------------------------------  ---------  ---------  ---------  ---------
                                                              ---------  ---------  ---------  ---------
</TABLE>
 
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
4.  SUBSIDIARIES (CONTINUED)
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1996
                                                             ------------------------------------------------
                                                             FIRST
                                                             PENN       LNH&C        LNRAC        LLANY
                                                             ------------------------------------------------
<S>                                                          <C>        <C>          <C>          <C>
Cash and invested assets                                     $ 1,090.7   $   146.4    $   406.7    $   664.3
- -----------------------------------------------------------
Other assets                                                      31.8        17.7        503.1          9.1
- -----------------------------------------------------------  ---------  -----------  -----------  -----------
Total admitted assets                                        $ 1,122.5   $   164.1    $   909.8    $   673.4
- -----------------------------------------------------------  ---------  -----------  -----------  -----------
                                                             ---------  -----------  -----------  -----------
 
Insurance reserves                                           $ 1,013.5   $    72.7    $   261.8    $   601.1
- -----------------------------------------------------------
Other liabilities                                                 41.3        18.7        597.2         22.1
- -----------------------------------------------------------
Capital and surplus                                               67.7        72.7         50.8         50.2
- -----------------------------------------------------------  ---------  -----------  -----------  -----------
Total liabilities and capital and surplus                    $ 1,122.5   $   164.1    $   909.8    $   673.4
- -----------------------------------------------------------  ---------  -----------  -----------  -----------
                                                             ---------  -----------  -----------  -----------
</TABLE>
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1996
                                                               ------------------------------------------------
                                                               FIRST
                                                               PENN       LNH&C        LNRAC        LLANY
                                                               ------------------------------------------------
<S>                                                            <C>        <C>          <C>          <C>
Revenues                                                       $   246.5   $   104.9    $   120.8    $   642.7
- -------------------------------------------------------------
Expenses                                                           247.1        97.1        114.1        661.3
- -------------------------------------------------------------
Net realized gains (losses)                                          (.6)         --           --           --
- -------------------------------------------------------------  ---------  -----------  -----------  -----------
Net income (loss)                                              $    (1.2)  $     7.8    $     6.7    $   (18.6)
- -------------------------------------------------------------  ---------  -----------  -----------  -----------
                                                               ---------  -----------  -----------  -----------
</TABLE>
 
    The carrying value of affiliated common stocks, representing
    their statutory-basis net equity, was $412,100,000 and
    $241,500,000 at December 31, 1997 and 1996, respectively.
    The cost basis of investments in subsidiaries as of December
    31, 1997 and 1996 was $466,200,000 and $194,000,000,
    respectively.
 
    During 1997 and 1996, the Company's insurance subsidiaries
    paid dividends of $15,000,000 and $10,500,000, respectively.
 
5.  FEDERAL INCOME TAXES
    The effective federal income tax rate for financial
    reporting purposes differs from the prevailing statutory tax
    rate principally due to tax-exempt investment income,
    dividends-received tax deductions, differences in policy
    acquisition costs and policy and contract liabilities for
    tax return and financial statement purposes.
 
    Federal income taxes incurred of $78,300,000, $83,600,000
    and $103,700,000 in 1997, 1996 and 1995, respectively, would
    be subject to recovery in the event that the Company incurs
    net operating losses within three years of the years for
    which such taxes were paid.
 
    Prior to 1984, a portion of the Company's current income was
    not subject to current income tax, but was accumulated for
    income tax purposes in a memorandum account designated as
    "policyholders' surplus." The Company's balance in the
    "policyholders' surplus" account at December 31, 1983 of
    $187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
    accordingly, there have been no additions to the accounts
    after that date. That portion of current income on which
    income taxes have been paid will continue to be accumulated
    in a memorandum account designated as "shareholder's
    surplus," and is available for dividends to the shareholder
    without additional payment of tax by the Company. The
    December 31, 1997 memorandum account balance for
    "shareholder's surplus"
 
                                                                            S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
5.  FEDERAL INCOME TAXES (CONTINUED)
    was $1,905,000,000. Should dividends to the shareholder
    exceed its respective "shareholder's surplus," amounts would
    need to be transferred from the "policyholders' surplus" and
    would be subject to federal income tax at that time. Under
    existing or foreseeable circumstances, the Company neither
    expects nor intends that distributions will be made that
    will result in any such tax.
 
6.  SUPPLEMENTAL FINANCIAL DATA
    The balance sheet caption, "Other Admitted Assets", includes
    amounts recoverable from other insurers for claims paid by
    the Company, and the balance sheet caption, "Future Policy
    Benefits and Claims," has been reduced for insurance ceded
    as follows:
 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31
                                                                                 1997       1996
                                                                                 --------------------
                                                                                 (IN MILLIONS)
                                                                                 --------------------
<S>                                                                              <C>        <C>
Insurance ceded                                                                  $ 1,431.0  $ 1,154.5
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers                                               35.9       16.0
- -------------------------------------------------------------------------------
</TABLE>
 
    Reinsurance transactions included in the income statement
    caption, "Premiums and Deposits," are as follows:
 
<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31
                                                                          1997       1996       1995
                                                                          -------------------------------
                                                                          (IN MILLIONS)
                                                                          -------------------------------
<S>                                                                       <C>        <C>        <C>
Insurance assumed                                                         $   727.2  $   241.3  $   667.7
- ------------------------------------------------------------------------
Insurance ceded                                                               302.9      193.3      453.1
- ------------------------------------------------------------------------  ---------  ---------  ---------
Net amount included in premiums                                           $   424.3  $    48.0  $   214.6
- ------------------------------------------------------------------------  ---------  ---------  ---------
                                                                          ---------  ---------  ---------
</TABLE>
 
    The income statement caption, "Benefits and Settlement
    Expenses," is net of reinsurance recoveries of
    $1,240,500,000, $787,900,000 and $1,407,000,000 for 1997,
    1996 and 1995, respectively.
 
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
6.  SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
    Deferred and uncollected life insurance premiums and annuity
    considerations included in the balance sheet caption,
    "Premiums and Fees in Course of Collection," are as follows:
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31, 1997
                                                                          -----------------------------------
                                                                                                  NET OF
                                                                          GROSS      LOADING      LOADING
                                                                          -----------------------------------
                                                                          (IN MILLIONS)
                                                                          -----------------------------------
<S>                                                                       <C>        <C>          <C>
Ordinary new business                                                     $     3.2   $     2.4    $      .8
- ------------------------------------------------------------------------
Ordinary renewal                                                               17.8         3.2         14.6
- ------------------------------------------------------------------------
Group life                                                                     10.6          .2         10.4
- ------------------------------------------------------------------------  ---------         ---        -----
                                                                          $    31.6   $     5.8    $    25.8
                                                                          ---------         ---        -----
                                                                          ---------         ---        -----
</TABLE>
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31, 1996
                                                                          -----------------------------------
                                                                                                  NET OF
                                                                          GROSS      LOADING      LOADING
                                                                          -----------------------------------
                                                                          (IN MILLIONS)
                                                                          -----------------------------------
<S>                                                                       <C>        <C>          <C>
Ordinary new business                                                     $     3.9   $     1.9    $     2.0
- ------------------------------------------------------------------------
Ordinary renewal                                                               35.1         3.0         32.1
- ------------------------------------------------------------------------
Group life                                                                      9.4         (.1)         9.5
- ------------------------------------------------------------------------  ---------         ---        -----
                                                                          $    48.4   $     4.8    $    43.6
                                                                          ---------         ---        -----
                                                                          ---------         ---        -----
</TABLE>
 
    The Company has entered into non-exclusive managing general
    agent agreements with International Benefit Services Corp.,
    HRM Claim Management, Inc. and Pediatrics Insurance
    Consultants, Inc. to write group life and health business.
    Direct premiums written related to the agreements amounted
    to $2,000,000, $2,600,000 and $8,800,000 in 1997 and
    $26,200,000, $3,800,000 and $8,600,000 in 1996,
    respectively. During 1996, LNC Administrative Services
    Corporation entered into a similar agreement with the
    Company with direct premiums written amounting to $7,200,000
    and 6,200,000 in 1997 and 1996, respectively. Authority
    granted by the managing general agents agreements include
    underwriting, claims adjustment and claims payment services.
 
7.  ANNUITY RESERVES
    At December 31, 1997, the Company's annuity reserves and
    deposit fund liabilities, including separate accounts, that
    are subject to discretionary withdrawal with adjustment,
 
                                                                            S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
7.  ANNUITY RESERVES (CONTINUED)
    subject to discretionary withdrawal without adjustment and
    not subject to discretionary withdrawal provisions are
    summarized as follows:
 
<TABLE>
<CAPTION>
                                                                                  AMOUNT     PERCENT
                                                                                  ----------------------
                                                                                  (IN MILLIONS)
                                                                                  ----------------------
<S>                                                                               <C>        <C>
Subject to discretionary withdrawal with adjustment:
  With market value adjustment                                                    $ 2,426.3           5%
   -----------------------------------------------------------------------------
  At book value, less surrender charge                                              4,225.8           8
   -----------------------------------------------------------------------------
  At market value                                                                  30,064.7          59
   -----------------------------------------------------------------------------  ---------         ---
                                                                                   36,716.8          72
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment                                                 11,657.7          23
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal                                             2,531.1           5
- --------------------------------------------------------------------------------  ---------         ---
Total annuity reserves and deposit fund liabilities -- before reinsurance          50,905.6         100%
- --------------------------------------------------------------------------------                    ---
                                                                                                    ---
Less reinsurance                                                                    1,797.5
- --------------------------------------------------------------------------------  ---------
Net annuity reserves and deposit fund liabilities, including separate accounts    $49,108.1
- --------------------------------------------------------------------------------  ---------
                                                                                  ---------
</TABLE>
 
8.  CAPITAL AND SURPLUS
    Life insurance companies are subject to certain Risk-Based Capital ("RBC")
    requirements as specified by the NAIC. Under those requirements, the amount
    of capital and surplus maintained by a life insurance company is to be
    determined based on the various risk factors related to it. At December 31,
    1997, the Company exceeds the RBC requirements.
 
    The payment of dividends by the Company is limited and cannot be made except
    from earned profits. The maximum amount of dividends that may be paid by
    life insurance companies without prior approval of the Indiana Insurance
    Commissioner is subject to restrictions relating to statutory surplus and
    net gain from operations. In 1998, the Company can pay dividends of
    $361,600,000 without prior approval of the Indiana Insurance Commissioner.
 
9.  EMPLOYEE BENEFIT PLANS
    LNC maintains defined benefit pension plans for its employees (including
    Company employees) and a defined contribution plan for the Company's agents.
    LNC also maintains 401(k) plans, deferred compensation plans and
    postretirement medical and life insurance plans for its employees and agents
    (including the Company's employees and agents). The aggregate expenses and
    accumulated obligations for the Company's portion of these plans are not
    material to the Company's statutory-basis financial statements of income or
    financial position for any of the periods shown.
 
    LNC has various incentive plans for key employees, agents and directors of
    LNC and its subsidiaries that provide for the issuance of stock options,
    stock appreciation rights, restricted stock awards and stock incentive
    awards. These plans are comprised primarily of stock option incentive plans.
    Stock options granted under the stock option incentive plans are at the
    market value at the date of grants and, subject to termination of
    employment, expire ten years from the date of grant. Such options are
    transferable only upon death and are exercisable one year from the date of
    grant for options issued prior to 1992. Option issued subsequent to 1991 are
    exercisable in 25% increments on the option issuance anniversary in the four
    years following issuance.
 
    As of December 31, 1997, 716,211 shares of LNC common stock were subject to
    options granted to Company employees and agents under the stock option
    incentive plans of which 370,239 were exercisable on that date. The exercise
    prices of the outstanding options range from $23.50 to $75.66. During 1997,
    1996 and 1995, 170,789, 72,405 and
 
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
9.  EMPLOYEE BENEFIT PLANS (CONTINUED)
    117,806 options were exercised, respectively, and 1,846, 10,950 and 11,473
    options were forfeited, respectively.
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
    DISABILITY INCOME CLAIMS
    The liability for disability income claims net of the related asset for
    amounts recoverable from reinsurers at December 31, 1997 and 1996 is a net
    liability of $516,900,000 and $572,000,000, respectively. This liability is
    based on the assumption that the recent experience will continue in the
    future. If incidence levels or claim termination rates fluctuate
    significantly from the assumptions underlying reserves, adjustments to
    reserves may be required in the future. Accordingly, this liability may
    prove to be deficient or excessive. However, it is management's opinion that
    such future development will not materially affect the financial position of
    the Company. The Company reviews reserve levels on an ongoing basis.
 
    During 1995, the Company completed an in-depth review of the experience of
    its disability income business. As a result of this study, and based on the
    assumption that recent experience will continue in the future, net income
    decreased by $15,200,000 as a result of strengthening the disability income
    reserve.
 
    Because of continuing adverse experience and worsening projections of future
    experience, the Company conducted an additional in-depth review of loss
    experience on its disability income business during 1997. As a result of
    this study, the reserve level was deemed to be inadequate to meet future
    obligations if current incident levels were to continue in the future. In
    order to address this situation, the Company strengthened its disability
    income reserve by $80,000,000 (pre-tax).
 
    MARKETING AND COMPLIANCE ISSUES
    Regulators continue to focus on market conduct and compliance issues. Under
    certain circumstances companies operating in the insurance and financial
    services markets have been held responsible for providing incomplete or
    misleading sales materials and for replacing existing policies with policies
    that were less advantageous to the policyholder. The Company's management
    continues to monitor the Company's sales materials and compliance procedures
    and is making an extensive effort to minimize any potential liability. Due
    to the uncertainty surrounding such matters, it is not possible to provide a
    meaningful estimate of the range of potential outcomes at this time;
    however, it is management's opinion that such future development will not
    materially affect the financial position of the Company.
 
    GROUP PENSION ANNUITIES
    The liabilities for guaranteed interest and group pension annuity contracts,
    which are no longer being sold by the Company, are supported by a single
    portfolio of assets that attempts to match the duration of these
    liabilities. Due to the long-term nature of group pension annuities and the
    resulting inability to exactly match cash flows, a risk exists that future
    cash flows from investments will not be reinvested at rates as high as
    currently earned by the portfolio.
 
    Accordingly, these liabilities may prove to be deficient or excessive.
    However, it is management's opinion that such future development will not
    materially affect the financial position of the Company.
 
