FORM 10-K

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D. C. 20549

[X]    Annual  report  pursuant to Section 13 or 15(d) of the  Securities
       Exchange  Act of 1934 for the fiscal year ended December 31, 1997

[  ]   Transition  report pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934 for the transition period from
       ____________ to   ______________


Commission file number 33-62674

                   GREAT NORTHERN INSURED ANNUITY CORPORATION

------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Washington                           91-1127115
-----------------------------------      ---------------------------------
  (State or other jurisdiction of     (I.R.S. Employer Identification No.)
          incorporation)

Two Union Square, Suite 5600
Seattle, Washington                                98101
-----------------------------------------------------------------------------
(Address of principal executive offices)        (Zip Code)

(Registrant's telephone number, including area code)      (206) 625-1755


Securities registered pursuant to Section 12(b) of the Act:          None
Securities registered pursuant to Section 12(g) of the Act:          None


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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained herein,  and will not be  contained,  to the
best of  registrant's  knowledge,  in definitive  proxy or  information
statements  incorporated  by  reference  in Part III of this Form 10-K or any
amendment  to this  Form  10-K.  [Not Applicable]

<PAGE>

The registrant meets the conditions set forth in general instructions J(1) (a)
and (b) of Form 10-K and is therefore filing this form with the permitted
abbreviated narrative disclosure.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Consolidated Financial Statements

December 31, 1997 and 1996

(With Independent Auditors' Report Thereon)

<PAGE>


                                     PART I

Item 1.       Business

OWNERSHIP

         Great Northern Insured Annuity Corporation (GNA or the Company) was
incorporated as a stock life insurance company organized under the laws of the
State of Washington on June 4, 1980 and began writing business pursuant to
licensing on October 15, 1980. On June 30, 1983, The Weyerhaeuser Company
(Weyerhaeuser) acquired a controlling interest in GNA.

         Pursuant to a Stock Purchase Agreement dated January 5, 1993, by and
between Weyerhaeuser and General Electric Capital Corporation (GE Capital), 100%
of the outstanding capital stock of GNA Corporation was sold to GE Capital
effective April 1, 1993.

         Effective July 14, 1993, GE Capital acquired 100% of the outstanding
capital stock of United Pacific Life Insurance Company (United Pacific Life). GE
Capital transferred controlling ownership of United Pacific Life to GNA.
Subsequently, United Pacific Life's name was changed to General Electric Capital
Assurance Company (GE Capital Assurance). GE Capital Assurance, a Delaware life
insurer, is licensed in the District of Columbia, and all states except Maine
and New York.

         On February 1, 1990, GNA acquired 100% of the outstanding stock of
First GNA Life Insurance Company of New York (First GNA). Subsequent to the
acquisition of United Pacific Life, GNA merged First GNA with United Pacific
Reliance Life Insurance Company of New York, a wholly-owned subsidiary of United
Pacific Life. The merged company is 48% owned by GNA and 52% by GE Capital
Assurance. Effective February 1, 1996, First GNA's name was changed to GE
Capital Life Assurance Company of New York (GE Capital Life of New York). GE
Capital Life of New York issues deferred and immediate annuities, life insurance
and long-term care insurance in the state of New York.

         Effective October 1, 1995, GNA was party to a reorganization involving
GNA Corporation and certain of its life insurance company subsidiaries (herein
referred to as the Reorganization). As part of the Reorganization, GNA became a
wholly-owned subsidiary of GE Capital Assurance, and GE Capital Assurance became
a wholly-owned subsidiary of GNA Corporation. Previously, all of GE Capital
Assurance's voting common stock was owned by GNA. The Reorganization allows all
life insurance company subsidiaries of GNA Corporation to file a consolidated
federal tax return.

MARKETING

         GNA is licensed in the District of Columbia and all states except New
Hampshire and New York. GNA markets fixed-rate deferred annuities, immediate
annuities and structured settlement immediate annuities primarily through banks,
thrifts and other financial institutions.

         Deferred Fixed Rate Annuities. The predominant form of deferred
annuities require either single premium or flexible premium payments and have a
minimum annual guaranteed crediting rate. After the initial guarantee period,
the crediting rate may be changed periodically. The policy owner is permitted to

<PAGE>

withdraw all or part of the premium paid plus interest credited, less a
surrender charge for withdrawals during the initial penalty period of one to
eight years. The surrender charge is initially 5% to 8% of the contract value
and decreases over the penalty period. Some deferred annuities provide for
penalty-free partial withdrawals of the accumulated interest credited or up to
10% annually of the accumulation value. In 1997, the Company issued $233 million
in deferred annuities. At December 31, 1997, deferred annuities comprised $5,064
million of total liabilities for future annuity and contract benefits.

         Immediate Annuities. The Company's immediate annuities are designed to
provide a series of periodic payments for a fixed length of time or for life,
according to the annuitant's choice at the time of issue. Once the payments have
begun, the amount, frequency and length of time for which they are payable are
fixed. A primary form of immediate annuities, the structured settlement annuity,
is usually sold as part of a settlement resulting from a personal injury or
wrongful death claim to provide scheduled payments to an injured person or their
dependents. Structured settlement annuities are generally long-term and cannot
be surrendered. In 1997, the Company issued $72.2 million in immediate
annuities. At December 31, 1997, immediate annuities comprised $760.1 million of
total liabilities for future annuity and contract benefits.

COMPETITION

         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. There are numerous stock, mutual and
other types of insurers in the life insurance business in the United States, a
significant number of which are substantially larger than GNA. As of December
31, 1997, the Company has 279 employees. In addition, the Company has 42 retail
sales agents selling the Company's products through an affiliated company, GNA
Insurance Services, Inc. The number of retail sales agents decreased
significantly during 1997 as a result of several banks internalizing sales
forces.

         A.M. Best assigned to GNA an A + (Superior) rating. Duff & Phelps
reaffirmed the Company's AA (Very High) rating, and Standard & Poor's reaffirmed
an AA (Excellent) rating based on the Company's high claims paying ability and
excellent asset quality.

GOVERNMENT REGULATION

         GNA is subject to the laws of the State of Washington governing
insurance companies and to the regulations of the Washington Insurance
Department. In addition, GNA is subject to regulation under the insurance laws
of other jurisdictions in which the Company operates. Regulation by other
supervisory agencies includes licensing to transact business, overseeing trade
practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing 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 amounts of
investments permitted. The Company's books and accounts are subject to review by
each Insurance Department and other supervisory agencies at all times, and GNA
files annual statements with these agencies. A full examination of the Company's
operations is conducted periodically by various Insurance Departments and may
include the participation of the insurance departments of other states in which
GNA conducts business. Recent examinations have not resulted in significant
findings.

<PAGE>

         In addition, many states regulate affiliated groups of insurers
(including GNA) under insurance holding company legislation. Under such laws,
intercompany transactions, including transfers of assets and dividend payments
from insurance subsidiaries, may be subject to prior notice or approval,
depending on the size of the transfers and payments in relation to the financial
positions of the companies involved. Due to the Company's volume of California
business, GNA is considered a California commercially domiciled insurer under
California insurance holding company law.

         The National Association of Insurance Commissioners (NAIC) has adopted
Risk-Based Capital (RBC) requirements to evaluate the adequacy of statutory
capital and surplus in relation to risks associated with: (i) asset quality,
(ii) insurance risk, (iii) interest rate risk, and (iv) other business factors.
The RBC formula is designed as an early warning tool for the states to identify
possible under-capitalized companies for the purpose of initiating regulatory
action. In the course of its operations, the Company monitors the level of its
RBC and it exceeds the minimum required levels.

         Under insurance guaranty fund laws in most states, insurers doing
business therein can be assessed (up to prescribed limits) for policyholder
losses incurred by insolvent companies. GNA has estimated assessments related to
known insolvencies, and has recorded a liability of $28.9 million at December
31, 1997 related to this estimated liability. The amount of any future
assessments related to future insolvencies under these laws, however, cannot be
reasonably estimated. Most of these laws do provide that an assessment may be
excused or deferred if it would threaten an insurer's own financial strength.

