** **

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

** **

The Registrantmeets the conditions set forth in General Instruction H (1)(a) and(b) of Form 10-Q and is therefore filing this Form with thereduced disclosure format.

 

**x****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE QUARTERLY PERIOD ENDED JUNE 30,2008**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)**

**OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

##### **Commissionfile number: 333-111553**

##### ** **

**LINCOLN BENEFIT LIFE COMPANY**

(Exact name of registrant asspecified in its charter)

 

| **Nebraska**                              | ** ** | **47-0221457**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State of  Incorporation)                 |       | (I.R.S.  Employer Identification No.) |
|                                      |       |                                  |
| **2940 South 84th Street**                |       |                                  |
| **Lincoln, Nebraska**                     | ** ** | **68506**                             |
| (Address of  principal executive offices) |       | (Zip code)                            |

 

**Registrant’s telephone number, including areacode: 800-525-9287**

 

**Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.**

** **

**Yes****x    No****o**

 

**Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See definition of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.**

** **

| **Large accelerated filer****o** | ** ** | **Accelerated filer ****o** | ** ** | **Non-accelerated filer****x**                     | ** ** | **Smaller reporting  company ****o** |
|----------------------------------|------------|----------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------|
| ** **                       | ** ** | ** **                       | ** ** | **(Do not check if a  smaller reporting company)** | ** ** | ** **                                |

 

**Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).**

**Yes**o    Nox

** **

**As of August 8, 2008, the Registrant had25,000 common shares, $100 par value, outstanding, all of which are held byAllstate Life Insurance Company.**

 

 

 

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##### **LINCOLNBENEFIT LIFE COMPANY**

**INDEXTO QUARTERLY REPORT ON FORM 10-Q**

##### **June 30,2008**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                    | ** ** |
|-------------------|------------------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                                         |       |
| Item 1.           | Financial Statements                                                                                                         |       |
|              |                                                                                                                         |       |
|              | Condensed Statements of Operations for the  Three-Month and Six-Month Periods Ended June 30, 2008 and 2007  (unaudited) | 1          |
|              |                                                                                                                         |       |
|              | Condensed Statements of Financial Position  as of June 30, 2008 (unaudited) and December 31, 2007                  | 2          |
|              |                                                                                                                         |       |
|              | Condensed Statements of Cash Flows for the Six-Month  Periods Ended June 30, 2008 and 2007 (unaudited)                  | 3          |
|              |                                                                                                                         |       |
|              | Notes to Condensed Financial Statements  (unaudited)                                                                         | 4          |
|              |                                                                                                                         |       |
| Item 2.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                  | 14         |
|              |                                                                                                                         |       |
| Item 4.           | Controls and Procedures                                                                                                      | 23         |
|              |                                                                                                                         |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                        | ** ** |
|              |                                                                                                                         |       |
| Item 1.           | Legal Proceedings                                                                                                            | 24         |
|              |                                                                                                                         |       |
| Item 1A.          | Risk Factors                                                                                                                 | 24         |
|              |                                                                                                                         |       |
| Item 6.           | Exhibits                                                                                                                     | 24         |

 

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#### **PART I. FINANCIAL INFORMATION**

 

#### **ITEM 1. FINANCIAL STATEMENTS**

 

#### **LINCOLN BENEFIT LIFE COMPANY**

 

**CONDENSED STATEMENTS OF OPERATIONS**

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in thousands)**                        | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                | ** ** |
| Revenues                                              |       |                             |       |                           |       |   |   |   |   |
| Net investment income                                 |       | $                                | 3,427      |                           | $          | 3,549 |   | $ | 7,067 |   | $ | 7,133 |   |
| Realized capital gains and losses                     |       | (91                              | )          | (405                           | )          | (345 | ) | (405 | ) |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Income  from operations before income tax expense** |       | 3,336                            |       | 3,144                          |       | 6,722 |   | 6,728 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Income tax expense                                    |       | 1,171                            |       | 1,098                          |       | 2,332 |   | 2,350 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Net  income**                                       |       | $                                | 2,165      |                           | $          | 2,046 |   | $ | 4,390 |   | $ | 4,378 |   |

 

See notes to condensedfinancial statements.

 

1

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**LINCOLN BENEFIT LIFE COMPANY**

 

**CONDENSED STATEMENTS OF FINANCIAL POSITION**

 
| ** **                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in thousands, except par value data)**                               | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                              | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
|                                                                                                    |       |              |       |                  |       |
| **Assets**                                                                                              |       |              |       |                  |       |
| Investments                                                                                             |       |              |       |                  |       |
| Fixed income securities, at fair value  (amortized cost $266,113 and $266,792)                          |       | $                 | 269,754    |                  | $          | 273,144 |   |
| Equity securities, at fair value (cost  $4,997)                                                         |       | 5,140             |       | —                |       |
| Short-term                                                                                              |       | 30,449            |       | 28,057                |       |
| Total investments                                                                                       |       | 305,343           |       | 301,201               |       |
|                                                                                                    |       |              |       |                  |       |
| Cash                                                                                                    |       | 16,234            |       | 18,612                |       |
| Reinsurance recoverable from Allstate Life  Insurance Company                                           |       | 18,755,610        |       | 18,777,851            |       |
| Reinsurance recoverable from non-affiliates                                                             |       | 1,520,743         |       | 1,422,931             |       |
| Other assets                                                                                            |       | 103,112           |       | 112,285               |       |
| Separate Accounts                                                                                       |       | 2,659,733         |       | 3,067,127             |       |
| **Total  assets**                                                                                       |       | $                 | 23,360,775 |                  | $          | 23,700,007 |   |
|                                                                                                    |       |              |       |                  |       |
| **Liabilities**                                                                                         |       |              |       |                  |       |
| Contractholder funds                                                                                    |       | $                 | 17,791,647 |                  | $          | 17,820,885 |   |
| Reserve for life-contingent contract  benefits                                                          |       | 2,444,364         |       | 2,348,116             |       |
| Unearned premiums                                                                                       |       | 24,219            |       | 25,819                |       |
| Deferred income taxes                                                                                   |       | 1,580             |       | 2,479                 |       |
| Payable to affiliates, net                                                                              |       | 58,897            |       | 21,912                |       |
| Current income taxes payable                                                                            |       | 7,147             |       | 4,815                 |       |
| Other liabilities and accrued expenses                                                                  |       | 80,530            |       | 118,916               |       |
| Separate Accounts                                                                                       |       | 2,659,733         |       | 3,067,127             |       |
| **Total  liabilities**                                                                                  |       | 23,068,117        |       | 23,410,069            |       |
|                                                                                                    |       |              |       |                  |       |
| **Commitments  and Contingent Liabilities (Note 4)**                                                    |       |              |       |                  |       |
|                                                                                                    |       |              |       |                  |       |
| **Shareholder’s  equity**                                                                          |       |              |       |                  |       |
| Common stock, $100 par value, 30 thousand  shares authorized, 25 thousand shares issued and outstanding |       | 2,500             |       | 2,500                 |       |
| Additional capital paid-in                                                                              |       | 180,000           |       | 180,000               |       |
| Retained income                                                                                         |       | 107,699           |       | 103,309               |       |
| Accumulated other comprehensive income:                                                                 |       |              |       |                  |       |
| Unrealized net capital gains and losses                                                                 |       | 2,459             |       | 4,129                 |       |
| **Total  accumulated other comprehensive income**                                                       |       | 2,459             |       | 4,129                 |       |
| **Total  shareholder’s equity**                                                                    |       | 292,658           |       | 289,938               |       |
| **Total  liabilities and shareholder’s equity**                                                    |       | $                 | 23,360,775 |                  | $          | 23,700,007 |   |

 

See notes to condensedfinancial statements.

 

2

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#### **LINCOLNBENEFIT LIFE COMPANY**

 

##### **CONDENSEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                                               | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **($ in thousands)**                                                                           | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                                                                               | ** ** | **(Unaudited)**                                     | ** ** |
|                                                                                                     |       |                                                |       |   |   |
| **Cash  flows from operating activities**                                                                |       |                                                |       |   |   |
|                                                                                                     |       |                                                |       |   |   |   |   |
| Net income                                                                                               |       | $                                                   | 4,390      |   | $ | 4,378 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                       |       |                                                |       |   |   |
| Amortization and other non-cash items                                                                    |       | 59                                                  |       | 45 |   |
| Realized capital gains and losses                                                                        |       | 345                                                 |       | 405 |   |
| Changes in:                                                                                              |       |                                                |       |   |   |
| Reserve for life-contingent contract  benefits and contractholder funds, net of reinsurance recoverables |       | (8,561                                              | )          | (8,985 | ) |
| Income taxes                                                                                             |       | 2,332                                               |       | 2,350 |   |
| Receivable/payable to affiliates, net                                                                    |       | 36,985                                              |       | 30,621 |   |
| Other operating assets and liabilities                                                                   |       | (30,881                                             | )          | (33,797 | ) |
| Net cash provided by (used in) operating  activities                                                     |       | 4,669                                               |       | (4,983 | ) |
|                                                                                                     |       |                                                |       |   |   |
| **Cash  flows from investing activities**                                                                |       |                                                |       |   |   |
|                                                                                                     |       |                                                |       |   |   |
| Proceeds from sales of fixed income  securities                                                          |       | 13,677                                              |       | 5,176 |   |
| Proceeds from sales of equity securities                                                                 |       | 6,896                                               |       | — |   |
| Collections on fixed income securities                                                                   |       | 7,054                                               |       | 11,164 |   |
| Purchases of fixed income securities                                                                     |       | (19,990                                             | )          | (8,013 | ) |
| Purchases of equity securities                                                                           |       | (2,512                                              | )          | — |   |
| Change in short-term investments                                                                         |       | (12,172                                             | )          | (14,742 | ) |
| Net cash used in investing activities                                                                    |       | (7,047                                              | )          | (6,415 | ) |
|                                                                                                     |       |                                                |       |   |   |
| **Net  decrease in cash**                                                                                |       | (2,378                                              | )          | (11,398 | ) |
| **Cash at  beginning of period**                                                                         |       | 18,612                                              |       | 23,352 |   |
| **Cash at  end of period**                                                                               |       | $                                                   | 16,234     |   | $ | 11,954 |   |

 

3

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** **

**LINCOLNBENEFIT LIFE COMPANY**

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

## **1.  General**

 

## **Basis ofPresentation**

 

Theaccompanying condensed financial statements include the accounts of LincolnBenefit Life Company (the “Company”), a wholly owned subsidiary of AllstateLife Insurance Company (“ALIC”), which is wholly owned by Allstate InsuranceCompany (“AIC”), a wholly owned subsidiary of The Allstate Corporation (the “Corporation”).