    LEASES
    The Company leases its home office properties through sale-leaseback
    agreements. The agreements provide for a 25 year lease period with options
    to renew for six additional terms of five years each. The agreements also
    provide the Company with the right of first refusal to purchase the
    properties during the term of the lease, including renewal periods, at a
    price as defined in the agreements. The Company also has the option to
    purchase the leased properties at fair market value as defined in the
    agreements on the last day of the initial 25-year lease ending in 2009 or on
    the last day of any of the renewal periods.
 
    Total rental expense on operating leases in 1997, 1996 and 1995 was
    $29,300,000, $26,400,000 and
 
                                                                            S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
    $22,500,000, respectively. Future minimum rental commitments are as follows
    (in millions):
 
<TABLE>
<S>                                     <C>
1998                                    $    18.5
- --------------------------------------
1999                                         18.9
- --------------------------------------
2000                                         20.1
- --------------------------------------
2001                                         20.4
- --------------------------------------
2002                                         20.7
- --------------------------------------
Thereafter                                  152.2
- --------------------------------------  ---------
                                        $   250.8
                                        ---------
                                        ---------
</TABLE>
 
    The future commitments include amounts for space and equipment to be used by
    the personnel that were added on January 2, 1998 as a result of the purchase
    of a block of individual life and annuity business (see NOTE 12).
 
    INFORMATION TECHNOLOGY COMMITMENT
    In February 1998, the Company signed a seven-year contract with IBM Global
    Services for providing information technology services for the Fort Wayne
    operations. Annual costs are estimated to range from $33,600,000 to
    $56,800,000.
 
    INSURANCE CEDED AND ASSUMED
    The Company cedes insurance to other companies, including certain
    affiliates. The portion of risks exceeding the Company's retention limit is
    reinsured with other insurers. Industry regulations prescribe the maximum
    coverage that the Company can retain on an individual insured. Prior to
    December 31, 1997, the Company limited its maximum coverage that it retained
    on an individual to $3,000,000. Based on a review of the capital and
    business in-force (including the addition of the block of business described
    in NOTE 12), effective in January 1998, the Company changed the amount it
    will retain on an individual to $10,000,000. Portions of the Company's
    deferred annuity business have also been reinsured with other companies to
    limit its exposure to interest rate risks. At December 31, 1997, the
    reserves associated with these reinsurance arrangements totaled
    $1,760,000,000. To cover products other than life insurance, the Company
    acquires other insurance coverages with retentions and limits that
    management believes are appropriate for the circumstances. The Company
    remains liable if its reinsurers are unable to meet their contractual
    obligations under the applicable reinsurance agreements.
 
    The Company assumes insurance from other companies, including certain
    affiliates. At December 31, 1997, the Company has provided $12,400,000 of
    statutory surplus relief to other insurance companies under reinsurance
    transactions. Generally, such amounts are offset by corresponding
    receivables from the ceding company, which are secured by future profits on
    the reinsured business. However, the Company is subject to the risk that the
    ceding company may become insolvent and the right of offset would not be
    permitted.
 
    The regulatory required liability for unsecured reserves ceded to
    unauthorized reinsurers was $8,200,000 and $4,300,000 at December 31, 1997
    and 1996, respectively.
 
    VULNERABILITY FROM CONCENTRATIONS
    At December 31, 1997, the Company did not have a concentration of: 1)
    business transactions with a particular customer, lender or distributor; 2)
    revenues from a particular product or service; 3) sources of supply of labor
    or services used in the business; or 4) a market or geographic area in which
    business is conducted that makes it vulnerable to an event that is at least
    reasonably possible to occur in the near term and which could cause a severe
    impact to the Company's financial condition.
 
    OTHER CONTINGENCY MATTERS
    The Company is involved in various pending or threatened legal proceedings
    arising from the conduct of business. Most of these proceedings are routine
    in the ordinary course of business. The Company maintains professional
    liability insurance coverage for claims in excess of $5,000,000. The degree
    of applicability of this coverage depends on the specific facts of each
    proceeding. In some instances, these proceedings include claims for
    compensatory and punitive damages and similar types of relief in addition to
    amounts for alleged contractual liability or requests for equitable relief.
    After consultation with legal counsel and a review of available facts, it is
    management's opinion that the ultimate liability, if any, under these suits
    will
 
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
    not have a material adverse affect on the financial position or results of
    operations of the Company.
 
    Two lawsuits involve alleged fraud in the sale of interest sensitive
    universal life and whole life insurance policies. These two suits have been
    filed as class actions against the Company, although the court has not
    certified a class in either case. Plaintiffs seek unspecified damages and
    penalties for themselves and on behalf of the putative class while the
    relief sought in these cases in substantial, the cases are in the early
    stages of litigation, and it is premature to make assessments about
    potential loss, if any. Management intends to defend these suits vigorously.
    The amount of liability, if any, which may arise as a result of these suits
    cannot be reasonably estimated at this time.
 
    The number of insurance companies that are under regulatory supervision has
    resulted, and is expected to continue to result, in assessments by state
    guaranty funds to cover losses to policyholders of insolvent or
    rehabilitated companies. Mandatory assessments may be partially recovered
    through a reduction in future premium taxes in some states. The Company has
    accrued for expected assessments net of estimated future premium tax
    deductions.
 
    GUARANTEES
    The Company has guarantees with off-balance-sheet risks whose contractual
    amounts represent credit exposure. Outstanding guarantees with off-
    balance-sheet risks, shown in notional or contract amounts, are as follows:
 
<TABLE>
<CAPTION>
                                NOTIONAL OR
                                CONTRACT AMOUNTS
                                --------------------
 
                                DECEMBER 31
                                --------------------
                                1997       1996
                                --------------------
                                (IN MILLIONS)
                                --------------------
<S>                             <C>        <C>
Mortgage loan pass-through
certificates                    $    41.6  $    50.3
- ------------------------------
Real estate partnerships               --         .5
- ------------------------------  ---------  ---------
                                $    41.6  $    50.8
                                ---------  ---------
                                ---------  ---------
</TABLE>
 
    The Company has invested in real estate partnerships that use conventional
    mortgage loans to finance their projects. In some cases, the terms of these
    arrangements involve guarantees by each of the partners to indemnify the
    mortgagor in the event a partner is unable to pay its principal and interest
    payments. In addition, the Company has sold commercial mortgage loans
    through grantor trusts which issued pass-through certificates. The Company
    has agreed to repurchase any mortgage loans which remain delinquent for 90
    days at a repurchase price substantially equal to the outstanding principal
    balance plus accrued interest thereon to the date of repurchase. It is
    management's opinion that the value of the properties underlying these
    commitments is sufficient that in the event of default the impact would not
    be material to the Company. Accordingly, both the carrying value and fair
    value of these guarantees is zero at December 31, 1997 and 1996.
 
    DERIVATIVES
    The Company has derivatives with off-balance-sheet risks whose notional or
    contract amounts exceed the credit exposure. The Company has entered into
    derivative transactions to reduce its exposure to fluctuations in interest
    rates, the widening of bond yield spreads over comparable maturity U.S.
    Government obligations, increased liabilities associated with reinsurance
    agreements and foreign exchange risks. In addition, the Company is subject
    to the risks associated with changes in the value of its derivatives;
    however, such changes in value generally are offset by changes in the value
    of the items being hedged by such contracts. Outstanding derivatives with
    off-balance-sheet risks, shown in notional or contract amounts along with
    their carrying value and estimated fair values, are as follows:
 
                                                                            S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
 
<TABLE>
<CAPTION>
                                          NOTIONAL OR         ASSETS (LIABILITIES)
                                          CONTRACT AMOUNTS    -----------------------------------
                                                              CARRYING   FAIR   CARRYING   FAIR
                                                              VALUE      VALUE  VALUE      VALUE
                                          -------------------------------------------------------
 
                                          DECEMBER 31         DECEMBER 31       DECEMBER 31
                                          1997      1996      1997       1997   1996       1996
                                          -------------------------------------------------------
                                          (IN MILLIONS)
                                          -------------------------------------------------------
<S>                                       <C>       <C>       <C>        <C>    <C>        <C>
Interest rate derivatives:
  Interest rate cap agreements            $4,900.0  $5,500.0   $13.9     $  .9   $20.8     $  8.2
       ---------------------------------
  Swaptions                                1,752.0     672.0     6.9       6.9    11.0       10.6
       ---------------------------------
  Financial futures contracts                   --     147.7      --        --    (2.4)      (2.4)
       ---------------------------------
  Interest rate swaps                         10.0        --      --      (1.8)     --         --
       ---------------------------------  --------  --------  --------   -----  --------   ------
                                           6,662.0   6,319.7    20.8       6.0    29.4       16.4
Foreign currency derivatives:
  Forward contracts                          163.1     251.5     5.4       5.4      .2        (.2)
       ---------------------------------
  Foreign currency options                      --      43.9      --        --      .6         .4
       ---------------------------------
  Foreign currency swaps                      15.0      15.0      --      (2.1)     --       (2.1)
       ---------------------------------  --------  --------  --------   -----  --------   ------
                                             178.1     310.4     5.4       3.3      .8       (1.9)
                                          --------  --------  --------   -----  --------   ------
                                          $6,840.1  $6,630.1   $26.2     $ 9.3   $30.2     $ 14.5
                                          --------  --------  --------   -----  --------   ------
                                          --------  --------  --------   -----  --------   ------
</TABLE>
 
    A reconciliation and discussion of the notional or contract amounts for the
    significant programs using derivative agreements and contracts at December
    31 is a follows:
 
<TABLE>
<CAPTION>
                                     ----------------------------------------------------------------
                                     INTEREST RATE CAPS    SPREAD LOCKS          SWAPTIONS
                                     1997       1996       1997       1996       1997       1996
                                     ----------------------------------------------------------------
                                     (IN MILLIONS)
                                     ----------------------------------------------------------------
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>
Balance at beginning of year         $ 5,500.0  $ 5,110.0  $      --  $   600.0  $   672.0  $      --
- -----------------------------------
New contracts                               --      390.0       50.0       15.0    1,080.0      672.0
- -----------------------------------
Terminations and maturities             (600.0)        --      (50.0)    (615.0)        --         --
- -----------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
Balance at end of year               $ 4,900.0  $ 5,500.0  $      --  $      --  $ 1,752.0  $   672.0
- -----------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
                                     ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                              FINANCIAL FUTURES     INTEREST RATE SWAPS
                                                              CONTRACTS
                                                              ------------------------------------------
                                                              1997       1996       1997       1996
                                                              ------------------------------------------
<S>                                                           <C>        <C>        <C>        <C>
Balance at beginning of year                                  $   147.7  $      --  $      --  $     5.0
- ------------------------------------------------------------
New contracts                                                      88.3    7,918.8       10.0         --
- ------------------------------------------------------------
Terminations and maturities                                      (236.0)  (7,771.1)        --       (5.0)
- ------------------------------------------------------------  ---------  ---------  ---------  ---------
Balance at end of year                                        $      --  $   147.7  $    10.0  $      --
- ------------------------------------------------------------  ---------  ---------  ---------  ---------
                                                              ---------  ---------  ---------  ---------
</TABLE>
 
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
 
<TABLE>
<CAPTION>
 
                                        FOREIGN CURRENCY DERIVATIVES
                                        ----------------------------------------------------------------
 
                                        FOREIGN EXCHANGE      FOREIGN CURRENCY      FOREIGN CURRENCY
                                        FORWARD CONTRACTS     OPTIONS               SWAPS
                                        1997       1996       1997       1996       1997       1996
                                        ----------------------------------------------------------------
                                        (IN MILLIONS)
                                        ----------------------------------------------------------------
<S>                                     <C>        <C>        <C>        <C>        <C>        <C>
Balance at beginning of year            $   251.5  $    15.7  $    43.9  $    99.2  $    15.0  $    15.0
- --------------------------------------
New contracts                               833.1      406.9         --    1,168.8         --         --
- --------------------------------------
Terminations and maturities                (921.6)    (171.1)     (43.9)  (1,224.1)        --         --
- --------------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
Balance at end of year                  $   163.1  $   251.5  $      --  $    43.9  $    15.0  $    15.0
- --------------------------------------  ---------  ---------  ---------  ---------  ---------  ---------
                                        ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>
 
    INTEREST RATE CAPS
    The interest rate cap agreements, which expire in 1998 through 2003, entitle
    the Company to receive quarterly payments from the counterparties on
    specified future reset dates, contingent on future interest rates. For each
    cap, the amount of such payments, if any, is determined by the excess of a
    market interest rate over a specified cap rate multiplied by the notional
    amount divided by four. The purpose of the Company's interest rate cap
    agreement program is to protect its annuity line of business from the effect
    of rising interest rates. The premium paid for the interest rate caps is
    included in other assets ($13,900,000 as of December 31, 1997) and is being
    amortized over the terms of the agreements. This amortization is included in
    net investment income.
 
    SWAPTIONS
    Swaptions, which expire in 2002 and 2003, entitle the Company to receive
    settlement payments from the counterparties on specified expiration dates,
    contingent on future interest rates. For each swaption, the amount of such
    settlement payments, if any, is determined by the present value of the
    difference between the fixed rate on a market rate swap and the strike rate
    multiplied by the notional amount. The purpose of the Company's swaption
    program is to protect its annuity line of business from the effect of
    fluctuating interest rates. The premium paid for the swaptions is included
    in other assets ($6,900,000 as of December 31, 1997) and is being amortized
    over the terms of the agreements. This amortization is included in net
    investment income.
 
    SPREAD LOCKS
    Spread-lock agreements provide for a lump sum payment to or by the Company,
    depending on whether the spread between the swap rate and a specified
    Government note is larger or smaller than a contractually specified spread.
    Cash payments are based on the product of the notional amount, the spread
    between the swap rate and the yield of an equivalent maturity Government
    security and the price sensitivity of the swap at that time. The purpose of
    the Company's spread-lock program is to protect a portion of its fixed
    maturity securities against widening of spreads.
 
    FINANCIAL FUTURES
    The Company uses exchange-traded financial futures contracts to hedge
    against interest rate risks and to manage duration of a portion of its fixed
    maturity securities. Financial futures contracts obligate the Company to buy
    or sell a financial instrument at a specified future date for a specified
    price. They may be settled in cash or through delivery of the financial
    instrument. Cash settlements on the change in market values of financial
    futures contracts are made daily.
 