         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 which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance and investment products sold by the Company and the
taxation impact on the relative desirability of various investment vehicles.

Item 2.       Properties

         The Company leases office space in Seattle, Washington. The Company is
reimbursed by its affiliates for rent based on direct and indirect allocation
methods.

Item 3.       Legal Proceedings

         There is no material pending litigation to which the Company is a party
or of which any of the Company's property is the subject, and there are no legal
proceedings contemplated by any governmental authorities against GNA of which
the Company has any knowledge.

<PAGE>


Item 4.       Submission of Matters to a Vote of Security Holders

         Not applicable.

                                     PART II

Item 5.       Market for Registrant's Common Equity and Related Stockholder
              Matters

         The common stock of the Company is owned entirely by GE Capital
Assurance and, therefore, there is no trading market in such stock.

Item 6.       Selected Financial Data

         The following selected financial data should be read in conjunction
with the consolidated financial statements and notes thereto included in this
Form 10-K.

                             Selected Financial Data
                              (Dollars in millions)
<TABLE>
<CAPTION>
                                                                     Year ended December 31
                                                                     ----------------------
                                    1997        1996           1995          1995          1994          1994        1993
--------------------------------------------------------------------------------------------------------------------------------
                                                           Pro forma                    Pro forma
                                                           (unaudited)                 (unaudited)
                                                              (1)                          (1)
<S> <C>
Net investment income             $ 475.3     $ 462.5      $ 444.5         $ 784.7      $ 391.6        $ 837.8      $   579.8
Income before income taxes
   and minority interest            106.8        76.0         39.1            62.0         70.6          107.7           57.0
Net income                           71.3        51.1         26.7            26.3         44.0           47.5           34.1
Total assets                      7,082.1     7,120.0      6,926.5         6,926.5      6,578.0       13,100.2       13,160.1
Shareholder's interest,
   excluding net unrealized
   investment gain/(loss)           754.2       682.9        631.7           631.7        607.3          794.2          754.0
Net unrealized investment
   gain/(loss)                       38.3         7.0         29.9            29.9       (166.7)        (528.8)         (16.3)
Total shareholder's interest        792.5       689.9        661.6           661.6        440.6          265.4          737.7

</TABLE>
(1)   Unaudited pro forma results reflect the Reorganization as if it had
      occurred at the beginning of the period.

<PAGE>


Item 7.       Management's Discussion and Analysis of Financial Condition and
              Results of Operations

RESULTS OF OPERATIONS

         GNA derives substantially all its income from earnings on investments
offset by interest credited to policyholders of predominantly deferred and
immediate annuities, operating expenses, acquisition costs and taxes. Funds
received for the purchase of immediate annuities with life contingencies,
including options elected under annuity contracts, are reported as premium
income. Other income is primarily surrender fees on deferred annuity policies.

         GNA's results of operations for the years ended December 31, 1997 and
1996 include the accounts of GNA, as well as the Company's investment in GE
Capital Life of New York, accounted for under the equity method.

1997 Compared to 1996

         Net investment income increased $12.8 million to $475.3 million. This
increase is primarily attributable to purchase of higher yield securities,
dividends from other invested assets and an increase in average investments
during the period.

         Net realized investment gains (losses) - Net realized investment gains
were $19.7 million during 1997, compared to a $3.1 million in 1996. This change
is related to the Company's asset/liability risk management and varies with
market and economic conditions.

         Premiums decreased $138.9 million to $61.1 million. This decrease is
due to lower sales of life contingent structured settlement product primarily
related to a shift in marketing focus to GE Capital Assurance products.

         Interest  credited on policyholder  deposits  decreased $1.8 million to
$293.9 million  primarily due to lower future annuity and contract benefit
liabilities during 1997.

         Benefits and other changes in policy reserves decreased $133.2 million
to $97.7 million. Change in policy reserves decreased largely due to a reduction
in sales of life contingent structured settlement products and reserved
reduction associated with the payout of benefits.

         Commissions decreased $12.7 million to $14.7 million. This decrease is
due to continued shift in marketing focus to GE Capital Assurance products.

         General expenses decreased $9.6 million to $26.9 million due to the
Company's continued shift in marketing focus to GE Capital Assurance products.

         Amortization of intangibles decreased $1.3 million to $32.6 million.
The Company established goodwill and present value of future profits (PVFP)
assets in connection with GNA's acquisition. The decrease is primarily related
to lower PVFP amortization for the period ended December 31, 1997.

<PAGE>
         Change in deferred  acquisition  costs decreased $18.5 million to $8.2
million  primarily as a result of lower commissions.

1996 Compared to 1995

         Net investment income decreased $322.2 million to $462.5 million, of
which $343.8 million relates to GE Capital Assurance and subsidiaries that were
divested and are no longer included in the earnings of the Company as of October
1, 1995. The offsetting $21.6 million increase is primarily attributable to
higher invested assets, the equity income of the Company's subsidiary, and the
impact of higher interest rates resulting in higher reinvestment rates.

         Net realized investment gains (losses) - Net realized investment gains
were $3.1 million during 1996, compared to a $14.4 million loss in 1995. This
change is related to the Company's asset/liability risk management and varies
with market and economic conditions.

         Premiums increased $22.9 million to $200.0 million. This increase
primarily relates to greater recognition of premiums on GNA's life contingent
structured settlement product, offset by the effects of the Reorganization of
$9.4 million.

         Interest credited on policyholder deposits decreased $166.5 million to
$295.7 million. The decrease was primarily related to the Reorganization.
Interest crediting rates remained relatively consistent with 1995.

         Benefits and Other Changes in policy reserves increased $26.5 million
to $201.0 million. Policy reserves related to life contingent products increased
primarily from greater life contingent structured settlement premiums, offset by
the effects of the Reorganization of $8.0 million.

         Annuity and surrender benefits decreased $106.8 million to $29.9
million. Offsetting the effects of the Reorganization, which decreased benefits
by $116.3 million, annuity and surrender benefits increased by $9.5 million,
primarily due to payments on life contingent structured settlements benefits.

         Commissions decreased $15.5 million to $27.4 million. The
Reorganization accounted for $10.7 million of the decrease with the remaining
decrease attributable to a lower sales of single premium deferred annuities.

         General expenses decreased $34.7 million to $36.5 million. This
decrease is primarily related to an accrual for guaranty association assessments
of $20.4 million recorded in the fourth quarter of 1995. There was no
significant additional accrual necessary during 1996. In addition, the effects
of the Reorganization resulted in a $14.5 million decrease in general expenses.

         Amortization of intangibles decreased $23.6 million to $33.9 million.
The decrease is primarily related to the fact that as result of the
Reorganization, the amortization of the goodwill and PVFP balances of GE Capital
Assurance are no longer included in the Company's earnings effective October 1,
1995.

<PAGE>

         Change in deferred acquisition costs decreased $16.2 million to $26.7
million primarily as a result of lower commissions of $4.8 million and the
effect of the Reorganization of $10.8 million.

         Provision for income taxes. The effective tax rate for 1996 decreased
from 39.5% to 32.8% primarily due to equity income of the Company's subsidiary
and lower state taxes as a result of the Reorganization.

         Minority interest decreased $11.2 million to zero due to the fact that
subsequent to the third quarter of 1995, after the effects of the
Reorganization, there was no longer minority interest recorded in GNA's
financial statements. The minority interest previously recorded represented GNA
Corporation's proportional ownership of GE Capital Assurance.

INVESTMENTS

         The Company manages its investment portfolio to meet the
diversification, credit quality, yield and liquidity requirements of its policy
liabilities by investing primarily in fixed maturity instruments, including
government and corporate bonds, mortgage backed bonds, and mortgage loans on
real estate. At December 31, 1997, the Company held $6.3 billion, or 94.5% of
its investment portfolio, in fixed maturity instruments and mortgage loans. The
Company's investment philosophy focuses on purchasing assets the durations of
which approximate policyholder obligations. To match some of its longer term
policy liabilities, the Company has followed a strategy of buying bonds with
adequate call protection. The Company also invests in policy loans, short-term
securities and other investments, which comprised the remaining 5.5% of its
investment portfolio at December 31, 1997.