 

The condensedfinancial statements and notes as of June 30, 2008, and for thethree-month and six-month periods ended June 30, 2008 and 2007 areunaudited.  The condensed financialstatements reflect all adjustments (consisting only of normal recurringaccruals), which are, in the opinion of management, necessary for the fairpresentation of the financial position, results of operations and cash flowsfor the interim periods.  These condensedfinancial statements and notes should be read in conjunction with the financialstatements and notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007. The results of operations for the interim periods should not beconsidered indicative of results to be expected for the full year.

 

## **Adopted accounting standards**

 

***Statement of Position 05-1, Accounting byInsurance Enterprises for Deferred Acquisition Costs in Connection withModifications or Exchanges of Insurance Contracts (“SOP 05-1”)***

 

InOctober 2005, the American Institute of Certified Pubic Accountants (“AICPA”)issued SOP 05-1.   SOP 05-1 providesaccounting guidance for deferred policy acquisition costs (“DAC”) associatedwith internal replacements of insurance and investment contracts other thanthose set forth in Statement of Financial Accounting Standards (“SFAS”) No. 97,“Accounting and Reporting by Insurance Enterprises for Certain Long-DurationContracts and for Realized Gains and Losses from the Sale of Investments”.  SOP 05-1 defines an internal replacement as amodification in product benefits, features, rights or coverages that occursthrough the exchange of an existing contract for a new contract, or byamendment, endorsement or rider to an existing contract, or by the election ofa feature or coverage within an existing contract.  The Company adopted the provisions of SOP 05-1on January 1, 2007 for internal replacements occurring in fiscal yearsbeginning after December 15, 2006. The adoption of SOP 05-1 did not have any effect on the results ofoperations or financial position of the Company.

 

*Financial Accounting Standards Board (“FASB”)Interpretation No. 48, Accounting for Uncertainty in Income Taxes – aninterpretation of FASB Statement No. 109 and FASB Staff Position No. FIN48-1, Definition of Settlement in FASB Interpretation No. 48 (“FIN 48”)*

 

The FASB issued FIN 48 in July 2006 andthe related staff position in May 2007. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an entity’s financial statements in accordance with SFAS No. 109,“Accounting for Income Taxes”.  FIN 48requires an entity to recognize the tax benefit of uncertain tax positions onlywhen it is more likely than not, based on the position’s technical merits, thatthe position would be sustained upon examination by the respective taxingauthorities.  The tax benefit is measuredas the largest benefit that is more than fifty-percent likely of being realizedupon final settlement with the respective taxing authorities.  On January 1, 2007, the Company adoptedthe provisions of FIN 48, which were effective for fiscal years beginning afterDecember 15, 2006. No cumulative effect of a change in accountingprinciple or adjustment to the liability for unrecognized tax benefits wasrecognized as a result of the adoption of FIN 48.  Accordingly, the adoption of FIN 48 did nothave an effect on the results of operations or financial position of theCompany.

 

*SFAS No. 157, Fair ValueMeasurements (“SFAS No. 157”)*

 

In September 2006, theFASB issued SFAS No. 157, which redefines fair value as the price thatwould be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date,establishes a framework for measuring fair value in accounting principlesgenerally accepted in the United States of America (“GAAP”), and expandsdisclosures about fair value measurements. SFAS No. 157 establishes a three-level hierarchy for fair valuemeasurements based upon the nature of the inputs to the valuation of an assetor liability.  SFAS No. 157 applieswhere other accounting pronouncements require or permit fair valuemeasurements.  In February 2008, theFASB issued FASB Staff Position No. 157-2, “Effective Date of FASBStatement No. 157” (“FSP 157-2”), which permits the deferral of theeffective date of SFAS No. 157 to fiscal years beginning after November 15,2008 for all non-financial assets and liabilities, except those that arerecognized or 

 

4

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disclosed at fair value in the financial statementson a recurring basis.  The Companyadopted the provisions of SFAS No. 157for financial assets and liabilities recognized or disclosed at fair value on arecurring and non-recurring basis as of January 1, 2008.  Consistent with the provisions of FSP 157-2,the Company decided to defer the adoption of SFAS No. 157 fornon-financial assets and liabilities measured at fair value on a non-recurringbasis until January 1, 2009.  Theadoption of SFAS No. 157 did not have a material effect on the Company’sresults of operations or financial position (see Note 2).

 

*SFAS No. 159, The Fair ValueOption for Financial Assets and Financial Liabilities – Including an amendmentof FASB Statement No. 115 (“SFAS No. 159”)*

 

In February 2007, the FASB issued SFAS No. 159,which provides reporting entities, on an ongoing basis, an option to reportselected financial assets, including investment securities, and financialliabilities, including most insurance contracts, at fair value throughearnings.  SFAS No. 159 establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement alternatives for similartypes of financial assets and liabilities. The standard also requires additional information to aid financialstatement users’ understanding of the impacts of a reporting entity’s decisionto use fair value on its earnings and requires entities to display, on the faceof the statement of financial position, the fair value of those assets andliabilities for which the reporting entity has chosen to measure at fairvalue.  SFAS No. 159 was effectiveas of the beginning of a reporting entity’s first fiscal year beginning after November 15,2007.  The Company did not apply the fairvalue option to any existing financial assets or liabilities as of January 1,2008.  Consequently, the initial adoptionof SFAS No. 159 had no impact on the Company’s results of operations orfinancial position.

 

**Pending accounting standard**

 

*SFAS No. 161, Disclosuresabout Derivative Instruments and Hedging Activities – an amendment of FASBStatement No. 133 (“SFAS No. 161”)*

 

In March 2008, the FASB issued SFAS No. 161,which amends and expands the disclosure requirements for derivatives currentlyaccounted for in accordance with SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”.  The new disclosures are designed toenhance the understanding of how and why an entity uses derivative instrumentsand how derivative instruments affect an entity’s financial position, resultsof operations, and cash flows.  The standard requires, on a quarterlybasis, quantitative disclosures about the potential cash outflows associatedwith the triggering of credit-related contingent features, if any; tabulardisclosures about the classification and fair value amounts of derivativeinstruments reported in the statement of financial position; disclosure of thelocation and amount of gains and losses on derivative instruments reported inthe statement of operations; and qualitative information about how and why an entityuses derivative instruments and how derivative instruments and related hedgeditems affect the entity’s financial statements.  SFAS No. 161 iseffective for fiscal periods beginning after November 15, 2008, and is tobe applied on a prospective basis only.  SFAS No. 161 affectsdisclosures and therefore will not impact the Company’s results of operationsor financial position.

 

5

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**2.  Fair Valueof Financial Assets and Financial Liabilities**

 

The measurement basis for a significant amount ofthe Company’s financial assets is fair value. Financial instruments measured atfair value on a recurring basis include:

 

*Financial Assets*   Investments including U.S. treasuries, moneymarket funds, corporates, municipals, U.S. government and agencies, commercialmortgage-backed securities (“CMBS”), mortgage-backed securities (“MBS”),asset-backed securities (“ABS”), and separate account assets.

 

*Financial Liabilities*   Derivatives embedded incertain contractholder liabilities.

 

SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007. The Company adopted the provisions ofSFAS No. 157 as of January 1, 2008 for its financial assets andfinancial liabilities that are measured at fair value. SFAS No. 157:

 

·                  Defines fair value as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date, andestablishes a framework for measuring fair value;

 

·                  Establishes a three-level hierarchy for fairvalue measurements based upon the transparency of inputs to the valuation as ofthe measurement date;

 

·                  Expands disclosures about financialinstruments measured at fair value.

 

In determining fair value, the Company principallyuses the market approach which generally utilizes market data for the same orsimilar instruments.  To a lesser extent,the Company uses the income approach which involves determining fair valuesfrom discounted cash flow methodologies. SFAS No. 157 establishes a hierarchy for inputs used in determiningfair value that maximizes the use of observable inputs and minimizes the use ofunobservable inputs by requiring that observable inputs be used whenavailable.  Certain financial assets arenot carried at fair value on a recurring basis and thus are only categorized inthe fair value hierarchy when held at fair value on a non-recurring basis.

 

Observable inputs are those used by marketparticipants in valuing financial instruments that are developed based onmarket data obtained from independent sources. In the absence of observable inputs, unobservable inputs reflect theCompany’s estimates of the assumptions market participants would use in valuingfinancial assets and financial liabilities and are developed based on the bestinformation available in the circumstances.

 

Pursuant to SFAS No. 157, fair value is amarket-based measure, considered from the perspective of a market participantwho owns an asset or owes a liability. Accordingly, when market observable data is not readily available, theCompany’s own assumptions are set to reflect those that market participantswould be presumed to use in pricing the asset or liability at the measurementdate.  The Company uses prices and inputsthat are current as of the measurement date, including during periods of marketdisruption.  In periods of marketdisruption, the ability to observe prices and inputs may be reduced for manyinstruments.  This condition could causean instrument to be reclassified from Level 1 to Level 2, or from Level 2 toLevel 3.

 

Financial assets and financial liabilities recordedon the Condensed Statements of Financial Position at fair value are categorizedbased on the reliability of inputs to the valuation techniques as follows:

 

*Level 1**        *Financial assets and financial liabilitieswhose values are based on unadjusted quoted prices for identical assets orliabilities in an active market that the Company can access.

 

*Level 2***        **Financial assets and financial liabilitieswhose values are based on the following:

 

a)  Quoted prices for similar assets orliabilities in active markets;

 

b)  Quoted prices for identical or similar assetsor liabilities in non-active markets; or

 

c)  Valuation models whose inputs are observable,directly or indirectly, for substantially the full term of the asset orliability

 

*Level 3**        *Financial assets and financial liabilitieswhose values are based on prices or valuation techniques that require inputsthat are both unobservable and significant to the overall fair valuemeasurement.  These inputs may reflectthe Company’s estimates of the assumptions that market participants would usein valuing the financial assets and financial liabilities.

 

6

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The availability of observable inputs varies byinstrument. In situations where fair value is based on internally developedpricing models or inputs that are unobservable in the market, the determinationof fair value requires more judgment. The degree of judgment exercised by the Company in determining fairvalue is typically greatest for instruments categorized in Level 3.  In many instances, inputs used to measurefair value fall into different levels of the fair value hierarchy. In those instances, for disclosure purposes, the level in the fair valuehierarchy within which the fair value measurement is categorized is determinedbased on the lowest level input that is significant to the fair valuemeasurement in its entirety.