    INTEREST RATE SWAPS
    The Company uses interest rate swap agreements to hedge its exposure to
    floating rate bond coupon payments, replicating a fixed rate bond. An
    interest rate swap is a contractual agreement to exchange payments at one or
    more times based on the actual or expected price, level, performance or
    value of one or more underlying interest rates. The Company is required to
    pay the counterparty to the
 
                                                                            S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
    agreements the stream of variable coupon payments generated from the bonds,
    and in turn, receives a fixed payment from the counterparty at a
    predetermined interest rate. The net receipts/payments from interest rate
    swaps are recorded in net investment income.
 
    FOREIGN CURRENCY DERIVATIVES
    The Company uses a combination of foreign exchange forward contracts,
    foreign currency options and foreign currency swaps, all of which are traded
    over-the-counter, to hedge some of the foreign exchange risk of investments
    in fixed maturity securities denominated in foreign currencies. The foreign
    currency forward contracts obligate the Company to deliver a specified
    amount of currency at a future date at a specified exchange rate. Foreign
    currency options give the Company the right, but not the obligation, to buy
    or sell a foreign currency at a specific exchange rate during a specified
    time period. A foreign currency swap is a contractual agreement to exchange
    the currencies of two different countries pursuant to an agreement to
    re-exchange the two currencies at the same rate of exchange at a specified
    future date.
 
    ADDITIONAL DERIVATIVE INFORMATION
    Expenses for the agreements and contracts described above amounted to
    $7,000,000, $6,900,000 and $5,600,000 in 1997, 1996 and 1995, respectively.
    Deferred losses of $2,600,000 as of December 31, 1997, were the result of:
    1) terminated and expired spread-lock agreements and; 2) financial futures
    contracts. These losses are included with the related fixed maturity
    securities to which the hedge applied and are being amortized over the life
    of such securities.
 
    The Company is exposed to credit loss in the event of nonperformance by
    counterparties on interest rate cap agreements, swaptions, spread-lock
    agreements, interest rate swaps, foreign exchange forward contracts, foreign
    currency options and foreign currency swaps. However, the Company does not
    anticipate nonperformance by any of the counterparties. The credit risk
    associated with such agreements is minimized by purchasing such agreements
    from financial institutions with long-standing, superior performance
    records. The amount of such exposure is essentially the net replacement cost
    or market value for such agreements with each counterparty if the net market
    value is in the Company's favor. At December 31, 1997, the exposure was
    $11,700,000.
 
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
    The following discussion outlines the methodologies and assumptions used to
    determine the estimated fair values of the Company's financial instruments.
    Considerable judgment is required to develop these fair values. Accordingly,
    the estimates shown are not necessarily indicative of the amounts that would
    be realized in a one-time, current market exchange of all of the Company's
    financial instruments.
 
    BONDS AND UNAFFILIATED COMMON STOCK
    Fair values of bonds are based on quoted market prices, where available. For
    bonds not actively traded, fair values are estimated using values obtained
    from independent pricing services. In the case of private placements, fair
    values are estimated by discounting expected future cash flows using a
    current market rate applicable to the coupon rate, credit quality and
    maturity of the investments. The fair values of unaffiliated common stocks
    are based on quoted market prices.
 
    MORTGAGE LOANS ON REAL ESTATE
    The estimated fair values of mortgage loans on real estate are established
    using a discounted cash flow method based on credit rating, maturity and
    future income. The rating for mortgages in good standing are based on
    property type, location, market conditions, occupancy, debt service
    coverage, loan to value, caliber of tenancy, borrower and payment record.
    Fair values for impaired mortgage loans are based on: 1) the present value
    of expected future cash flows discounted at the loan's effective interest
    rate; 2) the loan's market price; or 3) the fair value of the collateral if
    the loan is collateral dependent.
 
    POLICY LOANS
    The estimated fair values of investments in policy loans are calculated on a
    composite discounted cash flow basis using Treasury interest rates
    consistent with the maturity durations assumed. These durations are based on
    historical experience.
 
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
    The carrying values for assets classified as other investments and cash and
    short-term investments in the accompanying statutory-basis balance sheets
    approximate their fair value.
 
    INVESTMENT-TYPE INSURANCE CONTRACTS
    The balance sheet captions, "Future Policy Benefits and Claims" and "Other
    Policyholder Funds," include investment type insurance contracts (i.e.,
    deposit contracts and guaranteed interest contracts). The fair values for
    the deposit contracts and certain guaranteed interest contracts are based on
    their approximate surrender values. The fair values for the remaining
    guaranteed interest and similar contracts are estimated using discounted
    cash flow calculations. These calculations are based on interest rates
    currently offered on similar contracts with maturities that are consistent
    with those remaining for the contracts being valued.
 
    The remainder of the balance sheet captions "Future Policy Benefits and
    Claims" and "Other Policyholder Funds," that do not fit the definition of
    "investment-type insurance contracts" are considered insurance contracts.
    Fair value disclosures are not required for these insurance contracts and
    have not been determined by the Company. It is the Company's position that
    the disclosure of the fair value of these insurance contracts is important
    because readers of these financial statements could draw inappropriate
    conclusions about the Company's capital and surplus determined on a fair
    value basis. It could be misleading if only the fair value of assets and
    liabilities defined as financial instruments are disclosed. The Company and
    other companies in the insurance industry are monitoring the related actions
    of the various rule-making bodies and attempting to determine an appropriate
    methodology for estimating and disclosing the "fair value" of their
    insurance contract liabilities.
 
    SHORT-TERM DEBT
    Fair values of short-term debt approximates carrying values.
 
    GUARANTEES
    The Company's guarantees include guarantees related to real estate
    partnerships and mortgage loan pass-through certificates. Based on
    historical performance where repurchases have been negligible and the
    current status, which indicates none of the loans are delinquent, the fair
    value liability for the guarantees related to the mortgage loan pass-through
    certificates is insignificant.
 
    DERIVATIVES
    The Company's derivatives include interest rate cap agreements, swaptions,
    spread-lock agreements, foreign currency exchange contracts, financial
    futures contracts, interest rate swaps, foreign currency options and foreign
    currency swaps. Fair values for these contracts are based on current
    settlement values. These values are based on: 1) quoted market prices for
    the foreign currency exchange contracts and financial future contracts and;
    2) brokerage quotes that utilize pricing models or formulas using current
    assumptions for all other swaps and agreements.
 
    INVESTMENT COMMITMENTS
    Fair values for commitments to make investment in fixed maturity securities
    (primarily private placements), mortgage loans on real estate and real
    estate are based on the difference between the value of the committed
    investments as of the date of the accompanying balance sheets and the
    commitment date. These estimates would take into account changes in interest
    rates, the counterparties' credit standing and the remaining terms of the
    commitments.
 
                                                                            S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    The carrying values and estimated fair values of the Company's financial
    instruments are as follows:
 
<TABLE>
<CAPTION>
                                                 DECEMBER 31
                                                 ----------------------------------------------
                                                 1997                    1996
                                                 ----------------------------------------------
                                                 CARRYING                CARRYING
ASSETS (LIABILITIES)                             VALUE       FAIR VALUE  VALUE       FAIR VALUE
- -----------------------------------------------------------------------------------------------
                                                 (IN MILLIONS)
                                                 ----------------------------------------------
<S>                                              <C>         <C>         <C>         <C>
Bonds                                            $ 18,560.7  $ 19,798.6  $ 19,389.6  $ 20,194.4
- -----------------------------------------------
Preferred stock                                       257.3       268.7       239.7       248.5
- -----------------------------------------------
Unaffiliated common stock                             436.0       436.0       358.3       358.3
- -----------------------------------------------
Mortgage loans on real estate                       3,012.7     3,179.2     2,976.7     3,070.9
- -----------------------------------------------
Policy loans                                          660.5       648.3       626.5       612.7
- -----------------------------------------------
Other investments                                     335.5       335.5       282.7       282.7
- -----------------------------------------------
Cash and short-term investments                     2,133.0     2,133.0       759.2       759.2
- -----------------------------------------------
Investment-type insurance contracts:
  Deposit contracts and certain guaranteed
    interest contracts                            (17,324.2)  (16,887.6)  (17,871.6)  (17,333.0)
   --------------------------------------------
  Remaining guaranteed interest and similar
    contracts                                      (1,267.0)   (1,294.6)   (1,799.7)   (1,835.4)
   --------------------------------------------
Short-term debt                                      (120.0)     (120.0)     (100.0)     (100.0)
- -----------------------------------------------
Derivatives                                            26.2         9.3        26.5        13.8
- -----------------------------------------------
Investment commitments                                   --         (.5)         --         (.6)
- -----------------------------------------------
</TABLE>
 
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
    In October 1996, the Company and LLANY purchased a block of group
    tax-qualified annuity business from UNUM Corporation's affiliate. The
    transaction was completed in the form of a reinsurance transaction, which
    resulted in a ceding commission of $71,800,000. The ceding commission has
    been recorded as admissible goodwill of $62,300,000, which is to be
    amortized on a straight-line basis over 10 years. LLANY was required by the
    New York Department of Insurance to expense its portion of the ceding
    commission in 1996. Policy liabilities and related accruals of the Company
    and its wholly owned subsidiary increased by $3,200,000,000 as a result of
    this transaction.
 
    In 1997, LNC contributed 25,000,000 shares of common stock of American
    States Financial Corporation ("American States") to the Company. American
    States is a property casualty insurance holding company of which LNC owned
    83.3%. The contributed common stock was accounted for as a capital
    contribution equal to the fair value of the common stock received by the
    Company. Subsequently, the American States common stock owned by the
    Company, along with all other American States common stock owned by LNC and
    its affiliates, was sold. The Company received proceeds from the sale in the
    amount of $1,175,000,000. The Company recognized no gain or loss on the sale
    of its portion of the common stock due to the receipt of such stock at fair
    value.
 
    On January 2, 1998, the Company issued a surplus note to LNC in return for
    $500,000,000 in cash. The note calls for the Company to pay, on or before
    March 31, 2028, the principal amount of the note and interest quarterly at a
    6.56% annual rate. LNC also has a right to redeem the note for immediate
    repayment in total or in part once per year on the
 
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
12. ACQUISITIONS AND SALES OF SUBSIDIARIES (CONTINUED)
    anniversary date of the note, but not before January 2, 2003. Any payment of
    interest or repayment of principal may be paid only out of excess surplus
    (as defined in the note) and is subject to the approval of the Commissioner
    of the Indiana Department of Insurance.
 
    Proceeds from the sale of the Company's American States common stock, as
    well as proceeds from the surplus note, were used to finance an indemnity
    reinsurance transaction whereby the Company reinsured 100% of a block of
    individual life insurance and annuity business from CIGNA Corporation. The
    Company paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of
    the reinsurance agreement, which will result in a decrease to surplus in
    1998 of approximately $1,000,000,000. Operating results generated by this
    block of business after the closing date will be included in the Company
    financial statements from the closing date. At the time of closing, this
    block of business had statutory liabilities of $4,658,200,000 that became
    the Company's obligation. The company also received assets, measured on a
    historical statutory basis, equal to the liabilities. During 1997, this
    block produced premiums, fees and deposits of $1,051,000,000 and earnings of
    $87,200,000 on a statutory basis. The Company also expects to pay
    $30,000,000 to cover expenses associated with the reinsurance agreement and
    to record a charge of approximately $12,000,000 during 1998 to cover certain
    costs of integrating the existing operations with the new block of business.
 
13. TRANSACTIONS WITH AFFILIATES
    A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
    has a nearly exclusive general agents contract with the Company under which
    it sells the Company's products and provides the service that otherwise
    would be provided by a home office marketing department and regional
    offices. For providing these selling and marketing services, the Company
    paid LFGI override commissions and operating expense allowances of
    $61,600,000, $56,300,000 and $43,300,000 in 1997, 1996 and 1995,
    respectively. LFGI incurred expenses of $5,500,000, $15,700,000 and
    $10,400,000 in 1997, 1996 and 1995, respectively, in excess of the override
    commissions and operating expense allowances received from the Company,
    which the Company is not required to reimburse. Effective in January 1998,
    the Company and LFGI agreed to increase the override commission expense and
    eliminate the operating expense allowance.
 
    Cash and short-term investments at December 31, 1997 and 1996 include the
    Company's participation in a short-term investment pool with LNC of
    $325,600,000 and $175,100,000, respectively. Related investment income
    amounted to $15,500,000, $15,300,000 and $21,100,000 in 1997, 1996 and 1995,
    respectively. Other liabilities at December 31, 1997 and 1996 include
    $120,000,000 and $100,000,000, respectively, of notes payable to LNC.
 
    The Company provides services to and receives services from affiliated
    companies which resulted in a net payment of $48,500,000, $34,100,000 and
    $24,900,000 in 1997, 1996 and 1995, respectively.
 
    The Company cedes and accepts reinsurance from affiliated companies.
    Premiums in the accompanying statements of income include premiums on
    insurance business accepted under reinsurance contracts and exclude premiums
    ceded to other affiliated companies, as follows:
 
<TABLE>
<CAPTION>
                        YEAR ENDED DECEMBER 31
                        1997       1996       1995
                        -------------------------------
                        (IN MILLIONS)
                        -------------------------------
<S>                     <C>        <C>        <C>
Insurance assumed       $    11.9  $    17.9  $    17.6
- ----------------------
Insurance ceded             100.3      302.8      214.4
- ----------------------
</TABLE>
 
                                                                            S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
    The balance sheets include reinsurance balances with affiliated companies as
    follows:
 
<TABLE>
<CAPTION>
                          DECEMBER 31
                          1997       1996
                          --------------------
                          (IN MILLIONS)
                          --------------------
<S>                       <C>        <C>
Future policy benefits
and claims assumed        $   245.5  $   312.7
- ------------------------
Future policy benefits
and claims ceded              997.2      891.8
- ------------------------
Amounts recoverable on
paid and unpaid losses         30.4       31.2
- ------------------------
Reinsurance payable on
paid losses                     5.3        2.7
- ------------------------
Funds held under
reinsurance treaties --
net liability               1,115.4    1,062.4
- ------------------------
</TABLE>
 
    Substantially all reinsurance ceded to affiliated companies is with
    unauthorized companies. To take a reserve credit for such reinsurance, the
    Company holds assets from the reinsurer, including funds held under
    reinsurance treaties, and is the beneficiary on letters of credit
    aggregating $280,900,000 and $314,200,000 at December 31, 1997 and 1996,
    respectively. The letters of credit are issued by banks and represent
    guarantees of performance under the reinsurance agreement. At December 31,
    1997 and 1996, LNC had guaranteed $229,100,000 and $239,200,000,
    respectively, of these letters of credit. At December 31, 1997, the Company
    has a receivable (included in the foregoing amounts) from affiliated
    insurance companies in the amount of $130,700,000 for statutory surplus
    relief received under financial reinsurance ceded agreements.
 