         The Company primarily purchases investment-grade (BBB-/Baa3 or above)
bonds. At December 31, 1997, $4,601.5 million, or 91.1%, of the fixed maturity
securities held by the Company were bonds rated by a rating agency (S&P or
Moody's), or were government/agency bonds. Fixed maturity securities of $455.4
million, or 8.9%, were comprised primarily of private placement bonds not rated
by either rating agency. At December 31, 1997, the Company held $40.0 million of
bonds rated below investment grade (excluding split-rated bonds). In addition,
the Company held $22.5 million of "not-rated" bonds which the Company believes
are below investment grade. Below investment grade bonds include those bonds
originally purchased as investment grade but subsequently downgraded in rating,
as well as bonds purchased as below investment grade. The Company holds this
small percentage of below investment grade bonds in order to enhance the yield
on its investment portfolio.

         Investments in mortgage-backed bonds include $1,417.2 million in
collateralized mortgage obligations (CMOs) and asset-backed securities and
$396.5 million of pass-through securities. These bonds are secured primarily by
pools of residential mortgages and generally carry high credit ratings.
Approximately 62% of the mortgage-backed bonds are backed by securities issued
by Government National Mortgage Association, Federal Home Loan Mortgage
Corporation, or Federal National Mortgage Association. In the aggregate, the
mortgage-backed bonds had an average rating of AAA/Aaa at December 31, 1997.
Most CMO and pass-through securities are subject to prepayment and extension
risk (i.e. principal can be received earlier or later than anticipated, based on
the rate of mortgage prepayments in the underlying residential mortgage pools).

<PAGE>
         The Company has classified all of its fixed maturity investments
available-for-sale. Such securities are carried on the consolidated balance
sheet at current fair values and marked to market quarterly. Changes in market
value, net of the effect on present value of future profits, deferred policy
acquisition costs and deferred income taxes, are recorded as unrealized
appreciation or depreciation directly in shareholder's interest and,
accordingly, have no effect on net income. At December 31, 1997, the amortized
cost basis of the Company's fixed maturity securities was $4,903.2 million,
representing net unrealized gains of $153.7 million.


         The Company's mortgage loan portfolio consisted of 989 loans at
December 31, 1997. The loans, which are originated through a network of mortgage
bankers, are made only on completed, leased properties and have a maximum
loan-to-value ratio of 75% at the date of origination. Commercial loans comprise
the majority of the portfolio, with $656.5 million (53.1%), $298.9 million
(24.1%) and $185.1 million (14.9%) attributable to the retail, industrial and
office sectors, respectively. The remainder of the loans, $99.4 million (8.0%),
are attributable to the residential and other miscellaneous sectors. The
mortgage loans are secured by property throughout the U.S., with concentrations
in the Pacific region (44.0%) and the South Atlantic region (21.4%).

         Other invested assets of $256.0 million at December 31, 1997 were
comprised of several types of assets. The Company has made investments in mutual
funds offered by the Company's mutual fund and variable annuity distribution
channels of $47.8 million in order to provide seedmoney for these funds.
Pursuant to a periodic review of its asset allocation strategy, the Company has
also made investments in limited partnerships ($81.9 million) and an investment
in affiliate ($126.3 million).

LIQUIDITY AND CAPITAL RESOURCES

         The Company's liquidity requirements are met by funds from operations
and investment activity. Premiums and policyholder deposits are invested in
assets that generally have durations similar to the Company's liabilities. Funds
from investment activity included principal and interest payments from the bond
and mortgage portfolio as well as sales, calls and maturities of certain
securities. As of December 31, 1997, investments subject to certain call
provisions totaled $136.5 million; and mortgage-backed securities subject to
prepayment risk totaled $1,853.7 million.

         The Company is restricted by Washington State as to the amount of
dividends it may pay within a given calendar year to its parent without
regulatory consent. That restriction is the greater of statutory net gain from
operations for the previous year or 10% of the statutory surplus at the end of
the year, subject to a maximum equal to statutory earned surplus. As of December
31, 1997, approximately $73.7 million was available for dividend payments in
1998.

YEAR 2000

         Year 2000 compliance programs and information systems modifications
have been initiated in an attempt to ensure that these systems and key processes
will remain functional. This objective is expected to be achieved either by

<PAGE>

modifying present systems using existing internal and external programming
resources or by installing new systems, including enterprise systems, and by
monitoring supplier and other third-party interfaces. While there can be no
assurance that all such modifications will be successful, management does not
expect that either costs of modifications or consequences of any unsuccessful
modifications should have material adverse effect on the Corporation's financial
position, results of operations or liquidity.

NEW ACCOUNTING STANDARDS

         In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. Its distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 is required to be adopted by
the Company in 1997, except for certain sections which were deferred in
accordance with SFAS 127. The adoption of the applicable provisions of SFAS No.
125 in 1997 did not have a material impact on the Company's consolidated
financial statements and management of the Company does not expect that adoption
of the remaining provisions of SFAS No. 125 will have a material impact on the
Company's 1998 financial position, results of operations, or liquidity.

         In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income includes all changes in equity from
nonowner sources; investments by and distributions to owners are excluded. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. The
Company will include this new reporting information in its 1998 consolidated
financial statements as required.

         In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. SFAS No. 131 is effective of
disclosures about segments of an enterprise and related information for periods
beginning after December 15, 1997. This Statement establishes standards for the
way that public business enterprises reporting information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Management has not yet determined the impact, if any, of this Statement on the
Company's future disclosures.

         In December 1997, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 97-3, Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments. This SOP provides guidance
on accounting by insurance and other enterprises for guaranty-fund and certain
other insurance related assessments. The SOP requires enterprises to recognize a
liability for assessments when (a) an assessment has been asserted or
information available prior to issuance of the financial statements indicates it
is probable that an assessment will

<PAGE>

be asserted, (b) the underlying cause of the asserted or probable assessment has
occurred on or before the date of the financial statements, and (c) the amount
of the loss can be reasonably estimated. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998 and will be
reported in a manner similar to a cumulative effect of a change in accounting
principle in the initial year of adoption. Management of the Company does not
expect that this SOP will have a material impact on the Company's financial
position, results of operations, or liquidity.

<PAGE>

                         [KPMG PEAR MARWICK LETTERHEAD]

Independent Auditors' Report

The Board of Directors
Great Northern Insured Annuity Corporation:

We have audited the accompanying consolidated balance sheets of Great Northern
Insured Annuity Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, shareholder's interest, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Great Northern
Insured Annuity Corporation and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.

/s/ KPMG PEAT MARWICK

Richmond, Virginia
January 23, 1998

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 1997 and 1996
(Dollar amounts in millions, except per share amounts)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Assets                                                                         1997               1996
-------------------------------------------------------------------------------------------------------
<S> <C>
Investments:
     Fixed maturities available-for-sale, at fair value
      (amortized cost of $4,903.2 in 1997
        and $5,254.4 in 1996)                                               $ 5,056.9            5,270.1
     Mortgage loans, net of valuation allowance of $36.7 and $35.6
        at December 31, 1997 and 1996, respectively                           1,203.8            1,159.7
     Real estate owned, net                                                       4.1                -
     Policy loans                                                                 3.3                3.3
     Short-term investments                                                      98.8                3.9
     Other invested assets                                                      256.0              161.7
-------------------------------------------------------------------------------------------------------
Total investments                                                             6,622.9            6,598.7

