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As filed with the Securities and Exchange Commission on April 14, 2000

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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Post-Effective Amendment No. 4

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to the

FORM S-1 REGISTRATION STATEMENT

Under

(Exact name of registrant as specified in its charter)

(Primary Standard Industrial Classification Code Number)

125 High Street

Boston, Massachusetts 02110

(Address of Principal Executive Office)

Bernard R. Beckerlegge, Esquire

Senior Vice President and General Counsel

(617) 526-1610

(Name, address, and telephone number of agent for service)

Approximate date of commencement of proposed sale to the public. As soon as practicable following effectiveness of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X]

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CALCULATION OF REGISTRATION FEE

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The Certificates may be sold by or through depository institutions. However, the Certificates are not deposits and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. You should consider carefully the risk factors associated with the Certificates beginning on page 10 of this prospectus.

This prospectus sets forth information about the Certificates that you ought to know before purchasing or enrolling. You should read the prospectus before investing and retain it for future reference.

This prospectus does not constitute an offering in any state or jurisdiction in which such offering may not be lawfully made. No person is authorized by us to give any information or to make any representations other than those contained in this prospectus, in connection with this offering. You should not rely on any unauthorized information or representation.

Neither the Securities and Exchange Commission nor any state securities commission has approved the certificates or determined that this prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

We file annual and quarterly reports and other information with the SEC. You may read and copy any reports, statements or other information we file at the SEC's public reference room in Washington, D.C. You can obtain copies of these documents by writing to the SEC and paying a duplicating fee. Please call the SEC at 1-800-SEC-0330 for further information as to the operation of the public reference room. Our SEC filings are also available to the public on the SEC Internet site (http://www.sec.gov) .

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The date of this Prospectus is May 1, 2000.

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Certain terms used in this prospectus are defined as follows:

Account: The Account we establish for a Certificate Owner to which the Single Premium, paid by or on behalf of a Certificate Owner, is credited.

Account Anniversary: Each anniversary of the date an Interest or Indexed Account is opened or transferred, including the end of the Term.

Account Value: The total of the Indexed Account Value and the Interest Account Value under a Certificate prior to the Income Date.

Account Year: A continuous 12-month period commencing on the date that an Interest or Indexed Account is opened or transferred and each subsequent Account Anniversary.

Allocated Certificate: A Certificate under which amounts are allocated or credited to the account of one individual participant.

Annuitant: The natural person on whose life annuity payments are based and who will receive annuity payments starting on the Income Date.

Annuity: Options available for annuity payments.

Cap: The maximum percentage that an Indexed Account may increase during a single Term.

Certificate: The document issued to each Certificate Owner evidencing his or her interest in the group annuity contract. As used in this prospectus, the term Certificate also includes any group contract and any individual contract, unless the context requires otherwise.

Certificate Anniversary: Each anniversary of the Certificate Date.

Certificate Year: A continuous 12-month period commencing on the Certificate Date and each Certificate Anniversary thereafter.

Certificate Date: The date a Certificate is issued and the Certificate Owner's rights and benefits begin.

Certificate Owner ("You"): The person(s) or entity entitled to the ownership rights stated in the Certificate and in whose name(s) the Certificate is issued.

Certificate Value: The guaranteed minimum value of the Certificate at any time prior to any then-applicable Market Value Adjustment, calculated as described below.

Certificate Withdrawal Value: The greater of: (a) the Account Value, plus or minus any applicable Market Value Adjustment, less any applicable Surrender Charge, and (b) the Certificate Value, multiplied by the ratio of the Account Value, adjusted by the applicable Market Value Adjustment, to the unadjusted Account Value.

Company ("We", "Us", "Our", "Keyport"): Keyport Life Insurance Company.

Contract Owner: The person(s) or entity entitled to the ownership rights stated in a group contract or Individual Contract and in whose name(s) the contract is issued.

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Designated Beneficiary: The person who may be entitled to receive benefits following the death of the Annuitant (if the Certificate Owner is not a natural person), you or the Joint Certificate Owner.

Enrollment Form: A document signed by a participant that serves as his or her application for participation under an Allocated Certificate.

Excess Interest Credit: Additional interest that may be credited to the Certificate Value on the Account Anniversary or upon a transfer to ensure that the total interest, including previous Excess Interest Credits, credited to the Certificate Value equals the total interest or Index Increases ever credited to your Account Value.

Floor: The minimum percentage that an Indexed Account may increase during a single Term. The Floor will not be less than zero.

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Free Withdrawal Amount: The portion of your Account Value that may be surrendered, transferred, or applied to an Annuity option without payment of any surrender charge or Market Value Adjustment. If a partial surrender has not been made in the Certificate Year of the transaction, the Free Withdrawal Amount is equal to the sum of any interest or Index Increases credited to your Account Value in the prior 12 months or since the most recent partial surrender, if sooner.

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General Account: Our general investment account which contains all of our assets, except assets in any Separate Account.

Guaranteed Interest Rate: The fixed rate of interest we set and guarantee at the beginning of a Term of an Interest Account.

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Guaranteed Interest Rate Factors: The Participation Rate, Cap, and Floor, which we set and guarantee at the beginning of a Term of an Indexed Account.

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Income Date: The date on which annuity payments to an Annuitant are to begin.

Index: The Index, set forth in the Certificate, that is used to calculate Index Increases.

Indexed Account: An account to which we credit Index Increases.

Indexed Account Value: The value of an Indexed Account, equal to all allocations or transfers to the Indexed Account, plus all Index Increases credited to the Indexed Account, less all amounts transferred or surrendered from the Indexed Account.

Index Increase: Interest, based on the Guaranteed Interest Rate Factors, that we credit to an Indexed Account.

Individual Contract: A contract issued to a Contract Owner in states in which we may not issue a Certificate.

In Force: The status of a Certificate before the Income Date, so long as it is not totally surrendered and the Annuitant, or any Certificate Owner has not died, that will cause the Certificate to end within at most five years from the date of death.

Interest Account: An account to which we credit interest based on the Guaranteed Interest Rate.

Interest Account Value: The value of an Interest Account, equal to all allocations or transfers to the Interest Account, plus all interest credited to the Interest Account, less all amounts transferred or surrendered from the Interest Account.

Joint Certificate Owner: Any person designated by you to jointly possess rights in your Account. We require that you and any Joint Certificate Owner act together.

Non-Allocated Certificate: A Certificate under which a single account is established and held on behalf of all participants in a particular plan of an employer or other eligible entity on a non-allocated basis.

Non-Qualified Certificate: Any Certificate that is not issued under a Qualified Plan.

Participation Rate: The percentage of the increase in the Index.

Qualified Certificate: Any Certificate issued under a Qualified Plan.

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Qualified Plan: A retirement plan which receives special tax treatment under Sections 401, 403, 408 and 408A of the Internal Revenue Code and HR-10 (Keogh) Plans for self-employed persons.

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Reset Date: The date on which Account Value is allocated to an Interest or Indexed Account. The first day of each subsequent Term is the next Reset Date for that Account.

Separate Account: Our nonunitized separate investment account in which assets underlying the Certificates and other annuity contracts we issue may be held. Assets held in the Separate Account will be subject to the claims of our general creditors.

Single Premium: The money paid by, or on behalf of, a participant with respect to a Certificate.

Term: The period for which interest is credited at a Guaranteed Interest Rate to an Interest Account or Guaranteed Interest Rate Factors are used to calculate Index Increases for an Indexed Account.

Treasury Rate: The interest rate in the Treasury Constant Maturity Series, published by the Federal Reserve Board, that is used in calculating Market Value Adjustments.

Written Request: A request that is written in a form satisfactory to us, signed by you, and received at our office.

This summary and the detailed information in this prospectus describe participating interests in group and individual deferred annuity contracts and the Certificates issued thereunder. We offer the Certificates to assist you in your retirement planning.

The Certificate is designed to provide retirement benefits for eligible individuals. Eligible individuals include persons participating in certain trusts or plans and may include employees of an employer. Certain states, however, do not permit us to issue Certificates and require us to issue Individual Contracts instead.

We issue Allocated and Non-Allocated Certificates under group contracts. With Allocated Certificates, each individual's interest is separately accounted for and is held in a specific account established for that individual. We will issue an Allocated Certificate to each participant in a Non-Qualified plan and in certain Qualified Plans which will verify participation in a group contract. In such cases, the participant will have a 100% vested interest in all values credited to the individual participant's account.

With Non-Allocated Certificates, however, a participant's interest may be vested in the plan in which they are participating rather than in a Certificate. We will only issue Non-Allocated Certificates in connection with certain Qualified Plans. In such cases, the Certificate will usually be owned by the trustee(s) of the plan, and a single account will be established and held on behalf of all participants in the plan on a non-allocated basis.

Single Premium

We require a Single Premium of at least $5,000 per Account to accompany the application or the Enrollment Form for an Allocated Certificate. A Single Premium of $500,000 or more requires our approval. The Single Premium does not need to accompany the Enrollment form under a group contract. The Single Premium is the only premium payment that we permit or require, but you may purchase more than one Certificate. (See "Enrollment Form and Premium Payments," page 11).

You may allocate the Single Premium to one of two types of accounts, the Interest Account or the Indexed Account, of varying durations or Terms. Certain states, however, do not permit Indexed Accounts to be available for Certificates issued in those states.

The Single Premium that is credited to your Account becomes part of our assets. We own our General Account and Separate Account assets and generally invest these amounts in U.S. government securities and certain commercial debt securities having maturities that usually match the Terms. We may also invest our assets in various instruments, including equity options, futures, forwards, and other instruments based on the Index to hedge our obligations with respect to Indexed Accounts. We may also buy and sell interest rate swaps and caps, Treasury bond futures, and similar instruments to hedge our exposure to changes in interest rates. (See "Investments by Keyport," page 23).

Interest Accounts earn interest at a fixed rate that we set and guarantee at the beginning of the Term for the duration of the Term. We credit such Guaranteed Interest Rates to Interest Accounts on an annual, compounded basis for the entire duration of the selected Term. This means that we add interest to the amount invested, so that credited interest may earn interest. (See "Interest Accounts," page 12.)

Interest credited to Indexed Accounts, or Index Increase, is calculated by reference to fixed interest rate factors, which are applied to changes in the Standard & Poor's 500 Composite Stock Price Index using a formula set forth in the Certificate. We set and guarantee Guaranteed Interest Rate Factors at the beginning of a Term for the duration of the Term. If the publication of the Index is discontinued or there is a substantial change in the calculation of the Index, we will substitute a suitable index. Index Increases are based on a percentage of the percentage increase in the Index since the beginning of the Term. Index Increases are calculated using the Guaranteed Interest Rate Factors set at the beginning of the Term and credited proportionately over the selected Term on each Account Anniversary.

Index Increases are subject to a maximum and minimum limit, both of which we set and guarantee at the beginning of the Term. The minimum may not be less than zero. Thus, the Indexed Account Value will not decrease to reflect declines in the Index value since the beginning of the Term or from Account Anniversary to Account Anniversary. (See "Indexed Accounts," page 12). The amount of Index Increases earned on an Indexed Account may be more or less than the amount of interest earned on an Interest Account of the same Term and established at the same time. It is possible that an Indexed Account will not earn Index Increases on Account Anniversaries if the Index value on any of the Account Anniversaries in the Term does not exceed its value at the beginning of the Term. (See "Establishment of Guaranteed Interest Rates and Guaranteed Interest Rate Factors," page 14).

In certain circumstances, the Certificate permits a minimum value to be used, instead of the Indexed Account Value, to calculate benefits under a Certificate. This value, or the Certificate Value, is equal to:

The amount used to calculate death benefits, withdrawal amounts, and annuity values will not be less than the Certificate Value, subject to any Market Value Adjustment on the corresponding Account Value. If the Indexed Account Value is less than the Certificate Value at the end of a Term, we will credit interest to the Indexed Account so that its value will equal the Certificate Value. (See "Certificate Value," page 14; "Indexed Accounts," page 12).

