<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001

                                       or

[ ]   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: 1-13654

                        LIBERTY FINANCIAL COMPANIES, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


        Massachusetts                                   04-3260640
--------------------------------------------------------------------------------
 (State or other jurisdiction               (I.R.S. Employer Identification No.)
of incorporation or organization)


600 Atlantic Avenue, Boston, Massachusetts             02210-2214
--------------------------------------------------------------------------------
 (Address of principal executive offices)              (Zip Code)


                                 (617) 722-6000
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


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

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No

   There were 48,947,116 shares of the registrant's Common Stock, $.01 par
value, and 213,242 shares of the registrant's Series A Convertible Preferred
Stock, $.01 par value, outstanding as of July 20, 2001.

Exhibit Index - Page  29                                           Page 1 of 30


<PAGE>


                        LIBERTY FINANCIAL COMPANIES, INC.
          QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED JUNE 30, 2001


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
PART I.            FINANCIAL INFORMATION                                                                  PAGE
<S>                <C>                                                                                    <C>
Item 1.            Financial Statements

                   Consolidated Balance Sheets as of June 30, 2001 and December 31,
                      2000                                                                                  3

                   Consolidated Statements of Operations for the Three Months and Six Months
                      Ended June 30, 2001 and 2000                                                          4

                   Consolidated Statements of Cash Flows for the Six Months Ended
                      June 30, 2001 and 2000                                                                5

                   Consolidated Statement of Stockholders' Equity for the Six Months Ended
                      June 30, 2001                                                                         6

                   Notes to Consolidated Financial Statements                                               7

Item 2.            Management's Discussion and Analysis of Financial Condition and Results of
                      Operations                                                                           14

Item 3.            Quantitative and Qualitative Disclosures About Market Risk                              27

PART II.           OTHER INFORMATION

Item 1.            Legal Proceedings                                                                       27

Item 6.            Exhibits and Reports on Form 8-K                                                        27

Signatures                                                                                                 28

Exhibit Index                                                                                              29
</TABLE>


                                       2

<PAGE>

                        LIBERTY FINANCIAL COMPANIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                                  (IN MILLIONS)


<TABLE>
<CAPTION>
                                                                         JUNE 30              DECEMBER 31
                                                                           2001                   2000
                                                                     -----------------      -----------------
                                                                        UNAUDITED
<S>                                                                   <C>                   <C>
                                     ASSETS
Assets:
   Investments                                                             $12,084.0              $12,232.4
   Cash and cash equivalents                                                 1,695.8                1,891.0
   Accrued investment income                                                   155.1                  163.5
   Deferred policy acquisition costs                                           618.7                  547.9
   Deferred distribution costs                                                 175.7                  169.4
   Intangible assets                                                           515.8                  533.0
   Other assets                                                                371.0                  401.0
   Separate account assets                                                   4,130.9                4,212.5
                                                                     -----------------      -----------------
                                                                           $19,747.0              $20,150.7
                                                                     =================      =================


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
   Policyholder balances                                                   $11,897.0              $11,968.5
   Notes payable to affiliates                                                 200.0                  200.0
   Notes payable                                                               565.3                  563.2
   Payable for investments purchased and loaned                              1,203.1                1,364.5
   Other liabilities                                                           349.6                  429.3
   Separate account liabilities                                              4,098.5                4,166.8
                                                                     -----------------      -----------------
      Total liabilities                                                     18,313.5               18,692.3
                                                                     -----------------      -----------------


Series A redeemable convertible preferred stock, par value $.01; authorized,
   issued and outstanding 213,242 shares in 2001 and
   2000                                                                         10.7                   10.7
                                                                     -----------------      -----------------

Stockholders' Equity:
   Common stock, par value $.01; authorized 100,000,000 shares, issued and
      outstanding 48,927,740 shares in 2001 and
      48,784,459 shares in 2000                                                  0.5                    0.5
   Additional paid-in capital                                                  953.1                  949.1
   Retained earnings                                                           468.0                  532.4
   Accumulated other comprehensive income (loss)                                 4.1                  (30.6)
   Unearned compensation                                                        (2.9)                  (3.7)
                                                                     -----------------      -----------------
      Total stockholders' equity                                             1,422.8                1,447.7
                                                                     -----------------      -----------------
                                                                           $19,747.0              $20,150.7
                                                                     =================      =================
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>


                        LIBERTY FINANCIAL COMPANIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN MILLIONS, EXCEPT PER SHARE DATA)
                                    UNAUDITED

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED          SIX MONTHS ENDED
                                                                       JUNE 30                    JUNE 30
                                                               ------------------------- ---------------------------
                                                                  2001         2000          2001          2000
                                                               ------------ ------------ -------------  ------------
<S>                                                            <C>          <C>          <C>            <C>

Investment income, including distributions from private
    equity limited partnerships of $18.0 million and
    $26.9 million for the three months and six months
    ended June 30, 2001, respectively, and $0.8 million
    and $2.5 million for the three months and six
    months ended June 30, 2000, respectively                       $237.4       $216.4        $473.7        $422.3

Interest credited to policyholders                                 (153.4)      (133.2)      (301.9)        (260.5)
                                                               ------------ ------------ -------------  ------------
INVESTMENT SPREAD                                                    84.0         83.2         171.8         161.8
                                                               ------------ ------------ -------------  ------------
NET DERIVATIVE GAINS                                                  8.0            -           4.2             -
                                                               ------------ ------------ ------------   ------------
NET REALIZED INVESTMENT LOSSES                                      (13.4)       (12.9)       (33.1)         (16.8)
                                                               ------------ ------------ -------------  ------------
NET CHANGE IN UNREALIZED AND UNDISTRIBUTED (LOSSES) GAINS IN
       PRIVATE EQUITY LIMITED PARTNERSHIPS                          (17.3)         7.5         (14.6)         22.5
                                                               ------------ ------------ -------------  ------------
Fee income:
       Investment advisory and administrative fees                   73.2         71.3         148.3         143.2
       Distribution and service fees                                 14.3         15.1          29.6          30.5
       Transfer agency fees                                          11.7         12.2          24.3          24.9
       Surrender charges and net commissions                          8.0          9.3          16.8          20.0
       Separate account fees                                         14.4         11.1          27.2          21.8
                                                               ------------ ------------ -------------  ------------
TOTAL FEE INCOME                                                    121.6        119.0         246.2         240.4
                                                               ------------ ------------ -------------  ------------
Expenses:
       Operating expenses                                           (98.6)       (99.6)      (204.0)        (201.9)
       Restructuring                                                  1.7            -           0.3             -
       Special compensation plan                                    (19.8)           -        (40.2)             -
       Amortization of deferred policy acquisition costs            (30.9)       (29.8)       (63.6)         (56.9)
       Amortization of deferred distribution costs                  (12.5)       (10.4)       (24.5)         (20.6)
       Amortization of intangible assets                             (8.5)        (5.1)       (17.2)         (10.2)
       Interest expense, net                                         (9.3)        (4.2)       (19.5)          (8.2)
                                                               ------------ ------------ -------------  ------------
TOTAL EXPENSES                                                     (177.9)      (149.1)      (368.7)        (297.8)
                                                               ------------ ------------ -------------  ------------

PRETAX INCOME                                                         5.0         47.7           5.8         110.1
Income tax (expense) benefit                                         (3.3)       (18.7)          0.7         (41.7)
                                                               ------------ ------------ -------------  ------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES                 1.7         29.0           6.5          68.4
Cumulative effect of accounting changes, net of tax                  (6.5)           -         (60.8)            -
                                                               ------------ ------------ -------------  ------------
NET INCOME (LOSS)                                                   $(4.8)       $29.0        $(54.3)        $68.4
                                                               ============ ============ =============  ============

Net income (loss) per share - basic:
       Income before cumulative effect of accounting changes        $0.03        $0.60         $0.13         $1.43
                                                               ============ ============ =============  ============
       Net income (loss)                                           $(0.10)       $0.60        $(1.12)        $1.43
                                                               ============ ============ =============  ============

Net income (loss) per share - assuming dilution:
       Income before cumulative effect of accounting changes        $0.03        $0.60         $0.13         $1.41
                                                               ============ ============ =============  ============
       Net income (loss)                                           $(0.10)       $0.60        $(1.08)        $1.41
                                                               ============ ============ =============  ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>


                        LIBERTY FINANCIAL COMPANIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (IN MILLIONS)
                                    UNAUDITED

<TABLE>
<CAPTION>
                                                                                             SIX MONTHS ENDED
                                                                                                 JUNE 30
                                                                                      -------------------------------
                                                                                          2001              2000
                                                                                      -------------     -------------
<S>                                                                                   <C>               <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                                          $(54.3)            $68.4
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
   Cumulative effect of accounting changes, net of tax                                       60.8                 -
   Non-cash derivative activity                                                              52.6                 -
   Depreciation and amortization                                                             48.8              39.7
   Interest credited to policyholders                                                       301.9             260.5
   Net realized investment losses                                                            33.1              16.8
   Net change in unrealized and undistributed losses (gains) in private equity
     limited partnerships                                                                    14.6             (22.5)
   Net (accretion) amortization on investments                                               (2.6)             44.3
   Change in deferred policy acquisition costs                                              (27.3)            (22.9)
   Net change in other assets and liabilities                                              (135.1)            (35.7)
                                                                                      -------------     -------------
        Net cash provided by operating activities                                           292.5             348.6
                                                                                      -------------     -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Investments purchased available for sale                                              (1,323.6)         (1,821.8)
   Investments sold available for sale                                                    1,382.9           1,609.0
   Investments matured available for sale                                                    42.8              58.6
   Change in policy loans, net                                                              (11.5)            (13.9)
   Change in mortgage loans, net                                                              1.2               1.5
   Other                                                                                     (3.5)             23.9
                                                                                      -------------     -------------
          Net cash provided by (used in) investing activities                                88.3            (142.7)
                                                                                      -------------     -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Withdrawals from policyholder accounts                                                (1,330.2)         (1,106.5)
   Deposits to policyholder accounts                                                        901.2             754.8
   Securities lending                                                                      (142.3)            526.2
   Change in notes payable                                                                    2.1              15.1
   Exercise of stock options                                                                  3.3               1.7
   Dividends paid                                                                           (10.1)             (3.2)
   Redemption of preferred stock                                                                -              (5.4)
                                                                                      -------------     -------------
           Net cash (used in) provided by financing activities                             (576.0)            182.7
                                                                                      -------------     -------------
   (Decrease) increase in cash and cash equivalents                                        (195.2)            388.6
   Cash and cash equivalents at beginning of period                                       1,891.0           1,232.6
                                                                                      -------------     -------------
   Cash and cash equivalents at end of period                                            $1,695.8         $ 1,621.2
                                                                                      =============     =============
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       5
<PAGE>