Cash                                                                              2.8                2.3
Accrued investment income                                                       110.7              112.2
Deferred acquisition costs                                                       97.7              129.6
Intangible assets                                                                98.5              181.0
Deferred income taxes                                                             -                 19.1
Other assets                                                                    109.6               44.4
Separate account assets                                                          39.9               32.7
--------------------------------------------------------------------------------------------------------
Total assets                                                                $ 7,082.1            7,120.0
========================================================================================================
Liabilities and Shareholder's Interest
-------------------------------------------------------------------------------------------------------
Liabilities:
     Future annuity and contract benefits                                   $ 6,003.6            6,171.9
     Other policyholder liabilities                                              18.7               48.1
     Accounts payable and accrued expenses                                      215.1              177.4
     Separate account liabilities                                                39.9               32.7
     Deferred income tax liability                                               12.3                -
-------------------------------------------------------------------------------------------------------
Total liabilities                                                             6,289.6            6,430.1
-------------------------------------------------------------------------------------------------------
Shareholder's interest:
     Common stock, ($100 par value;  25,000 authorized, issued and
      outstanding)                                                                2.5                2.5
Additional paid-in capital                                                      542.0              542.0
Net unrealized investment gains                                                  38.3                7.0
Retained earnings                                                               209.7              138.4
-------------------------------------------------------------------------------------------------------
Total shareholder's interest                                                    792.5              689.9
-------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's interest                                $ 7,082.1            7,120.0
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 1997 and 1996
(Dollar amounts in millions)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                                                            1997            1996          1995
-------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Revenues:
     Net investment income                                                     $             475.3           462.5         784.7
     Net realized investment gains (losses)                                                   19.7             3.1         (14.4)
     Premiums                                                                                 61.1           200.0         177.1
     Policy fees and other income                                                              8.3             8.1          16.7
-------------------------------------------------------------------------------------------------------------------------------
Total revenues                                                                               564.4           673.7         964.1
-------------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:

     Interest credited                                                                       293.9           295.7         462.2
     Benefits and other changes in policy reserves                                            97.7           230.9         311.2
     Commissions                                                                              14.7            27.4          42.9
     General expenses                                                                         26.9            36.5          71.2
     Amortization of intangibles, net                                                         32.6            33.9          57.5
     Change in deferred acquisition costs, net                                                (8.2)          (26.7)        (42.9)
-------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses                                                                  457.6           597.7         902.1
-------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest                                             106.8            76.0          62.0

Provision for income taxes                                                                    35.5            24.9          24.5
-------------------------------------------------------------------------------------------------------------------------------
Income before minority interest                                                               71.3            51.1          37.5

Minority interest                                                                              -               -            11.2
-------------------------------------------------------------------------------------------------------------------------------

Net income                                                                     $              71.3            51.1          26.3
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholder's Interest

Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in millions, except share amounts)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------

                                                                                 Unrealized
                                                                Additional       Investment                       Total
                                                                  Paid-in          Gains        Retained     Shareholder's
                                      Shares    Amount            Capital         (Losses)      Earnings         Interest
--------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balances at December 31, 1994         25,000   $     2.5          719.4           (528.8)         72.3            265.4
Net income                                 -         -              -                -            26.3             26.3
Dividend of GE Capital Assurance           -         -           (175.2)             -           (11.3)          (186.5)
Purchase price adjustments                 -         -             (2.3)             -             -               (2.3)
Net unrealized investment gains            -         -              -              558.7           -              558.7
----------------------------------------------------------------------------------------------------------------------

Balances at December 31, 1995         25,000         2.5          541.9             29.9          87.3            661.6
Net income                                 -         -              -                -            51.1             51.1
Purchase price adjustments                 -         -              0.1              -             -                0.1
Net unrealized investment losses           -         -              -              (22.9)          -              (22.9)
----------------------------------------------------------------------------------------------------------------------

Balances at December 31, 1996         25,000         2.5          542.0              7.0         138.4            689.9
Net income                                 -         -              -                -            71.3             71.3
Net unrealized investment gains            -         -              -               31.3           -               31.3
----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997         25,000   $     2.5          542.0             38.3         209.7            792.5
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows

Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in millions)

--------------------------------------------------------------------------------------------------------------
                                                                         1997            1996            1995
--------------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
     Net income                                                      $     71.3            51.1            26.3
     Adjustments to reconcile net income to net cash provided
      by operating activities:
         Minority interest                                                  -               -              11.2
         Increase in future policy benefits                               355.3           496.7           636.7
         Equity in earnings of GE Capital Life of New York                 (8.4)           (7.6)           (1.3)
         Net realized investment gains                                    (19.7)           (3.1)           14.4
         Amortization of investment premiums and discounts                  9.9            27.7            61.4
         Amortization of intangibles                                       32.6            33.9            57.5
         Deferred income tax expense (benefit)                             17.0           (10.4)            4.0
         Change in certain assets and liabilities:
            Decrease (increase) in:
                Accrued investment income                                   1.5           (26.6)           (6.5)
                Deferred acquisition costs                                 (8.2)          (26.7)          (42.9)
                Other assets, net                                         (66.1)          (12.4)           12.6
            Increase (decrease) in:
                Other policy related balances                             (29.4)          (25.5)          (25.7)
                Accounts payable and accrued expenses                      37.7            73.3            24.1
--------------------------------------------------------------------------------------------------------------
Total adjustments                                                         322.2           519.3           745.5
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                 393.5           570.4           771.8
--------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
     Proceeds from investments in fixed maturities
      and real estate                                                   1,229.3           868.2         1,735.6
     Principal collected on mortgage and policy loans                     152.1           163.9           124.4
     Purchases of fixed maturities                                       (965.2)       (1,199.5)       (1,846.5)
     Mortgage and policy loan originations                               (198.0)          (42.3)         (159.9)
     Dividends received                                                     7.2             7.5             7.1
--------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                       225.4          (202.2)         (139.3)
--------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
     Proceeds from issue of investment contracts                          263.9           415.6           810.3
     Redemption and benefit payments on investment contracts             (787.4)         (807.6)       (1,469.2)
     Cash distributed in conjunction with dividend                          -               -             (31.5)
--------------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                    (523.5)         (392.0)         (690.4)
--------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                       95.4           (23.8)          (57.9)
===============================================================================================================
Cash and cash equivalents at beginning of year                              6.2            30.0            87.9
===============================================================================================================
Cash and cash equivalents at end of year                             $    101.6             6.2            30.0
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 1997, 1996 and 1995
(Dollar amounts in millions)

==============================================================================



   (1)   Basis of Presentation, Principles of Consolidation and Summary of
         Significant Accounting Policies

         Basis of Presentation

         These consolidated financial statements have been prepared on the basis
         of generally accepted accounting principles (GAAP) for stock life
         insurance companies, which vary in several respects from accounting
         practices prescribed or permitted by the Insurance Commissioner of the
         State of Washington, where Great Northern Insured Annuity Corporation
         (GNA or the Company) is domiciled. The preparation of financial
         statements in conformity with GAAP requires management to make
         estimates and assumptions that affect the reported amounts and related
         disclosures. Actual results could differ from those estimates.

         Principles of Consolidation

         Effective April 1, 1993, General Electric Capital Corporation (GE
         Capital), all of whose common stock is indirectly owned by General
         Electric Company, completed the acquisition of GNA's parent company,
         GNA Corporation. Effective July 14, 1993, GE Capital acquired 100% of
         the issued and outstanding capital stock of United Pacific Life
         Insurance Company and four of its seven wholly-owned subsidiaries
         (collectively, the Acquisitions). During 1994 United Pacific Life
         Insurance Company was renamed General Electric Capital Assurance
         Company (GE Capital Assurance).

         Effective October 1, 1995, the Company was party to a reorganization
         (the Reorganization) involving GNA Corporation and certain of its life
         insurance company subsidiaries. The Reorganization allows all life
         insurance company subsidiaries of GNA Corporation to file a
         consolidated federal tax return.

         Prior to the Reorganization, GE Capital Assurance's voting common stock
         was owned by GNA and its preferred and nonvoting common stock was owned
         by GNA Corporation, thus resulting in minority interest. As part of the
         Reorganization, GNA became a wholly-owned subsidiary of GE Capital
         Assurance and GE Capital Assurance became a wholly-

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================




   (1)   Continued

         owned subsidiary of GNA Corporation. In order for GE Capital Assurance
         to become the direct parent of GNA, GNA Corporation contributed all of
         the stock of GNA to GE Capital Assurance in exchange for voting share
         of GE Capital Assurance. On October 1, 1995, GNA distributed its
         holdings of GE Capital Assurance common stock to GE Capital Assurance
         with the result that GE Capital Assurance is now wholly-owned by GNA
         Corporation and a decrease in shareholder's interest of $186.5.