14. SEPARATE ACCOUNTS
    Separate account assets and liabilities reported in the accompanying balance
    sheets represent funds that are separately administered, principally for
    annuity contracts, and for which the contractholder, rather than the
    Company, bears the investment risk. Separate account contractholders have no
    claim against the assets of the general account of the Company. Separate
    account assets are reported at fair value and consist primarily of long-term
    bonds, common stocks, short-term investments and mutual funds. The detailed
    operations of the separate accounts are not included in the accompanying
    financial statements. Fees charged on separate account policyholder deposits
    are included in other income.
 
    Separate account premiums, deposits and other considerations amounted to
    $4,821,800,000, $4,148,700,000 and $3,068,200,000 in 1997, 1996 and 1995,
    respectively. Reserves for separate accounts with assets at fair value were
    $30,560,700,000 and $23,047,800,000 at December 31, 1997 and 1996,
    respectively. All reserves are subject to discretionary withdrawal at market
    value. Substantially all of the Company's separate accounts are
    nonguaranteed.
 
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
14. SEPARATE ACCOUNTS (CONTINUED)
 
    A reconciliation of transfers to (from) separate accounts are as follows:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
                                                              1997           1996
                                                              ------------------------
                                                              (IN MILLIONS)
                                                              ------------------------
<S>                                                           <C>            <C>
Transfers as reported in the Summary of Operations of
various Separate Accounts:
  Transfers to separate accounts                              $ 4,824.0      $ 4,149.6
- ------------------------------------------------------------
  Transfers from separate accounts                             (2,943.8)      (2,058.5)
- ------------------------------------------------------------  ---------      ---------
Net transfer to separate accounts as reported in the
Company's NAIC Annual Statement -- Summary of Operations      $ 1,880.2      $ 2,091.1
- ------------------------------------------------------------  ---------      ---------
                                                              ---------      ---------
</TABLE>
 
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
    In 1997, certain errors were identified by the Illinois
    Insurance Department in the calculation of the AVR as of
    December 31, 1996 and 1995. The effects of the AVR errors
    also resulted in the need for revisions in the calculation
    of certain investment limitation thresholds, the results of
    which indicated that additional assets should have been
    nonadmitted as of December 31, 1996. As discussed by the
    Company with the Indiana and Illinois Insurance Departments,
    corrections were made to affected pages of the Company's
    NAIC Annual Statement which were refiled with various state
    insurance departments. However, due to immateriality of the
    corrections in relation to the financial statements taken as
    a whole, the audited 1996 and 1995 statutory-basis financial
    statements were not corrected and re-issued.
 
    The Company's 1997 NAIC Annual Statement, as filed with
    various state insurance departments, also includes the
    corrected balances for 1996 and 1995. The following is a
    reconciliation of total admitted assets, total liabilities
    and capital and surplus as of December 31, 1996 as presented
    in the 1997 NAIC Annual Statement (as corrected) to the
    accompanying audited financial statements.
 
<TABLE>
<CAPTION>
                                          TOTAL                    CAPITAL
                                          ADMITTED   TOTAL         AND
                                          ASSETS     LIABILITIES   SURPLUS
                                          ---------------------------------
<S>                                       <C>        <C>           <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements                      $50,016.6   $ 48,054.0   $ 1962.6
- ----------------------------------------
Effect of AVR errors                             --         37.6      (37.6)
- ----------------------------------------
Effect of change in investment
limitations                                   (57.0)          --      (57.0)
- ----------------------------------------  ---------  -----------   --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement                                 $49,959.6   $ 48,091.6   $1,868.0
- ----------------------------------------  ---------  -----------   --------
                                          ---------  -----------   --------
</TABLE>
 
16. IMPACT OF YEAR 2000 (UNAUDITED)
    The Year 2000 Issue is pervasive and complex and affects virtually every
    aspect of the Company's business. The Company's computer systems and
    interfaces with the computer systems of vendors, suppliers, customers and
    business partners are particularly vulnerable. The inability to properly
    recognize date sensitive electronic information and transfer data between
    systems could cause errors or even a complete systems failure which would
    result in a temporary inability to process transactions correctly and engage
    in normal business
 
                                                                            S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
 
16. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
    activities. The Company is redirecting a large portion of its internal
    information technology efforts and contracting with outside consultants to
    update its systems to accommodate the year 2000. Also, the Company has
    initiated formal communications with critical parties that interface with
    the Company's systems to gain an understanding of their progress in
    addressing Year 2000 Issues. While the Company is making every effort to
    address its own systems and the systems with which it interfaces, it is not
    possible to provide assurance that operational problems will not occur. The
    Company presently believes that with the modification of existing computer
    systems, updates by vendors and conversion to new software and hardware, the
    Year 2000 Issue will not pose significant operational problems for its
    computer systems. In addition, the Company is developing contingency plans
    in the event that, despite its best efforts, there are unresolved year 2000
    problems. If the remediation efforts noted above are not completed timely or
    properly, the Year 2000 Issue could have a material adverse impact on the
    operation of the Company's business.
 
    During 1997 and 1996, the Company incurred expenditures of approximately
    $5,500,000 ($3,600,000 after-tax) to address this issue. The Company's
    financial plans for 1998 through 2000 include expected expenditures of an
    additional $20,000,000 ($13,000,000 after-tax) on this issue. The cost of
    addressing Year 2000 Issues and the timeliness of completion will be closely
    monitored by management and are based on managements's current best
    estimates which were derived utilizing numerous assumptions of future
    events, including the continued availability of certain resources, third
    party modification plans and other factors. Nevertheless, there can be no
    guarantee that these estimated costs will be achieved and actual results
    could differ significantly from those anticipated. Specific factors that
    might cause such differences include, but are not limited to, the
    availability and cost of personnel trained in this area, the ability to
    locate and correct all relevant computer problems and other uncertainties.
 
S-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
The Lincoln National Life Insurance Company
 
We have audited the accompanying statutory-basis balance sheets
of The Lincoln National Life Insurance Company (a wholly owned
subsidiary of Lincoln National Corporation) as of December 31,
1997 and 1996, and the related statutory-basis statements of
income, changes in capital and surplus and cash flows for each
of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
 
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
 
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1997.
 
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
 
February 5, 1998
 
                                                                            S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
 
DECEMBER 31, 1997 (IN MILLIONS)
 
<TABLE>
<S>        <C>                                                                                        <C>
Investment income earned:
           Government bonds                                                                           $    52.8
           -----------------------------------------------------------------------------------------
           Other bonds (unaffiliated)                                                                   1,471.6
           -----------------------------------------------------------------------------------------
           Preferred stocks (unaffiliated)                                                                 23.5
           -----------------------------------------------------------------------------------------
           Common stocks (unaffiliated)                                                                     8.3
           -----------------------------------------------------------------------------------------
           Common stocks of affiliates                                                                     15.0
           -----------------------------------------------------------------------------------------
           Mortgage loans                                                                                 257.2
           -----------------------------------------------------------------------------------------
           Real estate                                                                                     92.2
           -----------------------------------------------------------------------------------------
           Premium notes, policy loans and liens                                                           37.5
           -----------------------------------------------------------------------------------------
           Cash on hand and on deposit                                                                      1.0
           -----------------------------------------------------------------------------------------
           Short-term investments                                                                          69.3
           -----------------------------------------------------------------------------------------
           Other invested assets                                                                           21.9
           -----------------------------------------------------------------------------------------
           Derivative instruments                                                                         (10.0)
           -----------------------------------------------------------------------------------------
           Aggregate write-ins for investment income                                                       16.3
           -----------------------------------------------------------------------------------------  ---------
Gross investment income                                                                               $ 2,056.6
- ----------------------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
 
Real estate owned (cost, less encumbrances)                                                           $   585.2
- ----------------------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
 
Mortgage loans (unpaid balance):
           Farm mortgages                                                                             $     0.1
           -----------------------------------------------------------------------------------------
           Residential mortgages                                                                            3.1
           -----------------------------------------------------------------------------------------
           Commercial mortgages                                                                         3,009.5
           -----------------------------------------------------------------------------------------  ---------
Total mortgage loans                                                                                  $ 3,012.7
- ----------------------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
 
Mortgage loans by standing (unpaid balance):
           Good standing                                                                              $ 2,974.1
           -----------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
           Good standing with restructured terms                                                      $    38.5
           -----------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
           Interest overdue more than three months, not in foreclosure                                $      --
           -----------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
           Foreclosure in process                                                                     $     0.1
           -----------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
Other long-term assets (statement value)                                                              $   281.5
- ----------------------------------------------------------------------------------------------------  ---------
                                                                                                      ---------
</TABLE>
 
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
 
DECEMBER 31, 1997 (IN MILLIONS)
 
<TABLE>
<S>                                                                                              <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
    Common stocks of subsidiaries                                                                $   466.2
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Bonds and short-term investments by class and maturity:
  Bonds by maturity (statement value):
    Due within one year or less                                                                  $ 3,140.1
     ------------------------------------------------------------------------------------------
    Over 1 year through 5 years                                                                    5,182.8
     ------------------------------------------------------------------------------------------
    Over 5 years through 10 years                                                                  5,772.8
     ------------------------------------------------------------------------------------------
    Over 10 years through 20 years                                                                 3,275.3
     ------------------------------------------------------------------------------------------
    Over 20 years                                                                                  3,270.6
     ------------------------------------------------------------------------------------------  ---------
  Total by maturity                                                                              $20,641.6
   --------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
  Bonds by class (statement value):
    Class 1                                                                                      $13,879.0
     ------------------------------------------------------------------------------------------
    Class 2                                                                                        5,215.6
     ------------------------------------------------------------------------------------------
    Class 3                                                                                          848.0
     ------------------------------------------------------------------------------------------
    Class 4                                                                                          668.8
     ------------------------------------------------------------------------------------------
    Class 5                                                                                           23.6
     ------------------------------------------------------------------------------------------
    Class 6                                                                                            6.6
     ------------------------------------------------------------------------------------------  ---------
  Total by class                                                                                 $20,641.6
   --------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
 
Total bonds publicly traded                                                                      $16,457.1
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Total bonds privately placed                                                                     $ 4,184.5
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Preferred stocks (statement value)                                                               $   257.3
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
 
Unaffiliated common stocks (market value)                                                        $   436.0
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Short-term investments (cost or amortized cost)                                                  $ 2,080.9
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Financial options and caps owned (statement value)                                               $    20.8
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
 
Financial options and caps written (statement value)                                             $      --
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Swap and forward agreements open (statement value)                                               $     5.4
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Futures contracts open (current value)                                                           $      --
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Cash on deposit                                                                                  $    52.1
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
 
Life insurance in-force:
    Ordinary                                                                                     $   108.6
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group life                                                                                   $    31.2
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
</TABLE>
 
                                                                            S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
 
DECEMBER 31, 1997 (IN MILLIONS)
 
<TABLE>
<S>                                                                                              <C>
Amount of accidental death insurance in-force under ordinary policies                            $     5.3
- -----------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Life insurance policies with disability provisions in-force:
    Ordinary                                                                                     $     5.5
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group life                                                                                   $      --
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Supplementary contracts in-force:
    Ordinary -- not involving life contingencies:
      Amount on deposit                                                                          $      --
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
      Income payable                                                                             $     0.8
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Ordinary -- involving life contingencies:
      Income payable                                                                             $     3.0
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group -- not involving life contingencies:
      Income payable                                                                             $     1.1
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group -- involving life contingencies:
      Income payable                                                                             $      --
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Annuities:
    Ordinary:
      Immediate -- amount of income payable                                                      $    71.8
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
      Deferred -- fully paid account balance                                                     $     0.7
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
      Deferred -- not fully paid account balance                                                 $   264.0
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group:
      Amount of income payable                                                                   $     0.3
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
      Fully paid account balance                                                                 $     0.1
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
      Not fully paid account balance                                                             $    72.3
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Accident and health insurance -- premiums in-force:
    Ordinary                                                                                     $   166.0
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Group                                                                                        $    77.7
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
Deposit funds and dividend accumulations:
    Deposit funds account balance                                                                $16,507.3
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
    Dividend accumulations -- account balance                                                    $   114.4
     ------------------------------------------------------------------------------------------  ---------
                                                                                                 ---------
</TABLE>
 
S-34
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
 
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
 
NOTE -- BASIS OF PRESENTATION
 
The accompanying schedule presents selected statutory-basis
financial data as of December 31, 1997 and for the year then
ended for purposes of complying with paragraph 9 of the Annual
Audited Financial Reports in the General Section of the National
Association of Insurance Commissioners' Annual Statement
Instructions and agrees to or is included in the amounts
reported in The Lincoln National Life Insurance Company's 1997
Statutory Annual Statement as filed with the Indiana Department
of Insurance.
 
                                                                            S-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
 
Board of Directors
The Lincoln National Life Insurance Company
 
Our audits were conducted for the purpose of forming an opinion
on the statutory-basis financial statements taken as a whole.
The accompanying supplemental schedule of selected statutory
basis financial data is presented to comply with the National
Association of Insurance Commissioners' Annual Statement
Instructions and is not a required part of the statutory-basis
financial statements. Such information has been subjected to the
auditing procedures applied in our audit of the statutory-basis
financial statements and, in our opinion, is fairly stated in
all material respects in relation to the statutory-basis
financial statements taken as a whole.
 
February 5, 1998
 
S-36

<PAGE>
   
                                                                    29249 (5/98)
    
<PAGE>
   
                                    PART II
                        FEES AND CHARGES REPRESENTATION
    
 
   
    Lincoln Life represents that the fees and charges deducted under the
Policies, in the aggregate, are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by Lincoln Life.
    
 
                          UNDERTAKING TO FILE REPORTS
 
    Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
 
                                INDEMNIFICATION
 
        (a) Brief description of indemnification provisions.
 