                        LIBERTY FINANCIAL COMPANIES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                  (IN MILLIONS)
                                    UNAUDITED



<TABLE>
<CAPTION>
                                                                            ACCUMULATED
                                             ADDITIONAL                        OTHER                                 TOTAL
                                 COMMON       PAID-IN       RETAINED       COMPREHENSIVE         UNEARNED        STOCKHOLDERS'
                                 STOCK        CAPITAL       EARNINGS       INCOME (LOSS)       COMPENSATION          EQUITY
                              ------------- ------------ --------------- ------------------- ----------------- -------------------
<S>                           <C>           <C>          <C>             <C>                 <C>               <C>

BALANCE,
   DECEMBER 31, 2000                 $0.5       $949.1         $532.4            $(30.6)            $(3.7)           $1,447.7
Effect of stock-based
   compensation plans                              4.0                                                0.8                 4.8
Common stock
   dividends                                                     (9.8)                                                   (9.8)
Preferred stock
   dividends                                                     (0.3)                                                   (0.3)
Net income (loss)                                               (54.3)                                                  (54.3)
Other comprehensive
    income, net of tax                                                             34.7                                  34.7
                              ------------- ------------ --------------- ------------------- ----------------- -------------------
BALANCE,
   JUNE 30, 2001                     $0.5       $953.1         $468.0              $4.1             $(2.9)           $1,422.8
                              ============= ============ =============== =================== ================= ===================
</TABLE>








          See accompanying notes to consolidated financial statements.



                                       6
<PAGE>

                        LIBERTY FINANCIAL COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001
                                    UNAUDITED

1.       GENERAL

          The accompanying unaudited consolidated financial statements include
     all adjustments, consisting of normal recurring accruals, that management
     considers necessary for a fair presentation of the Company's financial
     position and results of operations as of and for the interim periods
     presented. Certain footnote disclosures normally included in financial
     statements prepared in accordance with generally accepted accounting
     principles in the United States have been condensed or omitted pursuant to
     the rules and regulations of the Securities and Exchange Commission.
     Therefore, these consolidated financial statements should be read in
     conjunction with the audited consolidated financial statements contained in
     the Company's Form 10-K (as amended) for the year ended December 31, 2000.
     The results of operations for the three months and six months ended June
     30, 2001 are not necessarily indicative of the results to be expected for
     the full year.

2.       DISPOSITIONS AND MERGER

         On May 3, 2001, the Company announced that it had reached a definitive
     agreement to sell its annuity and bank marketing business to Sun Life
     Assurance Company of Canada, a Canadian insurance corporation ("Sun Life").
     Pursuant to this agreement, Sun Life will acquire Keyport Life Insurance
     Company and Independent Financial Marketing Group. Sun Life will pay
     approximately $1.7 billion in cash. A copy of the Sun Life Stock Purchase
     Agreement was included as an exhibit to a Form 8-K filed on May 4, 2001.

         The transaction is subject to certain conditions to closing, including
     receipt of approvals by various state insurance regulators in the U.S.,
     certain other regulatory authorities in the U.S. and Canada and the
     Company's shareholders. In connection with the execution of the definitive
     purchase agreement, Liberty Mutual Insurance Company ("Liberty Mutual"),
     the Company's controlling stockholder, entered into an agreement to vote in
     favor of the Sun Life transaction.

         The transaction is expected to close in the second half of 2001. Based
     on current estimates, the Company expects that it will record an after-tax
     gain of approximately $150 million and will have proceeds, net of
     transaction costs and taxes, of approximately $1.47 billion from the
     closing of the Sun Life transaction.

         On June 4, 2001, the Company announced that it reached a definitive
     agreement to sell its asset management business to Fleet National Bank
     ("Fleet"). Through this transaction, Fleet will acquire all of the
     Company's asset management operations, including: Colonial Management
     Associates, Crabbe Huson Group, Inc., Liberty Asset Management Company,
     Liberty Funds Distributor, Liberty Funds Services, Newport Pacific
     Management, Inc., Progress Investment Management, Inc., Stein Roe & Farnham
     Incorporated and Liberty Wanger Asset Management. Fleet will pay
     approximately $900 million in cash. The purchase price is subject to
     adjustment in certain circumstances including adjustments for substantial
     changes in assets under management and changes in the tangible net worth of
     the asset management subsidiaries. In connection with the sale, Fleet will
     also discharge approximately $110 million in revolving debt incurred by a
     subsidiary of the Company to finance sales commissions. A copy of the Fleet
     Stock Purchase Agreement was included as an exhibit to a Form 8-K filed on
     June 6, 2001.

         The transaction is subject to certain conditions to closing, including
     without limitation approvals of regulatory authorities, mutual fund
     trustees and shareholders and the Company's shareholders. In connection
     with the execution of the definitive purchase agreement, Liberty Mutual
     entered into an agreement to vote in favor of the sale.

         The transaction is expected to close in the second half of 2001. Based
     on current estimates, the Company expects that it will record an after-tax
     gain of approximately $40 million and will have proceeds, net of
     transaction costs and taxes, of approximately $700 million from the closing
     of the Fleet transaction.


                                       7
<PAGE>

         On June 4, 2001, the Company announced that it had entered into a
     merger agreement with Liberty Mutual. Under the agreement, the Company will
     become a wholly owned subsidiary of Liberty Mutual and the Company's public
     stockholders will receive a cash amount currently estimated to be $33.44
     per share. Such amount is subject to adjustment in certain circumstances,
     including changes in the net after-tax proceeds of the Sun Life and Fleet
     sales, transaction costs or the net after-tax cost of settling net
     corporate liabilities from those currently estimated. The closing under the
     merger transaction is subject to certain conditions, including the receipt
     of all necessary regulatory approvals, approval of the Company's
     stockholders and the prior closing of the Sun Life and Fleet transactions.
     A copy of the Merger Agreement was included as an exhibit to a Form 8-K
     filed on June 6, 2001.

3.       CHANGES IN ACCOUNTING PRINCIPLES

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

         The Company adopted the Statement on January 1, 2001. The Statement
     requires the Company to recognize all derivatives on the balance sheet at
     fair value. Derivatives that are not hedges must be adjusted to fair value
     through operations. If the derivative is a hedge, depending on the nature
     of the hedge, changes in the fair value of derivatives will either be
     offset by the change in fair value of the hedged assets, liabilities or
     firm commitments through operations or recognized in other comprehensive
     income until the hedged item is recognized in operations. The ineffective
     portion of a derivative's change in fair value will be immediately
     recognized in operations. The cumulative effect, reported after tax and net
     of related effects on deferred policy acquisition costs, upon adoption of
     the Statement at January 1, 2001 decreased net income and stockholders'
     equity by $54.3 million. The adoption of the Statement may increase
     volatility in future reported income due, among other reasons, to the
     requirements of defining an effective hedging relationship under the
     Statement as opposed to certain hedges the Company believes are effective
     economic hedges. The Company anticipates that it will continue to utilize
     its current risk management philosophy, which includes the use of
     derivative instruments.

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

4.       ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES

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


                                       8

<PAGE>

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

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

         The Company utilizes treasury rate lock agreements to reduce its
     exposure to interest rate risk related to certain of its notes payable.
     Treasury rate lock agreements are agreements to exchange with a
     counterparty payments based on an underlying principal balance (notional
     principal) to hedge against interest rate changes. The treasury rate lock
     agreements are designated and qualify as fair value hedges. The ineffective
     portion of the fair value hedges resulted in a loss of $0.5 million for the
     three and six months ended June 30, 2001.

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

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

5.       SEGMENT INFORMATION

         The Company is an asset accumulation and management company with two
     reportable segments: retirement-oriented insurance (principally annuities)
     and asset management. The annuity insurance business is conducted at
     Keyport Life Insurance Company ("Keyport"). Keyport generates investment
     spread income from the investment portfolio which supports policyholder
     balances associated with its fixed and indexed annuity business and its
     closed block of single premium whole life insurance. The annuity insurance
     business also derives fee income from the administration of fixed, indexed
     and variable annuity contracts. The asset management business is conducted
     at Liberty Funds Group, an investment advisor (through its subsidiary
     Colonial Management Associates), distributor and transfer agent to mutual
     funds, Stein Roe & Farnham Incorporated, a diversified investment advisor,
     Newport Pacific Management, Inc., an investment advisor to mutual funds and
     institutional accounts specializing in Asian equity markets, Crabbe Huson
     Group, Inc., an investment advisor to mutual funds and institutional
     accounts, Progress Investment Management Company, an investment advisor to
     institutional accounts, Liberty Asset Management Company, an investment
     advisor to mutual funds, and Liberty Wanger Asset Management, an investment
     advisor to mutual funds and institutional accounts. The asset management
     business derives fee income from investment products and services.