 

**Summary of Significant Valuation Techniques for Financial Assets andFinancial Liabilities on a Recurring Basis**

 

**Level 1 Measurements**

 

Fixed Income Securities:  U.S.Treasuries are in Level 1 and valuation is based on unadjusted quoted pricesfor identical assets in active markets that the Company can access.

 

Short-term:  Comprise actively traded moneymarket funds that have daily quoted net asset values for identical assets thatthe Company can access.

 

Equity Securities; Separate Account Assets: Comprise actively traded mutual funds that have quoted net asset valuesfor identical assets that the Company can access.  Net asset values for the actively tradedmutual funds in which the separate account assets are invested are obtaineddaily from the fund managers.

** **

**Level 2 Measurements**

 

Fixed Income Securities:

* *

*Corporate, including privatelyplaced*:  Valued based on inputs including quotedprices for identical or similar assets in markets that are not active.  Also includes privately placed securitiestotaling $6.5 million that are valued based on market-observable externalratings from independent third party rating agencies.

 

*Municipal*: Externally rated municipals are valued based on inputs including quotedprices for identical or similar assets in markets that are not active.

 

*U.S. Government and Agencies*: Valued based on inputs including quoted prices for identical or similarassets in markets that are not active.

 

*CMBS*: Valuation is principally based on inputs including quoted prices foridentical or similar assets in markets that are not active and are categorizedas Level 2.

 

*MBS; ABS:* Valued based on inputs including quoted prices for identical or similarassets in markets that are not active. Other ABS are categorized as Level 3.

 

Contractholder Funds: Derivatives embedded in certain annuity contracts are valued based oninternal models that rely on inputs such as interest rate yield curves andequity index volatility assumptions that are market observable forsubstantially the full term of the contract. The valuation techniques are widely accepted in the financial servicesindustry and do not include significant judgment.

 

**Level 3 Measurements**

 

Fixed Income Securities

 

*ABS*: Principally valued based on inputs including quoted prices for identicalor similar assets in markets that exhibit less liquidity relative to thosemarkets supporting Level 2 fair value measurements.  Due to the reduced availability of actualmarket prices or relevant observable inputs as a result of the decrease inliquidity that has been experienced in the market for these securities, theyare categorized as Level 3.

 

Contractholder Funds: Derivatives embedded in annuity contracts are valued internally usingmodels widely accepted in the financial services industry that determine a single best estimate of fairvalue for a block of contractholder liabilities that contain certain embeddedderivatives.  The models usestochastically determined cash flows based on the contractual elements ofembedded derivatives and other applicable market data.  These are categorized as Level 3 as a result of the significance of non-marketobservable inputs.

 

7

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The following tablesummarizes the Company’s financial assets and financial liabilities measured atfair value on a recurring basis as of June 30, 2008:

 
| ** **                                | ** ** | **Quoted  Prices in  Active  Markets for  Identical  Assets** | ** **    | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Other  Valuations  and** | ** ** | **Balance as of** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------------|---------------|--------------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| **($ in thousands)**            | ** ** | **(Level 1)**                                                      | ** **    | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** | **Netting**                | ** ** | **June 30, 2008** | ** ** |
| **Financial  assets:**                    | ** ** | ** **                                                              | ** **    | ** **                                 | ** ** | ** **                            | ** ** | ** **                 | ** ** | ** **                  | ** ** |
| Fixed income securities                   |       | $                                                                       | 46,048        |                                       | $          | 216,219                               |       | $                          | 7,487      |                        |       |   | $ | 269,754 |   |
| Equity securities                         |       | 5,140                                                                   |          | —                                     |       | —                                |       |                       |       | 5,140                       |       |
| Short–term investments               |       | 30,399                                                                  |          | —                                     |       | —                                |       |                       |       | 30,399                      |       |
| **Total  recurring basis assets**         |       | 81,587                                                                  |          | 216,219                                    |       | 7,487                                 |       |                       |       | 305,293                     |       |
| Valued at cost                            |       |                                                                    |          |                                       |       |                                  |       | $                          | 50         |                        | 50         |   |
| **Total  investments**                    | ** ** | **81,587**                                                              | ** **    | **216,219**                                | ** ** | **7,487**                             | ** ** | **50**                     | ** ** | **305,343**                 | ** ** |
| ** **                                | ** ** | ** **                                                              | ** **    | ** **                                 | ** ** | ** **                            | ** ** | ** **                 | ** ** | ** **                  | ** ** |
| Separate account assets                   |       | 2,659,733                                                               |          | —                                     |       | —                                |       | —                     |       | 2,659,733                   |       |
| **Total  financial assets**               | ** ** | **$**                                                                   | **2,741,320** | ** **                                 | **$**      | **216,219**                           | ** ** | **$**                      | **7,487**  | ** **                  | **$**      | **50** | ** ** | **$** | **2,965,076** | ** ** |
| % of total financial assets               |       | 92.4                                                                    | %             | 7.3                                        | %          | 0.3                                   | %          | —                     | %          | 100.0                       | %          |
| ** **                                |       |                                                                    |          |                                       |       |                                  |       |                       |       |                        |       |
| **Financial  liabilities:**               |       |                                                                    |          |                                       |       |                                  |       |                       |       |                        |       |
| Contractholder funds:                     |       |                                                                    |          |                                       |       |                                  |       |                       |       |                        |       |
| Derivatives embedded in annuity contracts |       | $                                                                       | —        |                                       | $          | (44,578                               | )          | $                          | (2,301     | )                           | $          | — |   | $ | (46,879 | ) |
| **Total  financial liabilities**          | ** ** | **$**                                                                   | **—**    | ** **                                 | **$**      | **(44,578**                           | **)**      | **$**                      | **(2,301** | **)**                       | **$**      | **—** | ** ** | **$** | **(46,879** | **)** |
| % of total financial liabilities          |       | —                                                                  | %             | 95.1                                       | %          | 4.9                                   | %          | —                     | %          | 100.0                       | %          |
|                                           |            |                                                                         |               |                                            |            |                                       |            |                            |            |                             |            |  |  |  |  |  |  |

 

As required by SFAS No. 157,when the inputs used to measure fair value fall within different levels of thehierarchy, the level within which the fair value measurement is categorized isbased on the lowest level input that is significant to the fair valuemeasurement in its entirety.  Thus, aLevel 3 fair value measurement may include inputs that are observable (Level 1or Level 2) and unobservable (Level 3). Gains and losses for such assets and liabilities categorized within theLevel 3 table may include changes in fair value that are attributable to bothobservable inputs (Level 1 and Level 2) and unobservable inputs (Level 3).

 

The following table providesa summary of changes in fair value during the three-month period ended June 30,2008 of Level 3 financial assets and financial liabilities held at fair valueon a recurring basis at June 30, 2008.

 
| ** **                                        | ** ** | ** **                                        | ** ** | **Total realized and unrealized  Gains (Losses) included in:** | ** ** | ** **                                              | ** ** | **Net**                                                           | ** ** | ** **                                                 | ** ** | **Total Gains  (Losses)  included in  Net Income for** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **($ in thousands)**                    | ** ** | **Balance as of  March 31,  2008** | ** ** | **Net  Income ****(1)**                                                                 | ** ** | **OCI on  Statement of  Financial  Position** | ** ** | **Purchases,  Sales, Issuances  and  Settlements, net** | ** ** | **Transfers  In and/or  (Out) of  Level 3** | ** ** | **Balance as of  June 30, 2008**                       | ** ** | **Instruments  Still Held at  June 30,  2008** | ** ** |
| **Financial assets**                              |       |                                              |       |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                       |       |   |   |
| Fixed  income securities                          |       | $                                                 | 11,967     |                                                                                         | $          | 185                                                     |       | $                                                                 | (436       | )                                                          | $          | (4,229                                                                     | )          | $ | — |   | $ | 7,487 |   | $ | (3 | ) |
| **Total recurring level 3 financial assets**      | ** ** | **$**                                             | **11,967** | ** **                                                                                   | **$**      | **185**                                                 | ** ** | **$**                                                             | **(436**   | **)**                                                      | **$**      | **(4,229**                                                                 | **)**      | $ | — | ** ** | **$** | **7,487** | ** ** | **$** | **(3** | **)** |
|                                              |       |                                              |       |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                       |       |   |   |
| **Financial liabilities**                         |       |                                              |       |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                       |       |   |   |
| Contractholder  funds:                            |       |                                              |       |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                       |       |   |   |
| Derivatives  embedded in annuity contracts        |       | $                                                 | (1,235     | )                                                                                            | $          | (1,107                                                  | )          | $                                                                 | —     |                                                       | $          | 41                                                                         |       | $ | — |   | $ | (2,301 | ) | $ | (1,107 | ) |
| **Total recurring level 3 financial liabilities** |       | $                                                 | (1,235     | )                                                                                            | $          | (1,107                                                  | )          | $                                                                 | —     |                                                       | $          | 41                                                                         |       | $ | — |   | $ | (2,301 | ) | $ | (1,107 | ) |

 

----

(1)          The amounts aboveattributable to fixed income securities total $185 thousand and are reported inthe Condensed Statements of Operations as follows:  $188 thousand in realized capital gains andlosses, and $(3) thousand in net investment income.  The amounts above attributable to derivativesembedded in annuity contracts are reported as a component of contract benefitsand are ceded in accordance with the Company’s reinsurance agreements.