           In general, Article VII of the By-Laws of The Lincoln National Life
           Insurance Company (LNL) provides that LNL will indemnify certain
           persons against expenses, judgments and certain other specified costs
           incurred by any such person if he/she is made a party or is
           threatened to be made a party to a suit or proceeding because he/she
           was a director, officer, or employee of LNL, as long as he/she acted
           in good faith and in a manner he/she reasonably believed to be in the
           best interests of, or not opposed to the best interests of, LNL.
           Certain additional conditions apply to indemnification in criminal
           proceedings.
 
           In particular, separate conditions govern indemnification of
           directors, officers, and employees of LNL in connection with suits
           by, or in the right of, LNL.
 
           Please refer to Article VII of the By-Laws of LNL (Exhibit No. 6(b)
           hereto) for the full text of the indemnification provisions.
           Indemnification is permitted by, and is subject to the requirements
           of, Indiana law.
 
        (b) Undertaking pursuant to Rule 484 of Regulation C under the
           Securities Act of 1933.
 
           Insofar as indemnification for liabilities arising under the
           Securities Act of 1933 may be permitted to directors, officers and
           controlling persons of the Registrant pursuant to the provisions
           described in Item 28(a) above or otherwise, the Registrant has been
           advised that in the opinion of the Securities and Exchange Commission
           such indemnification is against public policy as expressed in the Act
           and is, therefore, unenforceable. In the event that a claim for
           indemnification against such liabilities (other than the payment by
           the Registrant of expenses incurred or paid by a director, officer,
           or controlling person of the Registrant in the successful defense of
           any such action, suit or proceeding) is asserted by such director,
           officer or controlling person in connection with the securities being
           registered, the Registrant will, unless in the opinion of its counsel
           the matter has been settled by controlling precedent, submit to a
           court of appropriate jurisdiction the question whether such
           indemnification by it is against public policy as expressed in the
           Act and will be governed by the final adjudication of such issue.
 
                       CONTENTS OF REGISTRATION STATEMENT
 
    This registration statement comprises the following papers and documents:
 
   
       The facing sheet;
       A cross-reference sheet (reconciliation and tie);
       The prospectus, consisting of 85 pages;
       The undertaking to file reports;
       The signatures;
       Written consents of the following persons:
    
   
           Brian Burke, Esq.
           Michael J. Roscoe
           Ernst & Young LLP
    
<PAGE>
 
   
<TABLE>
<S>        <C>
1.         The following exhibits correspond to those required by paragraph A of the
           instructions as to exhibits in Form N-8B-2:
     (1)   Resolution of the Board of Directors of The Lincoln National Life Insurance
           Company and related documents authorizing establishment of the Account.*
     (2)   Not applicable.
     (3)   (a)  Not applicable.
           (b)  Commission Schedule for Variable Life Policies.
     (4)   Not applicable.
     (5)   (a)  Proposed Form of Policy and Application.*
           (b)  Riders.*
     (6)   (a)  Articles of Incorporation of The Lincoln National Life Insurance Company.
           (Incorporated by reference to Registration Statement on Form N-4 (File No.
           33-27783) filed on December 5, 1996.)
           (b)  Bylaws of The Lincoln National Life Insurance Company. (Incorporated by
           reference to Registration Statement on Form N-4 (File No. 33-27783) filed on
           December 5, 1996.)
     (7)   Not applicable.
     (8)   Fund Participation Agreements.
           Forms of Agreements between The Lincoln National Life Insurance Company and:
           (a)  AIM Variable Insurance Funds, Inc.**
           (b)  BT Insurance Funds Trust.**
           (c)  Delaware Group Premium Fund, Inc.***
           (d)  Fidelity Variable Insurance Products Fund.****
           (e)  Fidelity Variable Insurance Products Fund II.****
           (f)  MFS-Registered Trademark- Variable Insurance Trust.
           (g)  Templeton Variable Products Series Fund.**
           (h)  OCC Accumulation Trust.**
     (9)   Services Agreement between The Lincoln National Life Insurance Co. and Delaware
           Management Co. is incorporated herein by reference to Registration Statement on
           Form S-6 (File No. 33-40745) filed on November 21, 1997.
    (10)   See Exhibit 1(5).
2.         See Exhibit 1(5).
3.         Opinion and Consent of Brian Burke, Esq.
4.         Not applicable.
5.         Not applicable.
6.         Opinion and consent of Michael J. Roscoe, F.S.A.
7.         Consent of Ernst & Young LLP, Independent Auditors.
8.         Not applicable.
</TABLE>
    
 
   
   * Incorporated by reference to Registrant's registration statement on Form
     S-6 (File No. 333-42479) filed on December 17, 1997.
    
   
  ** To be filed by amendment.
    
   
 *** Incorporated by reference to Registration Statement on Form N-4 (File No.
     33-25990) filed on April 22, 1998.
    
   
**** Incorporated by reference to Registration Statement on Form N-4 (File No.
     333-04999) filed on September 26, 1996.
    
<PAGE>
                                   SIGNATURES
 
   
    As required by the Securities Act of 1933, the registrant has duly caused
this amendment to its registration statement on Form S-6 to be signed on its
behalf by the undersigned thereunto duly authorized, in the Town of Fort Wayne
and State of Indiana, on the 28th day of April, 1998.
    
 
                                          LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE
                                          LIFE
                                           ACCOUNT M
                                          (Name of Registrant)
 
   
                                          By:       /s/ GABRIEL L. SHAHEEN
    
 
                                             -----------------------------------
   
                                                     Gabriel L. Shaheen
                                                          PRESIDENT
                                             THE LINCOLN NATIONAL LIFE INSURANCE
                                                           COMPANY
    
 
                                          THE LINCOLN NATIONAL LIFE INSURANCE
                                          COMPANY
                                          (Name of Depositor)
 
   
                                          By:       /s/ GABRIEL L. SHAHEEN
    
 
                                             -----------------------------------
   
                                                     Gabriel L. Shaheen
                                                          PRESIDENT
    
<PAGE>
   
    Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below on April 28, 1998 by the
following persons, as officers and directors of the Depositor, in the capacities
indicated:
    
 
   
                    SIGNATURE                                 TITLE
- --------------------------------------------------  -------------------------
 
                                                    President, Chief
              /s/ GABRIEL L. SHAHEEN                 Executive Officer and
   -------------------------------------------       Director (Principal
                Gabriel L. Shaheen                   Executive Officer)
 
                                                    Executive Vice President,
   -------------------------------------------       General Counsel and
                  Jack D. Hunter                     Director
 
   -------------------------------------------      Executive Vice President
               Lawrence T. Rowland                   and Director
 
                /s/ IAN M. ROLLAND
   -------------------------------------------      Director
                  Ian M. Rolland
 
              /s/ H. THOMAS MCMEEKIN
   -------------------------------------------      Director
                H. Thomas McMeekin
 
              /s/ RICHARD C. VAUGHAN
   -------------------------------------------      Director
                Richard C. Vaughan
 
                /s/ JON A. BOSCIA
   -------------------------------------------      Director
                  Jon A. Boscia
 
                                                    Senior Vice President,
                /s/ KEITH J. RYAN                    Assistant Treasurer and
   -------------------------------------------       Chief Financial Officer
                  Keith J. Ryan                      (Principal Financial
                                                     Officer)
 
    

<PAGE>

              INDIVIDUAL LIFE COMMISSION SCHEDULE (Contract 1285)
                For Payment of First Year Policy Commissions,
                    Renewal Commissions, and Service Fees

- -------------------------------------------------------------------------------
<TABLE>
                   POLICY             Target              Excess
                    YEAR             Premium              Premium
- -------------------------------------------------------------------------------
                 <S>                 <C>                  <C>
                      1                50%*                2.5%
- -------------------------------------------------------------------------------
                    2-10              2.5%                 2.5%
- -------------------------------------------------------------------------------
                 11 or more           2.5%                 2.5%
- -------------------------------------------------------------------------------
</TABLE>

*   Additional First Year Commissions paid:
    a.   50% of the target premium for increase in specified amount.  
         (An increase for this purpose will include only the portion of the 
         increase in excess of the previous highest specified amount.)  
    b.   50% of the cost of insurance for all other increases or rider 
         additions.
         There will be a prorate chargeback of these commissions if within 12 
         months of the increase the policy is surrendered or such increase in 
         coverage is decreased or deleted.


<PAGE>

                                                              Exhibit 99.1(8)(F)

                               PARTICIPATION AGREEMENT

                                        AMONG

                            MFS VARIABLE INSURANCE TRUST,

                    THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

                                         AND

                       MASSACHUSETTS FINANCIAL SERVICES COMPANY


     THIS AGREEMENT, made and entered into this ____ day of April 1998, by and
among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, an Indiana corporation
(the "Company") on its own behalf and on behalf of each of the segregated asset
accounts of the Company set forth in Schedule A hereto, as may be amended from
time to time (the "Accounts"), and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a
Delaware corporation ("MFS").

     WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares are registered or will be registered under the Securities Act of
1933, as amended (the "1933 Act");

     WHEREAS, shares of beneficial interest of the Trust are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;

     WHEREAS, the series of shares of the Trust offered by the Trust to the
Company and the Accounts are set forth on Schedule A attached hereto (each, a
"Portfolio," and, collectively, the "Portfolios");

     WHEREAS, MFS is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended and is the Trust's investment
adviser;

     WHEREAS, the Company will issue certain variable annuity and/or variable
life insurance contracts (individually, the "Policy" or, collectively, the
"Policies") which, if required by applicable law, will be registered under the
1933 Act;

     WHEREAS, the Accounts are duly organized, validly existing segregated asset
accounts, established by resolution of the Board of Directors of the Company, to
set aside and invest assets attributable to the aforesaid variable annuity
and/or variable life insurance contracts that are allocated to the Accounts (the
Policies and the Accounts covered by this Agreement, and each corresponding
Portfolio covered by this Agreement in which the Accounts invest, is specified
in Schedule A attached hereto as may be modified from time to time);

     WHEREAS, the Company has registered or will register the Accounts as unit
investment trusts under the 1940 Act (unless exempt therefrom);

     WHEREAS, MFS Fund Distributors, Inc. (the "Underwriter") is registered as a
broker-dealer with the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as


<PAGE>

amended (hereinafter the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD");

     WHEREAS, the Company, the underwriter for the Policies, is registered as a
broker-dealer with the SEC under the 1934 Act and is a member in good standing
of the NASD; and

     WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf of
the Accounts to fund the Policies, and the Trust intends to sell such Shares to
the Accounts at net asset value;

     NOW, THEREFORE, in consideration of their mutual promises, the Trust, MFS,
and the Company agree as follows:


ARTICLE I.  SALE AND REDEMPTION OF TRUST SHARES

     1.1.  The Trust agrees to sell to the Company those Shares which the
     Accounts order (based on orders placed by Policy holders on that Business
     Day, as defined below) and which are available for purchase by such
     Accounts, executing such orders on a daily basis at the net asset value
     next computed after receipt by the Trust or its designee of the order for
     the Shares.  For purposes of this Section 1.1, the Company shall be the
     designee of the Trust for receipt of such orders from Policy owners and
     receipt by such designee shall constitute receipt by the Trust; PROVIDED
     that the Trust receives notice of such orders by 9:30 a.m. New York time on
     the next following Business Day.  "Business Day" shall mean any day on
     which the New York Stock Exchange, Inc. (the "NYSE") is open for trading
     and on which the Trust calculates its net asset value pursuant to the rules
     of the SEC.

     1.2.  The Trust agrees to make the Shares available indefinitely for
     purchase at the applicable net asset value per share by the Company and the
     Accounts on those days on which the Trust calculates its net asset value
     pursuant to rules of the SEC and the Trust shall calculate such net asset
     value on each day which the NYSE is open for trading.  Notwithstanding the
     foregoing, the Board of Trustees of the Trust (the "Board") may refuse to
     sell any Shares to the Company and the Accounts, or suspend or terminate
     the offering of the Shares if such action is required by law or by
     regulatory authorities having jurisdiction or is, in the sole discretion of
     the Board acting in good faith and in light of its fiduciary duties under
     federal and any applicable state laws, necessary in the best interest of
     the Shareholders of such Portfolio.

     1.3.  The Trust and MFS agree that the Shares will be sold only to 
     insurance companies which have entered into participation agreements 
     with the Trust and MFS (the "Participating Insurance Companies") and 
     their separate accounts, qualified pension and retirement plans and 
     MFS or its affiliates. The Trust and MFS will not sell Trust shares 
     to any insurance company or separate account unless an agreement 
     containing provisions substantially the same as Articles III and VII of 
     this Agreement is in effect to govern such sales. The Company will not 
     resell the Shares except to the Trust or its agents.

     1.4.  The Trust agrees to redeem for cash, on the Company's request, any
     full or fractional Shares held by the Accounts (based on orders placed by
     Policy owners on that Business Day), executing such requests on a daily
     basis at the net asset value next computed after receipt by the


                                         -2-
<PAGE>

     Trust or its designee of the request for redemption.  For purposes of this
     Section 1.4, the Company shall be the designee of the Trust for receipt of
     requests for redemption from Policy owners and receipt by such designee 
     shall constitute receipt by the Trust; provided that the Trust receives 
     notice of such request for redemption by 9:30 a.m. New York time on the 
     next following Business Day.

     1.5.  Each purchase, redemption and exchange order placed by the Company
     shall be placed separately for each Portfolio and shall not be netted with
     respect to any Portfolio.  However, with respect to payment of the purchase
     price by the Company and of redemption proceeds by the Trust, the Company
     and the Trust shall net purchase and redemption orders with respect to each
     Portfolio and shall transmit one net payment for all of the Portfolios in
     accordance with Section 1.6 hereof.

     1.6.  In the event of net purchases, the Company shall pay for the Shares 
     by 2:00 p.m. New York time on the next Business Day after an order to 
     purchase the Shares is made in accordance with the provisions of 
     Section 1.1. hereof.  In the event of net redemptions, the Trust shall 
     pay the redemption proceeds by 2:00 p.m. New York time on the next 
     Business Day after an order to redeem the shares is made in accordance 
     with the provisions of Section 1.4. hereof.  All such payments shall be 
     in federal funds transmitted by wire.

     1.7.  Issuance and transfer of the Shares will be by book entry only.  
     Stock certificates will not be issued to the Company or the Accounts.  
     The Shares ordered from the Trust will be recorded in an appropriate title
     for the Accounts or the appropriate subaccounts of the Accounts.