                                       9
<PAGE>

         The Company's reportable segments offer different products and are each
     managed separately. Information by reportable segment is shown below (in
     millions):

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                              JUNE 30                 JUNE 30
                                                                       ----------------------- -----------------------
                                                                          2001        2000        2001        2000
                                                                       ----------- ----------- ----------- -----------
<S>                                                                    <C>         <C>         <C>         <C>

     Statement of Operations Data

     REVENUES (EXCLUDING NET REALIZED INVESTMENT LOSSES AND NET CHANGE IN
     UNREALIZED AND UNDISTRIBUTED (LOSSES) GAINS IN PRIVATE EQUITY LIMITED
     PARTNERSHIPS):
       Annuity:
         Unaffiliated                                                     $269.0     $237.5       $523.3     $463.8
         Intersegment                                                       (4.7)      (4.3)        (9.2)      (8.1)
                                                                       ----------- ----------- ----------- -----------
         Total annuity                                                     264.3      233.2        514.1      455.7
                                                                       ----------- ----------- ----------- -----------
       Asset management:
         Unaffiliated                                                       98.0       97.9        200.8      198.9
         Intersegment                                                        4.7        4.3          9.2        8.1
                                                                       ----------- ----------- ----------- -----------
         Total asset management                                            102.7      102.2        210.0      207.0
                                                                       ----------- ----------- ----------- -----------
         Total revenues  (excluding net realized investment losses and
           net change in unrealized and undistributed (losses) gains
           in private equity limited partnerships)                        $367.0     $335.4       $724.1     $662.7
                                                                       =========== =========== =========== ===========

     Statement of Operations Data

     INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES:
       Annuity:
         Income before amortization of intangible assets                   $62.1      $49.2       $110.2      $98.6
         Amortization of intangible assets                                  (0.3)      (0.3)        (0.6)      (0.6)
                                                                       ----------- ----------- ----------- -----------
           Subtotal annuity                                                 61.8       48.9        109.6       98.0
                                                                       ----------- ----------- ----------- -----------
       Asset management:
         Income before amortization of intangible assets                    15.0       18.2         30.9       36.0
         Amortization of intangible assets                                  (8.1)      (4.8)       (16.4)      (9.6)
                                                                       ----------- ----------- ----------- -----------
           Subtotal asset management                                         6.9       13.4         14.5       26.4
                                                                       ----------- ----------- ----------- -----------
       Other:
         Loss before amortization of intangible assets                     (14.8)      (9.2)       (30.5)     (20.0)
         Amortization of intangible assets                                  (0.1)         -         (0.2)         -
                                                                       ----------- ----------- ----------- -----------
          Subtotal other                                                   (14.9)      (9.2)       (30.7)     (20.0)
                                                                       ----------- ----------- ----------- -----------
       Income before non-operating items, cumulative effect of
         accounting changes and income taxes                                 53.8      53.1         93.4      104.4
       Net realized investment losses                                       (13.4)    (12.9)       (33.1)     (16.8)
       Net change in unrealized and undistributed gains in private
         equity limited partnerships                                        (17.3)      7.5        (14.6)      22.5
       Restructuring                                                          1.7         -          0.3          -
       Special compensation plan                                            (19.8)        -        (40.2)         -
                                                                       ----------- ----------- ----------- -----------
          Pretax income                                                      $5.0     $47.7         $5.8     $110.1
                                                                       =========== =========== =========== ===========

</TABLE>


                                       10

<PAGE>

6.       INVESTMENTS

         Investments were comprised of the following (in millions):

<TABLE>
<CAPTION>
                                                 JUNE 30            DECEMBER 31
                                                  2001                 2000
                                             ----------------     ----------------
<S>                                          <C>                  <C>

Fixed maturities                                 $10,717.5            $10,668.3
Equity securities                                     70.3                 76.4
Policy loans                                         632.3                620.8
Other invested assets                                663.9                866.9
                                             ----------------     ----------------
    Total                                        $12,084.0            $12,232.4
                                             ================     ================
</TABLE>

         The Company's general investment policy is to hold fixed maturity
     securities for long-term investment and, accordingly, the Company does not
     have a trading portfolio. To provide for maximum portfolio flexibility and
     appropriate tax planning, the Company classifies its entire portfolio of
     fixed maturity securities as "available for sale" and, accordingly, carries
     such investments at fair value.









                                       11
<PAGE>

7.       NET INCOME PER SHARE

         The following table sets forth the computation of net income per
     share-basic and net income per share-assuming dilution:

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED         SIX MONTHS ENDED
                                                                        JUNE 30                    JUNE 30
                                                                ------------------------- --------------------------
                                                                   2001         2000         2001          2000
                                                                ------------ ------------ ------------  ------------
    <S>                                                         <C>          <C>          <C>           <C>

    Numerator (in millions)
       Income before cumulative effect of accounting changes          $1.7        $29.0         $6.5         $68.4
       Less: preferred stock dividends                                (0.1)        (0.2)        (0.3)         (0.4)
                                                                ------------ ------------ ------------  ------------
       Numerator for income per share - basic - income before
        cumulative effect of accounting changes available to
        common stockholders                                            1.6         28.8          6.2          68.0
       Cumulative effect of accounting changes, net of tax            (6.5)           -        (60.8)            -
                                                                ------------ ------------ ------------  ------------
       Numerator for net income (loss) per share - basic - net
        income (loss) available to common stockholders               $(4.9)       $28.8       $(54.6)        $68.0
                                                                ============ ============ ============  ============

       Income before cumulative effect of accounting changes
        available to common stockholders                              $1.6        $28.8         $6.2         $68.0
       Plus: income impact of assumed conversions
        Preferred stock dividends                                      0.1          0.2          0.3           0.4
                                                                ------------ ------------ ------------  ------------
       Numerator for income per share - assuming dilution -
        income before cumulative effect of accounting
        changes available to common stockholders after
        assumed conversions                                            1.7         29.0          6.5          68.4
       Cumulative effect of accounting changes, net of tax            (6.5)           -        (60.8)            -
                                                                ------------ ------------ ------------  ------------
       Numerator for net income (loss) per share - assuming
        dilution - net income (loss) available to common
        stockholders after assumed conversions                       $(4.8)       $29.0       $(54.3)        $68.4
                                                                ============ ============ ============  ============

    Denominator
       Denominator for net income per share - basic - weighted-
          average shares                                        48,669,272   47,741,444   48,621,515    47,556,268
       Effect of dilutive securities:
          Employee stock options                                 1,079,518      339,333    1,278,597       347,816
          Convertible preferred stock                              337,743      468,824      337,743       491,597
                                                                ------------ ------------ ------------  ------------
       Dilutive potential common shares                          1,417,261      808,157    1,616,340       839,413
                                                                ------------ ------------ ------------  ------------
       Denominator for net income per share - assuming          50,086,533   48,549,601   50,237,855    48,395,681
           dilution                                             ============ ============ ============  ============

    Net income (loss) per share - basic:
       Income before cumulative effect of accounting changes         $0.03        $0.60        $0.13         $1.43
       Cumulative effect of accounting changes, net of tax           (0.13)           -        (1.25)            -
                                                                ------------ ------------ ------------  ------------
       Net income (loss)                                            $(0.10)       $0.60       $(1.12)        $1.43
                                                                ============ ============ ============  ============

    Net income (loss) per share - assuming dilution:
       Income before cumulative effect of accounting changes         $0.03        $0.60        $0.13         $1.41
       Cumulative effect of accounting changes, net of tax           (0.13)           -        (1.21)            -
                                                                ------------ ------------ ------------  ------------
       Net income (loss)                                            $(0.10)       $0.60       $(1.08)        $1.41
                                                                ============ ============ ============  ============
</TABLE>

                                       12
<PAGE>



8.       COMPREHENSIVE INCOME (LOSS)

         Comprehensive income (loss) was comprised of the following (in
millions):

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED            SIX MONTHS ENDED
                                                                 JUNE 30                      JUNE 30
                                                       ---------------------------- ----------------------------
                                                           2001           2000          2001          2000
                                                       -------------- ------------- ------------- --------------
<S>                                                    <C>            <C>           <C>           <C>

    Net income (loss)                                        $(4.8)         $29.0       $(54.3)          $68.4
    Other comprehensive income (loss), net of taxes:
        Net unrealized gains (losses) on securities            1.2          (33.8)        34.7           (38.3)
                                                       -------------- ------------- ------------- --------------
    Comprehensive income (loss)                              $(3.6)         $(4.8)      $(19.6)          $30.1
                                                       ============== ============= ============= ==============
</TABLE>


9.       SUBSEQUENT EVENT

     On July 24, 2001, the Company notified holders of the Company's Series A
Convertible Preferred Stock (the "Preferred Stock") that all outstanding shares
will be redeemed on August 23, 2001 (the "Redemption Date"). The redemption
price will be $51.54688 per share and includes all dividends unpaid and accruing
up to the Redemption Date. Any holders who do not want to participate in this
redemption may convert their Preferred Stock into shares of the Company's common
stock (the "Common Stock") and receive a number of shares of Common Stock
determined by multiplying 1.58385 times the number of shares of Preferred Stock
converted, with a cash payment in lieu of any fractional shares of Common Stock.