Terms and Renewal of Terms

We currently offer initial Terms of one, three, five, six, seven, and ten (Interest Account only) years. From time to time we may discontinue offering terms of certain durations or offer Terms of other durations. The interest rates and interest rate factors we declare may vary depending on the duration of the Term. You should contact us to determine the Terms we currently offer. You may transfer from one type of account to the other and/or to Terms of different durations, subject to contractual provisions and any surrender charge and Market Value Adjustment.

At the end of each Term, a new Term of one year will begin, unless you instruct us otherwise within 30 days before the end of the Term. At that time, you may choose another Term from among the Terms we then offer or transfer the Account Value to the other type of account. (See "Renewal Terms," page 13).

We consider a variety of factors in setting Guaranteed Interest Rates and Guaranteed Interest Rate Factors for any Term. These factors include the interest rates generally available on the types of instruments in which we invest your Single Premium, the duration of the Term, regulatory and tax requirements, sales commissions and expenses we bear, general economic trends, and competitive factors.

You may obtain a portion or all of your Account Value, by making a partial or total surrender, subject to certain restrictions. Such surrenders may be subject to a surrender charge and/or a Market Value Adjustment. Generally, we deduct a surrender charge from any partial or total surrender made before the end of a Term. However, we will not deduct a surrender charge from the following:

The minimum partial surrender generally is $250. The minimum for partial surrenders under our systematic withdrawal program is $100. After a partial surrender, the minimum Account Value must be at least $2,500. We do not permit partial surrenders from the Indexed Account of any Certificate issued under a corporate or Keogh Qualified Plan that is established pursuant to Section 401 of the Internal Revenue Code of 1986, as amended.

The surrender charge equals a percentage of the gross amount surrendered in excess of the Free Withdrawal Amount, before the addition or deduction of any Market Value Adjustment. The surrender charge percentage declines depending on the number of years (rounded up) remaining until the end of the Term. The maximum surrender charge currently is 7% for surrenders when seven or more years remain in the Term.

We may defer payment of any partial or total surrender for up to six months from the date we receive your surrender request. Some states permit only a shorter deferral period. A payment deferral for more than 30 days is unlikely to occur except under highly unusual circumstances. (See "Payment upon Partial or Total Surrender," page 17).

You may transfer the Interest Account Value to another account at any time before the Income Date, subject to certain conditions. You may transfer the Indexed Account Value only at the end of a Term. Any amount you transfer before the end of a Term may be subject to a Market Value Adjustment. Presently, we do not charge for transfers, but we may institute a transfer charge on transfers in excess of a certain number of transfers annually. (See "Transfer of Values," page 15; "Market Value Adjustment," page 18).

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The amount payable upon a partial or total surrender from, or upon the application to an Annuity Option of Account Value of, an Account with a Term of three years or more may be adjusted up or down by a Market Value Adjustment. The scaling factor is currently 1.0, which means there will be no reduction of any Market Value Adjustment amount. The Market Value Adjustment is an amount that in certain circumstances we add or subtract from your Account Value to reflect the relative difference between:

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It is possible, therefore, that a significant increase in Treasury Rates from the beginning of a Term would cause your total surrender amount to be less than the original amount credited to your Account. (See "Market Value Adjustment," page 18).

A Market Value Adjustment will not apply to a partial or total surrender within the first 30 calendar days after the end of any Term. With respect to another surrender or annuitization, if a partial surrender has not occurred in the same Certificate Year, we base the Market Value Adjustment on the gross amount payable that is in excess of the Free Withdrawal Amount, before deducting any surrender charge. Otherwise, we base the Market Value Adjustment on the gross amount payable, before deducting any surrender charge. (See "Market Value Adjustment," page 18).

A Market Value Adjustment also applies to any transfer from an Interest or Indexed Account with a Term of three years or more, unless the effective date of the transfer is:

The Market Value Adjustment upon transfer is based on the Account Value or, if a partial surrender has not occurred in the same Certificate Year, on the Account Value in excess of the Free Withdrawal Amount. (See "Market Value Adjustment," page 18).

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The Market Value Adjustment for Indexed Accounts includes a scaling factor, which may reduce the positive or negative amount of any such Market Value Adjustment. The scaling factor is currently 1.0, which means there will be no reduction of any Market Value Adjustment amount. The Market Value Adjustment for Interest Accounts does not include a scaling factor. (See "Market Value Adjustment," page 18).

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On the Income Date, we will start to pay the designated Annuitant a series of annuity payments under an Annuity Option. The Annuity Option you select determines the timing and basis of the annuity payments. (See "Annuity Period Provisions," page 21).

The Certificate provides for a special death benefit if you die before the Income Date, if the Certificate Owner is not a natural person, or the Annuitant dies before the Income Date. The Designated Beneficiary may claim the special death benefit by surrendering the Certificate to us for the special death benefit. The special death benefit is the greater of:

If the surrender request is made after the applicable 90 or 60 day period or upon the death of a Joint Certificate Owner, the Designated Beneficiary will receive the Certificate Withdrawal Value. If the Designated Beneficiary chooses not to surrender the Certificate, it may stay In Force for up to five years after the date of death. At the end of the five years, we will pay the Designated Beneficiary the Certificate Withdrawal Value, without deducting any surrender charge. (See "Death Provisions," page 19; "Surrender Charge," page 17).

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We will deduct the amount of any premium taxes levied by any state or governmental entity when the premium tax is actually paid, unless we defer the deduction until the time of surrender or the Income Date. We cannot describe precisely the amount of premium tax you may have to pay on any transaction. The amount of any premium tax charged to your Certificate depends, among other things, on the type of Certificate, your state of residence, the Annuitant's state of residence, our status within those states, and the insurance tax laws of those states. Currently premium tax rates range from 0% to 5.0%. Appendix C, on page 76 of this prospectus, contains a schedule of premium tax rates.

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At least once each Certificate Year, we will send you a report which will show the Account Value, the Certificate Withdrawal Value, the Market Value Adjustment used to calculate the Certificate Withdrawal Value, and any surrender charge.

An inherent risk of the Certificate is that, if you make a partial or total surrender before the end of the applicable Term, application of any surrender charge and/or Market Value Adjustment might reduce the value of your Account. As a result you could receive less than your original Single Premium. (See "Surrender Charge", page 17; "Market Value Adjustment", page 18).

We base the interest and Index Increases earned by an Account on the Guaranteed Interest Rate and Guaranteed Interest Rate Factors that we declare at the beginning of each Term. The initial and subsequent Guaranteed Interest Rates and Guaranteed Interest Rate Factors apply to the original principal sum and reinvested earnings. Our management will decide what Guaranteed Interest Rates and Guaranteed Interest Rate Factors to declare. We cannot predict or guarantee future Guaranteed Interest Rates and Guaranteed Interest Rate Factors. (See "Establishment of Guaranteed Interest Rates and Guaranteed Interest Rate Factors", page 14).

The Certificate Owner is the person or entity designated in the application or Enrollment Form for the Certificate. You may exercise all rights under the Certificate. Joint Certificate Owners are permitted, but not contingent Certificate Owners.

Prior to the Income Date, you and any Joint Certificate Owner may direct us in writing to change the Certificate Owner, Joint Certificate Owner, Beneficiary, Contingent Beneficiary, Contingent Annuitant, or in certain instances, the Annuitant. You may change an irrevocably-named person only with the written consent of that person.

Because a change of Certificate Owner by means of a gift may be a taxable event, you should consult a competent tax adviser about the tax consequences resulting from such a transfer.

Qualified Certificates may have limitations on the transfer of ownership. You should consult a competent tax adviser about the tax consequences resulting from such a transfer.

You must submit a Single Premium of at least $5,000 per Certificate with the Enrollment Form for an Allocated Certificate. We must approve a Single Premium payment of $500,000 or more. You may purchase multiple Certificates, but we reserve the right to limit the total premiums you may pay on your Certificates. We also may reject any premium payment.

We credit the Single Premium to your Account, which is established on the date we receive of a properly completed Enrollment Form, along with the required premium payment. We will issue a Certificate and confirm the receipt of the Single Premium in writing. If we issue a contract on a non-allocated basis, a single Account is opened for the Contract Owner.

Your Account starts earning interest the day after it is established. You may choose to allocate the Single Premium to an Interest Account or an Indexed Account. The Indexed Account is not available for Certificates issued in certain states.

If we determine that an Enrollment Form is incomplete, we will notify you in writing or by telephone to obtain the necessary information. We will return an incomplete Enrollment Form, along with the Single Premium, if you do not complete it within three weeks of its receipt.

We will permit others to act on your behalf in certain instances, including the following two examples. First, we will accept an application for a Certificate that contains a signature signed under a power of attorney, if a copy of the power of attorney is also submitted. Second, we will also issue a Certificate to replace an existing life insurance or annuity policy that was issued by us or an affiliated company without requiring a new application from the applicant.

Certain dealers and other authorized persons, such as employers and Qualified Plan fiduciaries, will inform us of an applicant's answers to the questions in the application by telephone or order ticket and remit the Single Premium to us. If the information is complete, we will issue the Certificate, along with a copy of the completed Enrollment Form, to you so that you may verify the accuracy of the information. We may also ask you to confirm the accuracy of the information by signing and returning a copy of the Enrollment Form or a Certificate delivery receipt to us. We confirm all purchases with you in writing and our liability extends only to confirmed purchases.

You chose whether to allocate the Single Premium to an Interest Account or an Indexed Account and the duration of the initial Term. We offer Terms of one, three, five, six, seven, and ten years. However, the ten-year Term is only available on an Interest Account. We may offer other Terms from time to time. The Indexed Account is not available for Certificates issued in certain states.

A Term begins on the date the Single Premium is allocated or an amount is transferred to an account and ends when the number of years in the Term elected has elapsed. The last day of the Term is the expiration date for the Term. The subsequent Term begins on the first day after the expiration date of the previous Term.

The Single Premium, less any surrenders and premium taxes, earns and is credited interest and/or Index Increases in accordance with the applicable formula for an account. We credit interest to an Interest Account at the Guaranteed Interest Rates that are specified at the beginning of the Term for the duration of the Term. We credit Index Increases to Indexed Accounts by reference to Guaranteed Interest Rate Factors that are specified at the beginning of the Term for the duration of the Term.

Through the Interest Accounts, we offer specified effective and guaranteed annual rates of interest, for a specified period of time, the Term that you select. Guaranteed Interest Rates may differ among different Terms or Terms established at different times. A Guaranteed Interest Rate will not be less than 3% per year. Once we declare a Guaranteed Interest Rate at the beginning of a Term, we will not change it during the Term.

We will credit interest daily at a compounded rate which will be equal to the Guaranteed Interest Rate. If an amount remains in an Interest Account until the end of the applicable Term, its value will be equal to the amount originally allocated or transferred to the Interest Account, less all amounts withdrawn, plus all interest credited.

Appendix A provides an example of how interest is credited to the Interest Account.

Through the Indexed Accounts, we offer Index Increases that depend on increases in a specified Index. Index Increases are determined based on a formula using specified Guaranteed Interest Rate Factors (the Participation Rate, Cap, and Floor) that are available for the Terms you select. Guaranteed Interest Rate Factors may differ among different Terms or Terms established at different times. Once these Guaranteed Interest Rate Factors are declared at the beginning of a term, they will never be changed during the Term.

Index Increases may be added to an Indexed Account on each Account Anniversary. If an amount remains in an Indexed Account until the end of the applicable Term, its value will be equal to the amount originally allocated or transferred to the Indexed Account, less all amounts withdrawn, plus all Index Increases credited.

We will calculate and credit Index Increases on each Account Anniversary after the start of a Term. The Certificate contains the formula for calculating the Index Increases. We will credit Index Increases to the Indexed Account proportionately over the entire Term.