         The accompanying consolidated financial statements include the accounts
         of GNA and its subsidiaries prior to the Reorganization, GE Capital
         Assurance and First GNA Life Insurance Company of New York (First GNA),
         owned 48% by GNA and 52% by GE Capital Assurance. The results
         subsequent to the Reorganization include GNA, as well as its
         proportionate share of First GNA, accounted for under the equity
         method. Effective February 1, 1996, First GNA was renamed GE Capital
         Life Assurance Company of New York (GE Capital Life of New York).

         Products

         The Company's operations are in one business segment, Wealth
         Accumulation and Transfer. Wealth Accumulation and Transfer products
         are investment vehicles and insurance contracts intended to increase
         the policyholder's wealth, transfer wealth to beneficiaries or provide
         a means for replacing the income of the insured in the event of
         premature death. The Company's principal product lines under the Wealth
         Accumulation and Transfer segment are deferred annuities (fixed and
         variable) and immediate annuities.

         The Company primarily sells its products through banks, thrifts and
         other financial institutions.

         Revenues

         Investment income is recorded when earned. Investment gains and losses
         are calculated on the basis of specific identification. Premiums on
         short duration insurance contracts are reported as revenue over the
         terms of the related insurance policies. In general, earned premiums
         are calculated on a pro-rata basis or are recognized in proportion to
         expected claims. Premiums on long-duration insurance products are
         recognized as earned when

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================





   (1)   Continued

         due or, in the case of life contingent immediate annuities, when the
         contracts are issued. Premiums received under annuity contracts without
         significant mortality risk and premiums received on universal life
         products are not reported as revenues but as future annuity and
         contract benefits. Other income consists primarily of surrender charges
         on certain policies. Surrender charges are recognized as income when
         the policy is surrendered.

         Statements of Cash Flows

         Certificates and other time deposits are classified as short-term
         investments on the consolidated balance sheets and considered cash
         equivalents in the consolidated statements of cash flows.

         Investments

         The Company has designated its fixed maturities (bonds, notes, and
         redeemable preferred stock) as available-for-sale. The fair value for
         fixed maturities is based on quoted market prices, where available. For
         fixed maturities not actively traded, fair values are estimated using
         values obtained from independent pricing services or, in the case of
         private placements, are estimated by discounting expected future cash
         flows using a current market rate applicable to the credit quality,
         call features and maturity of the investments, as applicable.

         Changes in the market values of investments available-for-sale, net of
         the effect on deferred policy acquisition costs, present value of
         future profits and deferred federal income taxes, are reflected as
         unrealized investment gains or losses in a separate component of
         shareholder's interest and, accordingly, have no effect on net income.
         Unrealized losses that are considered other than temporary are
         recognized in earnings through an adjustment to the amortized cost
         basis of the underlying securities.

         Investment income on mortgage-backed securities is initially based upon
         yield, cash flow and prepayment assumptions at the date of purchase.
         Subsequent revisions in those assumptions are recorded using the
         retrospective method, whereby the amortized cost of the securities is
         adjusted to the amount that would have existed had the revised

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================




   (1)   Continued

         assumptions been in place at the date of purchase. The adjustments to
         amortized cost are recorded as a charge or credit to investment income.

         The Company does not engage in derivatives trading, market-making or
         other speculative activities. The Company requires all options to be
         designated and accounted for as hedges of specific assets, liabilities
         or committed transactions; resulting payments and receipts are
         recognized contemporaneously with effects of hedged transactions. Any
         instrument designated but ineffective as a hedge is marked to market
         and recognized in operations immediately. A payment or receipt arising
         from early termination of an effective hedge is accounted for as an
         adjustment to the basis of the hedged transaction.

         Mortgage and policy loans are stated at the unpaid principal balance of
         such loans, net of allowances for estimated uncollectable amounts.

         Deferred Acquisition Costs

         Acquisition costs include costs and expenses which vary with and are
         primarily related to the acquisition of insurance and investment
         contracts, such as commissions, direct advertising and printing and
         certain support costs such as underwriting and policy issue expenses.
         Acquisition costs capitalized are determined by actual costs and
         expenses incurred by product in the year of issue.

         For investment contracts, deferred acquisition costs are amortized
         based on the present value of the anticipated gross profits from
         investments, interest credited, surrender charges, mortality and
         maintenance expenses. As actual gross profits vary from projected, the
         impact on amortization is included in net income. For insurance
         contracts, the acquisition costs are amortized in relation to the
         benefit payments or the present value of expected future premiums.

         Recoverability of deferred acquisition costs is evaluated periodically
         by comparing the current estimate of expected future gross profits to
         the unamortized asset balances. If such comparison indicates that the
         expected gross profits will not be sufficient to recover the asset, the
         difference is charged to expense.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================




   (1)   Continued

         Intangible Assets

         Present Value of Future Profits - In conjunction with the acquisitions
         of life insurance subsidiaries, a portion of the purchase price is
         assigned to the right to receive future gross profits arising from
         existing insurance and investment contracts. This intangible asset,
         called the present value of future profits (PVFP), represents the
         actuarially determined present value of the projected future cash flows
         from the acquired policies.

         Goodwill - Goodwill is amortized over its estimated period of benefit
         on the straight-line method. No amortization period exceeds 25 years.
         Goodwill in excess of associated expected operating cash flows is
         considered to be impaired and is written down to fair value.

         Federal Income Taxes

         The Company is included with GE Capital Assurance in a life insurance
         consolidated federal income tax return. Deferred taxes are allocated by
         applying the asset and liability method of accounting for deferred
         income taxes to members of the group as if each member was a separate
         taxpayer. Intercompany balances are settled annually.

         Future Annuity and Contract Benefits

         Future annuity and contract benefits consists of the liability for life
         insurance policies and immediate and deferred annuity contracts.
         Depending on the type of contract, these are calculated based upon
         actuarial assumptions as to mortality, morbidity, interest, expense and
         withdrawals, with experience adjustments for adverse deviation where
         appropriate.

         Separate Accounts

         The separate account assets and liabilities represent funds held for
         the exclusive benefit of the variable annuity contract owners. The
         Company receives mortality risk fees and administration charges from
         the variable mutual fund portfolios. The separate account assets are
         carried at fair value and are equivalent to the liabilities that
         represent the policyholders' equity in those assets.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================




   (1)   Continued

         Reclassifications

         Certain reclassifications may have been made to the prior year's
         financial statements to conform to the current year's presentation.
         These reclassifications have no effect on reported net income of
         financial position.

    (2)  Investments

         General

         For the years ended December 31, the sources of investment income of
the Company were as follows:
<TABLE>
<CAPTION>
                                                                                    1997      1996       1995
-------------------------------------------------------------------------------------------------------------
<S> <C>
 Fixed maturities                                                          $      369.6     353.0      662.9
 Mortgage loans                                                                    97.8     102.8      122.3
 GE Capital Life of New York equity method income                                   8.4       7.6        1.3
 Other                                                                              3.4       2.4        4.9
-------------------------------------------------------------------------------------------------------------
 Gross investment income                                                          479.2     465.8      791.4
 Investment expenses                                                               (3.9)     (3.3)      (6.7)
-------------------------------------------------------------------------------------------------------------
 Net investment income                                                     $      475.3     462.5      784.7
=============================================================================================================
</TABLE>


<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements
(Dollar amounts in millions)

   (2)   Continued

         For the years ended December 31, sales proceeds and gross realized
         investment gains and losses resulting from the sales of investment
         securities available-for-sale were as follows:

<TABLE>
<CAPTION>
                                                                                1997       1996      1995
------------------------------------------------------------------------------------------------------------
<S> <C>
Sales proceeds                                                             $     349.4      192.8     998.9
Gross realized investment:
     Gains                                                                        24.1        8.1      16.6
     Losses                                                                       (4.4)      (5.0)    (31.0)
------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses)                                     $      19.7        3.1     (14.4)
============================================================================================================
</TABLE>


         The additional proceeds from investments presented in the statements of
         cash flows result from principal collected on mortgage-backed
         securities, maturities, calls and sinking payments.