     1.8.  The Trust shall furnish same day notice (by wire or telephone 
     followed by written confirmation) to the Company of any dividends or 
     capital gain distributions payable on the Shares.  The Company hereby 
     elects to receive all such dividends and distributions as are payable on 
     a Portfolio's Shares in additional Shares of that Portfolio, but may 
     revoke that election at any time by notifying the Trust in writing.  The 
     Trust shall notify the Company of the number of Shares so issued as payment
     of such dividends and distributions.

     1.9.  The Trust or its custodian shall make the net asset value per share
     for each Portfolio available to the Company on each Business Day as soon as
     reasonably practical after the net asset value per share is calculated and
     shall use its best efforts to make such net asset value per share available
     by 6:30 p.m. New York time.  In the event that the Trust is unable to meet
     the 6:30 p.m. time stated herein, it shall provide additional time for the
     Company to place orders for the purchase and redemption of Shares.  Such
     additional time shall be equal to the additional time which the Trust takes
     to make the net asset value available to the Company.  If the Trust
     provides materially incorrect share net asset value information, the Trust
     shall make an adjustment to the number of shares purchased or redeemed for
     the Accounts to reflect the correct net asset value per share.  Any
     material error in the calculation or reporting of net asset value per
     share, dividend or capital gains information shall be reported promptly
     upon discovery to the Company.



                                         -3-
<PAGE>


ARTICLE II.  CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS

     2.1.  The Company represents and warrants that the Policies are or will be
     registered under the 1933 Act or are exempt from or not subject to
     registration thereunder, and that the Policies will be issued, sold, and
     distributed in compliance in all material respects with all applicable
     state and federal laws, including without limitation the 1933 Act, the
     Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940
     Act.  The Company further represents and warrants that it is an insurance
     company duly organized and validly existing under applicable law and that
     it has legally and validly established the Account as a segregated asset
     account under applicable law and has registered or, prior to any issuance
     or sale of the Policies, will register the Accounts as unit investment
     trusts in accordance with the provisions of the 1940 Act (unless exempt
     therefrom) to serve as segregated investment accounts for the Policies, and
     that it will maintain such registration for so long as any Policies are
     outstanding.  The Company shall amend the registration statements under the
     1933 Act for the Policies and the registration statements under the 1940
     Act for the Accounts from time to time as required in order to effect the
     continuous offering of the Policies or as may otherwise be required by
     applicable law.  The Company shall register and qualify the Policies for
     sales in accordance with the securities laws of the various states only if
     and to the extent deemed necessary by the Company.

     2.2.  The Company represents and warrants that the Policies are currently
     and at the time of issuance will be treated as life insurance policies,
     endowment or annuity contracts under applicable provisions of the Internal
     Revenue Code of 1986, as amended (the "Code"), that it will maintain such
     treatment and that it will notify the Trust or MFS immediately upon having
     a reasonable basis for believing that the Policies have ceased to be so
     treated or that they might not be so treated in the future.

     2.3.  The Company represents and warrants that it, as the underwriter for
     the Policies, is a member in good standing of the NASD and is a registered
     broker-dealer with the SEC.  The Company represents and warrants that, to
     the extent it sells the Policies directly, it will sell and distribute such
     policies in accordance in all material respects with all applicable state
     and federal securities laws, including without limitation the 1933 Act, the
     1934 Act, and the 1940 Act.

     2.4.  The Trust and MFS represent and warrant that the Shares sold pursuant
     to this Agreement shall be registered under the 1933 Act, duly authorized
     for issuance and sold in compliance with the laws of The Commonwealth of
     Massachusetts and all applicable federal and state securities laws and that
     the Trust is and shall remain registered under the 1940 Act. The Trust
     shall amend the registration statement for its Shares under the 1933 Act
     and the 1940 Act from time to time as required in order to effect the
     continuous offering of its Shares.  The Trust shall register and qualify
     the Shares for sale in accordance with the laws of the various states only
     if and to the extent deemed necessary by the Trust.

     2.5.  MFS represents and warrants that the Underwriter is a member in good
     standing of the NASD and is registered as a broker-dealer with the SEC.
     The Trust and MFS represent that the Trust and the Underwriter will sell
     and distribute the Shares in accordance in all material respects with all
     applicable state and federal securities laws, including without limitation
     the 1933 Act, the 1934 Act, and the 1940 Act.


                                         -4-
<PAGE>

     2.6.  The Trust represents that it is lawfully organized and validly
     existing under the laws of The Commonwealth of Massachusetts and that it
     does and will comply in all material respects with the 1940 Act and any
     applicable regulations thereunder.

     2.7.  MFS represents and warrants that it is and shall remain duly
     registered under all applicable federal securities laws and that it shall
     perform its obligations for the Trust in compliance in all material
     respects with any applicable federal securities laws and with the
     securities laws of The Commonwealth of Massachusetts.  MFS represents and
     warrants that it is not subject to state securities laws other than the
     securities laws of The Commonwealth of Massachusetts and that it is exempt
     from registration as an investment adviser under the securities laws of The
     Commonwealth of Massachusetts.

     2.8.  The Company shall submit to the Board such reports, material or data
     as the Board may reasonably request from time to time so that it may carry
     out fully the obligations imposed upon it by the conditions contained in
     the exemptive application pursuant to which the SEC has granted exemptive
     relief to permit mixed and shared funding (the "Mixed and Shared Funding
     Exemptive Order").


ARTICLE III.  PROSPECTUS AND PROXY STATEMENTS; VOTING

     3.1.  At least annually, the Trust or its designee shall provide the
     Company, free of charge, with as many copies of the current prospectus
     (describing only the Portfolios listed in Schedule A hereto) for the Shares
     as the Company may reasonably request for distribution to existing Policy
     owners whose Policies are funded by such Shares.  The Trust or its designee
     shall provide the Company, at the Company's expense, with as many copies of
     the current prospectus for the Shares as the Company may reasonably request
     for distribution to prospective purchasers of Policies.  If requested by
     the Company in lieu thereof, the Trust or its designee shall provide such
     documentation (including a "camera ready" copy of the new prospectus as set
     in type or, at the request of the Company, as a diskette in the form sent
     to the financial printer) and other assistance as is reasonably necessary
     in order for the parties hereto once each year (or more frequently if the
     prospectus for the Shares is supplemented or amended) to have the
     prospectus for the Policies and the prospectus for the Shares printed
     together in one document; the expenses of such printing to be apportioned
     between (a) the Company and (b) the Trust or its designee in proportion to
     the number of pages of the Policy and Shares' prospectuses, taking account
     of other relevant factors affecting the expense of printing, such as
     covers, columns, graphs and charts; the Trust or its designee to bear the
     cost of printing the Shares' prospectus portion of such document for
     distribution to owners of existing Policies funded by the Shares and the
     Company to bear the expenses of printing the portion of such document
     relating to the Accounts; PROVIDED, however, that the Company shall bear
     all printing expenses of such combined documents where used for
     distribution to prospective purchasers or to owners of existing Policies
     not funded by the Shares.  In the event that the Company requests that the
     Trust or its designee provides the Trust's prospectus in a "camera ready"
     or diskette format, the Trust shall be responsible for providing the
     prospectus in the format in which it or MFS is accustomed to formatting
     prospectuses and shall bear the expense of providing the prospectus in such
     format (E.G., typesetting expenses), and the Company shall bear the expense
     of adjusting or changing the format to conform with any of its
     prospectuses.

     3.2.  The prospectus for the Shares shall state that the statement of
     additional information for the Shares is available from the Trust or its
     designee.  The Trust or its designee, at its expense, shall


                                         -5-
<PAGE>

     print and provide such statement of additional information to the Company
     (or a master of such statement suitable for duplication by the Company) for
     distribution to any owner of a Policy funded by the Shares.  The Trust or
     its designee, at the Company's expense, shall print and provide such
     statement to the Company (or a master of such statement suitable for
     duplication by the Company) for distribution to a prospective purchaser who
     requests such statement or to an owner of a Policy not funded by the
     Shares.

     3.3. The Trust or its designee shall provide the Company free of charge
     copies, if and to the extent applicable to the Shares, of the Trust's proxy
     materials, reports to Shareholders and other communications to Shareholders
     in such quantity as the Company shall reasonably require for distribution
     to Policy owners.

     3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3 above, or
     of Article V below, the Company shall pay the expense of printing or
     providing documents to the extent such cost is considered a distribution
     expense.  Distribution expenses would include by way of illustration, but
     are not limited to, the printing of the Shares' prospectus or prospectuses
     for distribution to prospective purchasers or to owners of existing
     Policies not funded by such Shares.

     3.5. The Trust hereby notifies the Company that it may be appropriate to
     include in the prospectus pursuant to which a Policy is offered disclosure
     regarding the potential risks of mixed and shared funding.

     3.6. If and to the extent required by law, the Company shall:

          (a)  solicit voting instructions from Policy owners;

          (b)  vote the Shares in accordance with instructions received from
               Policy owners; and

          (c)  vote the Shares in each separate Account for which no
               instructions have been received in the same proportion as the 
               Shares of such Portfolio in such Account for which instructions 
               have been received from Policy owners;

     so long as and to the extent that the SEC continues to interpret the 1940
     Act to require pass through voting privileges for variable contract owners.
     The Company will in no way recommend action in connection with or oppose or
     interfere with the solicitation of proxies for the Shares held for such
     Policy owners.  The Company reserves the right to vote shares held in any
     segregated asset account in its own right, to the extent permitted by law.
     Participating Insurance Companies shall be responsible for assuring that
     each of their separate accounts holding Shares calculates voting privileges
     in the manner required by the Mixed and Shared Funding Exemptive Order.
     The Trust and MFS will notify the Company of any changes of interpretations
     or amendments to the Mixed and Shared Funding Exemptive Order.


ARTICLE IV.  SALES MATERIAL AND INFORMATION

     4.1. The Company shall furnish, or shall cause to be furnished, to the
     Trust or its designee, each piece of sales literature or other promotional
     material in which the Trust, MFS, any other investment adviser to the
     Trust, or any affiliate of MFS are named, at least ten (10) Business Days


                                         -6-
<PAGE>

     prior to its use.  No such material shall be used if the Trust, MFS, or
     their respective designees reasonably objects to such use within five (5)
     Business Days after receipt of such material.

     4.2. The Company shall not give any information or make any representations
     or statement on behalf of the Trust, MFS, any other investment adviser to
     the Trust, or any affiliate of MFS or concerning the Trust or any other
     such entity in connection with the sale of the Policies other than the
     information or representations contained in the registration statement,
     prospectus or statement of additional information for the Shares, as such
     registration statement, prospectus and statement of additional information
     may be amended or supplemented from time to time, or in reports or proxy
     statements for the Trust, or in sales literature or other promotional
     material approved by the Trust, MFS or their respective designees, except
     with the permission of the Trust, MFS or their respective designees.  The
     Trust, MFS or their respective designees each agrees to respond to any
     request for approval on a prompt and timely basis.  The Company shall adopt
     and implement procedures reasonably designed to ensure that information
     concerning the Trust, MFS or any of their affiliates which is intended for
     use only by brokers or agents selling the Policies (I.E., information that
     is not intended for distribution to Policy owners or prospective Policy
     owners) is so used, and neither the Trust, MFS nor any of their affiliates
     shall be liable for any losses, damages or expenses relating to the
     improper use of such broker only materials.

     4.3. The Trust or its designee shall furnish, or shall cause to be
     furnished, to the Company or its designee, each piece of sales literature
     or other promotional material in which the Company and/or the Accounts is
     named, at least ten (10) Business Days prior to its use.  No such material
     shall be used if the Company or its designee reasonably objects to such use
     within five (5) Business Days after receipt of such material.

     4.4. The Trust and MFS shall not give, and agree that the Underwriter shall
     not give, any information or make any representations on behalf of the
     Company or concerning the Company, the Accounts, or the Policies in
     connection with the sale of the Policies other than the information or
     representations contained in a registration statement, prospectus, or
     statement of additional information for the Policies, as such registration
     statement, prospectus and statement of additional information may be
     amended or supplemented from time to time, or in reports for the Accounts,
     or in sales literature or other promotional material approved by the
     Company or its designee, except with the permission of the Company.  The
     Company or its designee agrees to respond to any request for approval on a
     prompt and timely basis.  The parties hereto agree that this Section 4.4.
     is neither intended to designate nor otherwise imply that MFS is an
     underwriter or distributor of the Policies.

     4.5. The Company and the Trust (or its designee in lieu of the Company or
     the Trust, as appropriate) will each provide to the other at least one
     complete copy of all registration statements, prospectuses, statements of
     additional information, reports, proxy statements, sales literature and
     other promotional materials, applications for exemptions, requests for
     no-action letters, and all amendments to any of the above, that relate (in
     the case of the Trust) to the Policies, or (in the case of the Company) to
     the Trust or its Shares, within twenty (20) days after the filing of such
     document with the SEC or other regulatory authorities.  The Company and the
     Trust shall also each promptly inform the other of the results of any
     examination by the SEC (or other regulatory authorities) that relates to
     the Policies, the Trust or its Shares, and the party that was the subject
     of the examination shall provide the other party with a copy of relevant
     portions of any "deficiency letter" or other correspondence or written
     report regarding any such examination.


                                         -7-
<PAGE>

     4.6. The Trust and MFS will provide the Company with as much notice as is
     reasonably practicable of any proxy solicitation for any Portfolio, and of
     any material change in the Trust's registration statement, particularly any
     change requiring change to the registration statement or prospectus or
     statement of additional information for any Account.  The Trust and MFS
     will cooperate with the Company so as to enable the Company to solicit
     proxies from Policy owners or to make changes to its prospectus, statement
     of additional information or registration statement, in an orderly manner.
     The Trust and MFS will make reasonable efforts to attempt to have changes
     affecting Policy prospectuses become effective simultaneously with the
     annual updates for such prospectuses.

     4.7. For purpose of this Article IV and Article VIII, the phrase "sales
     literature or other promotional material" includes but is not limited to
     advertisements (such as material published, or designed for use in, a
     newspaper, magazine, or other periodical, radio, television, telephone or
     tape recording, videotape display, signs or billboards, motion pictures, or
     other public media), and sales literature (such as brochures, circulars,
     reprints or excerpts or any other advertisement, sales literature, or
     published articles), distributed or made generally available to customers
     or the public, educational or training materials or communications
     distributed or made generally available to some or all agents or employees.