                                       13

<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     On May 3, 2001, the Company announced that it had reached a definitive
agreement to sell its annuity and bank marketing business to Sun Life Assurance
Company of Canada, a Canadian insurance corporation ("Sun Life"). Pursuant to
this agreement, Sun Life will acquire Keyport Life Insurance Company and
Independent Financial Marketing Group. Sun Life will pay approximately $1.7
billion in cash. A copy of the Sun Life Stock Purchase Agreement was included as
an exhibit to a Form 8-K filed on May 4, 2001.

     The transaction is subject to certain conditions to closing, including
receipt of approvals by various state insurance regulators in the U.S., certain
other regulatory authorities in the U.S. and Canada and the Company's
shareholders. In connection with the execution of the definitive purchase
agreement, Liberty Mutual Insurance Company ("Liberty Mutual"), the Company's
controlling stockholder, entered into an agreement to vote in favor of the Sun
Life transaction.

     The transaction is expected to close in the second half of 2001. Based on
current estimates, the Company expects that it will record an after-tax gain of
approximately $150 million and will have proceeds, net of transaction costs and
taxes, of approximately $1.47 billion from the closing of the Sun Life
transaction.

     On June 4, 2001, the Company announced that it reached a definitive
agreement to sell its asset management business to Fleet National Bank
("Fleet"). Through this transaction, Fleet will acquire all of the Company's
asset management operations, including: Colonial Management Associates, Crabbe
Huson Group, Inc., Liberty Asset Management Company, Liberty Funds Distributor,
Liberty Funds Services, Newport Pacific Management, Inc., Progress Investment
Management, Inc., Stein Roe & Farnham Incorporated and Liberty Wanger Asset
Management. Fleet will pay approximately $900 million in cash. The purchase
price is subject to adjustment in certain circumstances including adjustments
for substantial changes in assets under management and changes in the tangible
net worth of the asset management subsidiaries. In connection with the sale,
Fleet will also discharge approximately $110 million in revolving debt incurred
by a subsidiary of the Company to finance sales commissions. A copy of the Fleet
Stock Purchase Agreement was included as an exhibit to a Form 8-K filed on June
6, 2001.

     The transaction is subject to certain conditions to closing, including
without limitation approvals of regulatory authorities, mutual fund trustees and
shareholders and the Company's shareholders. In connection with the execution of
the definitive purchase agreement, Liberty Mutual entered into an agreement to
vote in favor of the sale.

     The transaction is expected to close in the second half of 2001. Based on
current estimates, the Company expects that it will record an after-tax gain of
approximately $40 million and will have proceeds, net of transaction costs and
taxes, of approximately $700 million from the closing of the Fleet transaction.

     On June 4, 2001, the Company announced that it had entered into a merger
agreement with Liberty Mutual. Under the agreement, the Company will become a
wholly owned subsidiary of Liberty Mutual and the Company's public stockholders
will receive a cash amount currently estimated to be $33.44 per share. Such
amount is subject to adjustment in certain circumstances, including changes in
the net after-tax proceeds of the Sun Life and Fleet sales, transaction costs or
the net after-tax cost of settling net corporate liabilities from those
currently estimated. The closing under the merger transaction is subject to
certain conditions, including the receipt of all necessary regulatory approvals,
approval of the Company's stockholders and the prior closing of the Sun Life and
Fleet transactions. A copy of the Merger Agreement was included as an exhibit to
a Form 8-K filed on June 6, 2001.

CHANGES IN ACCOUNTING PRINCIPLES

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

                                       14

<PAGE>

     The Company adopted the Statement on January 1, 2001. The Statement
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
operations. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset by the change in
fair value of the hedged assets, liabilities or firm commitments through
operations or recognized in other comprehensive income until the hedged item is
recognized in operations. The ineffective portion of a derivative's change in
fair value will be immediately recognized in operations. The cumulative effect,
reported after tax and net of related effects on deferred policy acquisition
costs, upon adoption of the Statement at January 1, 2001 decreased net income
and stockholders' equity by $54.3 million. The adoption of the Statement may
increase volatility in future reported income due, among other reasons, to the
requirements of defining an effective hedging relationship under the Statement
as opposed to certain hedges the Company believes are effective economic hedges.
The Company anticipates that it will continue to utilize its current risk
management philosophy, which includes the use of derivative instruments.

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

RESULTS OF OPERATIONS

     NET INCOME (LOSS) was $(4.8) million or $(0.10) per share for the quarter
ended June 30, 2001 compared to $29.0 million or $0.60 per share for the quarter
ended June 30, 2000. This decrease resulted largely from the net change in
unrealized and undistributed gains in private equity limited partnerships,
special compensation plan expenses, and the cumulative effect of accounting
change related to the adoption of EITF 99-20 discussed above. In addition, there
was higher amortization expense and interest expense, net. Partially offsetting
these items was the net derivative gain and lower income tax expense. For the
first six months of 2001, net income (loss) was $(54.3) million or $(1.08) per
share compared to $68.4 million or $1.41 per share for the first six months of
2000. This decrease resulted largely from the cumulative effect of accounting
changes discussed above. Income (loss) before cumulative effect of accounting
changes decreased reflecting the net change in unrealized and undistributed
gains in private equity limited partnerships and special compensation plan
expense. In addition, there were increased net realized investment losses,
amortization expense and interest expense, net. Partially offsetting these items
were a tax benefit in 2001 compared to tax expense in 2000, higher investment
spread, the net derivative gain and higher fee income.

     PRETAX INCOME was $5.0 million for the quarter ended June 30, 2001 compared
to $47.7 million for the quarter ended June 30, 2000. This decrease resulted
largely from the net change in unrealized and undistributed gains in private
equity limited partnerships and special compensation plan expenses. In addition,
there was higher amortization expense and interest expense, net. Partially
offsetting these items was the net derivative gain. For the first six months of
2001, pretax income was $5.8 million compared to $110.1 million for the first
six months of 2000. Pretax income decreased reflecting the net change in
unrealized and undistributed gains in private equity limited partnerships and
special compensation plan expense. In addition, there were increased net
realized investment losses, amortization expense and interest expense, net.
Partially offsetting these items higher investment spread, the net derivative
gain and higher fee income.

     INVESTMENT SPREAD is the amount by which investment income earned on the
Company's investments exceeds interest credited on policyholder balances.
Investment spread was $84.0 million for the quarter ended June 30, 2001 compared
to $83.2 million for the quarter ended June 30, 2000. The amount by which the
average yield on investments exceeds the average interest credited rate on
policyholder balances is the investment spread percentage. The investment spread
percentage for the quarter ended June 30, 2001 was 2.47% compared to 2.40% for
the quarter ended June 30,

                                       15

<PAGE>

2000. For the first six months of 2001, investment spread was $171.8 million
compared to $161.8 million for the first six months of 2000. The investment
spread percentage was 2.50% for the first six months of 2001 compared to 2.34%
for the first six months of 2000.

     Investment income was $237.4 million for the quarter ended June 30, 2001
compared to $216.4 million for the quarter ended June 30, 2000. The increase of
$21.0 million in 2001 compared to 2000 includes a $24.4 million increase as a
result of a higher average investment yield and a $4.4 million decrease
resulting from a lower level of average invested assets. The average investment
yield was 7.60% for the quarter ended June 30, 2001 compared to 6.83% for the
quarter ended June 30, 2000. For the first six months of 2001, investment income
was $473.7 million compared to $422.3 million for the first six months of 2000.
The increase of $51.4 million in 2001 compared to 2000 includes a $54.7 million
increase as a result of a higher average investment yield and a $3.3 million
decrease resulting from a lower level of average invested assets. The average
investment yield was 7.53% for the first six months of 2001 compared to 6.67%
for the first six months of 2000. The adoption of SFAS 133 requires that call
options be carried at fair value and are non-designated derivatives. The changes
of the fair value of the call options are reported as a component of net
derivative gains in 2001. In the prior year, the premium paid for a call option
was amortized over its contract term and the call option amortization was
included as a component of investment income. Investment income for the three
and six months ended June 30, 2000 was net of $23.5 million and $44.6 million,
respectively, of S&P 500 Index call option amortization expense related to the
Company's equity-indexed annuities. If SFAS 133 was not adopted, call option
amortization expense and the average investment yield would have been $23.3
million and 6.83% and $48.1 million and 6.76% for the three and six months ended
June 30, 2001, respectively.

     Interest credited to policyholders totaled $153.4 million for the quarter
ended June 30, 2001 compared to $133.2 million for the quarter ended June 30,
2000. The increase of $20.2 million in 2001 compared to 2000 primarily relates
to a $20.8 million increase as a result of a higher average interest credited
rate, partially offset by a $0.6 million decrease as a result of a slightly
lower level of average policyholder balances. Policyholder balances averaged
$11.9 billion (including $10.0 billion of fixed products, consisting of fixed
annuities and a closed block of single premium whole life insurance, and $1.9
billion of equity-indexed annuities) for the quarter ended June 30, 2001
compared to $12.0 billion (including $9.6 billion of fixed products and $2.4
billion of equity-indexed annuities) for the quarter ended June 30, 2000. The
average interest credited rate was 5.13% (5.37% on fixed products and 3.97% on
equity-indexed annuities) for the quarter ended June 30, 2001 compared to 4.43%
(5.26% on fixed products and 0.85% on equity-indexed annuities) for the quarter
ended June 30, 2000. Keyport's equity-indexed annuities credit interest to the
policyholder at a "participation rate" equal to a portion (ranging for existing
policies from 25% to 100%) of the change in value of the S&P 500 Index.
Keyport's equity-indexed annuities also provide a full guarantee of principal if
held to term, plus interest at 0.85% annually. For the first six months of 2001,
interest credited to policyholders totaled $301.9 million compared to $260.5
million for the first six months of 2000. The increase of $41.4 million in 2001
compared to 2000 primarily relates to a $42.2 million increase as a result of a
higher average interest credited rate, partially offset by a $0.8 million
decrease resulting from a slightly lower level of average policyholder balances.
Policyholder balances averaged $12.0 billion (including $10.0 billion of fixed
products and $2.0 billion of equity-indexed annuities) for the first six months
of 2001 compared to $12.0 billion (including $9.7 billion of fixed products and
$2.3 billion of equity-indexed annuities) for the first six months of 2000. The
average interest credited rate was 5.03% (5.29% on fixed products and 3.77% on
equity-indexed annuities) for the first six months of 2001 compared to 4.33%
(5.13% on fixed products and 0.85% on equity-indexed annuities) for the first
six months of 2000.

