** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

----

**FORM 10-Q**

** **

The Registrant meets the conditions set forthin General Instruction H (1)(a) and (b) of Form 10-Q and istherefore filing this Form with the reduced disclosure format.

 

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

**OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

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

 

**OR**

 

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 

##### **Commission file number: 333-111553**

##### ** **

**LINCOLNBENEFIT LIFE COMPANY**

(Exact name of registrant as specified in itscharter)

 

| **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 area code: 800-525-9287**

 

**Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.**

** **

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

 

**Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definition of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.**

 

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

 

**Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).**

**Yes**o    Nox

** **

**As of November 11, 2008, the Registrant had 25,000 common shares,$100 par value, outstanding, all of which are held by Allstate Life InsuranceCompany.**

 

 

##### ** **

----

 

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

**INDEX TO QUARTERLY REPORT ON FORM 10-Q**

##### **September 30, 2008**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                         | ** ** |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                                              |       |
| Item 1.           | Financial Statements                                                                                                              |       |
|              |                                                                                                                              |       |
|              | Condensed Statements of Operations for the Three-Month and Nine-Month  Periods Ended September 30, 2008 and 2007 (unaudited) | 1          |
|              |                                                                                                                              |       |
|              | Condensed Statements of Financial Position as of September 30,  2008 (unaudited) and December 31, 2007                  | 2          |
|              |                                                                                                                              |       |
|              | Condensed Statements of Cash Flows for the Nine-Month Periods Ended  September 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                                       | 15         |
|              |                                                                                                                              |       |
| Item 4.           | Controls and Procedures                                                                                                           | 25         |
|              |                                                                                                                              |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                             |       |
|              |                                                                                                                              |       |
| Item 1.           | Legal Proceedings                                                                                                                 | 26         |
|              |                                                                                                                              |       |
| Item 1A.          | Risk Factors                                                                                                                      | 26         |
|              |                                                                                                                              |       |
| Item 5.           | Other Information                                                                                                                 | 26         |
|              |                                                                                                                              |       |
| Item 6.           | Exhibits                                                                                                                          | 27         |

 

----

 

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

####  

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

####  

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

####  

**CONDENSEDSTATEMENTS OF OPERATIONS**

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in thousands)**                        | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                 | ** ** |
| **Revenues**                                          |       |                             |       |                            |       |   |   |   |   |
| Net investment income                                 |       | $                                | 3,498      |                            | $          | 3,594 |   | $ | 10,565 |   | $ | 10,727 |   |
| Realized capital gains and losses                     |       | 1,524                            |       | —                          |       | 1,179 |   | (405 | ) |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| **Income from operations before income tax  expense** |       | 5,022                            |       | 3,594                           |       | 11,744 |   | 10,322 |   |
| Income tax expense                                    |       | 1,752                            |       | 1,256                           |       | 4,084 |   | 3,606 |   |
| **Net income**                                        |       | $                                | 3,270      |                            | $          | 2,338 |   | $ | 7,660 |   | $ | 6,716 |   |

 

See notes to condensed financial statements.

 

1

----

 

**LINCOLN BENEFITLIFE COMPANY**

 