ARTICLE V.  FEES AND EXPENSES

     5.1. The Trust shall pay no fee or other compensation to the Company under
     this Agreement, and the Company shall pay no fee or other compensation to
     the Trust, except that if the Trust or any Portfolio adopts and implements
     a plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution
     and Shareholder servicing expenses, then, subject to obtaining any required
     exemptive orders or regulatory approvals, the Trust may make payments to
     the Company or to the underwriter for the Policies if and in amounts agreed
     to by the Trust in writing.  Each party, however, shall, in accordance with
     the allocation of expenses specified in Articles III and V hereof,
     reimburse other parties for expenses initially paid by one party but
     allocated to another party. In addition, nothing herein shall prevent the
     parties hereto from otherwise agreeing to perform, and arranging for
     appropriate compensation for, other services relating to the Trust and/or
     to the Accounts.

     5.2. The Trust or its designee shall bear the expenses for the cost of
     registration and qualification of the Shares under all applicable federal
     and state laws, including preparation and filing of the Trust's
     registration statement, and payment of filing fees and registration fees;
     preparation and filing of the Trust's proxy materials and reports to
     Shareholders; setting in type and printing its prospectus and statement of
     additional information (to the extent provided by and as determined in
     accordance with Article III above); setting in type and printing the proxy
     materials and reports to Shareholders (to the extent provided by and as
     determined in accordance with Article III above); the preparation of all
     statements and notices required of the Trust by any federal or state law
     with respect to its Shares; all taxes on the issuance or transfer of the
     Shares; and the costs of distributing the Trust's prospectuses and proxy
     materials to owners of Policies funded by the Shares and any expenses
     permitted to be paid or assumed by the Trust pursuant to a plan, if any,
     under Rule 12b-1 under the 1940 Act.  The Trust shall not bear any expenses
     of marketing the Policies.

     5.3. The Company shall bear the expenses of distributing the Shares'
     prospectus or prospectuses in connection with new sales of the Policies and
     of distributing the Trust's Shareholder reports to Policy owners.  The
     Company shall bear all expenses associated with the registration,
     qualification,


                                         -8-
<PAGE>

     and filing of the Policies under applicable federal securities and state
     insurance laws; the cost of preparing, printing and distributing the Policy
     prospectus and statement of additional information to other than existing
     Policy owners; and the cost of preparing, printing and distributing annual
     individual account statements for Policy owners as required by state
     insurance laws.


ARTICLE VI.  DIVERSIFICATION AND RELATED LIMITATIONS

     6.1. The Trust and MFS represent and warrant that each Portfolio of the
     Trust will meet the diversification requirements of Section 817 (h)  (1) of
     the Code and Treas. Reg. 1.817-5, relating to the diversification
     requirements for variable annuity, endowment, or life insurance contracts,
     as they may be amended from time to time (and any revenue rulings, revenue
     procedures, notices, and other published announcements of the Internal
     Revenue Service interpreting these sections), as if those requirements
     applied directly to each such Portfolio.

     6.2. The Trust and MFS represent that each Portfolio will elect to be
     qualified as a Regulated Investment Company under Subchapter M of the Code
     and that they will maintain such qualification (under Subchapter M or any
     successor or similar provision), and will notify the Company if it appears
     that any Portfolio will not so qualify.


ARTICLE VII.  POTENTIAL MATERIAL CONFLICTS

     7.1. The Trust agrees that the Board, constituted with a majority of
     disinterested trustees, will monitor each Portfolio of the Trust for the
     existence of any material irreconcilable conflict between the interests of
     the variable annuity contract owners and the variable life insurance policy
     owners of the Company and/or affiliated companies ("contract owners")
     investing in the Trust.  The Board shall have the sole authority to
     determine if a material irreconcilable conflict exists, and such
     determination shall be binding on the Company only if approved in the form
     of a resolution by a majority of the Board, or a majority of the
     disinterested trustees of the Board. The Board will give prompt notice of
     any such determination to the Company.

     7.2. The Company agrees that it will be responsible for assisting the Board
     in carrying out its responsibilities under the conditions set forth in the
     Trust's exemptive application pursuant to which the SEC has granted the
     Mixed and Shared Funding Exemptive Order by providing the Board, as it may
     reasonably request, with all information necessary for the Board to
     consider any issues raised and agrees that it will be responsible for
     promptly reporting any potential or existing conflicts of which it is aware
     to the Board including, but not limited to, an obligation by the Company to
     inform the Board whenever contract owner voting instructions are
     disregarded.  The Company also agrees that, if a material irreconcilable
     conflict arises, it will at its own cost remedy such conflict up to and
     including (a) withdrawing the assets allocable to some or all of the
     Accounts from the Trust or any Portfolio and reinvesting such assets in a
     different investment medium, including (but not limited to) another
     Portfolio of the Trust, or submitting to a vote of all affected contract
     owners whether to withdraw assets from the Trust or any Portfolio and
     reinvesting such assets in a different investment medium and, as
     appropriate, segregating the assets attributable to any appropriate group
     of contract owners that votes in favor of such segregation, or offering to
     any of the affected contract owners the option of segregating the assets
     attributable to their contracts or policies, and (b) establishing a new
     registered management investment company and segregating the assets
     underlying the Policies, unless a majority of Policy owners materially
     adversely affected by the


                                         -9-
<PAGE>

     conflict have voted to decline the offer to establish a new registered
     management investment company.

     7.3. A majority of the disinterested trustees of the Board shall determine
     whether any proposed action by the Company adequately remedies any material
     irreconcilable conflict. In the event that the Board determines that any
     proposed action does not adequately remedy any material irreconcilable
     conflict, the Company will withdraw from investment in the Trust each of
     the Accounts designated by the disinterested trustees and terminate this
     Agreement within six (6) months after the Board informs the Company in
     writing of the foregoing determination; PROVIDED, HOWEVER, that such
     withdrawal and termination shall be limited to the extent required to
     remedy any such material irreconcilable conflict as determined by a
     majority of the disinterested trustees of the Board.

     7.4. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
     Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
     1940 Act or the rules promulgated thereunder with respect to mixed or
     shared funding (as defined in the Mixed and Shared Funding Exemptive Order)
     on terms and conditions materially different from those contained in the
     Mixed and Shared Funding Exemptive Order, then (a) the Trust and/or the
     Participating Insurance Companies, as appropriate, shall take such steps as
     may be necessary to comply with Rule 6e-2 and 6e-3(T), as amended, and Rule
     6e-3, as adopted, to the extent such rules are applicable; and (b) Sections
     3.5, 3.6, 7.1, 7.2, 7.3 and 7.4 of this Agreement shall continue in effect
     only to the extent that terms and conditions substantially identical to
     such Sections are contained in such Rule(s) as so amended or adopted.


ARTICLE VIII.  INDEMNIFICATION

     8.1. INDEMNIFICATION BY THE COMPANY

          The Company agrees to indemnify and hold harmless the Trust, MFS, any
     affiliates of MFS, and each of their respective directors/trustees,
     officers and each person, if any, who controls the Trust or MFS within the
     meaning of Section 15 of the 1933 Act, and any agents or employees of the
     foregoing (each an "Indemnified Party," or collectively, the "Indemnified
     Parties" for purposes of this Section 8.1) against any and all losses,
     claims, damages, liabilities (including amounts paid in settlement with the
     written consent of the Company) or expenses (including  reasonable counsel
     fees) to which any Indemnified Party may become subject under any statute,
     regulation, at common law or otherwise, insofar as such losses, claims,
     damages, liabilities or expenses (or actions in respect thereof) or
     settlements are related to the sale or acquisition of the Shares or the
     Policies and:

          (a)  arise out of or are based upon any untrue statement or alleged
               untrue statement of any material fact contained in the
               registration statement, prospectus or statement of additional
               information for the Policies or contained in the Policies or
               sales literature or other promotional material for the Policies
               (or any amendment or supplement to any of the foregoing), or
               arise out of or are based upon the omission or the alleged
               omission to state therein a material fact required to be stated
               therein or necessary to make the statements therein not
               misleading PROVIDED that this agreement to indemnify shall not
               apply as to any Indemnified Party if such statement or omission
               or such alleged statement or omission was made in


                                         -10-
<PAGE>

               reasonable reliance upon and in conformity with information
               furnished to the Company or its designee by or on behalf of the
               Trust or MFS for use in the registration statement, prospectus or
               statement of additional information for the Policies or in the
               Policies or sales literature or other promotional material (or
               any amendment or supplement to any of the foregoing) or otherwise
               for use in connection with the sale of the Policies or Shares; or

          (b)  arise out of or as a result of statements or representations
               (other than statements or representations contained in the
               registration statement, prospectus, statement of additional
               information or sales literature or other promotional material of
               the Trust not supplied by the Company or its designee, or persons
               under its control and on which the Company has reasonably relied)
               or wrongful conduct of the Company or persons under its control,
               with respect to the sale or distribution of the Policies or
               Shares; or

          (c)  arise out of any untrue statement or alleged untruestatement of a
               material fact contained in the registration statement,
               prospectus, statement of additional information, or sales
               literature or other promotional literature of the Trust, or any
               amendment thereof or supplement thereto, or the omission or
               alleged omission to state therein a material fact required to be
               stated therein or necessary to make the statement or statements
               therein not misleading, if such statement or omission was made in
               reliance upon information furnished to the Trust by or on behalf
               of the Company; or

          (d)  arise out of or result from any material breach of any
               representation and/or warranty made by the Company in this
               Agreement or arise out of or result from any other material
               breach of this Agreement by the Company; or

          (e)  arise as a result of any failure by the Company to provide the
               services and furnish the materials under the terms of this
               Agreement;

     as limited by and in accordance with the provisions of this Article VIII.


     8.2. INDEMNIFICATION BY THE TRUST

          The Trust agrees to indemnify and hold harmless the Company and each
     of its directors and officers and each person, if any, who controls the
     Company within the meaning of Section 15 of the 1933 Act, and any agents or
     employees of the foregoing (each an "Indemnified Party," or collectively,
     the "Indemnified Parties" for purposes of this Section 8.2) against any and
     all losses, claims, damages, liabilities (including amounts paid in
     settlement with the written consent of the Trust) or expenses (including
     reasonable counsel fees) to which any Indemnified Party may become subject
     under any statute, at common law or otherwise, insofar as such losses,
     claims, damages, liabilities or expenses (or actions in respect thereof) or
     settlements are related to the sale or acquisition of the Shares or the
     Policies and:

          (a)  arise out of or are based upon any untrue statement or alleged
               untrue statement of any material fact contained in the
               registration statement, prospectus, statement of additional
               information or sales literature or other promotional material of
               the Trust


                                         -11-
<PAGE>

               (or any amendment or supplement to any of the foregoing), or
               arise out of or are based upon the omission or the alleged
               omission to state therein a material fact required to be stated
               therein or necessary to make the statement therein not
               misleading, PROVIDED that this agreement to indemnify shall not
               apply as to any Indemnified Party if such statement or omission
               or such alleged statement or omission was made in reasonable
               reliance upon and in conformity with information furnished to the
               Trust, MFS, the Underwriter or their respective designees by or
               on behalf of the Company for use in the registration statement,
               prospectus or statement of additional information for the Trust
               or in sales literature or other promotional material for the
               Trust (or any amendment or supplement to any of the foregoing) or
               otherwise for use in connection with the sale of the Policies or
               Shares; or

          (b)  arise out of or as a result of statements or representations
               (other than statements or representations contained in the
               registration statement, prospectus, statement of additional
               information or sales literature or other promotional material for
               the Policies not supplied by the Trust, MFS, the Underwriter or
               any of their respective designees or persons under their
               respective control and on which any such entity has reasonably
               relied) or wrongful conduct of the Trust or persons under its
               control, with respect to the sale or distribution of the Policies
               or Shares; or

          (c)  arise out of any untrue statement or alleged untrue statement of
               a material fact contained in the registration statement,
               prospectus, statement of additional information, or sales
               literature or other promotional literature of the Accounts or
               relating to the Policies, or any amendment thereof or supplement
               thereto, or the omission or alleged omission to state therein a
               material fact required to be stated therein or necessary to make
               the statement or statements therein not misleading, if such
               statement or omission was made in reliance upon information
               furnished to the Company by or on behalf of the Trust, MFS or the
               Underwriter; or

          (d)  arise out of or result from any material breach of any
               representation and/or warranty made by the Trust in this
               Agreement (including a failure, whether unintentional or in good
               faith or otherwise, to comply with the diversification
               requirements specified in Article VI of this Agreement) or arise
               out of or result from any other material breach of this Agreement
               by the Trust; or

          (e)  arise out of or result from the materially incorrect or untimely
               calculation or reporting of the daily net asset value per share
               or dividend or capital gain distribution rate; or

          (f)  arise as a result of any failure by the Trust to provide the
               services and furnish the materials under the terms of the
               Agreement;

     as limited by and in accordance with the provisions of this Article VIII.

     8.3. In no event shall the Trust be liable under the indemnification
     provisions contained in this Agreement to any individual or entity,
     including without limitation, the Company, or any Participating Insurance
     Company or any Policy holder, with respect to any losses, claims, damages,
     liabilities or expenses that arise out of or result from (i) a breach of
     any representation, warranty,


                                         -12-
<PAGE>

     and/or covenant made by the Company hereunder or by any Participating
     Insurance Company under an agreement containing substantially similar
     representations, warranties and covenants; (ii) the failure by the Company
     or any Participating Insurance Company to maintain its segregated asset
     account (which invests in any Portfolio) as a legally and validly
     established segregated asset account under applicable state law and as a
     duly registered unit investment trust under the provisions of the 1940 Act
     (unless exempt therefrom); or (iii) the failure by the Company or any
     Participating Insurance Company to maintain its variable annuity and/or
     variable life insurance contracts (with respect to which any Portfolio
     serves as an underlying funding vehicle) as life insurance, endowment or
     annuity contracts under applicable provisions of the Code.

     8.4. Neither the Company nor the Trust shall be liable under the
     indemnification provisions contained in this Agreement with respect to any
     losses, claims, damages, liabilities or expenses to which an Indemnified
     Party would otherwise be subject by reason of such Indemnified Party's
     willful misfeasance, willful misconduct, or gross negligence in the
     performance of such Indemnified Party's duties or by reason of such
     Indemnified Party's reckless disregard of obligations and duties under this
     Agreement.