Therefore, there are two components of the Index Increases calculated on each Account Anniversary. The first part is the proportionate credit for any increase in the Index from its prior highest Account Anniversary value to its new highest value on the current Account Anniversary. The second part is the proportionate credit for any increase in the Index occurring on a prior Account Anniversary(ies). The second part of the Index Increase will always be zero on the first Account Anniversary in any Term .

Part one and two amounts, as calculated above, may be reduced if the Cap is applicable and increased if a Floor in excess of zero is applicable. The sum of the two parts equals the total Index Increase. If the Index on each Account Anniversary in a Term is less than the Index at the beginning of the Term, there will not be any Index Increases credited during the Term. Index Increases can never be negative because of the Floor of zero.

The effect of this formula is that, in the absence of any partial or total surrender during a Term, the total Index Increases credited during a Term will equal:

Partial surrenders in excess of Index Increases will reduce the amount of subsequent Index Increases, but do not affect Index Increases previously credited.

Total Index Increases may be more or less than the amount of interest credited to an Interest Account established at the same time for the same Term, depending on the change in the Index over the course of the Term.

If no or small Index Increases are earned by an Indexed Account, in time, the value of an Indexed Account may be less than the Certificate Value. In such a circumstance, the Certificate Value is used to calculate any benefit payable under the Certificate. If at the end of a Term the value of an Indexed Account is less than the Certificate Value, we will credit the Indexed Account with an End of the Term Increase that is equal to the excess of the Certificate Value over the Indexed Account Value. (See "Certificate Value," page 14).

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Currently the Index is the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"). The S&P 500 is a widely-accepted and broad measure of the performance of the major United States stock markets. The S&P 500 is a market-value weighted measure of changes in the prices of the underlying securities and does not reflect any stock dividend income on the underlying securities. "S&Pâ ", "S&P 500â ", and "Standard & Poor's 500" are trademarks of The McGraw Hill Companies, Inc. that we have licensed for use. The Contract is not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of purchasing the Certificate.

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If publication of the Index discontinues, or calculation of the Index changes substantially, we will substitute a suitable index and notify you of the substitution.

Appendix A provides the formula we use to calculate Index Increases and illustrative examples of calculations.

A new Term will automatically begin at the end of each Term, unless you elect to make a total surrender. (See "Surrenders", page 15). Each new Term will be for one year unless, you notify us in writing within 30 days before the end of a Term, of your selection of a different Term or transfer the Account Value to a different type of account. You may choose from among the Terms we offer at that time. We may discontinue offering Terms of certain durations currently available or offer Terms of different durations from time to time. The available Guaranteed Interest Rates and Guaranteed Interest Rate Factors may vary based on the duration of the Term selected, and may differ from the rates currently available for new Certificates. You may not select a Term that is longer than the number of years remaining until the Income Date. If you do, we will allocate the Account Value to a Term of one year. If less than one year remains until the Income Date, we automatically will allocate the Account Value to an Interest Account with a Term of one year.

The Account Value at the beginning of any subsequent Term will be equal to the Account Value at the end of the previous Term. Absent any partial or total surrender or transfer (the effects of which are described below), the Account Value will earn and be credited with interest or Index Increases for each year in the subsequent Term using the Guaranteed Interest Rates or Guaranteed Interest Rate Factors established at the beginning of the subsequent Term for the type of Account and Term selected by you or established by default (as described above) in the absence of other instructions.

We will provide you with a toll-free number to call to inquire about rates for Terms offered at the time. We will notify you in writing of the available Terms before the beginning of each subsequent Term.

You will know the Guaranteed Interest Rate or Guaranteed Interest Rate Factors for the chosen Term at the time of the initial purchase. Guaranteed Interest Rates and Guaranteed Interest Rate Factors may differ among the Terms. We may offer differing Guaranteed Interest Rates and Guaranteed Interest Rate Factors for initial allocations, transfers during Terms, and renewal Terms.

We do not have a specific formula for determining future Guaranteed Interest Rates and Guaranteed Interest Rate Factors. The guaranteed rates and factors will reflect interest rates available on the types of investments in which we invest the proceeds of the Account. (See "Investments by Keyport," page 23). Our management may also consider various other factors to determine guaranteed rates and factors for a Term, such as the duration of a Term, regulatory and tax requirements, sales commissions and administrative expenses we bear, general economic trends, and competitive factors. The Guaranteed Interest Rates we declare, and the rate of interest we credit to the Certificate Value used in the determination of an Indexed Account Value, however, will never be less than 3% annually.

The Certificate provides a minimum value, called the Certificate Value, that we use to calculate benefits under a Certificate when the Certificate Value is higher than the value of an Indexed Account calculated as described above.

The Certificate Value is equal to:

In addition, at each Account Anniversary and at the time of a transfer, we will credit additional interest, called an "Excess Interest Credit", to the Certificate Value, to the extent needed to ensure that the total interest (including previous Excess Interest Credits) credited to the Certificate Value equals the total interest or Index Increases ever credited to your Account Value. Interest amounts credited to the Certificate Value will earn interest in subsequent Certificate Years.

The Certificate Value is used to calculate benefits if, for example, the Index were to remain level or decline for several years and accordingly, Index Increases were not credited to an Indexed Account. In such a circumstance, while the value of the Indexed Account would not decline, the Certificate Value might rise above the value of the Indexed Account, as a result of the 3% annual interest credited to Certificate Value.

You may transfer the entire Account Value from an Interest or Indexed Account to another Interest or Indexed Account, subject to the following limitations:

While currently transfers are free of charge, we reserve the right to charge $25 per transfer if you make more than four transfers in a Certificate Year. We reserve the right, at any time and without prior notice, to terminate, modify, or suspend the transfer privileges described above.

You may make a full or partial surrender of your Account at any time prior to the Income Date while the Certificate is In Force. Partial surrenders are subject to the following charges and conditions:

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We reserve the right to change the minimum amount of any partial surrender.

We do not allow partial surrenders from the Indexed Account of any Certificate issued under a corporate or Keogh Qualified Plan under Section 401 of the Internal Revenue Code.

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The net amount of a partial or total surrender will include deductions for any surrender charge and Market Value Adjustment. The amount you receive may be greater or less than the amount subtracted from the Account Value as a result of the surrender. As described below, certain partial surrenders are not subject to a surrender charge and/or Market Value Adjustment.

If a request for a partial surrender would create insufficient account value to keep the Certificate In Force, we will treat the request as a request to surrender only the excess amount over $2,500.

We will, upon request, inform you of the amount payable upon a full or partial surrender. Any total or partial surrender may be subject to tax in addition to certain Certificate charges and adjustments. (See "Tax Considerations," page 24).

To the extent permitted by law, we will make monthly, quarterly, semi-annual, or annual distributions of interest credited to an Interest Account if you have enrolled in the systematic withdrawal program. All interest distributions are made directly to you and are taxed like any other withdrawal or distribution of Account Value. (See "Tax Considerations," page 24.) The minimum withdrawal may not be less than $100. You may not take systematic withdrawals from an Indexed Account. Distributions under the systematic withdrawal program are not subject to surrender charges or Market Value Adjustments.

(b) Partial Surrender Procedures and Determination of Surrender Value

At any time before the Income Date, you may, in writing, request a partial surrender. The surrender amount paid to you will be the requested surrender amount increased or decreased by any Market Value Adjustment and decreased by any surrender charge. The surrender charge and the Market Value Adjustment are calculated based on the requested surrender amount. The requested surrender amount will be deducted from your Account Value. For example, if you request a surrender amount of $10,000, the surrender charge and the Market Value Adjustment were each 5%, and the Free Withdrawal Amount did not apply, the surrender charge and the Market Value Adjustment would each be 5% of $10,000, for a net surrender payment to you of $9,000 ($10,000-$500-$500).

We may in our discretion allow you to request the net partial surrender amount that you wish to be paid, instead of the surrender amount described in the prior paragraph. If a Market Value Adjustment applies, however, the amount we actually pay may be more or less than the amount requested because of computational rounding. The total amount deducted from the Account Value upon a partial surrender will be the surrender amount (prior to the application of any Market Value Adjustment and any applicable surrender charge) that we calculate based on your requested net amount. For example, if you request a net partial surrender amount of $9,000 under the assumptions in the example above the total amount calculated by us and deducted from your account would be approximately $10,000.

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You may make a total surrender by Written Request. Surrendering the Certificate will end it.

The surrender value will be determined as of the date we receive the Written Request for surrender. We will pay you the Certificate Withdrawal Value, which is the greater of:

We will deduct any premium taxes not previously paid.

For any total surrender made after the first Certificate Year, you may receive the surrender benefit under an Annuity Option rather than in a lump sum.

(d) Risk

The interest and Index Increases credited to your Account are based on guarantees we make. The initial and subsequent Guaranteed Interest Rates and Guaranteed Interest Rate Factors apply to the original principal sum and reinvested earnings.

An inherent risk in a surrender prior to the end of the applicable Term is that the Market Value Adjustment may reduce your Account Value. (See "Market Value Adjustment," page 18).

We may defer payment of any partial or total surrender for six months or less from the date of receipt of your request for surrender. It is unlikely that we would defer a surrender payment more than 30 days. Deferred payment may be caused by an unusually high number of surrender requests, accompanied by a substantial shift in interest rates. If we decide to defer payment for more than 30 days, we will notify you in writing.

We do not deduct a sales charge from the Single Premium when we receive it. A surrender charge is deducted upon any partial or total surrender, except:

The amount of any surrender charge is computed as a percentage of the gross surrender amount in excess of the Free Withdrawal Amount. The percentage used depends on the number of Account Years (rounded up) remaining until the end of the account Term. The surrender charge is equal to:

The following chart indicates the surrender charge percentage that will be applied while the specified number of years are remaining.

We reserve the right to increase or decrease the amount of this charge, and the period of time for which it will apply, on new Certificates up to a maximum of 7% and 10 years. Currently, the charge is 7%. If such amounts increase, the increase will only apply to new Certificates issued after full disclosure to new Certificate Owners or to existing Certificate Owners purchasing additional Certificates.

After each surrender, we will adjust our records to reflect appropriate deductions from the Account Value and the Certificate Value.

The surrender charge will apply to a full or partial surrender in each Term of a Certificate. Any surrender may, in addition to certain Certificate charges and adjustments, be subject to tax. (See "Tax Considerations," page 24).

Appendix B provides examples of how the surrender charge is determined.

The amount payable upon a partial or total surrender before the Income Date, a transfer, or application of Account Value to an Annuity Option, may be increased or decreased by the application of a Market Value Adjustment. The Market Value Adjustment reflects the difference between:

A Market Value Adjustment will not apply to a partial or total surrender, or the transfer of Account Value to an Annuity Option, within the first 30 calendar days after the end of a Term.

A Market Value Adjustment applies to any other partial or total surrender of, or upon the transfer of Account Value to an Annuity Option from, an account with a Term of three years or more. The Market Value Adjustment calculation upon such a surrender may be based on the gross surrender amount before the deduction of any surrender charge.

A Market Value Adjustment applies to any transfer from an Account with a Term of three years or more to another Account, unless the effective date of the transfer is:

The Market Value Adjustment calculation upon transfer may be based on the Account Value. A Market Value Adjustment in connection with a transfer also will result in an adjustment to Certificate Value. (See "Certificate Value," page 14.)

If you have not previously taken a partial surrender or effected any other transaction potentially subject to a Market Value Adjustment in the same Certificate Year, we subtract an amount not exceeding the Free Withdrawal Amount from the amount used to calculate the Market Value Adjustment. Otherwise, we use the amount you requested to be surrendered, transferred, or applied to an Annuity Option as the basis to calculate the Market Value Adjustment.