**CONDENSEDSTATEMENTS OF FINANCIAL POSITION**

 
| ** **                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in thousands, except par value data)**                               | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                              | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
|                                                                                                    |       |                   |       |                  |       |
| **Assets**                                                                                              |       |                   |       |                  |       |
| Investments                                                                                             |       |                   |       |                  |       |
| Fixed income securities, at fair value  (amortized cost $267,632 and $266,792)                          |       | $                      | 265,150    |                  | $          | 273,144 |   |
| Equity securities, at fair value (cost  $4,740)                                                         |       | 4,853                  |       | —                |       |
| Short-term                                                                                              |       | 34,518                 |       | 28,057                |       |
| Total investments                                                                                       |       | 304,521                |       | 301,201               |       |
|                                                                                                    |       |                   |       |                  |       |
| Cash                                                                                                    |       | 12,945                 |       | 18,612                |       |
| Reinsurance recoverable from Allstate Life  Insurance Company                                           |       | 18,825,813             |       | 18,777,851            |       |
| Reinsurance recoverable from non-affiliates                                                             |       | 1,573,976              |       | 1,422,931             |       |
| Deferred income taxes                                                                                   |       | 776                    |       | —                |       |
| Other assets                                                                                            |       | 102,357                |       | 112,285               |       |
| Separate Accounts                                                                                       |       | 2,296,302              |       | 3,067,127             |       |
| **Total assets**                                                                                        |       | $                      | 23,116,690 |                  | $          | 23,700,007 |   |
|                                                                                                    |       |                   |       |                  |       |
| **Liabilities**                                                                                         |       |                   |       |                  |       |
| Contractholder funds                                                                                    |       | $                      | 17,840,821 |                  | $          | 17,820,885 |   |
| Reserve for life-contingent contract  benefits                                                          |       | 2,517,680              |       | 2,348,116             |       |
| Unearned premiums                                                                                       |       | 23,771                 |       | 25,819                |       |
| Deferred income taxes                                                                                   |       | —                 |       | 2,479                 |       |
| Payable to affiliates, net                                                                              |       | 40,395                 |       | 21,912                |       |
| Current income taxes payable                                                                            |       | 4,249                  |       | 4,815                 |       |
| Other liabilities and accrued expenses                                                                  |       | 101,543                |       | 118,916               |       |
| Separate Accounts                                                                                       |       | 2,296,302              |       | 3,067,127             |       |
| **Total liabilities**                                                                                   |       | 22,824,761             |       | 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                                                                                         |       | 110,969                |       | 103,309               |       |
| Accumulated other comprehensive (loss)  income:                                                         |       |                   |       |                  |       |
| Unrealized net capital gains and losses                                                                 |       | (1,540                 | )          | 4,129                 |       |
| **Total accumulated other comprehensive  (loss) income**                                                |       | (1,540                 | )          | 4,129                 |       |
| **Total shareholder’s equity**                                                                     |       | 291,929                |       | 289,938               |       |
| **Total liabilities and shareholder’s equity**                                                     |       | $                      | 23,116,690 |                  | $          | 23,700,007 |   |

 

See notes to condensed financial statements.

 

2

----

 

#### **LINCOLNBENEFIT LIFE COMPANY**

####  

##### **CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **($ in thousands)**                                                                           | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                                                                               | ** ** | **(Unaudited)**                                     | ** ** |
|                                                                                                     |       |                                                |       |   |   |
| **Cash flows from operating activities**                                                                 |       |                                                |       |   |   |
| Net income                                                                                               |       | $                                                   | 7,660      |   | $ | 6,716 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                       |       |                                                |       |   |   |
| Amortization and other non-cash items                                                                    |       | 82                                                  |       | (13 | ) |
| Realized capital gains and losses                                                                        |       | (1,179                                              | )          | 405 |   |
| Changes in:                                                                                              |       |                                                |       |   |   |
| Reserve for life-contingent contract  benefits and contractholder funds, net of reinsurance recoverables |       | (9,507                                              | )          | (4,488 | ) |
| Income taxes                                                                                             |       | (769                                                | )          | (801 | ) |
| Receivable/payable to affiliates, net                                                                    |       | 18,483                                              |       | (15,287 | ) |
| Other operating assets and liabilities                                                                   |       | 72                                                  |       | 8,821 |   |
| Net cash provided by (used in) operating  activities                                                     |       | 14,842                                              |       | (4,647 | ) |
|                                                                                                     |       |                                                |       |   |   |
| **Cash flows from investing activities**                                                                 |       |                                                |       |   |   |
|                                                                                                     |       |                                                |       |   |   |
| Proceeds from sales of fixed income  securities                                                          |       | 17,671                                              |       | 5,176 |   |
| Proceeds from sales of equity securities                                                                 |       | 10,420                                              |       | — |   |
| Collections on fixed income securities                                                                   |       | 7,375                                               |       | 12,505 |   |
| Purchases of fixed income securities                                                                     |       | (33,507                                             | )          | (17,982 | ) |
| Purchases of equity securities                                                                           |       | (6,227                                              | )          | — |   |
| Change in short-term investments                                                                         |       | (16,241                                             | )          | (5,164 | ) |
| Net cash used in investing activities                                                                    |       | (20,509                                             | )          | (5,465 | ) |
|                                                                                                     |       |                                                |       |   |   |
| **Net decrease in cash**                                                                                 |       | (5,667                                              | )          | (10,112 | ) |
| **Cash at beginning of period**                                                                          |       | 18,612                                              |       | 23,352 |   |
| **Cash at end of period**                                                                                |       | $                                                   | 12,945     |   | $ | 13,240 |   |

 

See notes to condensed financial statements.