 

8

----

 

The following table providesa summary of changes in fair value during the six-month period ended June 30,2008 of Level 3 financial assets and financial liabilities held at fair valueon a recurring basis at June 30, 2008.

 
| ** **                                        | ** ** | ** **                                         | ** ** | **Total realized and unrealized  Gains (Losses) included in:** | ** ** | ** **                                              | ** ** | **Net**                                                           | ** ** | ** **                                                 | ** ** | **Total Gains  (Losses)  included in  Net Income for** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **($ in thousands)**                    | ** ** | **Balance as of  January 1,  2008** | ** ** | **Net  Income ****(1)**                                                            | ** ** | **OCI on  Statement of  Financial  Position** | ** ** | **Purchases,  Sales, Issuances  and  Settlements, net** | ** ** | **Transfers  In and/or  (Out) of  Level 3** | ** ** | **Balance as of  June 30, 2008**                       | ** ** | **Instruments  Still Held at  June 30,  2008** | ** ** |
| **Financial assets**                              |       |                                               |       |                                                                                    |       |                                                    |       |                                                              |       |                                                       |       |                                                                       |       |   |   |
| Fixed  income securities                          |       | $                                                  | 11,984     |                                                                                    | $          | 182                                                     |       | $                                                                 | (258       | )                                                          | $          | (4,421                                                                     | )          | $ | — |   | $ | 7,487 |   | $ | (3 | ) |
| **Total recurring level 3 financial assets**      | ** ** | **$**                                              | **11,984** | ** **                                                                              | **$**      | **182**                                                 | ** ** | **$**                                                             | **(258**   | **)**                                                      | **$**      | **(4,421**                                                                 | **)**      | **$** | **—** | ** ** | **$** | **7,487** | ** ** | **$** | **(3** | **)** |
|                                              |       |                                               |       |                                                                                    |       |                                                    |       |                                                              |       |                                                       |       |                                                                       |       |   |   |
| **Financial liabilities**                         |       |                                               |       |                                                                                    |       |                                                    |       |                                                              |       |                                                       |       |                                                                       |       |   |   |
| Contractholder  funds:                            |       |                                               |       |                                                                                    |       |                                                    |       |                                                              |       |                                                       |       |                                                                       |       |   |   |
| Derivatives  embedded in annuity contracts        |       | $                                                  | (256       | )                                                                                       | $          | (2,086                                                  | )          | $                                                                 | —     |                                                       | $          | 41                                                                         |       | $ | — |   | $ | (2,301 | ) | $ | (2,086 | ) |
| **Total recurring level 3 financial liabilities** |       | $                                                  | (256       | )                                                                                       | $          | (2,086                                                  | )          | $                                                                 | —     |                                                       | $          | 41                                                                         |       | $ | — |   | $ | (2,301 | ) | $ | (2,086 | ) |

 

----

(1)          The amounts aboveattributable to fixed income securities total $182 thousand and are reported inthe Condensed Statements of Operations as follows:  $185 thousand in realized capital gains andlosses, and $(3) thousand in net investment income.  The amounts above attributable to derivativesembedded in annuity contracts are reported as a component of contract benefitsand are ceded in accordance with the Company’s reinsurance agreements.

 

## **3.  Reinsurance**

 

The Companyhas reinsurance agreements under which it reinsures all of its business to ALICor other non-affiliated reinsurers. Under the agreements, premiums, contractcharges, interest credited to contractholder funds, contract benefits andsubstantially all expenses are reinsured. The Company continues to have primary liability as the direct insurerfor risks reinsured.

 

Investmentincome earned on the assets which support contractholder funds and the reservefor life-contingent contract benefits is not included in the condensedfinancial statements as those assets are owned and managed by ALIC or thirdparty reinsurers under terms of the reinsurance agreements.  The timing of the transfer of funds under thereinsurance agreements may result in fluctuations in net cash provided byoperating activities in the Condensed Statements of Cash Flows.

 

The effects ofreinsurance on premiums and contract charges are as follows:

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in thousands)**                     | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Premiums  and contract charges**                 |       |                             |       |                           |       |   |   |   |   |
| Direct                                             |       | $                                | 284,543    |                           | $          | 254,267 |   | $ | 550,334 |   | $ | 500,903 |   |
| Assumed-non-affiliate                              |       | 2,011                            |       | 2,179                          |       | 3,943 |   | 4,097 |   |
| Ceded                                              |       |                             |       |                           |       |   |   |   |   |
| Affiliate                                          |       | (177,022                         | )          | (153,682                       | )          | (333,819 | ) | (305,116 | ) |
| Non-affiliate                                      |       | (109,532                         | )          | (102,764                       | )          | (220,458 | ) | (199,884 | ) |
| Premiums and contract charges, net of  reinsurance |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |

 

9

----

 

The effects of reinsurance on interestcredited to contractholder funds, contract benefits and expenses are asfollows:

 
| ** **                                                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in thousands)**                                                                 | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Interest  credited to contractholder funds, contract benefits and expenses**                 |       |                             |       |                           |       |   |   |   |   |
| Direct                                                                                         |       | $                                | 430,243    |                           | $          | 553,466 |   | $ | 789,040 |   | $ | 1,009,069 |   |
| Assumed-non-affiliate                                                                          |       | 2,237                            |       | 2,916                          |       | 4,143 |   | 5,640 |   |
| Ceded                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Affiliate                                                                                      |       | (274,227                         | )          | (400,948                       | )          | (496,933 | ) | (750,374 | ) |
| Non-affiliate                                                                                  |       | (158,253                         | )          | (155,434                       | )          | (296,250 | ) | (264,335 | ) |
| Interest credited to contractholder funds,  contract benefits and expenses, net of reinsurance |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |

 

## **4.  Guarantees and Contingent Liabilities**

##  

## **Guarantees**

 

In the normalcourse of business, the Company provides standard indemnifications tocontractual counterparties in connection with numerous transactions, includingacquisitions and divestitures.  The typesof indemnifications typically provided include indemnifications for breaches ofrepresentations and warranties, taxes and certain other liabilities, such asthird party lawsuits.  Theindemnification clauses are often standard contractual terms and are enteredinto in the normal course of business based on an assessment that the risk ofloss would be remote.  The terms of theindemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and thecontingencies triggering the obligation to indemnify have not occurred and arenot expected to occur.  Consequently, themaximum amount of the obligation under such indemnifications is notdeterminable.  Historically, the Companyhas not made any material payments pursuant to these obligations.

 

The aggregateliability balance related to all guarantees was not material as of June 30,2008.

##  

## **Regulation**

 

The Company issubject to changing social, economic and regulatory conditions.  From time to time regulatory authorities orlegislative bodies seek to impose additional regulations regarding agent andbroker compensation and otherwise expand overall regulation of insuranceproducts and the insurance industry.  Theultimate changes and eventual effects of these initiatives on the Company’sbusiness, if any, are uncertain.

 

**Legaland Regulatory Proceedings and Inquiries**

*** ***

***Background***

 

The Companyand certain affiliates are involved in a number of lawsuits, regulatoryinquiries, and other legal proceedings arising out of various aspects of itsbusiness.  As background to the “Proceedings”sub-section below, please note the following:

 

·                  These mattersraise difficult and complicated factual and legal issues and are subject tomany uncertainties and complexities, including the underlying facts of eachmatter; novel legal issues; variations between jurisdictions in which mattersare being litigated, heard or investigated; differences in applicable laws andjudicial interpretations; the length of time before many of these matters mightbe resolved by settlement, through litigation or otherwise; the fact that someof the lawsuits are putative class actions in which a class has not beencertified and in which the purported class may not be clearly defined; the factthat some of the lawsuits involve multi-state class actions in which theapplicable law(s) for the claims at issue is in dispute and thereforeunclear; and the current challenging legal environment faced by largecorporations and insurance companies.

 

10

----

 

·                  The outcome onthese matters may also be affected by decisions, verdicts, and settlements, andthe timing of such decisions, verdicts, and settlements, in other individualand class action lawsuits that involve the Company, other insurers, or otherentities and by other legal, governmental, and regulatory actions that involvethe Company, other insurers, or other entities.

 

·                  In the lawsuits,plaintiffs seek a variety of remedies including equitable relief in the form ofinjunctive and other remedies and monetary relief in the form of contractualand extra-contractual damages.  In somecases, the monetary damages sought include punitive damages.  Often specific information about the reliefsought, such as the amount of damages, is not available because plaintiffs havenot requested specific relief in their pleadings.  In Allstate’s experience, when specificmonetary demands are made in pleadings, they bear little relation to theultimate loss, if any, to the Company.

 

·                  In connectionwith regulatory examinations and proceedings, government authorities may seekvarious forms of relief, including penalties, restitution and changes inbusiness practices.  The Company may notbe advised of the nature and extent of relief sought until the final stages ofthe examination or proceeding.

 

·                  For the reasonsspecified above, it is often not possible to make meaningful estimates of theamount or range of loss that could result from the matters described below inthe “Proceedings” subsection.  TheCompany reviews these matters on an on-going basis and follows the provisionsof SFAS No. 5, “Accounting for Contingencies” when making accrual anddisclosure decisions.  When assessingreasonably possible and probable outcomes, the Company bases its decisions onits assessment of the ultimate outcome following all appeals.

 

·                  Due to thecomplexity and scope of the matters disclosed in the “Proceedings” subsectionbelow and the many uncertainties that exist, the ultimate outcome of thesematters cannot be reasonably predicted. In the event of an unfavorable outcome in one or more of these matters,the ultimate liability may be in excess of amounts currently reserved and maybe material to the Company’s operating results or cash flows for a particularquarterly or annual period.  However,based on information currently known to it, management believes that theultimate outcome of all matters described below as they are resolved over timeis not likely to have a material adverse effect on the financial position ofthe Company.

** **

**Proceedings**

 

Legalproceedings involving Allstate agencies and AIC may impact the Company, evenwhen the Company is not directly involved, because the Company sells itsproducts through a variety of distribution channels including Allstateagencies. Consequently, information about the more significant of theseproceedings is provided in the following paragraph.

 

AIC is defending certain matters relating to its agency programreorganization announced in 1999.  Thesematters are in various stages of development.

 

·                  These mattersinclude a lawsuit filed in 2001 by the U.S. Equal Employment OpportunityCommission (“EEOC”) alleging retaliation under federal civil rights laws (the “EEOC I” suit) and a class action filedin 2001 by former employee agents alleging retaliation and age discriminationunder the Age Discrimination in Employment Act (“ADEA”), breach of contract and ERISA violations (the “RomeroI” suit).   In 2004, in the consolidatedEEOC I and Romero I litigation, the trial court issued a memorandum and orderthat, among other things, certified classes of agents, including a mandatoryclass of agents who had signed a release, for purposes of effecting the court’sdeclaratory judgment that the release is voidable at the option of the releasesigner.  The court also ordered that anagent who voids the release must return to AIC “any and all benefits receivedby the [agent] in exchange for signing the release.”  The court also stated that, “on theundisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the courtto clarify and/or reconsider its memorandum and order and in January 2007,the judge denied their request.  In June 2007,the court granted AIC’s motions for summary judgment.  Following plaintiffs’ filing of a notice ofappeal, the Third Circuit issued an order in December 2007 stating thatthe notice of appeal was not taken from a final order within the meaning of thefederal law and thus not appealable at this time.  In March 2008, the Third Circuit decidedthat the appeal should not summarily be dismissed and that the question ofwhether the matter is appealable at this time will be addressed by the Courtalong with the merits of the appeal.

 

11

----

 

·                  The EEOC also filed another lawsuit in 2004alleging age discrimination with respect to a policy limiting the rehire ofagents affected by the agency program reorganization (the “EEOC II” suit).  In EEOC II, in 2006, the court grantedpartial summary judgment to the EEOC. Although the court did not determine that AIC was liable for agediscrimination under the ADEA, it determined that the rehire policy resulted ina disparate impact, reserving for trial the determination on whether AIC hadreasonable factors other than age to support the rehire policy.  In June 2008, the Eighth Circuit Courtof Appeals affirmed summary judgment in the EEOC’s favor.  AIC filed a petition for rehearing *en banc*.