     Under SFAS 133, the index annuities are deemed to contain an embedded
derivative (the change in value attributable to the change in the S&P 500 Index)
and a host contract. The host contracts' interest rate is derived at the
inception of the contract and an effective interest rate is utilized that will
result in a liability equal to the guaranteed minimum account value at the end
of the term. The embedded derivative is a non-designated derivative and the
changes in fair value are reported as a component of derivative gains. In 2000,
the interest credited to equity-indexed policyholders related to the
participation rate is reflected net of income recognized on the S&P 500 Index
call options and futures resulting in a 0.85% net credited rate. If SFAS 133 was
not adopted, interest credited and the average interest credited rate would have
been $144.6 million and 4.82% and $285.1 million and 4.75% for the three and six
months ended June 30, 2001, respectively.

     Average investments in the Company's general account (computed without
giving effect to Statement of Financial Accounting Standards No. 115), including
cash and cash equivalents in the Company's annuity operations, were $12.5


                                       16
<PAGE>

billion for the quarter ended June 30, 2001 compared to $12.7 billion for the
quarter ended June 30, 2000. For the first six months of 2001, such average
investments were $12.6 billion compared to $12.7 billion for the first six
months of 2000.

     NET DERIVATIVE GAINS of $8.0 million and $4.2 million for the three months
and six months ended June 30, 2001, respectively, represent fair value changes
of non-designated derivatives and the ineffective portion of fair value hedges,
net of related effects on deferred policy acquisition costs.

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

      The Company issues equity-indexed annuity contracts that contain a
derivative instrument that is "embedded" in the contract. Upon issuing the
contract, the embedded derivative is separated from the host contract (annuity
contract), is carried at fair value and is considered a non-designated
derivative. The Company purchases call options and futures on the S&P 500 Index
to economically hedge its obligation under the annuity contract to provide
returns based upon this index. The call options and futures are non-designated
derivatives. In addition, the Company utilizes non-designated total return swap
agreements to hedge its obligations related to certain separate account
liabilities. The net derivative gain related to changes in the fair value of the
"embedded" derivatives, net of related effects on deferred policy acquisition
costs was $0.3 million and $30.9 million for the three and six months ended June
30, 2001, respectively. The net derivative gain (loss) related to changes in the
fair value of call options and futures, net of related effects on deferred
policy acquisition costs was $5.6 million and $(28.1) million for the three and
six months ended June 30, 2001, respectively.

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

     The Company utilizes treasury rate lock agreements to reduce its exposure
to interest rate risk related to certain of its notes payable. Treasury rate
lock agreements are agreements to exchange with a counterparty payments based on
an underlying principal balance (notional principal) to hedge against interest
rate changes. The treasury rate lock agreements are designated and qualify as
fair value hedges. The ineffective portion of the fair value hedges resulted in
a loss of $0.5 million for the three and six months ended June 30, 2001.

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

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

                                       17

<PAGE>

     NET REALIZED INVESTMENT LOSSES were $13.4 million for the quarter ended
June 30, 2001 compared to $12.9 million for the quarter ended June 30, 2000. The
net realized investment losses for the three months ended June 30, 2001 and 2000
included losses of $14.0 million and $5.4 million, respectively, for certain
investments where the decline in value was determined to be
other-than-temporary. For the first six months of 2001 and 2000, net realized
investment losses were $33.1 million and $16.8 million, respectively. The net
realized investment losses for the six months ended June 30, 2001 and 2000
included losses of $35.8 million and $8.7 million, respectively, for certain
investments where the decline in value was determined to be
other-than-temporary.

     NET CHANGE IN UNREALIZED AND UNDISTRIBUTED (LOSSES) GAINS IN PRIVATE EQUITY
LIMITED PARTNERSHIPS is accounted for on the equity method and represents
primarily (decreases) increases in the fair value of the underlying investments
of the private equity limited partnerships for which the Company has ownership
interests in excess of 3%. The net change of ($17.3) million and $7.5 million in
unrealized and undistributed (losses) gains is recorded net of the related
amortization of deferred policy acquisition costs of $(32.1) million and $13.8
million for the three months ended June 30, 2001 and 2000, respectively, and net
of amounts realized, which are recognized in investment income, of $18.0 million
and $0.8 million for the three months ended June 30, 2001 and 2000,
respectively. For the six months ended June 30, 2001 and 2000, the change of
$(14.6) million and $22.5 million in unrealized and undistributed (losses) gains
is recorded net of the related amortization of deferred policy acquisition costs
of $(27.2) million and $41.6 million, and net of amounts realized, which are
recognized in investment income, of $26.9 million and $2.5 million,
respectively. The financial information for these investments is obtained
directly from the private equity limited partnerships on a periodic basis. There
can be no assurance that any unrealized and undistributed gains will ultimately
be realized or that the Company will not incur losses in the future on such
investments.

     INVESTMENT ADVISORY AND ADMINISTRATIVE FEES are based on the market value
of assets managed for mutual funds and institutional investors. Investment
advisory and administrative fees were $73.2 million for the quarter ended June
30, 2001 compared to $71.3 million for the quarter ended June 30, 2000. For the
first six months of 2001, investment advisory and administrative fees were
$148.3 million compared to $143.2 million for the first six months of 2000.

     Average fee-based assets under management were $50.6 billion for the
quarter ended June 30, 2001 compared to $52.2 billion for the quarter ended June
30, 2000. For the first six months of 2001, average fee-based assets under
management were $51.3 billion compared to $51.8 billion for the first six months
of 2000. The decrease during 2001 compared to 2000 included net sales for the
twelve months ended June 30, 2001 and the acquisition, completed on September
29, 2000, of Wanger Asset Management, L.P., offset by negative market action for
the twelve months ended June 30, 2001 and from the sale, completed on December
29, 2000, of the Company's Private Capital Management division of Stein Roe &
Farnham, Incorporated. Investment advisory and administrative fees were 0.58%
and 0.55% of average fee-based assets under management for the quarters ended
June 30, 2001 and 2000, respectively. For the first six months of 2001 and 2000,
such percentages were 0.58% and 0.55%, respectively.




                                       18
<PAGE>


     The amount of fee-based assets under management is affected by product
sales and redemptions and changes in the market values of such assets under
management. Fee-based assets under management and changes in such assets are set
forth in the tables below (in billions).


FEE-BASED ASSETS UNDER MANAGEMENT

<TABLE>
<CAPTION>
                                                                                          AS OF JUNE 30
                                                                                  -------------------------------
                                                                                      2001              2000
                                                                                  -------------     -------------
<S>                                                                               <C>               <C>
  Mutual Funds:
        Intermediary-distributed                                                        $17.3             $17.6
        Direct-marketed                                                                  12.4               6.5
        Closed-end                                                                        2.5               2.8
        Variable annuity                                                                  2.8               2.1
                                                                                  -------------     -------------
                                                                                         35.0              29.0
  Private Capital Management                                                                -               9.5
  Institutional                                                                          16.3              14.0
                                                                                  -------------     -------------
        Total Fee-Based Assets Under Management*                                        $51.3             $52.5
                                                                                  =============     =============
</TABLE>

--------------
*    As of June 30, 2001 and 2000, Keyport's insurance assets of $14.7 billion
     and $14.0 billion, respectively, bring total assets under management to
     $66.0 billion and $66.5 billion, respectively.


  CHANGES IN FEE-BASED ASSETS UNDER MANAGEMENT

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED           SIX MONTHS ENDED
                                                                      JUNE 30                     JUNE 30
                                                             -------------------------- ----------------------------
                                                                 2001         2000          2001           2000
                                                             ------------- ------------ --------------  ------------
<S>                                                          <C>           <C>          <C>             <C>

  Fee-based assets under management - beginning                   $48.9         $53.1        $51.8           $51.4
  Sales and reinvestments:
       Mutual funds                                                 2.5           1.6          5.1             3.2
       Private Capital Management                                                 0.5                          0.9
                                                                    -                          -
       Institutional                                                1.0           1.3          1.4             2.2
                                                             ------------- ------------ --------------  ------------
                                                                    3.5           3.4          6.5             6.3
                                                             ------------- ------------ --------------  ------------
  Redemptions and withdrawals:
       Mutual funds                                                (2.3)         (1.6)        (4.7)           (3.8)
       Private Capital Management                                     -          (0.3)           -            (0.5)
       Institutional                                               (0.3)         (0.6)        (0.7)           (1.0)
                                                             ------------- ------------ --------------  ------------
                                                                   (2.6)         (2.5)        (5.4)           (5.3)
                                                             ------------- ------------ --------------  ------------
  Market appreciation (depreciation)                                1.5          (1.5)        (1.6)            0.1
                                                             ------------- ------------ --------------  ------------
  Fee-based assets under management - ending                      $51.3         $52.5        $51.3           $52.5
                                                             ============= ============ ==============  ============
</TABLE>


     DISTRIBUTION AND SERVICE FEES are based on the market value of the
Company's intermediary-distributed mutual funds. Distribution fees of 0.75% are
generally earned on the average assets attributable to such funds sold with
12b-1 distribution fees and contingent deferred sales charges and service fees
of 0.25% (net of amounts passed on to selling brokers) are generally earned on
the total of such average mutual fund assets. These fees totaled $14.3 million
for the quarter ended June 30, 2001 compared to $15.1 million for the quarter
ended June 30, 2000. For the first six months of 2001, distribution and service
fees were $29.6 million compared to $30.5 million for the first six months of
2000. As a percentage of intermediary-distributed average mutual fund assets,
distribution and service fees were approximately 0.32% for the quarter ended
June 30, 2001 compared to 0.35% for the quarter ended June 30, 2000. For the
first six months of 2001 and 2000, such percentages were 0.33% and 0.35%,
respectively.