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The Market Value Adjustment for Indexed Accounts includes a scaling factor. You will know the scaling factor for all Indexed Account Terms at the time of the initial purchase. Scaling factors may differ for Terms of different durations. We may change the scaling factors from time to time for new Certificates issued after the time of the change. The scaling factors will never be greater than one. Where a scaling factor is less than one, it will reduce the positive or negative amount of any Market Value Adjustment. The scaling factors are shown on the Certificate Schedule and are guaranteed for the life of the Certificate. The scaling factors are currently 1.0. The Market Value Adjustment for Interest Accounts does not include a scaling factor.

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Because the Market Value Adjustment is based on changes in the yields on U.S. Treasury securities, the effect of the Market Value Adjustment will be closely related to the levels of such yields. As a result, should such yields increase significantly from the time of purchase of a Certificate, coupled with any surrender charge, the amount you would receive upon a total surrender could be less than the Single Premium.

Appendix B provides the formula for calculating the Market Value Adjustment, as well as illustrative examples.

At your request, we will furnish you with illustrations of the Market Value Adjustment on your Account Value, if you make a total or partial surrender before the end of a Term.

We will deduct the amount of any premium taxes levied by a state or governmental entity when the premium tax is incurred, unless we defer the deduction until the time of surrender or the Income Date. The amount of premium tax payable on any transaction involving a Certificate will vary depending on whether the Certificate is Qualified or Non-Qualified, your state of residence, the state of residence of the Annuitant, our status within such states, and the insurance tax laws of such states. Currently, premium tax rates range from 0% to 5.0%. Appendix C contains a schedule of premium tax rates.

Death provisions do not apply to Non-Allocated Certificates. With Non-Allocated Certificates, Annuitants or payees are unknown until you request that an annuity be effected.

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Death of Certificate Owner, Joint Certificate Owner or Certain Non-Certificate Owner Annuitants: If, while the Certificate is In Force, you or any Joint Certificate Owner dies, or if the Annuitant dies when an entity (such as a trust) owns the Certificate, we will treat the Designated Beneficiary as the Certificate Owner after such a death. The Designated Beneficiary will be the first person among the following who is alive on the date of death; you; Joint Certificate Owner; Primary Beneficiary; Contingent Beneficiary; and otherwise your estate. If you and Joint Certificate Owner are both alive, you will be the Designated Beneficiary together.

The Designated Beneficiary may receive a death benefit by surrendering the Account. If the decedent was you or the Annuitant (if the Certificate Owner is not a natural person) and the surrender occurs by the later of the 90th day after the death or the 60th day after we are notified of the death, the death benefit is the greatest of the following three values:

If the decedent was you or the Annuitant (if the Certificate Owner is an entity), the Designated Beneficiary may, by the later of the 90th day after the death and the 60th day after we are notified of the death, surrender the Account for the death benefit on the date of surrender.

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The death benefit is the greatest of the following three values:

Otherwise, the death benefit is the Certificate Withdrawal Value.

If the Designated Beneficiary does not surrender the Certificate, the Certificate will continue as follows:

Payment of Benefits: Instead of receiving a lump sum, you or any Designated Beneficiary may direct us in writing to pay any benefit of $5,000 or more under an Annuity Option that meets the following:

You may also direct us to pay benefits to the Designated Beneficiary under an Annuity Option meeting these same requirements.

Death of Certain Non-Certificate Owner Annuitants: These provisions apply if and while the Certificate is In Force,

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The Certificate will continue after the Annuitant's death. The new Annuitant will be any living contingent Annuitant. If there is no living Contingent Annuitant, then you will be the new Annuitant.

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Death of Annuitant: If the Annuitant dies while the Certificate is In Force, the Designated Beneficiary will control the Certificate. The Designated Beneficiary has until the later of the 90th day after the death and the 60th day after we are notified of the death to surrender the Certificate for the death benefit. The death benefit is:

If a surrender is after the applicable 90 or 60 day period, the death benefit is the Certificate Withdrawal Value.

If the Designated Beneficiary does not surrender the Certificate, the Certificate may continue for the period permitted by the Internal Revenue Code. During this period, the Designated Beneficiary may exercise all ownership rights, including the right to make partial or total surrenders. If the Certificate is in effect at the end of the period, we will automatically end it then by paying to the Designated Beneficiary the Certificate Withdrawal Value. If the Designated Beneficiary is not alive, we will pay any person(s) named by the Designated Beneficiary in writing; otherwise we will pay the Designated Beneficiary's estate.

Payment of Benefits: Instead of receiving a lump sum, you or any Designated Beneficiary may direct us in writing to pay any benefit or $5,000 or more under an Annuity Option that meets the following:

You may also direct us to pay benefits to the Designated Beneficiary under an Annuity Option meeting these same requirements.

If the Annuitant is alive on the Income Date and the Certificate is In Force, we will begin payments under the payment option(s) you have chosen. We determine the payment by applying the Annuity Value on the Income Date (less any premium taxes not previously deducted) in accordance with the option selected. The Annuity Value is the greater of:

The Income Date, shown on the Certificate Schedule, is the later of the end of the Certificate Year in which the Annuitant's 85th birthday occurs or the end of the 10th Certificate Year.

For Allocated Certificates, you may elect, at least 30 days before the Income Date, to have the Annuity value applied on the Income Date pursuant to the Annuity Options described below. If you do not make an election, the Annuity value will be applied on the Income Date pursuant to Option 2 to provide a monthly life annuity with 10 years of payments guaranteed.

For Non-Allocated Certificates, you may request that we apply a portion of the Account Value, including any surrender charge and Market Value Adjustment, under an Annuity Option for a participant in your plan. We will issue a Certificate for such participant, who is also the Annuitant, and begin annuity payments as you direct.

You may not make a surrender after the Income Date. Other rules may apply to qualified retirement plans. (See "Qualified Plans," page 27.)

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You may change the Annuity Option from time to time, by Written Request. We must receive the request at least 30 days before the Income Date.

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Option 1 - Income for a Fixed Number of Year: We will pay an annuity for a chosen number of years, not less than 5 or more than 30 years. If on the payee's death, payments under the fixed number of years have not run out, then:

Option 2 - Life Income with 10 Years Guaranteed: We will pay an annuity income during the lifetime of the payee. If on the payee's death payments have been made for less than 10 years then:

The amount of the annuity payments will depend on the age of the payee at the time payments begin and may depend on the payee's sex.

Option 3 - Joint and Last Survivorship Income: We will pay an annuity as long as the payee or a designated second natural person is alive. The amount of the annuity payments will depend on the age of both persons at the time annuity payments begin and may depend on each person's sex. You may receive only one annuity payment under this option if both payees die after the receipt of the first payment, or receive only two annuity payments if both payees die after receipt of the second payment, and so on.

Other options may be arranged with the mutual consent of you and us.

Annuity payments are paid as monthly installments. However, if the net amount available under any Annuity Option is less than $5,000, we have the right to pay such amount in a lump sum. If the payments are less than $100 per payment, we may change the frequency of the payments to result in payments of at least $100.

We may require proof of age, sex, or survival of any payee upon whose age, sex or survival payments depend. If the age or sex has been misstated, we will compute the amount payable based on the correct age and sex. If income payments have begun, we will pay any underpayment on the next annuity payment and deduct any overpayment, unless repaid in one sum, from future annuity payments until we are repaid in full.

We invest our assets according to the requirements of applicable state laws regarding investments that may be made by the general accounts and separate accounts of life insurance companies. In general, these laws permit investments, subject to specified limits and certain qualifications, in federal, state, and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages, real estate and certain other investments. (See page 38 for further information on our investments).

All of our General Account assets, the assets of Separate Account C and of certain other Separate Accounts are available to fund claims under a Certificate.

In establishing the Guaranteed Interest Rates and Guaranteed Interest Rate Factors under the Certificates, we will take into account factors such as the yields available on the instruments in which the proceeds from the Certificates are invested. (See "Establishment of Guaranteed Interest Rates and Guaranteed Interest Rate Factors," page 14). Our obligations and the values and benefits under the Certificates, however, will not vary as a result of the returns on the instruments. Also, you, Designated Beneficiaries and payees with rights under a Certificate will not participate in the gains or losses of the investment instruments we hold in the Separate Account.

Our investment strategy will be to invest in debt securities, which we will use to match our liabilities with respect to the Terms to which the proceeds are allocated. It is in our sole discretion to invest in any type of investment that is authorized under state law. We expect to invest a substantial portion of the premiums in securities issued by the United States Government, or its agencies or instrumentalities, that may or may not be guaranteed by the United States Government. The government securities may include T-Bills, Notes, Bonds, Zero Coupon Securities and Mortgage Pass-Through Certificates such as Government National Mortgage Association backed securities (GNMA Certificates), Federal National Mortgage Association Guaranteed Pass-Through Certificates (FNMA Certificates) and Federal Home Loan Mortgage Corporation Mortgage Participation Certificates (FHLMC Certificates).

We may invest our assets in various instruments, including equity options, futures, forwards, and others based on the Index in order to hedge our obligations with respect to Indexed Accounts. We may also buy and sell interest rate swaps and caps, Treasury bond futures, and other instruments to hedge our exposure to changes in interest rates. These derivative instruments will be purchased from counterparties that conform to our policies and guidelines regarding derivative instruments. Investments in these instruments generally involve the following types of risks:

While the foregoing generally describes our investment strategy with respect to the proceeds attributable to the Certificates, we are not obligated to invest assets, including the proceeds attributable to the Certificates, according to any particular strategy except as may be required by Rhode Island and other state insurance laws.

We reserve the right to amend the group contracts and Certificate to meet the requirements of any applicable federal or state laws or regulations. We will notify you in writing of any such amendments.

You may assign a Certificate at any time, as permitted by applicable law. You must file a copy of any assignment with us. An assignment will not be binding on us until we receive a copy of it. Your rights and those of any revocably-named person will be subject to the assignment. Any Qualified Certificate may have limitations on your ability to assign the Certificate. We will not assume responsibility for the validity or effect of any assignment.

Because an assignment may be a taxable event, you should consult a competent tax adviser as to the tax consequences resulting from any assignment.

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Keyport Financial Services Corp. ("KFSC") serves as the principal underwriter for the Contracts and the Certificates described in this prospectus. KFSC is our indirect wholly-owned subsidiary and is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 ("Exchange Act") as a broker-dealer. KFSC is a member of the National Association of Securities Dealers, Inc. ("NASD") and is located at 125 High Street, Boston, Massachusetts 02110.

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The Certificate will be sold by insurance agents who are registered representatives of broker-dealers that have entered into distribution agreements with KFSC. We will pay a maximum commission to broker-dealers of 5.25% of the Single Premium. We may pay a reduced commission percentage applied to the Certificate Owner's Account Value at the start of each Term after the first term or at some other date(s).

Certificates may be sold with a lower commission structure to (a) our officers, directors or employees or those of our affiliates, or (b) any Qualified Plan established for such a person. Such Certificates will have higher Participation Rates under the Indexed Account, reflecting anticipated cost savings to us from the lower commission structure.

Because tax laws are complicated and tax consequences vary according to the actual status of the Contract Owner or Certificate Owner involved, legal and tax advice may be needed by a person, employer, or other entity contemplating the purchase of a contract or Certificate described in this prospectus.

You should understand that any detailed description of the tax consequences regarding the purchase of a contract or Certificate cannot be made in this prospectus. Special tax rules may apply with respect to certain purchase situations not discussed herein. We do not consider any applicable state or other tax laws. For detailed information, you should always consult a competent tax adviser.

This discussion is based upon our understanding of federal income tax laws as they are currently interpreted. The United States Congress has in the past and may in the future consider legislation that, if enacted, could adversely affect the tax treatment of annuity contracts, including distributions and undistributed appreciation. There is no way to predict whether, when or in what form Congress will enact legislation affecting annuity contracts. Any such legislation could have retroactive effect regardless of the date of enactment. We are not making any representation regarding the likelihood of continuation of those current federal income tax laws, or of the current interpretations by the Internal Revenue Service.