 

3

----

 

**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO 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 September 30, 2008, and for thethree-month and nine-month periods ended September 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 by InsuranceEnterprises for Deferred Acquisition Costs in Connection with Modifications orExchanges 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 SOP05-1 on January 1, 2007 for internal replacements occurring in fiscalyears beginning 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”) InterpretationNo. 48, Accounting for Uncertainty in Income Taxes – an interpretation ofFASB Statement No. 109 and FASB Staff Position No. FIN 48-1,Definition of Settlement in FASB Interpretation No. 48 (collectively “FIN48”)*

 

TheFASB issued the interpretation in July 2006 and the related staff positionin May 2007.  FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with SFAS No. 109, “Accounting for Income Taxes”.  FIN 48 requires an entity to recognize thetax benefit of uncertain tax positions only when it is more likely than not,based on the position’s technical merits, that the position would be sustainedupon examination by the respective taxing authorities.  The tax benefit is measured as the largestbenefit that is more than fifty-percent likely of being realized upon finalsettlement 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.

 

4

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**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

*SFAS No. 157,Fair Value Measurements (“SFAS No. 157”)*

 

In September 2006,the FASB 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 FAS 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 disclosed at fair value in the financial statements on arecurring basis.  The Company adopted 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 FAS157-2, 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.  In October 2008,the FASB issued FASB Staff Position No. FAS 157-3, “Determining the FairValue of a Financial Asset When the Market for That Asset Is Not Active” (“FSPFAS 157-3”), which clarifies the application of SFAS 157 in a market that isnot active.  The Company adopted theprovisions of FSP FAS 157-3 as of September 30, 2008.  The adoption of SFAS No. 157 and FSP FAS157-3 did not have a material effect on the Company’s results of operations orfinancial position (see Note 2).

 

*SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities –Including an amendment of FASB Statement No. 115 (“SFAS No. 159”)*

 

In February 2007,the FASB issued SFAS No. 159 which provides reporting entities, on anongoing basis, an option to report selected financial assets, includinginvestment securities, and financial liabilities, including most insurancecontracts, at fair value through earnings. SFAS No. 159 establishes presentation and disclosure requirementsdesigned to facilitate comparisons between companies that choose differentmeasurement alternatives for similar types of financial assets andliabilities.  The standard also requiresadditional information to aid financial statement users’ understanding of theimpacts of a reporting entity’s decision to use fair value on its earnings andrequires entities to display, on the face of the statement of financialposition, the fair value of those assets and liabilities for which thereporting entity has chosen to measure at fair value.  SFAS No. 159 was effective as of thebeginning 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,Disclosures about Derivative Instruments and Hedging Activities — an amendmentof FASB Statement No. 133 (“SFAS No. 161”)*

 

In March 2008, theFASB issued SFAS No. 161, which amends and expands the disclosurerequirements for derivatives currently accounted for in accordance with SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”.  The newdisclosures are designed to enhance the understanding of how and why an entityuses derivative instruments and how derivative instruments affect an entity’sfinancial position, results of operations, and cash flows.  The standardrequires, on a quarterly basis, quantitative disclosures about the potentialcash outflows associated with the triggering of credit-related contingentfeatures, if any; tabular disclosures about the classification and fair valueamounts of derivative instruments reported in the statement of financialposition; disclosure of the location and amount of gains and losses onderivative instruments reported in the statement of operations; and qualitativeinformation about how and why an entity uses derivative instruments and howderivative instruments and related hedged items affect the entity’s financialstatements.  SFAS No. 161 is effective for fiscal periods beginningafter November 15, 2008, and is to be applied on a prospective basisonly.  SFAS No. 161 affects disclosures and therefore will not impactthe Company’s results of operations or financial position.

