The impact of the merger with Keyport (decreased) increased net income by $(22.6) million and $87.7 million for the years ended December 31, 2002 and 2001, respectively.

The Company's wholly-owned subsidiaries include: Sun Life Insurance and Annuity Company of New York ("SLNY"), which issues individual fixed and variable annuity contracts, group life, long-term disability and stop loss insurance, and individual variable universal life insurance in New York; Independence Life and Annuity Company ("Independence"), a life insurance company that sold variable and whole life insurance products; Clarendon Insurance Agency, Inc. ("Clarendon"), a registered broker-dealer; Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1"), organized for the purpose of engaging in activities incidental to securitizing mortgage loans; Sun Capital Advisers, Inc. ("SCA"), a registered investment adviser; Sun Life of Canada (U.S.) Holdings General Partner LLC ("the General Partner"), the sole general partner of Sun Life of Canada (U.S.) Limited Partnership I ("the Partnership"); and Sun Benefit Services Company, Inc. ("SBSC"), an inactive subsidiary.

On November 18, 2003, the Company sold its interest in its' wholly-owned subsidiary, Vision Financial Corporation ("Vision), for $1.5 million. A loss of approximately $1.0 million was realized on this transaction.

3

On December 18, 2002, the Company sold its interest in its' wholly-owned subsidiary, Sun Life of Canada (U.S.) Distributors, Inc. ("SLD") to another affiliate, Sun Life Financial (U.S.) Holdings, Inc. ("SLF Holdings"), for $10.5 million. No gain or loss was realized on this transaction. Effective January 1, 2003, SLD changed its name to MFS/Sun Life Financial Distributors, Inc. ("MFSLF") and thereafter Massachusetts Financial Services Company ("MFS"), an affiliate of the Company, acquired a 50% ownership interest in MFSLF. MFSLF provides annuity distribution services to both the Company and MFS.

The Company and its subsidiaries are engaged in the sale of individual and group variable life insurance, individual and group fixed and variable annuities, group pension contracts, guaranteed investment contracts, group life, group disability, stop loss insurance, and other asset management services. These products are distributed through individual insurance agents, financial planners, insurance brokers and broker-dealers to both the tax qualified and non-tax-qualified markets.

The Company reinsures portions of its life insurance, annuity and disability income exposure with both affiliated and unaffiliated companies using traditional indemnity reinsurance agreements. The Company also reinsures on a stop-loss basis with unaffiliated companies the guaranteed minimum death benefit exposure with respect to a portion of the Company's variable annuity business. The Company, as the ceding company, remains responsible for that portion of the policies reinsured under each of its existing agreements in the event the reinsurance companies are unable to pay their portion of any reinsured claim. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk.

The Company also acts as the reinsurer of risk under the lapse protection benefit under certain universal life contracts issued by SLOC. One hundred percent of such risk is retroceded to Sun Life Financial Insurance and Annuity Company (Bermuda) Ltd.

The Company has established and reported liabilities for future policy benefits in accordance with generally accepted accounting principles ("GAAP") in order to meet its obligations on its outstanding contracts. Liabilities for variable annuity contracts, variable life insurance and variable universal life insurance policies are considered separate account liabilities and are carried at fair value (the policyholder bears the investment risk). Universal life policies, deferred fixed annuity contracts, and guaranteed investment contracts ("GICS") are classified as general account liabilities, and are carried at account value (the Company bears the investment risk). Account values of the contracts include deposits plus credited interest, less expenses, mortality fees and withdrawals. Reserves for individual life, group life, group disability and stop loss contracts are based on mortality and morbidity tables in general use in the United States and are computed to equal amounts that, with additions from premiums to be received, and with interest on such reserves compounded annually at assumed rates, will be sufficient to meet the Company's policy obligations.

The Company's consolidated total assets were $43.6 billion at December 31, 2003; 40.2% consisted of separate account assets, 43.5% were invested in bonds and similar securities, 2.2% in mortgages, 0.2% in real estate, and the remaining 13.9% in cash and other assets.

The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities marketing insurance products. A.M. Best Company, Inc. has assigned the Company and its affiliate, SLNY, a rating of A++ (with negative outlook). Fitch, Inc. has assigned the Company and SLNY a rating of AA. Standard & Poor's, a division of The McGraw-Hill Companies, has assigned the Company and SLNY each a rating of AA+ (with negative outlook). Moody's Investor Service, Inc. has assigned the Company a rating of Aa2.

Pursuant to a service agreement between the Company and SLOC, the Company provides personnel and certain services to SLOC. The Company is reimbursed for the cost of these services. As of December 31, 2003, the Company and its subsidiaries had 2,036 employees who were employed at its Principal Executive Office in Wellesley Hills, Massachusetts, as well as offices in Lincoln, Rhode Island, New York, New York, Brookfield, Wisconsin, and 20 regional group sales offices.