We are taxed as a life insurance company under Part I of Subchapter L of the Internal Revenue Code of 1986, as amended ("Code"). We own assets underlying the Certificates, and any income earned on those assets will be deemed our income.

Section 72 of the Code governs the taxation of annuities. You, a trust or other entity holding a Non-Qualified Certificate as an agent for an individual, are not taxed on increases in Account Value until a distribution occurs in the form of a total or partial surrender, an assignment or gift of the Certificate, or annuity payments. The provisions of Section 72 of the Code concerning distributions are briefly summarized below. A trust or other entity owning a Non-Qualified Certificate, other than as an agent for an individual, is taxed differently. Increases in Account Value are taxed yearly whether or not a distribution occurs.

If you fully surrender your Certificate, the portion of the payment that exceeds your cost basis in the Certificate is subject to tax. For Non-Qualified Certificates, the cost basis is generally the amount of the Single Premium, and the taxable portion of the surrender payment is subject to tax as ordinary income. For Qualified Certificates, the cost basis is generally zero, and the taxable portion of the surrender payment is generally taxed as ordinary income. A Designated Beneficiary receiving a lump sum surrender benefit after your death or the death of the Annuitant is similarly taxed on the portion of the amount that exceeds your cost basis in the Certificate. If the Designated Beneficiary elects to receive annuity payments that begin within one year of the decedent's death, different tax rules apply. (See "Annuity Payments" below).

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Partial surrenders received under Non-Qualified Certificates prior to the Income Date are first included in gross income to the extent the Account Value (plus or minus any Market Value Adjustment) exceeds the Single Premium. To the extent the Account Value (plus or minus any Market Value Adjustment) does not exceed the Single Premium, such surrenders are treated as a non-taxable return of principal to you. For partial surrenders under a Qualified Certificate, payments are treated first as a non-taxable return of principal up to the cost basis and then a taxable return of income. Since the cost basis of Qualified Certificates is generally zero, partial surrender amounts will generally be fully taxed as ordinary income.

If you assign or pledge a Non-Qualified Certificate, you will be treated as if you have received the amount assigned or pledged. You will be subject to taxation under the rules applicable to surrenders. If you give away the Certificate to anyone other than your spouse, you will be treated for income tax purposes as if you have fully surrendered the Certificate.

A special computational rule applies if, during any calendar year, we issue to you more than one Certificate or one or more Certificates and one or more of our other annuity contracts. Under this rule, the amount of any distribution includable in your gross income is determined under Section 72(e) of the Code. All such contracts will be treated as one contract. We believe that this means the amount of any distribution under any Certificate will be includable in gross income to the extent that, at the time of distribution, the sum of the values for all the Certificates or contracts exceeds the sum of the cost bases for all the contracts. This special computational rule applies to "laddered" Certificates, which are multiple Certificates of different Terms that are purchased during one calendar year.

We determine the non-taxable portion of each annuity payment with an "exclusion ratio" formula, which establishes the ratio that the cost basis of the Certificate bears to the total expected value of annuity payments for the term of the annuity. The remaining portion of each payment is taxable at ordinary income rates. For Qualified Certificates, the cost basis is generally zero. With annuity payments based on life contingencies, the payments will become fully taxable once the payee lives longer than the life expectancy used to calculate the non-taxable portion of the prior payments.

Payments received by you, Annuitants, and Designated Beneficiaries under the Certificates may be subject to both ordinary income taxes and a penalty tax equal to 10% of the amount received that is includable in income. The penalty tax is not imposed on amounts received under the following circumstances.

We are required to withhold federal income taxes on taxable amounts paid under the Certificates, unless the recipient elects not to have withholding apply. We will notify recipients of their right to elect not to have withholding apply. (See "Tax-Sheltered Annuities" ("TSAs"), below, for an alternative type of withholding that may apply to distributions from TSAs that are eligible for rollover to another TSA or an individual retirement annuity or account ("IRA")).

You may purchase a Non-Qualified Certificate with proceeds from the surrender of an existing annuity contract. Such a transaction may qualify as a tax-free exchange pursuant to Section 1035 of the Code. It is our understanding that in such an event:

Our understanding of the above is principally based on legislative reports prepared by the Staff of the Congressional Joint Committee on Taxation.

The Certificate may be used with several types of Qualified Plans. The tax rules applicable to participants in such Qualified Plans vary according to the type of plan and the terms and conditions of the plan. Therefore, we do not attempt to provide more than general information about the use of the Certificate with the various types of Qualified Plans. Participants under such Qualified Plans as well as Certificate Owners, Annuitants, and Designated Beneficiaries are cautioned that the rights of any person to any benefits under such Qualified Plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the Certificate issued in connection therewith. Following are brief descriptions of the various types of Qualified Plans and the use of the Certificate in connection therewith. Purchasers of the Certificate should seek competent advice concerning the terms and conditions of the particular Qualified Plan and use of the Certificate with that Plan.

Section 403(b) of the Code permits public school employees and employees of certain types of charitable, educational and scientific organizations specified in Section 501(c)(3) of the Code to purchase annuity contracts and, subject to certain contribution limitations, exclude the amount of premium payments from gross income. Such premium payments may be subject to Social Security ("FICA") taxes. This type of annuity contract is commonly referred to as a "Tax-Sheltered Annuity".

Section 403(b)(11) of the Code contains distribution restrictions. Specifically, benefits may be paid, through surrender of the Certificate or otherwise, only in the following circumstances:

Section 403(b)(11) does not apply to distributions attributable to assets held as of December 31, 1988. Thus, it appears that the legal restrictions apply only to distributions attributable to contributions made after 1988, to earnings on those contributions, and to earnings on amounts held as of December 31, 1988. The Internal Revenue Service has indicated that the distribution restrictions of Section 403(b)(11) are not applicable when TSA funds are being transferred tax-free directly to another TSA issuer, provided the transferred funds continue to be subject to the Section 403(b)(11) distribution restrictions.

If you request a distribution from a Certificate, we will notify you if all or part of such distribution is eligible for rollover to another TSA or to an IRA. Any amount eligible for rollover treatment will be subject to mandatory federal income tax withholding at a 20% rate, unless you direct us in writing to transfer the amount as a direct rollover to another TSA or IRA.

Sections 408(b) and 408A of the Code permit eligible individuals to contribute to an individual retirement program known as an "Individual Retirement Annuity" and "Roth IRA", respectively. These Individual Retirement Annuities are subject to limitations on the amount which may be contributed, the persons who may be eligible to contribute, and on the time when distributions may commence. In addition, distributions from certain types of Qualified Plans may be placed on a tax-deferred basis into a Section 408(b) Individual Retirement Annuity.

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Sections 401(a) and 403(a) of the Code permit corporate employers to establish various types of retirement plans for employees. Such retirement plans may permit the purchase of the Certificate to provide benefits under the plans.

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The discussion above provides general information regarding federal income tax consequences to annuity purchasers who are U.S. citizens or resident aliens. Purchasers who are not U.S. citizens or are resident aliens will generally be subject to U.S. federal income tax and withholding on annuity distributions at a 30% rate, unless a lower rate applies in a U.S. treaty with the purchaser's country. In addition, purchasers may be subject to state premium tax, other state and/or municipal taxes, and taxes that may be imposed by the purchaser's country of citizenship or residence. Prospective purchasers are advised to consult with a qualified tax adviser regarding U.S., state, and foreign taxation with respect to an annuity purchase.

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(a) Business

We are a specialty insurance company providing a diversified line of fixed, indexed and variable annuity products designed to serve the growing retirement savings market. These annuity products are sold through a wide ranging network of banks, agents and securities dealers. We seek to maintain our presence in the fixed annuity market while expanding our sales of variable and equity-indexed annuities. We seek to achieve a broader market presence through the use of diversified distribution channels and maintain a conservative approach to investment and liability management.

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We are licensed to do business in all states except New York and are also licensed in the District of Columbia and the Virgin Islands. We are rated A (Excellent) by A.M. Best and Company ("A.M. Best"), independent analysts of the insurance industry. Standard & Poor's ("S&P") rates us AA- for very strong financial security, Moody's Investor Services ("Moody's") rates us A2 for good financial strength and Duff & Phelps rates us AA- for very high claims paying ability. The A.M. Best's A rating is in the second highest rating category, which also includes a lower rating of A-. S&P and Duff & Phelps have one rating category above AA and Moody's has two rating categories above A. The Moody's "2" modifier means that we are in the middle of the A category. The S&P and Duff & Phelps "-" modifier signifies that we are at the lower end of the AA category. These ratings reflect the opinion of the rating company as to our relative financial strength and ability to meet contractual obligations to our policyholders.

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Our wholly owned insurance subsidiaries are Independence Life and Annuity Company ("Independence Life") and Keyport Benefit Life Insurance Company ("Keyport Benefit"). Other wholly owned subsidiaries are Liberty Advisory Services Corp., an investment advisory company, and Keyport Financial Services Corp., a broker-dealer.

We are an indirect wholly owned subsidiary of Liberty Financial Companies, Inc. ("Liberty Financial") which is a publicly traded holding company. Liberty Financial is an indirect majority owned subsidiary of Liberty Mutual Insurance Company ("Liberty"), a multi-line insurance company.

Liberty Financial is an asset accumulation and management company providing investment management and retirement-oriented insurance products through multiple distribution channels. We issue and underwrite substantially all of Liberty Financial's retirement-oriented insurance products. Liberty Financial's investment advisor, asset management and bank distribution operating units are The Colonial Group ("Colonial"), Stein Roe & Farnham Incorporated ("Stein Roe"), Newport Pacific Management, Inc. ("Newport") and Independent Holdings, Inc. ("Independent"). Colonial, Stein Roe and Newport manage certain underlying mutual funds and other invested assets of our separate accounts. Stein Roe also provides asset management services for a substantial portion of our general account. Independent, through its subsidiary, markets our products through the bank distribution channel.

Our executive and administrative offices are located at 125 High Street, Boston Massachusetts 02110. Our home office is at 695 George Washington Highway, Lincoln, Rhode Island 02865.

(b) Selected Financial Data

Net income was $94.7 million, $108.6 million and $113.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. The decrease in each of the years ended December 31, 1999 was primarily attributable to decreases in net realized investment gains. Income from operations (income before income taxes and net realized gains (losses)) was $182.1 million, $160.7 million and $147.9 for the years ended December 31, 1999, 1998 and 1997, respectively. The increase in 1999 as compared to 1998 is primarily attributable to the increase in net investment spread. The increase in 1998 compared to 1997 is mainly due to the reduction of amortization of deferred policy acquisition costs.

Investment spread is the amount by which investment income earned on our investments exceeds interest credited to policyholder balances. Investment spread was $278.6 million for the year ended December 31, 1999 and $253.0 million for the years ended December 31, 1998 and 1997. The amount by which the average yield on investments exceeds the average interest credited rate on policyholder balances is the investment spread percentage. The investment spread percentage was 1.97%, 1.78% and 1.91% for the years ended December 31, 1999, 1998, and 1997, respectively.

Investment income was $805.2 million, $815.2 million and $847.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. The decrease of $10.0 million in 1999 compared to 1998 is the result of a lower average investment yield ($13.2 million) offset by an increase in average invested assets ($3.2 million). The average investment yield was 6.25% in 1999 compared to 6.36% in 1998. Investment income decreased in 1998 compared to 1997 as a result of a lower average investment yield offset by an increase in average invested assets. The average investment yield was 6.36% in 1998 compared to 6.90% in 1997. Net investment income included option amortization related to our equity-indexed annuities of $77.2 million, $70.8 million and $47.6 million for the years ended December 31, 1999, 1998 and 1997, respectively.