 

·                  AIC is also defending a certified classaction filed by former employee agents who terminated their employment prior tothe agency program reorganization. Plaintiffs allege that they were constructively discharged so thatAllstate could avoid paying ERISA and other benefits offered under thereorganization.  They claim that theconstructive discharge resulted from the implementation of agency standards,including mandatory office hours and a requirement to have licensed staffavailable during business hours.  Thecourt approved the form of class notice which was sent to approximately 1,800potential class members in November 2007. Fifteen individuals opted out. AIC’s motions for judgment on the pleadings were partially granted.  In May 2008, the Court granted summaryjudgment in AIC’s favor on all class claims. Plaintiffs moved for reconsideration and in the alternative to decertifythe class.  AIC opposed this motion andfiled a motion for summary judgment with respect to the remaining non-classclaim.

 

·                  A putativenationwide class action has also been filed by former employee agents allegingvarious violations of ERISA, includinga worker classification issue.  Theseplaintiffs are challenging certain amendments to the Agents Pension Plan andare seeking to have exclusive agent independent contractors treated asemployees for benefit purposes.  Thismatter was dismissed with prejudice by the trial court, was the subject offurther proceedings on appeal, and was reversed and remanded to the trial courtin 2005.  In June 2007, the court granted AIC’smotion to dismiss the case.  Followingplaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007stating that the notice of appeal was not taken from a final order within the meaningof the federal law and thus not appealable at this time.  In March 2008, the Third Circuit decidedthat the appeal should not summarily be dismissed and that the question ofwhether the matter is appealable at this time will be addressed by the Courtalong with the merits of the appeal.

 

In all of these various matters, plaintiffsseek compensatory and punitive damages, and equitable relief.  AIC has been vigorously defendingthese lawsuits and other matters related to its agency program reorganization.

##  

## **Other Matters**

##  

## **Variousother legal, governmental, and regulatory actions, including state marketconduct exams, and other governmental and regulatory inquiries are currentlypending that involve the Company and specific aspects of its conduct of business.Like other members of the insurance industry, the Company is the target of anumber of lawsuits and proceedings, some of which involve claims forsubstantial or indeterminate amounts. These actions are based on a variety ofissues and target a range of the Company’s practices. The outcome of thesedisputes is currently unpredictable. However, based on information currently known to it and the existence ofthe reinsurance agreements with ALIC, management believes that the ultimateoutcome of all matters described in this “Other Matters” subsection in excessof amounts currently reserved, as they are resolved over time is not likely tohave a material effect on the operating results, cash flows or financialposition of the Company.**

 

12

----

 

## **5.   Other Comprehensive Income**

 

The componentsof other comprehensive (loss) income on a pre-tax and after-tax basis are asfollows:

 
| ** **                                                              | ** ** | **Three months ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                                              | ** ** | ** **                                          | ** ** | ** ** | ** ** | **After-** | ** ** | ** ** | ** ** | ** ** | ** ** | **After-** | ** ** |
| **($ in thousands)**                                          | ** ** | **Pre-tax**                                         | ** ** | **Tax** | ** ** | **tax** | ** ** | **Pre-tax** | ** ** | **Tax** | ** ** | **tax** | ** ** |
| * *                                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding losses arising during  the period                    |       | $                                                   | (6,034     | ) | $ | 2,112 |   | $ | (3,922 | ) | $ | (4,987 | ) | $ | 1,746 |   | $ | (3,241 | ) |
| Less: reclassification adjustment of  realized capital gains and losses |       | (91                                                 | )          | 32 |   | (59 | ) | (405 | ) | 142 |   | (263 | ) |
| Unrealized net capital gains and losses                                 |       | (5,943                                              | )          | 2,080 |   | (3,863 | ) | (4,582 | ) | 1,604 |   | (2,978 | ) |
| Other comprehensive loss                                                |       | $                                                   | (5,943     | ) | $ | 2,080 |   | (3,863 | ) | $ | (4,582 | ) | $ | 1,604 |   | (2,978 | ) |
|                                                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                              |       |                                                |       |   |   | 2,165 |   |   |   |   |   | 2,046 |   |
| Comprehensive loss                                                      |       |                                                |       |   |   | $ | (1,698 | ) |   |   |   |   | $ | (932 | ) |

 
|                                                                    | ** ** | **Six  months ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                            | ** ** | **2007** | ** ** |
|                                                                    | ** ** | ** **                          | ** ** | ** ** | ** ** | **After-** | ** ** | ** ** | ** ** | ** ** | ** ** | **After-** | ** ** |
| **($ in  thousands)**                                              | ** ** | **Pre-tax**                         | ** ** | **Tax** | ** ** | **tax** | ** ** | **Pre-tax** | ** ** | **Tax** | ** ** | **tax** | ** ** |
| * *                                                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding losses arising during  the period                    |       | $                                   | (2,914     | ) | $ | 1,020 |   | $ | (1,894 | ) | $ | (4,050 | ) | $ | 1,418 |   | $ | (2,632 | ) |
| Less: reclassification adjustment of  realized capital gains and losses |       | (345                                | )          | 121 |   | (224 | ) | (405 | ) | 142 |   | (263 | ) |
| Unrealized net capital gains and losses                                 |       | (2,569                              | )          | 899 |   | (1,670 | ) | (3,645 | ) | 1,276 |   | (2,369 | ) |
| Other comprehensive loss                                                |       | $                                   | (2,569     | ) | $ | 899 |   | (1,670 | ) | $ | (3,645 | ) | $ | 1,276 |   | (2,369 | ) |
|                                                                    |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                              |       |                                |       |   |   | 4,390 |   |   |   |   |   | 4,378 |   |
| Comprehensive income                                                    |       |                                |       |   |   | $ | 2,720 |   |   |   |   |   | $ | 2,009 |   |

 

13

----

 

**Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDEDJUNE 30, 2008 AND 2007**

 

## **OVERVIEW**

 

The followingdiscussion highlights significant factors influencing the condensed financialposition and results of operations of Lincoln Benefit Life Company (referred toin this document as “we”, “our”, “us”, or the “Company”).  It should be read in conjunction with thecondensed financial statements and notes thereto found under Part I. Item1. contained herein, and with the discussion, analysis, financial statementsand notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8.of the Lincoln Benefit Life Company Annual Report on Form 10-K for2007.  We operate as a single segmententity based on the manner in which we use financial information to evaluateperformance and to determine the allocation of resources.

 

## **OPERATIONS**

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in thousands)**    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                             |       |                           |       |   |   |   |   |
| Net investment income             |       | $                                | 3,427      |                           | $          | 3,549 |   | $ | 7,067 |   | $ | 7,133 |   |
| Realized capital gains and losses |       | (91                              | )          | (405                           | )          | (345 | ) | (405 | ) |
| Income tax expense                |       | (1,171                           | )          | (1,098                         | )          | (2,332 | ) | (2,350 | ) |
| Net income                        |       | $                                | 2,165      |                           | $          | 2,046 |   | $ | 4,390 |   | $ | 4,378 |   |

 

We have reinsurance agreementswhereby all premiums, contract charges, interest credited to contractholderfunds, contract benefits and substantially all expenses are ceded to AllstateLife Insurance Company (“ALIC”) and certain non-affiliated reinsurers, andreflected net of such reinsurance in the Condensed Statements ofOperations.  Our results of operationsinclude net investment income and realized capital gains and losses on ourassets that are not transferred under the reinsurance agreements.

 

**Netincome** increased 5.8% in the second quarter and 0.3%in the first six months of 2008 compared to the same periods in 2007.  The increase in both periods was the resultof a decline in net realized capital losses partially offset by lower netinvestment income.

 

**Netinvestment income** decreased 3.4% in the second quarterof 2008 and 0.9% in the first six months of 2008 compared to the same periodsin 2007.  The decline in both periods wasdue to lower yields on short-term investments partially offset by higheraverage investment balances.

 

**Netrealized capital losses** decreased 77.5% in the secondquarter of 2008 and 14.8% in the first six months of 2008 compared to the sameperiods in 2007, due to net gains on dispositions of fixed income securities inthe current year periods compared to net losses in the prior year periods,partially offset by net losses in the current year periods on equitysecurities.

 

14

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**FINANCIAL POSITION**

** **
| ** **                                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in thousands)**                 | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Fixed income securities (1)                    |       | $                 | 269,754    |                  | $          | 273,144 |   |
| Equity securities (2)                          |       | 5,140             |       | —                |       |
| Short-term                                     |       | 30,449            |       | 28,057                |       |
| Total investments                              |       | $                 | 305,343    |                  | $          | 301,201 |   |
|                                           |       |              |       |                  |       |
| Cash                                           |       | $                 | 16,234     |                  | $          | 18,612 |   |
| Reinsurance recoverable from ALIC              |       | 18,755,610        |       | 18,777,851            |       |
| Reinsurance recoverable from non-affiliates    |       | 1,520,743         |       | 1,422,931             |       |
| Contractholder funds                           |       | 17,791,647        |       | 17,820,885            |       |
| Reserve for life-contingent contract  benefits |       | 2,444,364         |       | 2,348,116             |       |
| Separate Accounts assets and liabilities       |       | 2,659,733         |       | 3,067,127             |       |
| Total shareholder’s equity                |       | 292,658           |       | 289,938               |       |

 

----

(1)         Fixed income securities are carried at fair value.  Amortized cost basis for these securities was$266.1 million and $266.8 million at June 30, 2008 and December 31,2007, respectively.

(2)         Equity securities are carried at fair value.  Cost basis for these securities was $5.0million at June 30, 2008.

 

Total investments increased to$305.3 million at June 30, 2008 from $301.2 million at December 31,2007 due primarily to the investment of cash flows from operating activities,partially offset by lower unrealized net capital gains on fixed incomesecurities.

 

At June 30,2008, all securities in the fixed income securities portfolio were rated investmentgrade, which is defined as a security having a rating from the NationalAssociation of Insurance Commissioners (“NAIC”) of 1 or 2; a rating of Aaa, Aa,A or Baa from Moody’s or a rating of AAA, AA, A or BBB from Standards and Poor’s(“S&P”), Fitch or Dominion or a rating of aaa, a or bbb from A.M.Best; or a comparable internal rating if an externally provided rating is notavailable.