      TRANSFER AGENCY FEES for the Company's intermediary-distributed mutual
funds are based on a three-tier structure, which includes an account fee, a
transaction fee and a fee based on the market value of the assets managed.
Transfer agency fees for the Company's direct-marketed mutual funds are based on
the market value of the assets in the funds, and variable annuity mutual funds
are charged a flat fee. Such fees were $11.7 million on average assets of $33.3
billion for the quarter ended June 30, 2001 and $12.2 million on average assets
of $26.3 billion for the quarter ended June 30,

                                       19

<PAGE>

2000. For the first six months of 2001, transfer agency fees were $24.3 million
on average assets of $33.8 billion compared to $24.9 million on average assets
of $26.5 billion for the first six months of 2000. As a percentage of total
average assets under management, transfer agency fees were approximately 0.14%
for the quarter ended June 30, 2001 compared to 0.19% for the quarter ended June
30, 2000. For the first six months of 2001 and 2000, such percentages were 0.14%
and 0.19%, respectively.

     SURRENDER CHARGES AND NET COMMISSIONS are revenues earned on: a) the early
withdrawal of annuity policyholder balances and redemptions of the
intermediary-distributed mutual funds which were sold with 12b-1 distribution
fees and contingent deferred sales charges; b) the distribution of the Company's
intermediary-distributed mutual funds (net of the substantial portion of
commissions that is passed on to the selling brokers); and c) the sales of
non-proprietary products through Independent Financial Marketing Group (net of
commissions that are paid to the Company's client banks and brokers). Total
surrender charges and net commissions were $8.0 million for the quarter ended
June 30, 2001 compared to $9.3 million for the quarter ended June 30, 2000. For
the first six months of 2001, total surrender charges and net commissions were
$16.8 million compared to $20.0 million for the first six months of 2000.

     Surrender charges on fixed and variable annuity withdrawals generally are
assessed at declining rates applied to policyholder withdrawals during the first
five to seven years of the contract; contingent deferred sales charges on mutual
fund redemptions are assessed at declining rates on amounts redeemed generally
during the first six years. Such charges totaled $5.4 million for the quarter
ended June 30, 2001 and $7.3 million for the quarter ended June 30, 2000. For
the first six months of 2001, surrender charges were $11.1 million compared to
$14.7 million for the first six months of 2000. Total annuity withdrawals
represented 21.1% and 16.9% of the total average annuity policyholder and
separate account balances for the quarters ended June 30, 2001 and 2000,
respectively. For the first six months of 2001 and 2000, the corresponding
percentages were 19.3% and 15.9%, respectively. The higher level of surrenders
in 2001 compared to 2000 reflects increased competition for the Company's fixed
and equity-indexed annuities from other investment products and a higher level
of surrenders of the Company's equity-indexed annuities. Net commissions were
$2.6 million for the quarter ended June 30, 2001 and $2.0 million for the
quarter ended June 30, 2000. For the first six months of 2001, net commissions
were $5.7 million compared to $5.3 million for the first six months of 2000.

     SEPARATE ACCOUNT FEES include mortality and expense charges earned on
variable annuity and variable life policyholder balances. In addition, for
certain separate institutional accounts, the difference between investment
income and interest credited on these institutional accounts is included in
separate account fees. These fees, which are primarily based on the market
values of the assets in separate accounts supporting the contracts, were $14.4
million for the quarter ended June 30, 2001 compared to $11.1 million for the
quarter ended June 30, 2000. For the first six months of 2001, separate account
fees were $27.2 million compared to $21.8 million for the first six months of
2000. The increase in separate account fees was due to the increase in separate
account assets in 2001. Such fees represented 1.42% and 1.23% of average
variable annuity, variable life and institutional separate account balances for
the quarters ended June 30, 2001 and 2000, respectively. For the first six
months of 2001 and 2000, such percentages were 1.32% and 1.25%, respectively.

     OPERATING EXPENSES primarily represent compensation, marketing, and other
general and administrative expenses. These expenses were $98.6 million for the
quarter ended June 30, 2001 compared to $99.6 million for the quarter ended June
30, 2000. For the first six months of 2001, operating expenses were $204.0
million compared to $201.9 million for the first six months of 2000. Operating
expenses expressed as a percent of average total assets under management were
0.60% and 0.60% for the quarters ended June 30, 2001 and 2000, respectively. For
the first six months of 2001 and 2000, such percentages were 0.62% and 0.62%,
respectively.

     RESTRUCTURING income for the three months and six months ended June 30,
2001 of $1.7 million and $0.3 million, respectively, consists of a $1.9 million
gain from the sale of the Company's internal fund accounting system largely
offset by severance and other expenses. The restructuring expenses primarily
relate to three initiatives, which commenced during 2000, streamlining the
Company's mutual fund product offerings, centralizing corporate functions and
outsourcing certain mutual fund operations.

     SPECIAL COMPENSATION PLAN expense of $19.8 million and $40.2 million for
the three months and six months ended June 30, 2001, respectively, relates to
the Company's announcement on November 1, 2000 that it had retained the
investment banking firm of Credit Suisse First Boston Corporation to review its
strategic initiatives, including a possible


                                       20
<PAGE>

sale of the Company. To help retain its employees during the strategic review,
the Company implemented a special compensation plan that provides cash retention
bonuses to substantially all employees. The retention bonuses are generally
based on employees' base salary and/or target incentive compensation amounts,
except for sales personnel where retention bonuses are based on sales. The
estimated maximum cost of the retention bonuses, assuming all covered employees
remain with the Company, is approximately $165.0 million with fifty percent
payable on November 1, 2001 and the remainder payable on May 1, 2002. In the
event of a change of control of the Company that occurs prior to November 1,
2001, the payments would be accelerated and the retention bonus amount would be
reduced. In calculating the expense of $19.8 million and $40.2 million for the
three months and six months ended June 30, 2001, an annualized turnover rate of
15% was assumed.

     AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS relates to the costs of
acquiring new business, which vary with, and are primarily related to, the
production of new annuity business. Such costs include commissions, costs of
policy issuance and underwriting and selling expenses. Amortization was $30.9
million for the quarter ended June 30, 2001 compared to $29.8 million for the
quarter ended June 30, 2000. For the first six months of 2001, amortization of
deferred policy acquisition costs was $63.6 million compared to $56.9 million
for the first six months of 2000. The increase during 2001 compared to 2000 was
due to the increased spread realized on the in-force business associated with
fixed and equity-indexed products. Amortization expense represented 31.4% and
31.6% of investment spread and separate account fees for the quarters ended June
30, 2001 and 2000, respectively. For the first six months of 2001 and 2000, the
corresponding percentages were 32.0% and 31.0%, respectively.

     AMORTIZATION OF DEFERRED DISTRIBUTION COSTS relates to the distribution of
mutual fund shares sold with 12b-1 distribution fees and contingent deferred
sales charges. Amortization was $12.5 million for the quarter ended June 30,
2001 compared to $10.4 million for the quarter ended June 30, 2000. For the
first six months of 2001, amortization of deferred distribution costs was $24.5
million compared to $20.6 million for the first six months of 2000. The increase
in 2001 compared to 2000 was due to increased sales of intermediary-distributed
mutual funds, which were sold with 12b-1 distribution fees and contingent
deferred sales charges.

     AMORTIZATION OF INTANGIBLE ASSETS relates to goodwill and certain
identifiable intangible assets arising from business combinations accounted for
as purchases. Amortization was $8.5 million for the quarter ended June 30, 2001
compared to $5.1 million for the quarter ended June 30, 2000. For the first six
months of 2001, amortization of intangible assets was $17.2 million compared to
$10.2 million for the first six months of 2000. The increase in amortization in
2001 is primarily attributable to the purchase of Wanger Asset Management, L.P.
in September of 2000. The Company has experienced higher than anticipated
redemptions of assets under management at an acquired company, which at June 30,
2001 had goodwill and other intangible assets of $76.4 million. Although the
Company has determined that there is no impairment of goodwill and other
intangible assets at this time, if the higher level of redemptions were to
continue and sales were not to increase, the Company's estimate of related
future cash flows may change, resulting in the need to record an impairment
loss.

     INTEREST EXPENSE, NET was $9.3 million for the quarter ended June 30, 2001
compared to $4.2 million for the quarter ended June 30, 2000. For the first six
months of 2001, interest expense, net was $19.5 million compared to $8.2 million
for the first six months of 2000. Interest expense primarily consists of
interest on notes payable and interest on the Liberty Funds Group revolving
credit facility which is utilized to finance sales commissions paid in
connection with the distribution of mutual fund shares sold with 12b-1
distribution fees and contingent deferred sales charges. Interest expense was
net of interest income of $5.2 million and $5.9 million for the quarters ended
June 30, 2001 and 2000, respectively. For the first six months of 2001 and 2000,
interest expense was net of interest income of $10.2 million and $11.7 million,
respectively.