Interest credited to policyholders totaled $526.6 million, $562.2 million and $594.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. The decrease of $35.6 million in 1999 compared to 1998 is the result of a lower average interest credited rate ($36.2 million) slightly offset by higher average policyholder balances ($.6 million). Policyholder balances averaged $12.3 billion ($10.1 billion of fixed products and $2.2 billion of equity-indexed annuities) in 1999 compared to $12.3 billion ($10.5 billion of fixed products and $1.8 billion of equity-indexed annuities) in 1998. The average interest credited rate was 4.28% (5.00% on fixed products and 0.85% on equity-indexed annuities) in 1999 compared to 4.58% (5.23% on fixed products and 0.85% on equity-indexed annuities) in 1998. Our equity-indexed annuities credit interest to the policyholder at a "participation rate" equal to a portion (ranging for existing policies from 25% to 100%) of the change in value of the S&P 500 Index. Our equity-indexed annuities also provide a full guarantee of principal if held to term, plus interest at 0.85% annually. For each of the periods presented, the interest credited to equity-indexed policyholders related to the participation rate was offset by investment income recognized on S&P 500 Index call options and futures, resulting in an 0.85% net interest credited rate. Interest credited to policyholders decreased in 1998 compared to 1997 as a result of a lower average interest credited rate offset by a higher level of average policyholder balances. Policyholder balances averaged $12.3 billion in 1998 compared to $11.9 billion in 1997. The average interest credited rate was 4.58% in 1998 compared to 4.99% in 1997.

Average investments (computed without giving effect to Statement of Financial Accounting Standards No. 115), including a portion of our cash and cash equivalents, were $12.9 billion and $12.8 billion at December 31, 1999 and 1998, respectively.

Net realized investment (losses) gains were $(41.5) million, $0.8 million and $24.7 million for the years ended December 31, 1999, 1998 and 1997, respectively. The net realized investment losses in 1999 and the net realized investment gains in 1998 included losses of $18.3 million and $28.3 million, respectively, for certain fixed maturity investments where the decline in value was determined to be other than temporary.

Surrender charges are revenues earned on the early withdrawal of fixed, equity-indexed and variable annuity policyholder balances. Surrender charges on fixed, equity-indexed and variable annuity withdrawals generally are assessed at declining rates applied to policyholder withdrawals during the first five to seven years of the contract. Total surrender charges were $17.7 million, $17.5 million and $16.0 million for the years ended December 31, 1999, 1998, and 1997, respectively.

Total annuity withdrawals represented 14.7%, 13.2% and 11.6% of the total average annuity policyholder and separate account balances during 1999, 1998 and 1997, respectively. Factors contributing to the higher surrenders included increased competition from other investment products and lower average interest credit rates on fixed accounts.

Separate account income is primarily mortality and expense charges earned on variable annuity and variable life policyholder balances. These charges, which are based on the market values of the assets in the separate accounts supporting the contracts, were $33.5 million, $20.6 million and $17.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. Variable product fees represented 1.43%, 1.44% and 1.54% of average variable annuity and variable life separate account balances for 1999, 1998 and 1997, respectively.

Management fees are primarily investment advisory fees related to the separate account assets. The fees are based on the levels of assets under management, which are affected by product sales, redemptions and changes in the market values of the investments managed. Management fees were $8.9 million, $4.8 million and $3.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. The increase of $4.1 million in 1999 compared to 1998 primarily reflects a higher level of average separate account assets under management. Average separate account assets were $2.6 billion and $1.5 billion for the years ended December 31, 1999 and 1998, respectively.

Operating expenses primarily represent compensation, selling and general and administrative expenses. These expenses were $54.4 million, $53.5 million and $49.9 million for the years ended December 31, 1999, 1998 and 1997, respectively. The increases during these periods were due to higher employee related expenses and selling expense.

Amortization of deferred policy acquisition costs relates to the costs of acquiring new business, which vary with, and are primarily related to, the production of new annuity business. Such acquisition costs included commissions, costs of policy issuance, underwriting and selling expenses.

Amortization was $97.4 million, $77.4 million, and $86.4 million for the years ended December 31, 1999, 1998 and 1997, respectively. The $20.0 million increase in amortization in 1999 compared to 1998 was primarily related to the increase in investment spread from the growth of business in force associated with fixed and equity-indexed products and the increased sales of variable annuity products during 1999. The $9.0 million decrease in amortization in 1998 compared to 1997 was primarily related to revisions in investment spread assumptions, partially offset by increased amortization due to the growth of business in force. Amortization expense represented 31.2%, 27.7% and 31.3% of investment spread and separate account fees for 1999, 1998 and 1997, respectively.

Income tax expense was $46.0 million, $52.9 million and $59.1 million or 32.69%, 32.76% and 34.20% of pretax income for the years ended December 31, 1999, 1998, and 1997, respectively.

Effective July 18, 1997, due to changes in ownership of Liberty Financial, we are not included in the consolidated federal income tax return of Liberty Mutual. We will be eligible to file a consolidated federal income tax return with Liberty Financial in 2002.

Stockholder's Equity was $1.013 billion and $1.136 billion at December 31, 1999 and 1998, respectively. The $122.2 million decrease in stockholder's equity consist of a $186.9 million increase in net unrealized investment losses, and $30.0 million in dividends paid to the parent company, offset by $94.7 million of net income.

Investments (computed without giving effect to Statement of Financial Accounting Standards No. 115), including a portion of our cash and cash equivalents, were $12.8 billion and $13.0 billion at December 31, 1999 and 1998, respectively.

Our general investment policy is to hold fixed maturity investments for long-term investment and, accordingly, we do not have a trading portfolio. To provide for maximum portfolio flexibility and appropriate tax planning, we classify our entire fixed maturity portfolio as "available for sale" and carries such investments at fair value. Gross unrealized (losses) gains at December 31, 1999 and 1998 were ($323.3) million and $105.3 million, respectively.

Approximately $11.1 billion, or 81.0%, of the Company's general account and certain separate account investments at December 31, 1999, were rated by Standard & Poor's Corporation, Moody's Investors Service or under comparable statutory rating guidelines established by the NAIC. At December 31, 1999, the carrying value of investments in below investment grade securities totaled $1.2 billion, or 8.9% of general account and certain separate account investments of $13.7 billion. Below investment grade securities generally provide higher yields and involve greater risks than investment grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities may be more limited than for investment grade securities.

We routinely review our portfolio of investment securities. We identify any investments that require additional monitoring on a monthly basis, and carefully review the carrying value of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews, we principally consider the adequacy of collateral (if any), compliance with contractual covenants, the borrower's recent financial performance, news reports and other externally generated information concerning the creditor's affairs. In the case of publicly traded investments, we also consider market value quotations, if available. As of December 31, 1999 and 1998, the carrying value of fixed maturity investments that were non-income producing was $22.6 million and $30.0 million, respectively, which constitutes 0.2% of general account and certain separate account investments.

Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. Our primary market risk exposures are to changes in interest rates and to changes in equity prices.

The active management of market risk is integral to our operations. We may use the following approaches to manage our exposure to market risk within defined tolerance ranges: 1) rebalance our existing asset or liability portfolios, 2) change the character of future investment purchases, or 3) use derivative instruments to modify the market risk characteristics of existing assets and liabilities or assets expected to be purchased.

We generate substantial investable funds from our annuity operations. We believe that our fixed and indexed policyholder balances should be backed by investments, principally comprised of fixed maturities, which generate predictable rates of return. We do not have a specific target rate of return. Instead, our rates of return vary over time depending on the current interest rates, the slope of the yield curve and the excess at which fixed maturities are priced over the yield curve. Our portfolio strategy is designed to achieve acceptable risk-adjusted returns by effectively managing portfolio liquidity and credit quality.

We administer and oversee the investment risk management processes primarily through our Investment Committee, our Board of Directors, and the Board of Directors of Liberty Financial. The Investment Committee and Board of Directors provide executive oversight of investment activities. The Investment Committee is a senior management committee consisting of the Chief Investment Officer, Chief Financial Officer, President and members of senior management of Liberty Financial. The Investment Committee meets monthly to provide detailed oversight of investment risk, including market risk.

We have investment guidelines that define the overall framework for managing market and other investment risks, including the accountabilities and controls over these activities. In addition, we have specific investment policies that delineate the investment limits and strategies that are appropriate given our liquidity, surplus, product and regulatory requirements.

We monitor and manage our exposure to market risk through asset allocation limits, duration limits, and stress tests. Asset allocation limits place restrictions on the aggregate fair value which may be invested within an asset class. Duration limits on the aggregate investment portfolio, and, as appropriate, on individual components of the portfolio, place restrictions on the amount of interest rate risk that may be taken. Stress tests measure downside risk to fair value and earnings over longer time intervals and for adverse market scenarios.

The day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by asset allocation, duration and other limits, including but not limited to credit and liquidity.

Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. This risk arises from our primary activities, as we invest substantial funds in interest-sensitive assets and also have interest-sensitive liabilities. Our asset/liability management emphasizes a conservative approach, which is oriented toward reducing downside risk in adverse markets, as opposed to maximizing spread in favorable markets.

We manage the interest rate risk inherent in our assets relative to the interest rate risk inherent in our liabilities. One of the measures we use to quantify this exposure is effective duration. Effective duration is a common measure for the price sensitivity of assets and liabilities to changes in interest rates. It measures the approximate percentage change in the fair value of assets and liabilities when interest rates change by 100 basis points. This measure includes the impact of estimated changes in portfolio cash flows from features such as prepayments and bond calls. The effective duration of assets and related liabilities are produced using standard financial valuation techniques. At December 31, 1999 and 1998, the estimated difference between our asset and liability duration was approximately 1.8 and 1.2, respectively. This positive duration gap indicates that the fair value of our assets is somewhat more sensitive to interest rate movements than the fair value of our liabilities.

We seek to invest premiums and deposits to create future cash flows that will fund future benefits, claims, and expenses, and earn stable margins across a wide variety of interest rate and economic scenarios. In order to achieve this objective and limit our exposure to interest rate risk, we adhere to a philosophy of managing the effective duration of assets and related liabilities. We use interest rate swaps, futures and caps to reduce the interest rate risk resulting from effective duration mismatches between assets and liabilities. To the extent that actual results differ from the assumptions utilized, our effective duration could be significantly impacted. Important assumptions include the timing of cash flows on mortgage-related assets and liabilities subject to policyholder surrenders. Additionally, our calculation assumes that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the impact of non-parallel changes in the term structure of interest rates and/or large changes in interest rates.

Our potential exposure due to a 10% increase in prevailing interest rates from our December 31, 1999 and 1998 levels was a loss of $146.3 million and $87.0 million, respectively, in fair value of our fixed-rate assets that were not offset by a decrease in the fair value of our fixed-rate liabilities. The increase in potential exposure is primarily due to higher prevailing market interest rates and the increase in positive duration gap. We expect that our exposure to loss as interest rate changes occur will be minimized and that actual losses will be less than the estimated potential loss due to the combination of asset/liability management strategies and flexibility in adjusting crediting rate levels.

Equity price risk is the risk that we will incur economic losses due to adverse changes in a particular stock or stock index. At December 31, 1999 and 1998, we had approximately $37.9 million and $24.6 million, respectively, in common stocks and $701.1 million and $535.1 million, respectively, in other equity investments (call options and futures contracts).

At December 31, 1999 and 1998, we had $2.5 billion and $2.1 billion, respectively, in equity-indexed annuity liabilities that provide customers with contractually guaranteed participation in price appreciation of the Standard & Poor's 500 Composite Price Index ("S&P 500 Index"). We purchase equity-indexed options and futures to hedge the risk associated with the price appreciation component of equity-indexed annuity liabilities.