4

The Company and its insurance subsidiaries are subject to supervision and regulation by the insurance authorities in each jurisdiction in which they transact business. The laws of the various jurisdictions address such issues as licensing, overseeing trade practices, licensing agents, approving policy forms, establishing reserve requirements, establishing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, prescribing the form and content of required financial statements and regulating the type and amount of investments permitted. On or before March 1 ^st each year, the Company and its insurance subsidiaries file annual statements relating to their operations for the preceding year and their financial condition at the end of such year with state insurance regulatory authorities in each jurisdiction where they are licensed.

The annual statements include financial statements and exhibits in conformity with statutory accounting principles, which differ from GAAP. Effective January 1, 2001, the laws of the respective state departments required that insurance companies domiciled in the respective state prepare their statutory financial statements in accordance with the National Association of Insurance Commissioners' ("NAIC") Accounting Practices and Procedures manual, version effective January 1, 2001, subject to any deviation prescribed or permitted by the Insurance Commissioner of the respective state. The books and records of the Company and SLNY are subject to review or examination by their respective state departments of insurance at any time and a full examination of their operations is conducted at periodic intervals.

Many states also regulate affiliated groups of insurers, such as the Company, SLOC and its affiliates, under insurance holding company legislation. Under such laws, inter-company transfers of assets and dividend payments from insurance subsidiaries may be subject to prior notice or approval, depending on the size of such transfers and payments in relation to the financial positions of the companies involved. Under insurance guaranty fund laws in most states, insurers doing business in a given state can be assessed (up to prescribed limits) for policyholder losses incurred by another insolvent insurance company in that state. However, most of these laws provide that an assessment may be excused or deferred if it would threaten an insurer's own financial strength and many also permit the deduction of all or a portion of any such assessment from any future premium or similar taxes.

The Company's variable annuity contracts and variable life insurance policies are subject to various levels of regulation under federal securities laws administered by the Securities and Exchange Commission (the "SEC") and under certain state securities laws. On or about October 30, 2003, the Company received a request from the SEC for information regarding its policies, practices and procedures with respect to subaccount "market timing," its policies, practices and procedures with respect to receiving and processing exchange orders from contract owners, and its oversight of such activities in the Company's separate accounts. The Company responded to this request and an additional related request. On March 4, 2004, the Boston District Office of the SEC notified the Company that it intended to commence an examination of the Company and certain of its affiliates pursuant to Section 31(b) of the Investment Company Act of 1940 and the Securities Exchange Act of 1934 relating to these and certain other subjects. The Company is cooperating in the examination.

In addition, the SEC and other regulators have conducted or are conducting investigations and examinations of certain of the Company's affiliates relating to various issues, including market timing and late trading of mutual funds and variable insurance products, directed brokerage, revenue-sharing and other arrangements with distributors .

Although the federal government generally does not directly regulate the business of insurance, 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 employee benefit regulation, removal of barriers preventing banks from engaging in the insurance business, and tax law changes affecting the taxation of insurance companies and insurance products, which may impact the relative desirability of various personal investment vehicles.

In May 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "2003 Act") was enacted. The 2003 Act included a provision that reduces the tax rate on capital gains and qualifying dividends to a maximum rate of 15 per cent. The reduced rate is, however, only available (either directly or through an investment in a mutual fund or other pass through entity) to individuals. Corporate taxation of dividends and capital gains, including those derived from corporate shares held through insurance, annuity and tax-qualified retirement plans, remains unchanged. It is not clear at this time what impact this provision has had or might have on the sale and surrender of certain products offered by the Company

5

On February 2, 2004, President Bush introduced his budget for fiscal year 2005. Included in the budget are provisions creating new tax-favored savings initiatives - Lifetime Savings Accounts, Retirement Savings Accounts, and Employer Retirement Savings Accounts - which, if passed as proposed, could adversely affect the sale of annuity and other tax-favored products currently offered by the Company.

In 2003, the Senate Finance Committee passed a bill entitled "National Employee Savings and Trust Equity Guarantee Act" ("NESTEG"), leaving open for further discussion a provision changing the current tax treatment of employers who buy Corporate Owned Life Insurance ("COLI"). On February 2, 2004, the Senate Finance Committee agreed upon amendments to the COLI provision of NESTEG. As amended, payments made to an employer under a COLI policy would be taxable unless certain qualifications, such as employment or level of compensation, are met. The provision also requires that employees covered under COLI policies be informed and give consent to the coverage before the employer purchases the COLI policy. NESTEG goes next to the Senate floor and, if passed, must be reconciled with the House version of the bill. If NESTEG becomes law, it could adversely affect the sale of COLI products currently offered by the Company.