     INCOME TAX (EXPENSE) BENEFIT was $(3.3) million or 66.0% of pretax income
for the quarter ended June 30, 2001 compared to $(18.7) million, or 39.2% of
pretax income for the quarter ended June 30, 2000. For the first six months of
2001, income tax (expense) benefit was $0.7 million or 12.1% of pretax income
compared to $(41.7) million or 37.9% of pretax income for the first six months
of 2000. The tax rates for 2001 primarily reflect a reduction to the valuation
allowance on unrealized capital losses in the "available for sale" investment
portfolio in the first quarter of 2001.


                                       21

<PAGE>


FINANCIAL CONDITION

     STOCKHOLDERS' EQUITY was $1.43 billion as of June 30, 2001 compared to
$1.45 billion as of December 31, 2000. The net loss for the first six months of
2001 was $47.8 million and cash dividends on the Company's preferred and common
stock totaled $10.1 million. Common stock totaling $3.3 million was issued in
connection with the exercise of stock options. Other comprehensive income, which
consists of net unrealized investment gains net of adjustments to deferred
policy acquisition costs and income taxes, during the period increased
stockholders' equity by $32.9 million.

     BOOK VALUE PER SHARE amounted to $29.08 at June 30, 2001 compared to $29.68
at December 31, 2000. Excluding net unrealized gains and losses on investments
(computed pursuant to Statement of Financial Accounting Standards No. 115), book
value per share amounted to $29.00 at June 30, 2001 and $30.30 at December 31,
2000. As of June 30, 2001, there were 48.9 million common shares outstanding
compared to 48.8 million shares as of December 31, 2000.

     INVESTMENTS not including cash and cash equivalents, totaled $12.1 billion
at June 30, 2001 as compared to $12.2 billion at December 31, 2000.

     The Company manages the majority of its invested assets internally. The
Company's general investment policy is to hold fixed maturity securities for
long-term investment and, accordingly, the Company does not have a trading
portfolio. To provide for maximum portfolio flexibility and appropriate tax
planning, the Company classifies its entire portfolio of fixed maturity
securities as "available for sale" and accordingly carries such investments at
fair value. The Company's total investments at June 30, 2001 and December 31,
2000 reflected net unrealized gains (losses) of $83.6 million and ($62.0)
million, respectively.

     Approximately $11.9 billion, or 79.4%, of the Company's general account and
certain separate account investments at June 30, 2001, were rated by Standard &
Poor's Corporation, Moody's Investors Service or under comparable statutory
rating guidelines established by the National Association of Insurance
Commissioners ("NAIC"). At June 30, 2001, the carrying value of investments in
below investment grade securities totaled $1.2 billion or 8.0% of general
account investments, including cash and cash equivalents in the Company's
annuity operations, and certain separate account investments of $15.0 billion.
Below investment grade securities generally provide higher yields and involve
greater risks than investment grade securities because their issuers typically
are more highly leveraged and more vulnerable to adverse economic conditions
than investment grade issuers. In addition, the trading market for these
securities may be more limited than for investment grade securities.

     The Company routinely reviews its portfolio of investment securities. The
Company identifies monthly any investments that require additional monitoring,
and reviews the carrying value of such investments at least quarterly to
determine whether specific investments should be placed on a nonaccrual basis
and to determine declines in value that may be other-than-temporary. In making
these reviews, the Company principally considers the adequacy of collateral (if
any), compliance with contractual covenants, the borrower's recent financial
performance, news reports, and other externally generated information concerning
the borrower's affairs. In the case of publicly traded fixed maturity
securities, management also considers market value quotations if available. As
of June 30, 2001 and December 31, 2000, the carrying value of fixed maturity
securities that were non-income producing was $23.6 million and $24.4 million,
respectively.

DERIVATIVES

     As a component of its investment strategy and to reduce its exposure to
interest rate risk, the Company utilizes interest rate and total return swap
agreements, interest rate cap agreements and treasury rate lock agreements.
Interest rate swap agreements are agreements to exchange with a counterparty
interest rate payments of differing character (e.g., fixed-rate payments
exchanged for variable-rate payments) based on an underlying principal balance
(notional principal) to hedge against interest rate changes. The Company
currently utilizes interest rate swap agreements to reduce asset duration and to
better match interest earned on longer-term fixed-rate assets with interest
credited to policyholders. A total return swap agreement is an agreement to
exchange payments based upon an underlying notional balance and changes in
variable rate and total return indices. The Company utilizes total return swap
agreements to hedge its obligations related to certain separate account
liabilities. The Company had 99 and 69 outstanding swap agreements with


                                       22
<PAGE>

an aggregate notional principal amount of $4.1 billion and $3.8 billion as of
June 30, 2001 and December 31, 2000, respectively.

     Interest rate cap agreements are agreements with a counterparty which
require the payment of a premium for the right to receive payments for the
difference between the cap interest rate and a market interest rate on specified
future dates based on an underlying principal balance (notional principal) to
hedge against rising interest rates. The Company had no outstanding interest
rate cap agreements as of June 30, 2001 and December 31, 2000.

     The Company utilizes treasury rate lock agreements to reduce its exposure
to interest rate risk related to certain of its notes payable. Treasury rate
lock agreements are agreements to exchange with a counterparty payments based on
an underlying principal balance (notional principal) to hedge against interest
rate changes. The Company had 2 outstanding treasury rate lock agreements with
an aggregate notional principal amount of $395 million as of June 30, 2001.
There were no such agreements outstanding as of December 31, 2000.

     With respect to the Company's equity-indexed annuities and certain separate
account liabilities, the Company buys call options, futures and certain total
return swap agreements on the S&P 500 Index to hedge its obligations to provide
returns based upon this index. The Company had call options with a carrying
value of $145.2 million and $337.7 million as of June 30, 2001 and December 31,
2000, respectively. The Company had open futures with a fair value of $7.5
million and $10.5 million as of June 30, 2001 and December 31, 2001,
respectively. The Company had total return swap agreements with a carrying value
of $24.6 million and $23.9 million as of June 30, 2001 and December 31, 2000,
respectively.

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

LIQUIDITY

     The Company is a holding company whose liquidity needs include the
following: (i) operating expenses; (ii) debt service; (iii) dividends on
preferred and common stock; (iv) acquisitions; and (v) working capital where
needed by its operating subsidiaries. The Company's principal sources of cash
are dividends from its operating subsidiaries, and, in the case of funding for
acquisitions and certain long-term capital needs of its subsidiaries, long-term
borrowings and offerings of preferred and common stock. In connection with the
Wanger acquisition, the Company issued $200.0 million of debt to Liberty Mutual
Insurance Company and its affiliates. Such debt is payable upon any change of
control of the Company. It is anticipated that this debt will be repaid in
connection with the merger.

     The Company also has a $150.0 million revolving credit facility (the
"Facility") which is utilized to finance sales commissions paid in connection
with the distribution of mutual fund shares sold with 12b-1 distribution fees
and contingent deferred sales charges. The Facility was established in April
1999. This five year Facility is secured by such

                                       23

<PAGE>

12b-1 distribution fees and contingent deferred sales charges. Interest accrues
on the outstanding borrowings under the Facility at a rate determined by sales
of highly rated commercial paper backed in part by the security interest in such
fees and charges. At June 30, 2001, the interest rate on borrowings under the
Facility was 4.05% per annum.

     Current Rhode Island insurance law applicable to Keyport permits the
payment of dividends or distributions, which, together with dividends and
distributions paid during the preceding 12 months, do not exceed the lesser of
(i) 10% of Keyport's statutory surplus as of the preceding December 31 or (ii)
Keyport's statutory net gain from operations for the preceding fiscal year. Any
proposed dividend in excess of this amount is called an "extraordinary dividend"
and may not be paid until it is approved by the Commissioner of Insurance of the
State of Rhode Island. As of June 30, 2001, the amount of dividends that Keyport
could pay during 2001 without such approval was $38.4 million. Future regulatory
changes and credit agreements may create additional limitations on the ability
of the Company's subsidiaries to pay dividends.

     Based upon the historical cash flow of the Company, the Company's current
financial condition and the Company's expectation that there will not be a
material adverse change in the results of operations of the Company and its
subsidiaries during the next twelve months, the Company believes that cash flow
provided by operating activities over this period will provide sufficient
liquidity for the Company to meet its working capital, capital investment and
other operational cash needs, its debt service obligations, its obligations to
pay dividends on the preferred stock and its intentions to pay dividends on the
common stock.

     Each of the Company's business segments has its own liquidity needs and
financial resources. In the Company's annuity insurance operations, liquidity
needs and financial resources pertain to the management of the general account
assets and policyholder balances. In the Company's asset management business,
liquidity needs and financial resources pertain to the investment management and
distribution of mutual funds and institutional accounts. The Company expects
that, based upon their historical cash flow and current prospects, these
operating subsidiaries will be able to meet their liquidity needs from internal
sources and, in the case of Liberty Funds Group LLC, also from its credit
facility used to finance sales of mutual fund shares sold with 12b-1
distribution fees and contingent deferred sales charges.

     Keyport uses cash for the payment of annuity and life insurance benefits,
operating expenses and policy acquisition costs, and the purchase of
investments. Keyport generates cash from annuity premiums and deposits, net
investment income, and from the sales and maturities of fixed investments.
Annuity premiums, maturing investments and net investment income have
historically been sufficient to meet Keyport's cash requirements. Keyport
monitors cash and cash equivalents in an effort to maintain sufficient liquidity
and has strategies in place to maintain sufficient liquidity in changing
interest rate environments. Consistent with the nature of its obligations,
Keyport has invested a substantial amount of its general account assets in
readily marketable securities. As of June 30, 2001, $11.9 billion, or 79.4%, of
Keyport's general account and certain separate account investments are
considered readily marketable.