 

5

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**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

**2.  Fair Value of Financial Assets and FinancialLiabilities**

 

The measurement basis fora significant amount of the Company’s financial assets is fair value. Financialinstruments measured at fair value on a recurring basis include:

 

*FinancialAssets*   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.

 

*FinancialLiabilities*   Derivatives embedded in certaincontractholder liabilities.

 

TheCompany adopted the provisions of SFAS No. 157 as of January 1, 2008for its financial assets and financial liabilities that are measured at fairvalue. SFAS No. 157:

 

·                 Defines fair value as theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants at the measurement date,and establishes a framework for measuring fair value;

·                 Establishes a three-levelhierarchy for fair value measurements based upon the transparency of inputs tothe valuation as of the measurement date;

·                 Expandsdisclosures about financial instruments measured at fair value.

 

In determining fair value, the Company principallyuses the market approach which generally utilizes market transaction data forthe same or similar instruments.  To alesser extent, the Company uses the income approach which involves determiningfair values from discounted cash flow methodologies.  SFAS No. 157 establishes a hierarchy forinputs used in determining fair value that maximizes the use of observableinputs and minimizes the use of unobservable inputs by requiring thatobservable inputs be used when available.

 

Observable inputs arethose used by market participants in valuing financial instruments that aredeveloped based on market data obtained from independent sources.  In the absence of sufficient observableinputs, unobservable inputs reflect the Company’s estimates of the assumptionsmarket participants would use in valuing financial assets and financialliabilities and are developed based on the best information available in thecircumstances.  The Company uses pricesand inputs that are current as of the measurement date, including duringperiods of market disruption.  In periodsof market disruption, the ability to observe prices and inputs may be reducedfor many instruments.  This conditioncould cause an instrument to be reclassified from Level 1 to Level 2, or fromLevel 2 to Level 3.

 

Financial assets andfinancial liabilities recorded on the Condensed Statements of FinancialPosition at fair value as of September 30, 2008 are categorized in thefair value hierarchy based on the reliability of inputs to the valuationtechniques as follows:

 

*Level 1:**    *Financial assets and financial liabilities whosevalues 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 liabilities whosevalues 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 liabilities whosevalues are based on prices or valuation techniques that require inputs that areboth unobservable and significant to the overall fair value measurement.  These inputs reflect the Company’s estimatesof the assumptions that market participants would use in valuing the financialassets and financial liabilities.

 

The availability ofobservable inputs varies by instrument. In situations where fair value is basedon internally developed pricing models or inputs that are unobservable in themarket, the determination of fair value requires more judgment.  The degree of judgment exercised by theCompany in determining fair value is typically greatest for instrumentscategorized in Level 3.  In manyinstances, valuation inputs used to measure fair value fall intodifferent levels of the fair value hierarchy.  The category level in the fair valuehierarchy is determined based on the lowest level input that is significant tothe fair value measurement in its entirety.

 

6

----

 

**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

**Summary of Significant ValuationTechniques for Financial Assets and Financial Liabilities on a Recurring Basis**

 

**Level 1Measurements**

 

Fixed incomesecurities:  U.S. treasuries are in Level 1 and valuationis based on unadjusted quoted prices for identical assets in active marketsthat the Company can access.

 

Equity securities: Comprise actively traded mutual funds that have quoted net asset valuesfor identical assets that the Company can access.

 

Short-term: Comprise actively traded money market funds that have daily quoted netasset values for identical assets that the Company can access.

 

Separate accountassets:  Comprise actively traded mutual funds thathave quoted net asset values for identical assets that the Company canaccess.  Net asset values for theactively traded mutual funds in which the separate account assets are investedare obtained daily from the fund managers.

 

**Level 2Measurements**

 

Fixed incomesecurities:

 

*Corporate,including privately placed*:  Valued basedon inputs including quoted prices for identical or similar assets in marketsthat are not active.  Also includesprivately placed securities totaling $6.6 million which have market-observableexternal ratings 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 inputsincluding quoted prices for identical or similar assets in markets that are notactive.

 

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

 

*MBS;ABS-credit card, auto and student loans:*  Valued basedon inputs including quoted prices for identical or similar assets in marketsthat are not active.