* *

*Unrealized net capital gains* totaled $3.8 million as of June 30,2008, compared to unrealized net capital gains of $6.4 million at December 31,2007.

 

Unrealized net capital gains onfixed income securities of $3.7 million as of June 30, 2008 comprised $6.4million of unrealized gains and $2.7 million of unrealized losses.  Unrealized net capital gains on fixed income securitiesof $6.4 million at December 31, 2007 comprised $7.7 million of unrealizedgains and $1.3 million of unrealized losses. Unrealized capital gains on equity securities of $143 thousand werecomprised solely of unrealized gains. There were no unrealized capital gains and losses on equity securitiesat December 31, 2007.

 

Of the gross unrealized lossesin the fixed income portfolio at June 30, 2008, $1.1 million or 40.8% wererelated to securities in our corporate fixed income securities portfolio andwere primarily comprised of losses on securities in the banking, consumergoods, transportation and capital goods sectors.  The gross unrealized losses in these sectorswere primarily related to changes in interest rates and credit spreads, andcompany specific conditions.  Of theremaining $1.6 million of unrealized losses, $816 thousand were related tomortgage-backed securities and $783 thousand were related to commercialmortgage-backed securities.  These lossesare believed to be the result of liquidity declines in the financial markets.

 

We have acomprehensive portfolio monitoring process to identify and evaluate, on acase-by-case basis, fixed income and equity securities whose carrying value maybe other-than-temporarily impaired.  Theprocess includes a quarterly review of all securities using a screening processto identify situations where the fair value, compared to amortized cost forfixed income securities, and cost for equity securities is below establishedthresholds for certain time periods, or which are identified through othermonitoring criteria such as ratings, ratings downgrades or paymentdefaults.  The securities identified, inaddition to other securities for which we may have a concern, are evaluatedbased on facts and circumstances for inclusion on our watch-list.  All investments in an unrealized lossposition at June 30, 2008 were included in our portfolio monitoringprocess for determining whether declines in value wereother-than-temporary.  We also conduct aportfolio review to recognize impairment on securities in an unrealized lossposition for

 

15

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which we do not have the intent and ability to holduntil recovery as a result of approved programs involving the disposition of investmentsfor reasons such as changes in economic and market outlooks, duration,revisions to strategic asset allocations, liquidity actions and federal incometax planning strategies for capital gain (loss) carryback and carryforward, aswell as changes in intent to hold certain investments by portfolio managers.

 

We also monitor the quality of our fixed income portfolio bycategorizing certain investments as “problem”, “restructured” or “potentialproblem.”  Problem fixed incomesecurities are in default with respect to principal or interest and/or areinvestments issued by companies that have gone into bankruptcy subsequent toour acquisition.  Restructured fixedincome securities have rates and terms that are not consistent with marketrates or terms prevailing at the time of the restructuring.  Potential problem fixed income investmentsare current with respect to contractual principal and/or interest, but becauseof other facts and circumstances, we have concerns regarding the borrower’sability to pay future principal and interest, which causes us to believe theseinvestments may be classified as problem or restructured in the future.

 

As of June 30, 2008 and December 31,2007, we had no securities categorized as “problem”, “restructured” or “potentialproblem.”

 

**Net Investment Income** The following table presents net investmentincome.

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in thousands)**    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                             |       |                           |       |   |   |   |   |
| Fixed income securities           |       | $                                | 3,369      |                           | $          | 3,358 |   | $ | 6,721 |   | $ | 6,707 |   |
| Equity securities                 |       | (29                              | )          | —                         |       | 67 |   | — |   |
| Short-term                        |       | 203                              |       | 275                            |       | 482 |   | 595 |   |
| Investment income, before expense |       | 3,543                            |       | 3,633                          |       | 7,270 |   | 7,302 |   |
| Investment expense                |       | (116                             | )          | (84                            | )          | (203 | ) | (169 | ) |
| Net investment income             |       | $                                | 3,427      |                           | $          | 3,549 |   | $ | 7,067 |   | $ | 7,133 |   |

 

**NetRealized Capital Gains and Losses** The following tablepresents realized capital gains and losses and the related tax effect.

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in thousands)**                    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Realized capital gains and losses, pre-tax        |       | $                                | (91        | )                              | $          | (405 | ) | $ | (345 | ) | $ | (405 | ) |
| Income tax benefit                                |       | 32                               |       | 142                            |       | 121 |   | 142 |   |
| **Realized capital gains and losses,  after-tax** |       | $                                | (59        | )                              | $          | (263 | ) | $ | (224 | ) | $ | (263 | ) |

 

The above table includes realized capitalgains and losses on fixed income and equity securities as a result of sales,changes in our intent to continue holding fixed income securities in anunrealized loss position until they recover in value, and other transactionssuch as calls and prepayments.  We maysell impaired fixed income or equity securities that were in an unrealized lossposition at the previous reporting date, or other investments where the fairvalue has declined below the carrying value, in situations where new factorssuch as negative developments, including subsequent credit deterioration andsubsequent deterioration in the economy or capital markets, developments in thefinancial and real estate industries, liquidity needs, investment riskmitigation strategies, and other new facts and circumstances that would cause achange in our previous intent to hold a security to recovery or maturity.

 

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##  

## **Reinsurancerecoverable, Contractholder funds and Reserve for life-contingent contractbenefits**

 

Contractholderfunds decreased $29.2 million to $17.79 billion at June 30, 2008 from$17.82 billion at December 31, 2007 as a result of new and additionaldeposits on fixed annuities and interest-sensitive life insurance products, andinterest credited to contractholder funds being more than offset by surrenders,withdrawals and benefit payments.  Thereserve for life-contingent contract benefits increased $96.2 million to $2.44billion at June 30, 2008 from $2.35 billion at December 31, 2007resulting from sales of immediate annuities with life contingencies and otherlife-contingent products, partially offset by benefits paid and policylapses.  Reinsurance recoverable fromALIC decreased by $22.2 million and reinsurance recoverable from non-affiliatesincreased by $97.8 million.

 

We purchase reinsurance afterevaluating the financial condition of the reinsurer, as well as the terms andprice of coverage.  We reinsure certainof our risks to non-affiliated reinsurers under yearly renewable term andcoinsurance agreements.  Yearly renewableterm and coinsurance agreements result in the passing of the agreed-uponportion of risk to the reinsurer in exchange for negotiated reinsurance premiumpayments.

 

**APPLICATION OF CRITICALACCOUNTING ESTIMATES**

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America (“GAAP”) requires management to adopt accountingpolicies and make estimates and assumptions that affect amounts reported in thefinancial statements.

 

In applying policies, management makes subjective andcomplex judgments that frequently require estimates about matters that areinherently uncertain.  Many of thesepolicies, estimates and related judgments are common in the insurance andfinancial services industries; others are specific to our businesses andoperations.  It is reasonably likely thatchanges in these estimates could occur from period to period and result in amaterial impact on our financial statements.

 

Our critical accounting estimate for the fair value of financial assetsand financial liabilities follows.  For adescription of critical accounting estimates not discussed below, see theApplication of Critical Accounting Estimates section of the MD&A foundunder Part II. Item 7. of the Lincoln Benefit Life Company Annual Reporton Form 10-K for 2007.

 

**Fair Value of Financial Assets and FinancialLiabilities**SFASNo. 157 is effective for fiscal years beginning after November 15,2007. We adopted the provisions of SFAS No. 157 as of January 1, 2008for financial assets and financial liabilities that are measured at fairvalue.  SFAS No. 157:

 

·                Definesfair value as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date, and establishes a framework for measuring fair value;

·                Establishesa three-level hierarchy for fair value measurements based upon the transparencyof inputs to the valuation as of the measurement date;

·                Expandsdisclosures about financial instruments measured at fair value.

 

We categorize our financial assets and financial liabilities measuredat fair value based on the priority of the inputs to the valuation technique,into a three-level fair value hierarchy. The fair value hierarchy gives thehighest priority to quoted prices in active markets for identical assets or liabilitieswhich we can access (Level 1); the second highest priority for similar assetsor liabilities in active markets, quoted prices for identical or similar assetsor liabilities in non-active markets, or valuation models whose inputs areobservable (Level 2); and the lowest priority to unobservable inputs (Level3).  If inputs used to measure afinancial instrument fall within different levels of the fair value hierarchy,the categorization is based on the lowest level input that is significant tothe fair value measurement of the entire instrument.  Certain financial assets are not carried atfair value on a recurring basis and thus are only categorized in the fair valuehierarchy when held at fair value on a non-recurring basis.

 

Theavailability of market observable information is the principal factor indetermining the level that financial instruments are assigned in thethree-level hierarchy. Observable inputs are those used by market participantsin valuing financial instruments that are developed based on market dataobtained from independent sources.  Inthe absence of observable inputs, unobservable inputs reflect our estimates ofthe assumptions market participants would use in valuing financial assets andfinancial liabilities and are

 

17

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developedbased on the best information available in the circumstances.  The degree of management judgment involved indetermining fair values is inversely related to the availability of marketobservable information.

 

Financial assets and financial liabilities recorded on the CondensedStatements of Financial Position at fair value are categorized based on thereliability of inputs to the valuation techniques as follows:

 

*Level 1:***    **Financial assets and financial liabilities whose values are based onunadjusted quoted prices for identical assets or liabilities in an activemarket that we can access.

 

*Level 2:*****Financial assets and financial liabilitieswhose values are based on the following:

 

a)            Quoted prices for similar assets orliabilities in active markets;

b)           Quoted prices for identical or similar assets or liabilities innon-active markets; or

c)            Valuation models whose inputs are observable,directly or indirectly, for substantially the full term of the asset or liability

 

*Level 3:*****  Financial assets and financial liabilities whose values are based onprices or valuation techniques that require inputs that are both unobservableand significant to the overall fair value measurement. These inputs may reflectour estimates of the assumptions that market participants would use in valuingthe financial assets and financial liabilities.

 

We utilize a combinationof third party valuation service providers, brokers, and internal valuationmodels to determine fair value.  We gainassurance on the overall reasonableness and consistent application of inputassumptions, valuation methodologies, and compliance with accounting standardsfor fair value determination through the execution of various processes andcontrols designed to ensure that our financial assets and financial liabilitiesare appropriately valued and our ongoing monitoring of the fair values receivedor derived internally.