         Net unrealized gains and losses on investment securities classified as
         available-for-sale are reduced by deferred income taxes and adjustments
         to the present value of future profits and deferred acquisition costs
         that would have resulted had such gains and losses been realized. Net
         unrealized gains and losses on available-for-sale investment securities
         reflected as a separate component of shareholder's interest are
         summarized as follows:

<TABLE>
<CAPTION>
                                                                                       1997         1996
-----------------------------------------------------------------------------------------------------------
<S> <C>
 Net unrealized gains on available-for-sale investment securities before
     adjustments:
 Fixed maturities                                                              $        153.7         15.7
 Other invested assets                                                                    3.5          5.4
-----------------------------------------------------------------------------------------------------------
 Sub-total                                                                              157.2         21.1

 Adjustments to the present value of future profits and deferred
      acquisition costs                                                                (100.1)       (10.0)
 Deferred income taxes                                                                  (18.8)        (4.1)
-----------------------------------------------------------------------------------------------------------
 Net unrealized gains on available-for-sale investment securities              $         38.3          7.0
===========================================================================================================
</TABLE>

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================




   (2)   Continued

         At December 31, the amortized cost, gross unrealized gains and losses,
         and fair values of the Company's fixed maturities available-for-sale
         were as follows:
<TABLE>
<CAPTION>

                                                                           Gross         Gross
                                                         Amortized    unrealized    unrealized          Fair
1997                                                          cost         gains        losses         value
-------------------------------------------------------------------------------------------------------------
<S> <C>
Fixed maturities:
     U.S. government and agency                      $          78.5          10.8           -            89.3
     Non-U.S. corporate                                        184.1          12.1          (0.9)        195.3
     U.S. corporate                                          2,826.9          97.6          (5.9)      2,918.6
     Mortgage-backed                                         1,813.7          48.7          (8.7)      1,853.7
-------------------------------------------------------------------------------------------------------------
 Total fixed maturities                              $       4,903.2         169.2         (15.5)      5,056.9
=============================================================================================================

</TABLE>

<TABLE>
<CAPTION>

                                                                            Gross         Gross
                                                         Amortized     unrealized    unrealized         Fair
1996                                                          cost          gains        losses        value
-------------------------------------------------------------------------------------------------------------
<S> <C>
Fixed maturities:
     U.S. government and agency                      $         144.5            9.9          (1.4)       153.0
     Non-U.S. corporate                                        200.9            6.7          (1.5)       206.1
     U.S. corporate                                          3,065.0           10.1         (28.0)     3,047.1
     Mortgage-backed                                         1,844.0           36.5         (16.6)     1,863.9
-------------------------------------------------------------------------------------------------------------
 Total fixed maturities                              $       5,254.4           63.2         (47.5)     5,270.1
==============================================================================================================
</TABLE>



<PAGE>


GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================



   (2) Continued

         The scheduled maturity distribution of the fixed maturities portfolio
         at December 31 follows. Expected maturities may differ from scheduled
         contractual maturities because issuers of securities may have the right
         to call or prepay obligations with or without call or prepayment
         penalties.

<TABLE>
<CAPTION>
                                                                                             1997
                                                                                --------------------------
                                                                                  Amortized          Fair
                                                                                       cost         value
----------------------------------------------------------------------------------------------------------
<S> <C>
Due in one year or less                                                       $         396.4         398.5
Due one year through five years                                                       1,475.0       1,501.7
Due five years through ten years                                                        569.2         592.3
Due after ten years                                                                     648.9         710.7
----------------------------------------------------------------------------------------------------------
Subtotals                                                                             3,089.5       3,203.2
Mortgage-backed securities                                                            1,813.7       1,853.7
----------------------------------------------------------------------------------------------------------
Totals                                                                        $       4,903.2       5,056.9
==========================================================================================================
</TABLE>


         As required by law, the Company has investments on deposit with
         governmental authorities and banks for the protection of policyholders
         of $3.5 and $3.0 to December 31, 1997 and 1996, respectively.

         At December 31, 1997, approximately 23.5% and 15.3% of the Company's
         investment portfolio is comprised of securities issued by the
         manufacturing and financial industries, respectively, the vast majority
         of which are rated investment grade, and which are senior secured
         bonds. No other industry group comprises more than 10% of the Company's
         investment portfolio. This portfolio is widely diversified among
         various geographic regions in the United States, and is not dependent
         on the economic stability of one particular region.

         At December 31, 1997, the Company did not hold any fixed maturity
         securities, other than securities issued or guaranteed by the U.S.
         government, which exceeded 10% of shareholder's interest.

<PAGE>


GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================



   (2) Continued

         The credit quality of the fixed maturity portfolio at December 31
         follows. The categories are based on the higher of the ratings
         published by Standard & Poors or Moody's.
<TABLE>
<CAPTION>
                                                               1997                         1996
                                                   ------------------------        ---------------------
                                                           Fair                          Fair
                                                          value    Percent              value   Percent
--------------------------------------------------------------------------------------------------------
<S> <C>
 Agencies and treasuries                         $        1,207.0       23.9%    $      1,400.5      26.6%
 AAA/Aaa                                                    612.3       12.1              476.7       9.0
 AA/Aa                                                      317.1        6.3              284.6       5.4
 A/A                                                      1,162.4       23.0            1,412.7      26.8
 BBB/Baa                                                  1,262.7       25.0            1,275.1      24.2
 BB/Ba                                                       36.9        0.7               40.7       0.8
 B/B                                                          3.1        0.1                -         -
 Not rated                                                  455.4        8.9              379.8       7.2
--------------------------------------------------------------------------------------------------------
 Totals                                          $        5,056.9      100.0%    $      5,270.1     100.0%
--------------------------------------------------------------------------------------------------------
</TABLE>




         Bonds with ratings ranging from AAA/Aaa to BBB-/Baa3 are generally
         regarded as investment grade securities. Some agencies and treasuries
         (that is, those securities issued by the United States government or an
         agency thereof) are not rated, but all are considered to be investment
         grade securities. Finally, some securities, such as private placements,
         have not been assigned a rating by any rating service and are therefore
         categorized as "not rated." This has neither positive nor negative
         implications regarding the value of the security.

         At December 31, 1997, there were no fixed maturities in default as to
         principal and interest.

         Mortgage Loans

         At December 31, 1997 and 1996, the Company's mortgage loan portfolio
         consisted of 989 and 1,044, respectively, first mortgage loans on
         commercial real estate properties. The loans, which are originated by
         the Company through a network of mortgage bankers, are made only on
         completed, leased properties and have a maximum loan-to-value ratio of
         75% at the date of origination.

<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)

   (2) Continued

         At December 31, 1997 and 1996, respectively, the Company held $451.1
         and $449.0 in mortgages secured by real estate in California,
         comprising 36% and 38% of the respective total mortgage portfolio. For
         the years ended December 31, 1997, 1996 and 1995, respectively, the
         Company originated $79.7, $12.5 and $18.5 of mortgages secured by real
         estate in California, which represent 40%, 29% and 13% of the
         respective total origination's for those years.

         "Impaired" loans are defined under generally accepted accounting
         principles as loans for which it is probable that the lender will be
         unable to collect all amounts due according to the original contractual
         terms of the loan agreement. That definition excludes, among other
         things, leases, or large groups of smaller-balance homogeneous loans,
         and therefore applies principally to the Company's commercial loans.

         Under these principles, the Company has two types of "impaired" loans
         as of December 31, 1997 and 1996: loans requiring allowances for losses
         ($0 and $1.7, respectively) and loans expected to be fully recoverable
         because the carrying amount has been reduced previously through
         charge-offs or deferral of income recognition ($6.1 and $12.6,
         respectively). Allowance for losses on these loans as of December 31,
         1997 and 1996 were $0 and $.8, respectively. Average investment in
         impaired loans during 1997, 1996 and 1995 was $8.9, $15.6 and $11.3
         respectively and interest income earned on these loans while they were
         considered impaired was $.7, $.7 and $1.3, respectively.