We manage the equity risk inherent in our assets relative to the equity risk inherent in our liabilities by conducting detailed computer simulations that model our S&P 500 Index derivatives and our equity-indexed annuity liabilities under stress-test scenarios in which both the index level and the index option implied volatility are varied through a wide range. Implied volatility is a value derived from standard option valuation models representing an implicit forecast of the standard deviation of the returns on the underlying asset over the life of the option or future. The fair values of S&P 500 Index linked securities, derivatives, and annuities are produced using standard derivative valuation techniques. The derivative portfolios are constructed to maintain acceptable interest margins under a variety of possible future S&P 500 Index levels and option or future cost environments. In order to achieve this objective and limit our exposure to equity price risk, we measure and manage these exposures using methods based on the fair value of assets and the price appreciation component of related liabilities. We use derivatives, including futures, options and total return swaps to modify our net exposure to fluctuations in the S&P 500 Index.

Based upon the information and assumptions we use in our stress-test scenarios at December 31, 1999 and 1998, we estimate that if the S&P 500 Index increases by 10%, the net fair value of our assets and liabilities described above would increase (decrease) by approximately $1.5 million and $(2.0) million, respectively. If the S&P 500 Index decreases by 10%, we estimate that the net fair value of our assets and liabilities will increase (decrease) by approximately $(0.2) million and $2.0 million, respectively. If option implied volatilities increase by 100 basis points, management estimates that the net fair value of our assets and liabilities will decrease by approximately $5.2 million and $6.0 million, respectively.

The simulations do not consider the effects of other changes in market conditions that could accompany changes in the equity option and futures markets including the effects of changes in implied dividend yields, interest rates, and equity-indexed annuity policy surrenders.

As a component of our investment strategy and to reduce our exposure to interest rate risk, we utilize interest rate and total return swap agreements and interest rate cap agreements to match assets more closely to liabilities. Interest rate swap agreements are agreements to exchange with counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. We currently utilize interest rate swap agreements to reduce asset duration and to better match interest earned on longer-term fixed-rate assets with interest credited to policyholders. A total return swap agreement is an agreement to exchange payments based upon an underlying notional balance and changes in variable rate and total return indices. We utilizes total return swap agreements to hedge our obligations related to certain separate account liabilities. We had 67 and 42 outstanding swap agreements with an aggregate notional principal amount of $3.4 billion and $2.4 billion as of December 31, 1999 and 1998, respectively.

Cap agreements are agreements with a counterparty that require the payment of a premium for the right to receive payments for the difference between the cap interest rate and a market interest rate on specified future dates based on an underlying principal balance (notional principal) to hedge against rising interest rates. We had interest rate cap agreements with an aggregate notional amount of $50.0 million and $250.0 million at December 31, 1999 and 1998, respectively.

With respect to our equity-indexed annuities and certain separate account liabilities, we buy call options, futures and certain total return swap agreements on the S&P 500 Index to hedge our obligations to provide returns based upon this index. We had call options with a carrying value of $701.1 million and $535.6 million at December 31, 1999 and 1998, respectively. The Company had futures with a carrying value of $(0.6) million at December 31, 1998. We had total return swap agreements with a carrying value of $37.8 million as of December 31, 1999.

There are risks associated with some of the techniques we use to match our assets and liabilities. The primary risk associated with swap, cap and call option agreements is counterparty nonperformance. We believe that the counterparties to our swap, cap and call option agreements are financially responsible and that the counterparty risk associated with these transactions is minimal. Future contracts trade on organized exchanges and, therefore, have minimal credit risk. In addition, swap and cap agreements have interest rate risk and call options, futures and certain total return swap agreements have stock market risk. These swap and cap agreements hedge fixed-rate assets and we expect that any interest rate movements that adversely affect the market value of swap agreements would be offset by changes in the market values of such fixed-rate assets. However, there can be no assurance that these hedges will be effective in offsetting the potential adverse effects of changes in interest rates. Similarly, the call options, futures and certain total return swap agreements hedge our obligations to provide returns on equity-indexed annuities and certain separate account liabilities based upon the S&P 500 Index, and we believe that any stock market movements that adversely affect the market value of S&P 500 Index call options, futures and certain total return swap agreements would be substantially offset by a reduction in policyholder and certain separate account liabilities. However, there can be no assurance that these hedges will be effective in offsetting the potentially adverse effects of changes in S&P 500 Index levels. Our profitability could be adversely affected if the value of our swap and cap agreements increase less than (or decrease more than) the change in the market value of our fixed rate assets and/or if the value of our S&P Index 500 call options, futures and certain total return swap agreements increase less than (or decrease more than) the value of the guarantees made to equity-indexed and certain separate account policyholders.

In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS 133 standardizes the accounting for derivative instruments and the derivative portion of certain other contracts that have similar characteristics by requiring that an entity recognize those instruments at fair value. This statement also requires a new method of accounting for hedging transactions, prescribes the type of items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. In June 1999, SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" was issued. SFAS 137 defers the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. Upon adoption, we will be required to record a cumulative effect adjustment to reflect this accounting change. We have not completed our analysis and evaluation of the requirements and the impact of this statement on our financial statements.

Our liquidity needs and financial resources pertain to the management of the general account assets and policyholder balances. We use cash for the payment of annuity and life insurance benefits, operating expenses, policy acquisition costs, and investment purchases. We generate cash from annuity premiums, deposits, net investment income, and from maturities and sales of our investments. Annuity premiums, maturing investments and net investment income have historically been sufficient to meet our cash requirements. We monitor cash and cash equivalents in an effort to maintain sufficient liquidity and have strategies in place to maintain sufficient liquidity in changing interest rate environments. Consistent with the nature of our obligations, we have invested a substantial amount of our general account assets in readily marketable securities. At December 31, 1999, $10.3 billion, or 75.6%, of our general account investments are considered readily marketable.

To the extent that unanticipated surrenders cause us to sell for liquidity purposes a material amount of securities prior to their maturity, such surrenders could have a material adverse effect on us. Although no assurance can be given, we believe that liquidity to fund withdrawals would be available through incoming cash flow, the sale of short-term or floating-rate instruments, thereby precluding the sale of fixed maturity investments in a potentially unfavorable market. In addition, our fixed-rate products incorporate surrender charges to encourage persistency and make the cost of our policyholder balances more predictable. Approximately 76% of our fixed annuity policyholder balances were subject to surrender charges or restrictions at December 31, 1999.

Current Rhode Island insurance law permits us to pay dividends or distributions to Liberty Financial, which, together with dividends and distributions paid during the preceding 12 months, do not exceed the lesser of (i) 10% of statutory surplus as of the preceding December 31 or (ii) the net gain from operations for the preceding fiscal year. Any proposed dividend in excess of this amount is called an "extraordinary dividend" and may not be paid until it is approved by the Commissioner of Insurance of the State of Rhode Island. We paid $30.0 million and $20.0 million in dividends to Liberty Financial in 1999 and 1998, respectively. We had not previously paid any dividends since our acquisition in 1988. At December 31, 1999, the amount of additional dividends that we could pay without such approval was $57.8 million.

Based upon our historical cash flow, our current financial condition and our expectation that there will not be a material adverse change in our results of operations and our subsidiaries during the next twelve months, we believe that cash flow provided by operating activities over this period will provide sufficient liquidity for us to meet our liquidity needs.

The Year 2000 issue related to computer programs that used two digits to identify a year in the date field and therefore may not have been able to correctly process dates after December 31, 1999. As we rely significantly on computer systems and applications in our operations, we completed a remediation plan that included repairing or replacing programs that were identified as not being Year 2000 compliant. As a result, we did not experience any significant Year 2000 problems with respect to computer systems, application programs, and non-information technology systems. In addition, we did not experience any significant disruptions related to interactions with third parties. We are continuing to closely monitor critical systems and applications to ensure that no unexpected Year 2000 issues develop. However, there can be no assurance that there will be no such issues.

During 1999, the external cost of the Year 2000 project was approximately $1.1 million, which was primarily related to consultants and replacement hardware and software. Such external costs for 1998 were approximately $0.8 million. We have not segregated payroll or other internal costs specifically devoted to our efforts to address Year 2000 issues. The costs of the year 2000 project have been funded through operating cash flows and have been expensed as incurred. In our opinion, any additional costs of addressing the Year 2000 issue are not expected to have a material adverse effect on our financial condition or our results of operations.

We desire to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Investors are cautioned that all statements, trend analyses and other information contained in this report or in any of our filings under Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the "Exchange Act"), relative to the markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend" and other similar expressions, constitute forward-looking statements under the Reform Act. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, many of which are beyond our control, that may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (1) general economic conditions and market factors, such as prevailing interest rate levels, stock market performance and fluctuations in the market for retirement-oriented savings products, which may adversely affect our ability to sell our products and services and the market value of our investments and assets under management and, therefore, the portion of our revenues that are based on a percentage of assets under management; (2) our ability to manage effectively our investment spread (i.e. the amount by which investment income exceeds interest credited to annuity and life insurance policyholders) as a result of changes in interest rates and crediting rates to policyholders, market conditions and other factors (our results of operations and financial condition are significantly dependent on our ability to manage effectively our investment spread); (3) levels of surrenders and withdrawals of our retirement-oriented insurance products; (4) our ability to manage effectively certain risks with respect to our investment portfolio, including risks relating to holding below investment grade securities and the ability to dispose of illiquid and/or restricted securities at desired times and prices, and the ability to manage and hedge against interest rate changes through asset/liability management techniques; (5) competition in the sale of our products and services, including our ability to establish and maintain relationships with distributors of our products; (6) changes in our financial ratings or those of our competitors; (7) our ability to attract and retain key employees, including senior officers, investment managers and sales executives; (8) the impact of and our compliance with existing and future regulation, including restrictions on the ability to pay dividends and any of our obligations under any guaranty fund assessment laws; (9) changes in applicable tax laws which may affect the relative tax advantages and attractiveness of some of our products; (10) the result of any litigation or legal proceedings involving us; (11) changes in generally accepted accounting principles and the impact of accounting principles and pronouncements on our financial condition and results of operations; (12) the other risk factors or uncertainties contained from time to time in any document incorporated by reference in this report or otherwise filed by us under the Exchange Act. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements and no assurances can be given that the estimates and expectations reflected in such statements will be achieved.

Premium deposits on fixed and indexed annuities are credited to our general account and certain separate account investments (which at December 31, 1999 totaled $13.7 billion). Total general account and certain separate account investments include cash and cash equivalents. To maintain our investment spread at acceptable levels, we must earn returns on our general account sufficiently in excess of the fixed or indexed returns credited to policyholders. The key element of this investment process is asset/liability management. Successful asset/liability management requires both a quantitative assessment of overall policy liabilities (including maturities, surrenders and crediting of interest) and prudent investment of general and certain separate account assets. The two most important tools in managing policy liabilities are setting crediting rates and establishing surrender periods. The investment process requires portfolio techniques that earn acceptable yields while effectively managing both interest rate risk and credit risk. We emphasize a conservative approach to asset/liability management, which is oriented toward reducing downside risk in adverse markets, as opposed to maximizing spread in favorable markets. The approach is also designed to reduce earnings volatility. Various factors can impact our investment spread, including changes in interest rates and other factors affecting our general account and certain separate account investments.

The bulk of our general account and certain separate account investments are invested in fixed maturity securities (81.0% at December 31, 1999). Our principal strategy for managing interest rate risk is to closely match the duration of our general account investment portfolio to our policyholder balances. We also employ hedging strategies to manage this risk, including interest rate swaps and caps. In the case of equity-indexed products, we purchase S&P 500 Index call options and futures to hedge our obligations to provide participation rate returns. Credit risk is managed by careful credit analysis and monitoring. A portion of the general account and certain separate account investments (8.9% at December 31, 1999) are invested in below investment grade fixed maturity securities to enhance overall portfolio yield. Below investment grade securities pose greater risks than investment grade securities. We actively manages our below investment grade portfolio to optimize our risk/return profile. At December 31, 1999, the carrying value of fixed maturity investments that were non-income producing was $22.6 million, which constituted 0.2% of our general account and certain separate account investments.