 

We are responsible for the determination of the value of the financialassets and financial liabilities carried at fair value and the supportingassumptions and methodologies.  Incertain situations, we employ independent third-party valuation service providersto gather, analyze, and interpret market information and derive fair valuesbased upon relevant assumptions and methodologies for individualinstruments.  In situations where ourvaluation service providers are unable to obtain sufficient market observableinformation upon which to estimate the fair value for a particular security,fair value is determined either by requesting brokers who are knowledgeableabout these securities to provide a quote or by employing internal valuationmodels that are widely accepted in the financial services industry.  Changing market conditions in the secondquarter of 2008 were incorporated into valuation assumptions and reflected inthe fair values, which were validated by calibration and other analyticaltechniques to available market observable data.

 

Valuation service providers typically obtain data about markettransactions and other key valuation model inputs from multiple sources and,through the use of proprietary algorithms, produce valuation information in theform of a single fair value for individual securities for which a fair valuehas been requested under the terms of our agreements.    The inputs used by the valuation serviceproviders include, but are not limited to, market prices from recentlycompleted transactions and transactions of comparable securities, interest rateyield curves, credit spreads, currency rates, and other market-observableinformation, as applicable. Valuation service providers also use proprietarydiscounted cash flow models that are widely accepted in the financial servicesindustry and similar to those used by other market participants to value thesame financial instruments.  Thevaluation models take into account, among other things, market observableinformation as of the measurement date, as described above, as well as thespecific attributes of the security being valued including its term, interestrate, credit rating, industry sector, and where applicable, collateral qualityand other issue or issuer specific information. Executing valuation models effectively requires seasoned professionaljudgment and experience.  In cases wheremarket transactions or other market observable data is limited, the extent towhich judgment is applied varies inversely with the availability of marketobservable information.

 

For certain of our financial assets carried at fair value, where ourvaluation service providers cannot provide fair value determinations, we obtainnon-binding price quotes from brokers familiar with the security who, similarto our valuation service providers, may consider transactions or activity insimilar securities, as applicable, among other information.  The brokers providing price quotes aregenerally from the brokerage divisions of leading financial institutions with marketmaking, underwriting and distribution expertise.

 

18

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The fair value offinancial assets and financial liabilities, including certain derivativesembedded in certain contractholder liabilities, where our valuationservice providers or brokers do not provide fair value determinations, is determined using valuation methodsand models widely accepted in the financial services industry.  Internally developed valuation models, whichinclude inputs that may not be market observable and as such involve somedegree of judgment, are considered appropriate for each class of security towhich they are applied.

 

Our internal pricing methods are primarily based onmodels using discounted cash flow methodologies that determine a single bestestimate of fair value for individual financial instruments.  In addition, our models use stochasticallydetermined cash flows for certain derivatives embedded in certaincontractholder liabilities, which are difficult to independently observe andverify.  Market specific inputs used inthese fair values, which we believe are representative of inputs other marketparticipants would use to determine fair values of the same instruments includeanticipated market return estimates for derivative embedded in certaincontractholder liabilities.  As a resultof the significance of non-market observable inputs, including stochastic cashflow estimates as described above, judgment is required in developing thesefair values.  The fair value of thesefinancial assets and financial liabilities may differ from the amount receivedto sell an asset or the amount paid to transfer a liability in an orderlytransaction between market participants at the measurement date.  Moreover, the use of different valuationassumptions may have a material effect on the financial assets’ and financialliabilities’ fair values.

 

Fair value of our investments comprise an aggregationof numerous, single best estimates for each security in the CondensedStatements of Financial Position. Because of this detailed approach there is no single set of assumptionsthat determine our fair value estimates. Moreover, management does not compile a range of estimates for itemsreported at fair value because we do not believe that a range would providemeaningful information.  Level 1 andLevel 2 measurements represent valuations where all significant inputs aremarket observable.  Level 3 measurementshave one or more significant inputs that are not market observable and as aresult these fair value determinations have greater potential variability as itrelates to their significant inputs.  TheLevel 3 principal component is asset-back securities (“ABS”).  In general, the greater the reliance onsignificant inputs that are not market observable, the greater potentialvariability of the fair value determinations. For broker quoted securities’fair value determinations, we believe the brokers providing the quotes mayconsider market observable transactions or activity in similar securities, asapplicable, and other information as calibration points.  We believe our most significant exposure tochanges in fair value is due to market risk. Our exposure to changes in market conditions is discussed fully in theMarket Risk section of the MD&A included in our 2007 Form 10-K.

 

We employ specific control processes to determine thereasonableness of the fair values of our financial assets and financialliabilities.  Our processes are designedto ensure that the values received or internally estimated are accuratelyrecorded and that the data inputs and the valuation techniques utilized areappropriate, consistently applied, and that the assumptions are reasonable andconsistent with the objective of determining fair value.  For example, on a continuing basis, we assessthe reasonableness of individual security values received from valuationservice providers that exceed certain thresholds as compared to previous valuesreceived from those valuation service providers.  In addition, we may validate thereasonableness of fair values by comparing information obtained from ourvaluation service providers to other third party valuation sources for selectedfinancial assets. When fair value determinations are expected to be morevariable, we validate them through reviews by members of management who haverelevant expertise and who are independent of those charged with executinginvesting transactions.

 

19

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The following tableidentifies investments as of June 30, 2008 by source of valuedetermination:

 
| ** **                                                    | ** ** | **Investments**     | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|
| **($ in thousands)**                                | ** ** | **Carrying  Value** | ** ** | **Percent  to total** | ** ** |
| Fair value based on internal sources                          |       | $                   | 1,308      |   | 0.4 | % |
| Fair value based on external sources                          |       | 303,985             |       | 99.6 |   |
| Total fixed income, equity and certain  short-term securities |       | 305,293             |       | 100.0 |   |
| Short-term investments, valued at cost                        |       | 50                  |       | — |   |
| Total                                                         |       | $                   | 305,343    |   | 100.0 | % |

 

For more detailed information on our accountingpolicy for the fair value of financial assets and financial liabilities andinformation on the financial assets and financial liabilities included in theLevels promulgated by SFAS No. 157, see Note 2 to the Condensed FinancialStatements.

 

The following table provides additional detailsregarding Level 1, 2 and 3 financial assets and financial liabilities by theirclassification in the Condensed Statement of Financial Position at June 30,2008.

 
| ** **                                | ** ** | **Quoted Prices  in Active  Markets for  Identical  Assets** | ** **    | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Other  Valuations  and** | ** ** | **Balance as of** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------|---------------|--------------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| **($ in thousands)**            | ** ** | **(Level 1)**                                                          | ** **    | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** | **Netting**                | ** ** | **June 30, 2008** | ** ** |
| **Financial assets**                 | ** ** | ** **                                                                  | ** **    | ** **                                 | ** ** | ** **                            | ** ** | ** **                 | ** ** | ** **                  | ** ** |
| Fixed income securities:                  |       |                                                                        |          |                                       |       |                                  |       |                       |       |                        |       |
| Corporate                                 |       |                                                                        |          | $                                          | 70,128     |                                  | $          | 1,308                      |       |                        |       | $ | 71,436 |   |
| Corporate privately placed securities     |       |                                                                        |          | 6,530                                      |       |                                  |       |                       |       | 6,530                       |       |
| Municipal                                 |       |                                                                        |          | 525                                        |       |                                  |       |                       |       | 525                         |       |
| U.S. government and agencies              |       | $                                                                           | 46,048        |                                       | 69,374     |                                  |       |                       |       |                        | 115,422    |   |
| ABS                                       |       |                                                                        |          |                                       |       | 6,179                                 |       |                       |       | 6,179                       |       |
| CMBS                                      |       |                                                                        |          | 22,119                                     |       |                                  |       |                       |       | 22,119                      |       |
| MBS                                       |       |                                                                        |          | 46,542                                     |       |                                  |       |                       |       | 46,542                      |       |
| ABS – Credit card and auto loans     |       |                                                                        |          | 1,001                                      |       |                                  |       |                       |       | 1,001                       |       |
| Total fixed income securities             |       | 46,048                                                                      |          | 216,219                                    |       | 7,487                                 |       |                       |       | 269,754                     |       |
| U.S. equities                             |       | 5,140                                                                       |          |                                       |       |                                  |       |                       |       | 5,140                       |       |
| Short-term investments:                   |       |                                                                        |          |                                       |       |                                  |       |                       |       |                        |       |
| Money market funds                        |       | 30,399                                                                      |          |                                       |       |                                  |       |                       |       | 30,399                      |       |
| Total short–term investments         |       | 30,399                                                                      |          |                                       |       |                                  |       |                       |       | 30,399                      |       |
| **Total  recurring basis assets**         |       | **81,587**                                                                  | ** **    | **216,219**                                | ** ** | **7,487**                             | ** ** | ** **                 | ** ** | **305,293**                 | ** ** |
| Valued at cost                            |       |                                                                        |          |                                       |       |                                  |       | $                          | 50         |                        | 50         |   |
| **Total  investments**                    |       | **81,587**                                                                  | ** **    | **216,219**                                | ** ** | **7,487**                             | ** ** | **50**                     | ** ** | **305,343**                 | ** ** |
| Separate account assets                   |       | 2,659,733                                                                   |          |                                       |       |                                  |       |                       |       | 2,659,733                   |       |
| **Total  financial assets**               | ** ** | **$**                                                                       | **2,741,320** | ** **                                 | **$**      | **216,219**                           | ** ** | **$**                      | **7,487**  | ** **                  | **$**      | **50** | ** ** | **$** | **2,965,076** | ** ** |
| % of total financial assets               |       | 92.4                                                                        | %             | 7.3                                        | %          | 0.3                                   | %          | —                     | %          | 100.0                       | %          |
|                                      |       |                                                                        |          |                                       |       |                                  |       |                       |       |                        |       |
| **Financial  liabilities**                |       |                                                                        |          |                                       |       |                                  |       |                       |       |                        |       |
| Contractholder funds:                     |       |                                                                        |          |                                       |       |                                  |       |                       |       |                        |       |
| Derivatives embedded in annuity contracts |       |                                                                        |          | $                                          | (44,578    | )                                     | $          | (2,301                     | )          |                        |       | $ | (46,879 | ) |
| **Total  financial liabilities**          |       |                                                                        |          | $                                          | (44,578    | )                                     | $          | (2,301                     | )          |                        |       | $ | (46,879 | ) |
| % of total financial liabilities          |       |                                                                        |          | 95.1                                       | %          | 4.9                                   | %          |                       |       | 100.0                       | %          |

 

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The following table providesa summary of changes in fair value during the three-month period ended June 30,2008 of Level 3 financial assets and financial liabilities held at fair valueon a recurring basis at June 30, 2008.