     To the extent that unanticipated surrenders cause Keyport to sell for
liquidity purposes a material amount of securities prior to their maturity, such
surrenders could have a material adverse effect on the Company. Although no
assurances can be given, Keyport believes that liquidity to fund anticipated
withdrawals would be available through incoming cash flow and the sale of
short-term or floating-rate investments, thereby precluding the sale of fixed
maturity investments in a potentially unfavorable market. In addition, the
Company's fixed-rate products incorporate surrender charges to encourage
persistency and to make the cost of its policyholder balances more predictable.
Approximately 76.0% of the Company's fixed annuity policyholder balances were
subject to surrender charges or restrictions as of June 30, 2001.

EFFECTS OF INFLATION

     Inflation has not had a material effect on the Company's consolidated
results of operations to date. The Company manages its investment portfolio in
part to reduce its exposure to interest rate fluctuations. In general, the
market value of the Company's fixed maturity portfolio increases or decreases in
inverse relationship with fluctuations in interest rates, and the Company's net
investment income increases or decreases in direct relationship with interest
rate changes. For example, if interest rates decline, the Company's fixed
maturity investments generally will increase in market value, while net
investment income will decrease as fixed maturity investments mature or are sold
and the proceeds are

                                       24

<PAGE>

reinvested at reduced rates. Inflation may result in increased operating
expenses that may not be readily recoverable in the prices of the services
charged by the Company.

FORWARD-LOOKING STATEMENTS

     The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
Investors are cautioned that all statements not based on historical fact, trend
analyses and other information contained in this report or in any of the
Company's filings under Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), relative to the Company's plans, markets for the
Company's products and trends in the Company's operations or financial results,
as well as other statements including words such as "anticipate", "believe",
"plan", "estimate", "expect", "intend" and other similar expressions, constitute
forward-looking statements under the Reform Act. These forward-looking
statements are made based on current expectations and assumptions and are
subject to known and unknown risks, uncertainties and other factors, many of
which are beyond the Company's control, that may cause actual results to be
materially different from those expressed or implied by the forward-looking
statements. Such factors include, among other things: (1) general economic
conditions and market factors, such as prevailing interest rate levels, stock
market performance and fluctuations in the market for retirement-oriented
savings products and investment management products, which may adversely affect
the ability of the Company to sell its products and services and the market
value of the Company's investments and assets under management and, therefore,
the portion of its revenues that are based on a percentage of assets under
management; (2) the Company's ability to manage effectively its investment
spread (i.e. the amount by which investment income exceeds interest credited to
annuity and life insurance policyholders) as a result of changes in interest
rates and crediting rates to policyholders, market conditions and other factors
(the Company's results of operations and financial condition are significantly
dependent on the Company's ability to manage effectively its investment spread);
(3) that unrealized and undistributed gains in private equity limited
partnerships will not be realized or that future losses on such investments will
not occur; (4) levels of surrenders, withdrawals and net redemptions of the
Company's retirement-oriented insurance products and investment management
products; (5) the Company's ability to establish and maintain relationships with
investment management clients, including levels of assets under management; (6)
the ability of the Company to manage effectively certain risks with respect to
its investment portfolio, including risks relating to holding below investment
grade securities and the ability to dispose of illiquid and/or restricted
securities at desired times and prices, and the ability to manage and hedge
against interest rate changes through asset/liability management techniques; (7)
competition in the sale of the Company's products and services, including the
Company's ability to establish and maintain relationships with distributors of
its products; (8) changes in financial ratings of Keyport or those of its
competitors; (9) the Company's ability to attract and retain key employees,
including senior officers, portfolio managers and sales executives; (10) the
impact of and compliance by the Company with existing and future regulation,
including restrictions on the ability of certain subsidiaries to pay dividends
and any obligations of the Company under any guaranty fund assessment laws; (11)
changes in applicable tax laws which may affect the relative tax advantages and
attractiveness of some of the Company's products; (12) the result of any
litigation or legal proceedings involving the Company; (13) changes in generally
accepted accounting principles and the impact of accounting principles and
pronouncements on the Company's financial condition and results of operations;
(14) changes in the Company's senior debt ratings; (15) changes in operating
expense levels; (16) acquisition risks, including risks that the acquisition and
integration of Wanger Asset Management, L.P. will not be as successful as
anticipated; (17) sales risks, including the risk that the proposed sale of the
Company's annuity and bank marketing business to Sun Life Financial will not be
consummated; (18) risks that the Company will not achieve favorable effective
tax rates; (19) risks that the Company's restructuring efforts and retention
efforts will not be successful; (20) risks related to the consummation of the
sale of the Company's annuity and bank marketing business to Sun Life or its
asset management business to Fleet and the merger of the Company with a wholly
owned subsidiary of Liberty Mutual; (21) benefits of the Fleet and Sun Life
transactions and the merger failing to materialize; (22) risks related to the
Company's proposed actions with respect to its preferred stock and senior debt;
(23) the failure of conditions to the closing of the Sun Life transaction, the
Fleet transaction or the merger with Liberty Mutual to be satisfied in a timely
manner or at all; (24) a decrease pursuant to the Fleet purchase agreement in
the consideration to be paid by Fleet to purchase the Company's asset management
business; (25) a decrease in the consideration payable to the Company's
stockholders in the merger as a result of adjustments to the consideration paid
by Fleet or other adjustments set forth in the merger agreement; (26) that the
merger will not be consummated if either of the Sun Life transaction or the
Fleet transaction do not close; (27) risks that the actual after-tax gain and
net proceeds on the sale of Keyport and Independent Financial Marketing Group
("IFMG") may be different than estimates due to, among other things, changes in
the estimated stockholders' equity of Keyport and IFMG including the effects of
Statement of Financial Accounting

                                       25
<PAGE>

Standards No. 115 - net unrealized investment gains and losses, changes in
estimated income taxes on the sale, transaction costs and other factors; (28)
increased volatility of reported income associated with the adoption of SFAS
Nos. 133 and 138; and (29) the other risk factors or uncertainties contained
from time to time in any document incorporated by reference in this report or
otherwise filed by the Company under the Exchange Act. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements and no assurances can be given that the
estimates and expectations reflected in such statements will be achieved.








                                       26

<PAGE>



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There have been no material changes during the first six months of 2001 in
the Company's market risks or in the methods which the Company uses to manage
such risks, which are described in the Company's Form 10-K (as amended) for the
year ended December 31, 2000.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     On June 5, 2001, a lawsuit seeking class action status was filed by
purported stockholders of the Company in the Superior Court of Suffolk County,
Massachusetts, against the Company, Fleet, Liberty Mutual and the directors of
the Company. The plaintiff in the lawsuit alleges, among other things, that the
Company, Liberty Mutual and the directors of the Company have breached fiduciary
duties owed to the Company's stockholders other than Liberty Mutual and its
affiliates, by not obtaining the best possible price in the proposed Fleet
transaction and the merger with Liberty Mutual. The plaintiff seeks, among other
things, an order enjoining the merger from being consummated (or, if
consummated, an order rescinding the transaction) and an award of attorneys'
fees and other costs of litigation. In the event the merger is consummated, the
plaintiff has indicated that it may choose to continue its action and seek
rescission of the merger, damages or both. The Company believes that this
lawsuit is without merit and intends to vigorously defend it. On July 10, 2001,
the Company, Liberty Mutual and the directors of the Company moved to dismiss
the plaintiff's complaint in its entirety. The plaintiff has not yet responded
to our motion to dismiss. Also, on July 11, 2001, the Company and its directors
moved to stay all discovery pending a decision on the motion to dismiss.

     In May 2001, after the announcement of the signing of the Sun Life purchase
agreement with respect to the Company's annuity and bank marketing business, the
Company received a letter on behalf of a company that claims that it has a right
of first refusal with respect to the sale of Independent Financial Marketing
Group, one of the subsidiaries to be purchased by Sun Life in the Sun Life
transaction. The Company believes that the claim is without merit and intends to
vigorously dispute it and to proceed with and complete the Sun Life transaction
as soon as the conditions to closing the transaction have been satisfied or
waived.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)   EXHIBITS

      12  Statement re Computation of Ratios

(b)   REPORTS ON FORM 8-K

         On May 4, 2001, the Company filed a report on Form 8-K under Item 5 of
     such form. A copy of the definitive agreement to sell the Company's annuity
     and bank marketing business to Sun Life Financial was filed as Exhibit 99.1
     to the Form 8-K.

         On June 6, 2001, the Company filed a report on Form 8-K under Item 5 of
     such form. A copy of the definitive agreement to sell the Company's asset
     management business to Fleet National Bank was filed as Exhibit 99.1 to the
     Form 8-K. A copy of the definitive agreement to merge a wholly owned
     subsidiary of Liberty Mutual Insurance Company with and into the Company
     was filed as Exhibit 99.2 to the Form 8-K.



                                       27

<PAGE>


                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                               LIBERTY FINANCIAL COMPANIES, INC.

                                                     /s/ J. Andy Hilbert
                                               ---------------------------------
                                                       J. Andy Hilbert
                                                 (Duly Authorized Officer and
                                                   Chief Financial Officer)






Date:   July 31, 2001







                                       28



<PAGE>


                                  EXHIBIT INDEX


EXHIBIT NO.    DESCRIPTION                                             PAGE

       12      Statement re Computation of Ratios                       30

















                                       29