     8.5. Promptly after receipt by an Indemnified Party under this Section 8.5.
     of notice of commencement of any action, such Indemnified Party will, if a
     claim in respect thereof is to be made against the indemnifying party under
     this section, notify the indemnifying party of the commencement thereof;
     but the omission so to notify the indemnifying party will not relieve it
     from any liability which it may have to any Indemnified Party otherwise
     than under this section.  In case any such action is brought against any
     Indemnified Party, and it notified the indemnifying party of the
     commencement thereof, the indemnifying party will be entitled to
     participate therein and, to the extent that it may wish, assume the defense
     thereof, with counsel satisfactory to such Indemnified Party.  After notice
     from the indemnifying party of its intention to assume the defense of an
     action, the Indemnified Party shall bear the expenses of any additional
     counsel obtained by it, and the indemnifying party shall not be liable to
     such Indemnified Party under this section for any legal or other expenses
     subsequently incurred by such Indemnified Party in connection with the
     defense thereof other than reasonable costs of investigation.

     8.6. Each of the parties agrees promptly to notify the other parties of the
     commencement of any litigation or proceeding against it or any of its
     respective officers, directors, trustees, employees or 1933 Act control
     persons in connection with the Agreement, the issuance or sale of the
     Policies, the operation of the Accounts, or the sale or acquisition of
     Shares.

     8.7. A successor by law of the parties to this Agreement shall be entitled
     to the benefits of the indemnification contained in this Article VIII.  The
     indemnification provisions contained in this Article VIII shall survive any
     termination of this Agreement.


ARTICLE IX.  APPLICABLE LAW

     9.1. This Agreement shall be construed and the provisions hereof
     interpreted under and in accordance with the laws of The Commonwealth of
     Massachusetts.

     9.2. This Agreement shall be subject to the provisions of the 1933, 1934
     and 1940 Acts, and the rules and regulations and rulings thereunder,
     including such exemptions from those statutes, rules


                                         -13-
<PAGE>

     and regulations as the SEC may grant and the terms hereof shall be
     interpreted and construed in accordance therewith.

ARTICLE X.  NOTICE OF FORMAL PROCEEDINGS

     The Trust, MFS, and the Company agree that each such party shall promptly
notify the other parties to this Agreement, in writing, of the institution of
any formal proceedings brought against such party or its designees by the NASD,
the SEC, or any insurance department or any other regulatory body regarding such
party's duties under this Agreement or related to the sale of the Policies, the
operation of the Accounts, or the purchase of the Shares.


ARTICLE XI.  TERMINATION

     11.1.   This Agreement shall terminate with respect to the Accounts, or
     one, some, or all Portfolios:

             (a)  at the option of any party upon six (6) months' advance 
                  written notice to the other parties; or

             (b)  at the option of the Company to the extent that the Shares of
                  Portfolios are not reasonably available to meet the 
                  requirements of the Policies or are not "appropriate funding 
                  vehicles" for the Policies, as reasonably determined by the 
                  Company.  Without limiting the generality of the foregoing, 
                  the Shares of a Portfolio would not be "appropriate funding 
                  vehicles" if, for example, such Shares did not meet the 
                  diversification or other requirements referred to in Article 
                  VI hereof; or if the Company would be permitted to disregard 
                  Policy owner voting instructions pursuant to Rule 6e-2 or 
                  6e-3(T) under the 1940 Act.  Prompt notice of the election to 
                  terminate for such cause and an explanation of such cause 
                  shall be furnished to the Trust by the Company; or

             (c)  at the option of the Trust or MFS upon institution of formal
                  proceedings against the Company by the NASD, the SEC, or any
                  insurance department or any other regulatory body regarding 
                  the Company's duties under this Agreement or related to the 
                  sale of the Policies, the operation of the Accounts, or the 
                  purchase of the Shares; or

             (d)  at the option of the Company upon institution of formal
                  proceedings against the Trust or MFS by the NASD, the SEC, or 
                  any state securities or insurance department or any other 
                  regulatory body regarding the Trust's or MFS' duties under 
                  this Agreement or related to the sale of the Shares; or

             (e)  at the option of the Company, the Trust or MFS upon receipt of
                  any necessary regulatory approvals and/or the vote of the 
                  Policy owners having an interest in the Accounts (or any 
                  subaccounts) to substitute the shares of another investment 
                  company for the corresponding Portfolio Shares in accordance 
                  with the terms of the Policies for which those Portfolio 
                  Shares had been selected to serve as the underlying investment
                  media.  The Company will give thirty (30) days' prior


                                         -14-
<PAGE>

                  written notice to the Trust of the Date of any proposed vote 
                  or other action taken to replace the Shares; or

             (f)  termination by either the Trust or MFS by written notice to 
                  the Company, if either one or both of the Trust or MFS 
                  respectively, shall determine, in their sole judgment 
                  exercised in good faith, that the Company has suffered a 
                  material adverse change in its business, operations, financial
                  condition, or prospects since the date of this Agreement; or

             (g)  termination by the Company by written notice to the Trust and
                  MFS, if the Company shall determine, in its sole judgment
                  exercised in good faith, that the Trust or MFS has suffered a
                  material adverse change in this business, operations, 
                  financial condition or prospects since the date of this 
                  Agreement; or

             (h)  at the option of any party to this Agreement, upon another
                  party's material breach of any provision of this Agreement; or


             (i)  upon assignment of this Agreement, unless made with the 
                  written consent of the parties hereto.

     11.2.   The notice shall specify the Portfolio or Portfolios, Policies
     and, if applicable, the Accounts as to which the Agreement is to be
     terminated.

     11.3.   It is understood and agreed that the right of any party hereto to
     terminate this Agreement pursuant to Section 11.1(a) may be exercised for
     cause or for no cause.  Termination by any party pursuant to any of Section
     11.1(b) through Section 11.1(i) shall not take effect until the terminating
     party shall have provided written notice to the other party.

     11.4.   Except as necessary to implement Policy owner initiated
     transactions, or as required by state insurance laws or regulations, the
     Company shall not redeem the Shares attributable to the Policies (as
     opposed to the Shares attributable to the Company's assets held in the
     Accounts), and the Company shall not prevent Policy owners from allocating
     payments to a Portfolio that was otherwise available under the Policies,
     until thirty (30) days after the Company shall have notified the Trust of
     its intention to do so.

     11.5.   Notwithstanding any termination of this Agreement, the Trust and
     MFS shall, at the option of the Company, continue to make available
     additional shares of the Portfolios pursuant to the terms and conditions of
     this Agreement, for all Policies in effect on the effective date of
     termination of this Agreement (the "Existing Policies"), except as
     otherwise provided under Article VII of this Agreement.  Specifically,
     without limitation, the owners of the Existing Policies shall be permitted
     to transfer or reallocate investment under the Policies, redeem investments
     in any Portfolio and/or invest in the Trust upon the making of additional
     purchase payments under the Existing Policies.


                                         -15-
<PAGE>

ARTICLE XII.  NOTICES

     Any notice shall be sufficiently given when sent by registered or certified
mail, overnight courier or facsimile to the other party at the address of such
party set forth below or at such other address as such party may from time to
time specify in writing to the other party.

     If to the Trust:

          MFS VARIABLE INSURANCE TRUST
          500 Boylston Street
          Boston, Massachusetts  02116
          Facsimile No.: (617) 954-6624
          Attn:  Stephen E. Cavan, Secretary

     If to the Company:

          THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
          1300 South Clinton Street
          Fort Wayne, Indiana  46802-3506
          Facsimile No.:  (219) 455-1773
          Attn:  Kelly D. Clevenger


     If to MFS:

          MASSACHUSETTS FINANCIAL SERVICES COMPANY
          500 Boylston Street
          Boston, Massachusetts  02116
          Facsimile No.: (617) 954-6624
          Attn:  Stephen E. Cavan, General Counsel


ARTICLE XIII.  MISCELLANEOUS

     13.1.   Subject to the requirement of legal process and regulatory
     authority, each party hereto shall treat as confidential the names and
     addresses of the owners of the Policies and all information reasonably
     identified as confidential in writing by any other party hereto and, except
     as permitted by this Agreement or as otherwise required by applicable law
     or regulation, shall not disclose, disseminate or utilize such names and
     addresses and other confidential information without the express written
     consent of the affected party until such time as it may come into the
     public domain.

     13.2.   The captions in this Agreement are included for convenience of
     reference only and in no way define or delineate any of the provisions
     hereof or otherwise affect their construction or effect.

     13.3.   This Agreement may be executed simultaneously in one or more
     counterparts, each of which taken together shall constitute one and the
     same instrument.

     13.4.   If any provision of this Agreement shall be held or made invalid
     by a court decision, statute, rule or otherwise, the remainder of the
     Agreement shall not be affected thereby.


                                         -16-
<PAGE>

     13.5.   The Schedule attached hereto, as modified from time to time, is
     incorporated herein by reference and is part of this Agreement.

     13.6.   Each party hereto shall cooperate with each other party in
     connection with inquiries by appropriate governmental authorities
     (including without limitation the SEC, the NASD, and state insurance
     regulators) relating to this Agreement or the transactions contemplated
     hereby.

     13.7.   The rights, remedies and obligations contained in this Agreement
     are cumulative and are in addition to any and all rights, remedies and
     obligations, at law or in equity, which the parties hereto are entitled to
     under state and federal laws.

     13.8.   A copy of the Trust's Declaration of Trust is on file with the
     Secretary of State of The Commonwealth of Massachusetts.  The Company
     acknowledges that the obligations of or arising out of this instrument are
     not binding upon any of the Trust's trustees, officers, employees, agents
     or shareholders individually, but are binding solely upon the assets and
     property of the Trust in accordance with its proportionate interest
     hereunder.  The Company further acknowledges that the assets and
     liabilities of each Portfolio are separate and distinct and that the
     obligations of or arising out of this instrument are binding solely upon
     the assets or property of the Portfolio on whose behalf the Trust has
     executed this instrument.  The Company also agrees that the obligations of
     each Portfolio hereunder shall be several and not joint, in accordance with
     its proportionate interest hereunder, and the Company agrees not to proceed
     against any Portfolio for the obligations of another Portfolio.



                                         -17-
<PAGE>

     IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement 
to be executed in its name and on its behalf by its duly authorized 
representative and its seal to be hereunder affixed hereto as of the date 
specified above.

                         THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

                         By its authorized officer,


                         By: 
                               ---------------------------------

                         Title: 
                               ---------------------------------


                         MFS VARIABLE INSURANCE TRUST, ON BEHALF OF THE
                         PORTFOLIOS
                         By its authorized officer and not individually,


                         By: 
                               ---------------------------------
                               James R. Bordewick, Jr.
                               Assistant Secretary


                         MASSACHUSETTS FINANCIAL SERVICES COMPANY
                         By its authorized officer,


                         By: 
                               ---------------------------------
                               Arnold D. Scott
                               Senior Executive Vice President



                                         -18-
<PAGE>

                                   As of  
                                          ----------------------




                                    SCHEDULE A


                         ACCOUNTS, POLICIES AND PORTFOLIOS
                       SUBJECT TO THE PARTICIPATION AGREEMENT





         NAME OF SEPARATE
         ACCOUNT AND DATE            POLICIES FUNDED            PORTFOLIOS
ESTABLISHED BY BOARD OF DIRECTORS   BY SEPARATE ACCOUNT   APPLICABLE TO POLICIES
- ---------------------------------   -------------------   ----------------------












                                           -19-

<PAGE>

Writer's Direct Dial:    219/455-1847
Telefax Number:     219/455-5135



April 23, 1998

VIA EDGAR



The Lincoln National Life Insurance Company
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, IN 46801

Re:  Lincoln Life Flexible Premium Variable Life Account M 
     (File No.  333-42479)

Ladies and Gentlemen:

I have made such examination of law and have examined such records and documents
as I have deemed necessary to render the opinion expressed below.

I am of the opinion that upon acceptance by Lincoln Life Flexible Premium
Variable Life Account M (the "Account"), a segregated account of The Lincoln
National Life Insurance Company (Lincoln Life), of contributions from a person
pursuant to an insurance policy issued in accordance with the prospectus
contained in the registration statement on Form S-6, and upon compliance with
applicable law, such person will have a legally issued interest in his or her
individual account with the Account, and the securities issued will represent
binding obligations of Lincoln Life.

I consent to the filing of this Opinion as an exhibit to the Account's 
Pre-Effective Amendment No.  1 to the Registration Statement on Form S-6.

Sincerely,

/s/ Brian Burke

Brian Burke
Counsel


<PAGE>


LINCOLN LIFE
900 COTTAGE GROVE ROAD
HARTFORD, CT 06152


April 17, 1998

Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549

Re: Lincoln Life Flexible Premium Variable Life Separate Account M
    Registration Statement S-6, File No. 333-42479 - 
    Pre-Effective Amendment No. 1

Commissioners:

This opinion is furnished in connection with Pre-Effective Amendment No. 1 to 
the Registration Statement on Form S-6 filed by The Lincoln National Life 
Insurance Company under the Securities Act of 1993 recorded as File No. 
333-42479. The prospectus included in said Pre-Effective Amendment describes 
second-to-die flexible premium variable universal life insurance policies 
(the "Policies"). The forms of Policies were prepared under my direction.

In my opinion, the illustrations of benefits under the Policies included in 
the Section entitled "Illustrations" in the prospectus, based on assumptions 
stated in the illustrations, are consistent with the provisions of the forms 
of the Policies. The ages selected in the illustrations are representative of 
the manner in which the Policies operate.

I hereby consent to the use of this opinion as an exhibit to the Registration 
Statement and to the reference to me under the heading "Experts" in the 
prospectus.


Very truly yours,
/s/ MICHAEL J. ROSCOE
- ---------------------------------
Michael J. Roscoe, FSA, MAAA











<PAGE>

                                                          EXHIBIT 7


             CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" in the 
Pre-Effective Amendment No. 1 to the Registration Statement (Form S-6 
No. 333-42479) pertaining to the Lincoln Life Flexible Premium Variable Life 
Separate Account M, and to the use therein of our report dated February 5, 
1998, with respect to the statutory-basis financial statements of The Lincoln
National Life Insurance Company.


                                             /s/ Ernst & Young LLP


Fort Wayne, Indiana
April 22, 1998






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