 
| ** **                                        | ** ** | ** **                                            | ** ** | **Total realized and unrealized  Gains (Losses) included in:** | ** ** | ** **                                              | ** ** | ** **                                                        | ** ** | ** **                                                          | ** ** | **Total  Gains (Losses)  included in**     | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in thousands)**                    | ** ** | **Balance as of  March 31, 2008** | ** ** | **Net Income  (1)**                                                                     | ** ** | **OCI on  Statement of  Financial  Position** | ** ** | **Purchases,  Sales, Issuances  and Settlements,  net** | ** ** | **Net  Transfers In  and/or (Out)  of Level 3** | ** ** | **Balance as of  June 30, 2008** | ** ** | **Net Income for  Instruments  Still Held at  June 30, 2008** | ** ** |
| **Financial assets**                              |       |                                                  |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                 |       |   |   |
| Fixed  income securities:                         |       |                                                  |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                 |       |   |   |
| ABS                                               |       | $                                                     | 10,659     |                                                                                         | $          | 185                                                     |       | $                                                                 | (436       | )                                                                   | $          | (4,229                                               | )          | $ | — |   | $ | 6,179 |   | $ | (3 | ) |
| Corporate                                         |       | 1,308                                                 |       | —                                                                                       |       | —                                                  |       | —                                                            |       | —                                                              |       | 1,308                                                |       | — |   |
| **Total recurring level 3 financial assets**      |       | $                                                     | 11,967     |                                                                                         | $          | 185                                                     |       | $                                                                 | (436       | )                                                                   | $          | (4,229                                               | )          | $ | — |   | $ | 7,487 |   | $ | (3 | ) |
|                                              |       |                                                  |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                 |       |   |   |
| **Financial liabilities**                         |       |                                                  |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                 |       |   |   |
| Contractholder  funds:                            |       |                                                  |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                 |       |   |   |
| Derivatives  embedded in annuity contracts        |       | $                                                     | (1,235     | )                                                                                            | $          | (1,107                                                  | )          | $                                                                 | —     |                                                                | $          | 41                                                   |       | $ | — |   | $ | (2,301 | ) | $ | (1,107 | ) |
| **Total recurring level 3 financial liabilities** |       | $                                                     | (1,235     | )                                                                                            | $          | (1,107                                                  | )          | $                                                                 | —     |                                                                | $          | 41                                                   |       | $ | — |   | $ | (2,301 | ) | $ | (1,107 | ) |

 

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(1)         Theamounts above attributable to fixed income securities total $185 thousand andare reported in the Condensed Statements of Operations as follows:  $188 thousand in realized capital gains andlosses, and $(3) thousand in net investment income.  The amounts above attributable to derivativesembedded in annuity contracts are reported as a component of contract benefitsand are ceded in accordance with the Company’s reinsurance agreements.

 

The following table providesa summary of changes in fair value during the six-month period ended June 30,2008 of Level 3 financial assets and financial liabilities held at fair valueon a recurring basis at June 30, 2008.

 
| ** **                                        | ** ** | ** **                                         | ** ** | **Total realized and unrealized  Gains (Losses) included in:** | ** ** | ** **                                              | ** ** | ** **                                                        | ** ** | ** **                                                                   | ** ** | **Total  Gains (Losses)  included in**     | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in thousands)**                    | ** ** | **Balance as of  January 1,  2008** | ** ** | **Net Income (1)**                                                                 | ** ** | **OCI on  Statement of  Financial  Position** | ** ** | **Purchases,  Sales, Issuances  and Settlements,  net** | ** ** | **Net  Transfers In  and/or (Out)  of Level 3 (2)** | ** ** | **Balance as of  June 30, 2008** | ** ** | **Net Income for  Instruments  Still Held at  June 30, 2008** | ** ** |
| **Financial assets**                              |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                         |       |                                                 |       |   |   |
| Fixed  income securities:                         |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                         |       |                                                 |       |   |   |
| ABS                                               |       | $                                                  | 10,484     |                                                                                         | $          | 182                                                     |       | $                                                                 | (258       | )                                                                            | $          | (4,229                                               | )          | $ | — |   | $ | 6,179 |   | $ | (3 | ) |
| Corporate                                         |       | 1,500                                              |       | —                                                                                       |       | —                                                  |       | (192                                                              | )          | —                                                                       |       | 1,308                                                |       | — |   |
| **Total recurring level 3 financial assets**      |       | $                                                  | 11,984     |                                                                                         | $          | 182                                                     |       | $                                                                 | (258       | )                                                                            | $          | (4,421                                               | )          | $ | — |   | $ | 7,487 |   | $ | (3 | ) |
|                                              |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                         |       |                                                 |       |   |   |
| **Financial liabilities**                         |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                         |       |                                                 |       |   |   |
| Contractholder  funds:                            |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                         |       |                                                 |       |   |   |
| Derivatives  embedded in annuity contracts        |       | $                                                  | (256       | )                                                                                            | $          | (2,086                                                  | )          | $                                                                 | —     |                                                                         | $          | 41                                                   |       | $ | — |   | $ | (2,301 | ) | $ | (2,086 | ) |
| **Total recurring level 3 financial liabilities** |       | $                                                  | (256       | )                                                                                            | $          | (2,086                                                  | )          | $                                                                 | —     |                                                                         | $          | 41                                                   |       | $ | — |   | $ | (2,301 | ) | $ | (2,086 | ) |

 

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(1)         Theamounts above attributable to fixed income securities total $182 thousand andare reported in the Condensed Statements of Operations as follows:  $185 thousand in realized capital gains andlosses, and $(3) thousand in net investment income. The amounts aboveattributable to derivatives embedded in annuity contracts are reported as acomponent of contract benefits and are ceded in accordance with the Company’sreinsurance agreements.

 

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The following table presentsfair value as a percent of amortized cost for Level 3 investments at June 30,2008.

 
| **($ in thousands)** | ** ** | **Fair value** | ** ** | **Fair value as a % of  Amortized cost** | ** ** |
|--------------------------------|------------|---------------------|------------|------------------------------------------------------------------------|------------|
|                           |       |                |       |                                                                   |       |
| ABS                            |       | $                   | 6,179      |                                                                   | 103.3      | % |
| Corporate                      |       | 1,308               |       | 100.0                                                                  |       |
| **Total  Level 3 investments** |       | $                   | 7,487      |                                                                   | 102.7      |   |

 

## **CAPITALRESOURCES AND LIQUIDITY**

 

**CapitalResources**consist of shareholder’s equity.  The following table summarizes our capitalresources:

 
| **($ in thousands)**                                | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Common stock, additional capital paid-in  and retained income |       | $                       | 290,199    |                        | $          | 285,809 |   |
| Accumulated other comprehensive income                        |       | 2,459                   |       | 4,129                       |       |
| Total shareholder’s equity                               |       | $                       | 292,658    |                        | $          | 289,938 |   |

 

*Shareholder’s equity*increased in the first six months of 2008 due to net income partially offset bya decline in unrealized net capital gains on fixed income securities.

 

**FinancialRatings and Strength** We share the insurance financialstrength ratings of our parent, ALIC, as our business is reinsured toALIC.  ALIC’s ratings are influenced bymany factors including operating and financial performance, asset quality,liquidity, asset/liability management, overall portfolio mix, financialleverage (i.e., debt), exposure to risks, the current level of operatingleverage, AIC’s ratings and other factors. There have been no changes to ALIC’s insurance financial strengthratings since December 31, 2007. S&P affirmed the ratings for ALIC in July 2008.  Moody’s placed certain of ALIC’s ratingsunder review.

 

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## **Item 4.    Controls and Procedures**

* *

*Evaluation of Disclosure Controls andProcedures. *Wemaintain disclosure controls and procedures as defined in Rule 13a-15(e) and15(d)-15(e) under the Securities Exchange Act of 1934.  Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis report.  Based upon this evaluation,the principal executive officer and the principal financial officer concludedthat our disclosure controls and procedures are effective in providingreasonable assurance that material information required to be disclosed in ourreports filed with or submitted to the Securities and Exchange Commission underthe Securities Exchange Act is made known to management, including theprincipal executive officer and the principal financial officer, as appropriateto allow timely decisions regarding required disclosure.

* *

*Changes in Internal Control over FinancialReporting. *Duringthe fiscal quarter ended June 30, 2008, there have been no changes in ourinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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## **PART II.  OTHER INFORMATION**

##  

## **Item 1.  Legal Proceedings**

 

Information required for this Part II, Item 1, is incorporated byreference to the discussion under the heading “Regulation” and under theheading “Legal and regulatory proceedings and inquires” in Note 4 of theCondensed Financial Statements in Part I, Item 1, of this Form 10-Q.

 

**Item 1A.Risk Factors**

 

This document contains “forward-looking statements”that anticipate results based on our estimates, assumptions and plans that aresubject to uncertainty.  These statementsare made subject to the safe-harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. We assume no obligation to update anyforward-looking statements as a result of new information or future events ordevelopments.

 

These forward-looking statements do not relatestrictly to historical or current facts and may be identified by their use ofwords like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,”“intends,” “believes,” “likely,” “targets” and other words with similarmeanings.  These statements may address,among other things, our strategy for growth, product development, regulatoryapprovals, market position, expenses, financial results, litigation andreserves.  We believe that thesestatements are based on reasonable estimates, assumptions and plans. However, ifthe estimates, assumptions or plans underlying the forward-looking statementsprove inaccurate or if other risks or uncertainties arise, actual results coulddiffer materially from those communicated in these forward-looking statements.  Risk factors which could cause actual resultsto differ materially from those suggested by such forward-looking statementsinclude but are not limited to those discussed or identified in this document,in our public filings with the Securities and Exchange Commission, and thoseincorporated by reference in Part I, Item 1A of Lincoln Benefit LifeCompany’s Annual Report on Form 10-K for 2007.

 

## **Item6.  Exhibits**

 

(a) Exhibits

 

An Exhibit Index has been filed as partof this report on page E-1.

 

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## **SIGNATURE**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                 | Lincoln Benefit Life Company                                          |
|----------------------|-----------------------------------------------------------------------|
|                 |                                                                  |
|                 | (Registrant)                                                          |
|                 |                                                                  |
| August 8,  2008 |                                                                  |
|                 | By /s/ Samuel H. Pilch                                                |
|                 | Samuel H. Pilch                                                       |
|                 | (Controller)                                                          |
|                 | (chief accounting officer  and duly authorized officer of Registrant) |

 

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| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
|                 |       |            |
| 31.1                 |       |            | Rule 15d-14(a) Certification of  Principal Executive Officer |
|                 |       |            |   |
| 31.2                 |       |            | Rule 15d-14(a) Certification of  Principal Financial Officer |
|                 |       |            |   |
| 32                   |       |            | Section 1350 Certifications |

 

E-1

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