As of December 31, 1999, we owned approximately $3.4 billion of mortgage-backed securities (24.8% of our general and certain separate account investments), 96.7% of which were investment grade. Mortgage-backed securities are subject to prepayment and extension risks, since the underlying mortgages may be repaid more or less rapidly than scheduled.

As of December 31, 1999, approximately $3.4 billion (24.8% of our general and certain separate account investments) were invested in securities that were sold without registration under the Securities Act and were not freely tradable under the Securities Act or which were otherwise illiquid. These securities may be resold pursuant to an exemption from registration under the Securities Act. If we sought to sell such securities, we might be unable to do so at the then current carrying values and might have to dispose of such securities over extended periods of time at uncertain levels.

Our sales strategy is to use multiple distribution channels to achieve broader market presence. During 1999, the bank channel represented approximately 41.9% of our annuity sales, and the brokerage channel represented approximately 15.5%. The sale of insurance and investment products through the bank distribution channel is highly regulated. Sales through other distributors of insurance products, such as financial planners, insurance agents and an institutional channel represented approximately 42.6% of total annuity sales.

The following table presents sales information in our distribution channels for the periods indicated (in millions).

(1) Includes institutional annuities.

Our business activities are extensively regulated. The following briefly summarizes the principal regulatory requirements and certain related matters.

Our retirement-oriented insurance products generally are issued to individuals. The policy is a contract between the issuing insurance company and the policyholder. State law regulates policy forms, including all principal contract terms. In most cases, the policy form must be approved by the insurance department or similar agency of a state in order for the policy to be sold in that state.

We are chartered in Rhode Island and the State of Rhode Island Insurance Department is our primary oversight regulator. We also must be licensed by the state insurance regulators in each other jurisdiction in which we conduct business. We currently are licensed to conduct business in 49 states (the exception being New York), and in the District of Columbia and the Virgin Islands. State insurance laws generally provide regulators with broad powers related to issuing licenses to transact business, regulating marketing and other trade practices, operating guaranty associations, regulating certain premium rates, regulating insurance holding company systems, establishing reserve requirements, prescribing the form and content of required financial statements and reports, performing financial and other examinations, determining the reasonableness and adequacy of statutory capital and surplus, regulating the type and amount of investments permitted, limiting the amount of dividends that can be paid and the size of transactions that can be consummated without first obtaining regulatory approval, and other related matters. The regulators also make periodic examinations of individual companies and review annual and other reports on the financial conditions of all companies operating within their respective jurisdictions. The Rhode Island Insurance Department has commenced a periodic examination for the period ended December 31, 1998. The Insurance Department has not communicated the results of their examination as of the date of this filing.

We prepare our statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Insurance Department of the State of Rhode Island. State laws prescribe certain statutory accounting practices. Permitted statutory accounting practices encompass all accounting practices that are not proscribed; such practices may differ between the states and companies within a state. In 1998, the NAIC adopted codified statutory accounting principles ("Codification"). Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that we use to prepare our statutory-based financial statements. Codification 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 us, the state of Rhode Island must adopt Codification as the prescribed basis of accounting on which domestic insurers must report their statutory-basis results to the Insurance Department. At this time it is anticipated that the state of Rhode Island will adopt Codification. We have not yet determined the impact of Codification to our statutory-basis financial statements.

Risk-Based Capital Requirements. In recent years, various states have adopted new quantitative standards promulgated by the NAIC. These standards are designed to reduce the risk of insurance company insolvencies, in part by providing an early warning of financial or other difficulties. These standards include the NAIC's risk-based capital ("RBC") requirements. RBC requirements attempt to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The requirements provide for four different levels of regulatory attention which implement increasing levels of regulatory control (ranging from development of an action plan to mandatory receivership). As of December 31, 1999, our capital and surplus exceeded the level at which the least severe of these regulatory attention levels would be triggered.

Guaranty Fund Assessments. Under the insurance guaranty fund laws existing in each state, insurers can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. Because assessments typically are not made for several years after an insurer fails, we cannot accurately determine the precise amount or timing of our exposure to known insurance company insolvencies at this time. For certain information regarding our historical and estimated future assessments, see Note 11 to our Consolidated Financial Statements. The insolvency of large life insurance companies in future years could result in material assessments to us by state guaranty funds. No assurance can be given that such assessments would not have a material adverse effect on us.

Insurance Holding Company Regulation. Current Rhode Island insurance law permits us to pay dividends or distributions from the Company to Liberty Financial, which, together with dividends and distributions paid during the preceding 12 months, do not exceed the lesser of (i) 10% of statutory surplus as of the preceding December 31 or (ii) the net gain from operations for the preceding fiscal year. Any proposed dividend in excess of this amount is called an "extraordinary dividend" and may not be paid until it is approved by the Commissioner of Insurance of the State of Rhode Island. We paid $30.0 million and $20.0 million in dividends to Liberty Financial during 1999 and 1998, respectively. As of December 31, 1999, the amount of additional dividends that we could pay without such approval was $57.8 million.

Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures that may significantly affect the insurance business include limitations on antitrust immunity, minimum solvency requirements and the removal of barriers restricting banks from engaging in the insurance business. In particular, several proposals to repeal or modify the Bank Holding Company Act of 1956 (which prohibits banks from being affiliated with insurance companies) have been made by members of Congress and the Clinton Administration. Moreover, the United States Supreme Court held in 1995 in NationsBank of North Carolina v. Variable Annuity Life Insurance Company that annuities are not insurance for purposes of the National Bank Act. In addition, the Supreme Court also held in 1995 in Barnett Bank of Marion City v. Nelson that state laws prohibiting national banks from selling insurance in small town locations are preempted by federal law. The Office of the Comptroller of the Currency adopted a ruling in November 1996 that permits national banks, under certain circumstances, to expand into other financial services, thereby increasing competition for us. At present, the extent to which banks can sell insurance and annuities without regulation by state insurance departments is being litigated in various courts in the United States. Although the effect of these recent developments on us and our competitors is uncertain, there can be no assurance that such developments would not have a material adverse effect on us.

On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 was signed into law. The major provisions of this new law took effect on March 12, 2000. While the Gramm-Leach-Bliley Act eliminates legal barriers to affiliates among banks, insurance companies and other financial services companies and therefor effectively repeals the Glass-Steagall Act of 1933 (which restricted banks from engaging in securities-related businesses), the effect on us and our competitors is uncertain.

Our business activities are conducted in extremely competitive markets. We compete with a large number of life insurance companies, some of which are larger and more highly capitalized and have higher ratings than we do. No one company dominates the industry. In addition, our products compete with alternative investment vehicles available through financial institutions, brokerage firms and investment managers. We believe that we compete principally with respect to product features, pricing, ratings and service; we also believe that we can continue to compete successfully in this market by offering innovative products and superior services. In addition, financial institutions and broker-dealers focus on the insurer's ratings for financial strength or claims-paying ability in determining whether to market the insurer's annuities.

As of December 31, 1999, we had 416 full-time employees. We provide our employees with a broad range of employee benefit programs. We believe that our relations with our employees are excellent.

The following are the principal officers and directors of the Company:

The tables that appear below, along with the accompanying text and footnotes, provide information on compensation and benefits for the named executive officers, in accordance with applicable SEC requirements. All the data regarding values for stock options pertain to options to purchase shares of our parent corporation, Liberty Financial Companies, Inc. ("Liberty Financial"). Such data are hypothetical in terms of the amounts that an individual may or may not receive, because such amounts are contingent on continued employment with us and the price of Liberty Financial's Common Stock ("Common Stock"). All year-end values shown in these tables for outstanding stock options reflect a price of $22.9375 per share, which was the closing price of the Common Stock on the New York Stock Exchange on December 31, 1999 (the last trading day of 1999). None of the named executive officers received any perquisites during 1999 exceeding the lesser of $50,000 or 10% of such officer's total salary and bonus for such year.

Summary Compensation Table. The following table sets forth compensation information for the past three fiscal years for each of our chief executive officer and the other four most highly compensated executive officers:

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(1) The value of unexercised in-the-money options is calculated by multiplying the number of underlying shares by the difference between the closing price of the Liberty Financial Common Stock on the New York Stock Exchange at the end of 1999 ($22.9375) and the option exercise price of those shares. These values have not been realized. The closing price of the Liberty Financial Common Stock on the New York Stock Exchange on March 17, 2000 was $21.1875.

Defined Benefit Retirement Programs. Each of the executive officers in the above summary compensation table participates in Liberty Financial's Pension Plan and our Supplemental Pension Plan (collectively, the "Pension Plans"). The following table shows the estimated annual pension benefits payable upon retirement for the specified compensation and years of service classification under the Pension Plans.

Benefits under the Pension Plans are based on an employee's average pay for the five highest consecutive years during the last ten years of employment, the employee's estimated social security retirement benefit and years of credited service with us. The current average compensation covered by the Pension Plans for each participating executive officer in the above summary compensation table is as follows: Mr. LeFevre, $557,380; Mr. Reinhart, $364,500; Mr. Morrison, $359,340; and Mr. Koch, $378,567. For purposes of determining benefits payable upon retirement under the Pension Plans, compensation includes base salary and annual bonus. Benefits are payable in the form of a single-life annuity providing for monthly payments. Actuarially equivalent methods of payment may be elected by the recipient. As of December 31, 1999, the executive officers named in the above summary compensation table had the following full credited years of service under the Pension Plans: Mr. LeFevre, 20 years; Mr. Reinhart, 15 years; Mr. Morrison, 9 years; and Mr. Koch, 2 years. Mr. Polkinghorn is not yet vested under the Pension Plan.

Change of Control Provisions of 1990 Stock Option Plan. Liberty Financial's 1990 Stock Option Plan, as amended (the "1990 Plan"), provided for the grant of options to officers and other key employees of Liberty Financial for the purchase of shares of common stock. As of March 13, 2000, options issued and outstanding under the 1990 Plan included 12,872 shares held by Mr. LeFevre (all of which were vested) and 12,750 shares held by Mr. Reinhart (all of which were vested). No additional options will be granted under the 1990 Plan. Upon a change of control of Liberty Financial (defined as the transfer of 50% or more of the equity ownership of Liberty Financial other than solely pursuant to a public offering in which securities are issued for cash), Liberty Financial's Compensation and Stock Option Plan committee may, in its discretion, elect to cancel all outstanding options by paying the holders thereof an amount equal to the difference between the fair market value of the Common Stock and the exercise price of such options.

Compensation of Directors. Our directors who are also employees receive no compensation in addition to their compensation as employees. The two outside directors (Lippitt and Nyman) receive $2,000 per quarter, plus $500 for each meeting of the Board of Directors and $200 for each Audit Committee meeting that they attend. Three meetings of the Board of Directors and two meetings of the Audit Committee are scheduled annually.

As of December 31, 1999, we maintained our executive, administrative and sales offices in leased facilities. We lease approximately 96,500 square feet in two facilities in downtown Boston pursuant to leases which expire in 2008. We also lease approximately 19,800 square feet in a single facility in Lincoln, Rhode Island and 13,300 square feet in a single facility in Lake Mary, Florida pursuant to leases that expire in 2007 and 2004, respectively. We sub-lease approximately 600 square feet from Independent Financial Marketing Group in Purchase, New York under a lease which expires in 2007.

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We are, from time to time, involved in litigation incidental to our business. In our opinion, the resolution of such litigation is not expected to have a material adverse effect on our financial condition or results of operations.

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Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedules at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, as set forth in their report dated January 27, 2000. We've included our financial statements and schedules in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing.

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Legal matters with respect to our organization, our authority to issue annuity contracts and the validity of the Certificates, as well as matters relating to the Federal securities laws, have been passed upon by Bernard R. Beckerlegge, General Counsel. In addition, certain matters relating to the Federal securities laws have been passed upon by Jorden Burt Boros Cicchetti Berenson & Johnson LLP as our Special Counsel.

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Report of Independent Auditors