         The following table shows the activity in the allowance for losses
         during the years ended December 31:

                                              1997      1996       1995
------------------------------------------------------------------------

Balance at January 1                    $       35.6      35.3       32.0
Dividend of GE Capital Assurance                 -         -         (0.3)
Provision charged to operations                  2.3       2.5        2.8
Amounts written off, net of recoveries          (1.2)     (2.2)       0.8
------------------------------------------------------------------------
Balance at December 31                  $       36.7      35.6       35.3
========================================================================



<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================



   (2) Continued

         The  write-offs  represented  .09%,  0.18% and 0.15% of average
         mortgage loans  outstanding  during 1997, 1996 and 1995, respectively.

         The allowance for losses on mortgage  loans at  December 31,  1997 and
         1996  represented  3.0% and 3.1% of gross mortgage loans, respectively.

         Investment in GE Capital Life of New York

         A portion of other invested assets at December 31, 1997 and 1996
         included $126.3 and $121.0, respectively, for the Company's 48%
         investment in GE Capital Life of New York, accounted for under the
         equity method. Investment income for 1997 and 1996 includes $8.4 and
         $7.6 for equity in earnings of GE Capital Life of New York
         respectively. For 1995, investment income includes $1.3 for equity in
         earnings of GE Capital Life of New York subsequent to the
         Reorganization on October 1, 1995. Prior to the Reorganization, GE
         Capital Life of New York was consolidated. Following is the summarized
         financial information for GE Capital Life of New York as of and for the
         years ended December 31:

                                              1997        1996        1995
--------------------------------------------------------------------------
Total revenue                         $       164.4       163.3       102.0
Total expenses                                135.4       137.6        84.1
--------------------------------------------------------------------------
Income before income taxes                     29.0        25.7        17.9
Provision for income taxes                     11.5         9.8         8.4
--------------------------------------------------------------------------
Net income                            $        17.5        15.9         9.5
==========================================================================
Total investments                     $     1,667.6     1,554.1     1,491.6

Other assets                                  139.9       154.9       100.1
--------------------------------------------------------------------------
Total assets                          $     1,807.5     1,709.0     1,591.7
==========================================================================

Total liabilities                     $     1,547.2     1,459.8     1,334.9

Shareholder's interest                        260.3       249.2       256.8
--------------------------------------------------------------------------
Total liabilities and
  shareholder's interest              $     1,807.5     1,709.0     1,591.7
--------------------------------------------------------------------------


GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================




   (3)   Deferred Acquisition Costs

         Activity impacting deferred acquisition costs for the years ended
December 31, was as follows:

<TABLE>
<CAPTION>
                                                                                 1997      1996       1995
-----------------------------------------------------------------------------------------------------------
<S> <C>
Unamortized balance at January 1                                           $      133.2     106.5       90.2
Dividend of GE Capital Assurance                                                    -         -        (26.6)
Costs deferred                                                                     18.4      36.0       53.0
Amortization, net                                                                 (10.2)     (9.3)     (10.1)
-----------------------------------------------------------------------------------------------------------
Unamortized balance at December 31                                                141.4     133.2      106.5
Cumulative effect of net unrealized investment gains                              (43.7)     (3.6)     (17.7)
-----------------------------------------------------------------------------------------------------------
Recorded balance                                                           $       97.7     129.6       88.8
============================================================================================================

</TABLE>


   (4) Intangible Assets

         Present Value of Future Profits (PVFP)

         The method used by the Company to value PVFP in connection with
         acquisitions of life insurance entities is summarized as follows: (1)
         identify the future gross profits attributable to certain lines of
         business, (2) identify the risks inherent in realizing those gross
         profits, and (3) discount these gross profits at the rate of return
         that the Company must earn in order to accept the inherent risks.

         After PVFP is determined, the amount is amortized, net of accreted
         interest in a manner similar to the amortization of deferred
         acquisition cost. Interest accretes at rates credited to policyholders
         on underlying contracts. As actual results vary from projected amounts,
         the impact on amortization is included in net income.

         Recoverability of PVFP is evaluated periodically by comparing the
         current estimate of expected future gross profits to the unamortized
         asset balance. If such comparison indicates that the expected gross
         profits will not be sufficient to recover PVFP, the difference is
         charged to expense.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================



   (4) Continued

         The following table presents the activity in PVFP for the years ended
         December 31:

<TABLE>
<CAPTION>
                                                                                  1997      1996       1995
----------------------------------------------------------------------------------------------------------
<S> <C>
Unamortized balance at January 1                                          $      155.1     187.5      313.9
Dividend of GE Capital Assurance                                                   -         -        (74.0)
Interest accrued at 5.2% in 1997, 5.4% in 1996 and 4.8% in 1995                    7.1      10.0       15.4
Amortization                                                                     (38.1)    (42.4)     (67.8)
----------------------------------------------------------------------------------------------------------
Unamortized balance at December 31                                               124.1     155.1      187.5
Cumulative effect of net unrealized investment gains                             (56.4)     (6.4)     (65.1)
----------------------------------------------------------------------------------------------------------
Recorded balance                                                          $       67.7     148.7      122.4
===========================================================================================================
</TABLE>


         The estimated percentage of the December 31, 1997 balance, before the
         effect of unrealized investment gains or losses, to be amortized over
         each of the next five years is as follows:

1998                    20%
1999                    16
2000                    13
2001                    11
2002                     9


         Goodwill

         At December 31, 1997 and 1996, total unamortized goodwill was $29.7 and
         $31.2, respectively, which is shown net of accumulated amortization of
         $6.9 and $5.5, respectively. Goodwill amortization was $1.5, $1.5 and
         $4.8 for the years ended December 31, 1997, 1996 and 1995,
         respectively.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================



   (5)   Future Annuity and Contract Benefits

         Investment and Universal Life Type Contracts

         Investment contracts are broadly defined to include contracts without
         significant mortality or morbidity risk. Payments received from sales
         of investment and universal life contracts are recognized by providing
         a liability equal to the current account value of the policyholder's
         contracts. Interest rates credited to investment contracts are
         guaranteed for the initial policy term with renewal rates determined as
         necessary by management. At December 31, 1997 and 1996, investment and
         universal life contracts comprised $5,435.8 and $5,660.9, respectively.

         Insurance Contracts

         Insurance contracts are broadly defined to include contracts with
         significant mortality and/or morbidity risk. The liability for future
         benefits of insurance contracts is the present value of such benefits
         based on mortality, morbidity, and other assumptions which were
         appropriate at the time the policies were issued or acquired. These
         assumptions are periodically evaluated for potential premium
         deficiencies. At December 31, 1997 and 1996, insurance contracts
         comprised $567.8 and $511.0, respectively.

         Interest rate assumptions used in calculating the present value of
         future annuity and contract benefits range from 5.8% to 9.9%.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================



   (6) Income Taxes

         The total provision for income taxes for the years ended December 31
         consisted of the following components:

<TABLE>
<CAPTION>
                                                                                  1997        1996       1995
------------------------------------------------------------------------------------------------------------
<S> <C>
Current federal income tax provision                                      $       17.2        34.3       19.5
Deferred federal income tax provision (benefit)                                   17.3       (10.1)       3.9
------------------------------------------------------------------------------------------------------------

Subtotal federal provision                                                        34.5        24.2       23.4

Current state income tax provision                                                 1.3         1.0        1.0
Deferred state income tax provision (benefit)                                     (0.3)       (0.3)       0.1
------------------------------------------------------------------------------------------------------------
Subtotal state provision                                                           1.0         0.7        1.1
------------------------------------------------------------------------------------------------------------
Total income tax provision                                                $       35.5        24.9       24.5
=============================================================================================================
</TABLE>


         The reconciliation of the federal statutory tax rate to the effective
         income tax rate is as follows:
<TABLE>
<CAPTION>

                                                                                1997       1996        1995
------------------------------------------------------------------------------------------------------------
<S> <C>
Statutory U.S. federal income tax rate                                          35.0%      35.0%       35.0%
Equity in earnings of GE Capital Life of New York                               (2.8)      (3.5)       (0.7)
State income tax                                                                 0.6        0.6         1.2
Goodwill amortization                                                            0.5        0.7         2.7
Other, net                                                                      (0.1)       -           1.3
----------------------------------------------------------------------------------------------------------
Effective rate                                                                  33.2%      32.8%       39.5%
===========================================================================================================

</TABLE>

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================



   (6) Continued

         The components of the net deferred income tax benefit at December 31
         are as follows:
<TABLE>
<CAPTION>

                                                                                      1997             1996
------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:

     Future annuity and contract benefits                                  $           68.7             68.2
     Guaranty association assessments                                                  11.7             14.1
     Mortgage loans and real estate owned                                               -                6.2
     Other                                                                              1.0              0.7
-----------------------------------------------------------------------------------------------------------
Total deferred tax assets                                                              81.4             89.2
-----------------------------------------------------------------------------------------------------------
Liabilities:

     Net unrealized gains on investment securities                                    (18.8)            (4.1)
     Investments                                                                       (3.1)            (2.0)
     Present value of future profits                                                  (35.7)           (45.2)
     Deferred acquisition costs                                                       (22.5)           (16.4)
     Other                                                                            (13.6)            (2.4)
-----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities                                                        (93.7)           (70.1)
-----------------------------------------------------------------------------------------------------------
Net deferred income tax benefit (liability)                                $          (12.3)            19.1
============================================================================================================
</TABLE>


         Based on an analysis of the Company's tax position, management believes
         it is more likely than not that the results of future operations and
         implementation of tax planning strategies will generate sufficient
         taxable income enabling the Company to realize remaining deferred tax
         assets. Accordingly, no valuation allowance for deferred tax assets was
         deemed necessary.

         The Company paid $25.4,  $50.4 and $1.7,  for federal and state  income
         taxes during the years 1997,  1996 and 1995, respectively.


   (7) Related Party Transactions

         During the years ended December 31, 1997, 1996 and 1995, the Company
         recognized $3.4, $3.4 and $1.6, respectively, from its affiliates,
         Capital Brokerage Corporation (formerly known as GNA Securities, Inc.)
         and GNA Distributors, Inc. for reimbursement of marketing,
         administrative and general office expenses.

<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================



   (7) Continued

         During the years ended December 31, 1997, 1996 and 1995, the Company
         received a dividend from GE Capital Life of New York of $7.2, $7.5 and
         $7.1, respectively.

   (8) Commitments and Contingencies

         Mortgage Loan Commitments

         As of  December 31,  1997 and 1996,  the Company was committed to fund
         $94.8 and $27.7,  respectively,  in mortgage loans.

         Guaranty Association Assessments

         The Company's insurance subsidiaries are required by law to participate
         in the guaranty associations of the various states in which they do
         business. The state guaranty associations ensure payment of guaranteed
         benefits, with certain restrictions, to policyholders of impaired or
         insolvent insurance companies by assessing all other companies involved
         in similar lines of business.

         There are currently several unrelated insurance companies which had
         substantial amounts of annuity business in the process of liquidation
         or rehabilitation. The Company's insurance subsidiaries paid
         assessments of $5.4, $3.9 and $6.6 to various state guaranty
         associations during the years 1997, 1996 and 1995, respectively. At
         December 31, 1997 and 1996, accounts payable and accrued expenses
         include $28.9 and $34.4, respectively, related to estimated future
         assessments.

         Litigation

         There is no material pending litigation to which the Company is a party
         or of which any of the Company's property is the subject, and there are
         no legal proceedings contemplated by any governmental authorities
         against the Company of which management has any knowledge.

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements
(Dollar amounts in millions)

(9)      Fair Value of Financial Instruments

         On December 31, 1995, the Company adopted SFAS No. 119, Disclosures
         About Derivative Financial Instruments and Fair Value of Financial
         Instruments. This statement requires disclosures about the amounts,
         nature and terms of derivative financial instruments and modifies
         existing disclosure requirements for other financial instruments.

         The Company has no derivative financial instruments as defined by SFAS
         No. 119 at December 31, 1997, other than mortgage loan commitments of
         $94.8.

         The fair values of financial instruments presented in the applicable
         notes to the Company's consolidated financial statements are estimates
         of the fair values at a specific point in time using available market
         information and valuation methodologies considered appropriate by
         management. These estimates are subjective in nature and involve
         uncertainties and significant judgment in the interpretation of current
         market data. Therefore, the fair values presented are not necessarily
         indicative of amounts the Company could realize or settle currently.
         The Company does not necessarily intend to dispose of or liquidate such
         instruments prior to maturity.

         Financial  instruments  that,  as a  matter  of  accounting  policy,
         are  reflected  in the  accompanying consolidated  financial statements
         at fair value are not  included in the  following  disclosures.  Such
         items include fixed maturities, accrued investment income and certain
         other invested assets. The carrying value of policy loans and
         short-term investments approximates fair value at December 31, 1997 and
         1996, respectively.

         At December 31, the carrying amounts and fair values of the Company's
         remaining financial instruments were as follows:
<TABLE>
<CAPTION>
                                                             1997                        1996
                                               ----------------------------   ----------------------------
                                                   Carrying           Fair        Carrying           Fair
Financial Instruments                                amount          value          amount          value
----------------------------------------------------------------------------------------------------------
<S> <C>
Mortgage loans                               $        1,203.8        1,268.6         1,159.7        1,171.2
Investment contracts                         $        5,315.3        5,194.3         5,504.0        5,364.5
----------------------------------------------------------------------------------------------------------

</TABLE>



<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

===============================================================================




   (9) Continued

         The fair value of mortgage loans is estimated by discounting the
         estimated future cash flows using interest rates applicable to current
         loan origination, adjusted for credit risks.

         The estimated fair value of investment contracts is the amount payable
         on demand (cash surrender value) for deferred annuities and the net
         present value based on interest rates currently offered on similar
         contracts for non-life contingent immediate annuities. Fair value
         disclosures are not required for insurance contracts.

(10)     Restrictions on Dividends

         Insurance companies are restricted by states as to the aggregate amount
         of dividends they may pay to their parent in any consecutive twelve
         month period without regulatory approval. Generally, dividends may be
         paid out of earned surplus without approval with thirty days prior
         written notice within certain limits. The limits are generally based on
         10% of the prior year surplus (net of adjustments in some cases) and
         prior year statutory income (net gain from operations, net income
         adjusted for realized capital gains, or net investment income).
         Dividends in excess of the prescribed limits or the company's earned
         surplus are deemed extraordinary and require formal state insurance
         commission approval. Based on statutory results as of December 31,
         1997, the Company is able to pay $73.7 in dividends in 1998 without
         obtaining regulatory approval.

   (11)  Supplementary Financial Data

         The Company's insurance subsidiaries file financial statements with
         state insurance regulatory authorities and the National Association of
         Insurance Commissioners (NAIC) that are prepared on an accounting basis
         prescribed by such authorities (statutory basis). Statutory accounting
         practices differ from generally accepted accounting principles (GAAP)
         in several respects, causing differences in reported net income and
         shareholder's interest. Permitted statutory accounting practices
         encompass all accounting practices not so prescribed but that have been
         specifically allowed by state insurance authorities. The Company's
         insurance subsidiaries have no significant permitted accounting
         practices.

         Combined  statutory net income for the Company's  insurance
         subsidiaries for the years ended December 31, 1997, 1996 and 1995 was
         $73.0, $65.4 and $76.7 , respectively. The

<PAGE>

GREAT NORTHERN INSURED ANNUITY CORPORATION

Notes to Consolidated Financial Statements

(Dollar amounts in millions)

================================================================================

   (11)  Continued

         combined  statutory  capital  and  surplus  as of  December 31,  1997
         and  1996 was  $496.5  and  $411.2, respectively.

         The NAIC has adopted Risk-Based Capital (RBC) requirements to evaluate
         the adequacy of statutory capital and surplus in relation to risks
         associated with: (i) asset quality, (ii) insurance risk, (iii) interest
         rate risk, and (iv) other business factors. The RBC formula is
         designated as an early warning tool for the states to identify possible
         under- capitalized companies for the purpose of initiating regulatory
         action. In the course of operations, the Company periodically monitors
         the RBC level of each of its insurance subsidiaries. At December 31,
         1997 and 1996, each of the Company's insurance subsidiaries exceeded
         the minimum required RBC levels.

===============================================================================