 

Contractholderfunds:  Derivatives embedded in certain annuitycontracts are valued based on internal models that rely on inputs such asinterest rate yield curves and equity index volatility assumptions that aremarket observable for substantially the full term of the contract.  The valuation techniques are widely acceptedin the financial services industry and do not include significant judgment.

 

**Level 3Measurements**

 

Fixed incomesecurities

 

*Corporate*: Valued based on non-binding broker quotes and are categorized as Level3.

 

*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.

 

Contractholderfunds:  Derivatives embedded in annuity contracts arevalued internally using models widely accepted in the financial servicesindustry that determine a single bestestimate of fair value for the embedded derivative within a block ofcontractholder liabilities.  The modelsuse stochastically 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

----

 

**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

Thefollowing table summarizes the Company’s financial assets and financialliabilities measured at fair value on a recurring basis as of September 30,2008:

 
| ** **                                | ** ** | **Quoted  prices in  active  markets for  identical  assets** | ** **    | **Significant  other  observable  inputs** | ** ** | **Significant  unobservable**

**inputs** | ** ** | **Other  valuations  and** | ** ** | **Balance as of  September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------------|---------------|--------------------------------------------|------------|-------------------------------------------|------------|----------------------------|------------|-------------------------------------------------|------------|
| **($ in thousands)**            | ** ** | **(Level 1)**                                                      | ** **    | **(Level 2)**                         | ** ** | **(Level 3)**                        | ** ** | **netting**                | ** ** | **2008**                                        | ** ** |
| **Financial assets:**                     | ** ** | ** **                                                              | ** **    | ** **                                 | ** ** | ** **                                | ** ** | ** **                 | ** ** | ** **                                      | ** ** |
| Fixed income securities                   |       | $                                                                       | 46,270        |                                       | $          | 211,502                                   |       | $                          | 7,378      |                                            |       |   | $ | 265,150 |   |
| Equity securities                         |       | 4,853                                                                   |          | —                                     |       | —                                    |       |                       |       | 4,853                                           |       |
| Short–term investments               |       | 34,468                                                                  |          | —                                     |       | —                                    |       |                       |       | 34,468                                          |       |
| **Total recurring basis assets**          |       | 85,591                                                                  |          | 211,502                                    |       | 7,378                                     |       |                       |       | 304,471                                         |       |
| Valued at cost                            |       |                                                                    |          |                                       |       |                                      |       | $                          | 50         |                                            | 50         |   |
| **Total investments**                     | ** ** | **85,591**                                                              | ** **    | **211,502**                                | ** ** | **7,378**                                 | ** ** | **50**                     | ** ** | **304,521**                                     | ** ** |
| ** **                                | ** ** | ** **                                                              | ** **    | ** **                                 | ** ** | ** **                                | ** ** | ** **                 | ** ** | ** **                                      | ** ** |
| Separate account assets                   |       | 2,296,302                                                               |          | —                                     |       | —                                    |       | —                     |       | 2,296,302                                       |       |
| **Total financial assets**                | ** ** | $                                                                       | **2,381,893** | ** **                                 | $          | **211,502**                               | ** ** | $                          | **7,378**  | ** **                                      | $          | **50** | ** ** | $ | **2,600,823** | ** ** |
| % of total financial assets               |       | 91.6                                                                    | %             | 8.1                                        | %          | 0.3                                       | %          | —                     | %          | 100.0                                           | %          |
|                                      |       |                                                                    |          |                                       |       |                                      |       |                       |       |                                            |       |
| **Financial liabilities:**                |       |                                                                    |          |                                       |       |                                      |       |                       |       |                                            |       |
| Contractholder funds:                     |       |                                                                    |          |                                       |       |                                      |       |                       |       |                                            |       |
| Derivatives embedded in annuity contracts |       | $                                                                       | —        |                                       | $          | (41,626                                   | )          | $                          | (6,430     | )                                               |       |   | $ | (48,056 | ) |
| **Total financial liabilities**           | ** ** | **$**                                                                   | **—**    | ** **                                 | $          | **(41,626**                               | **)**      | $                          | **(6,430** | **)**                                           |       |   | $ | **(48,056** | **)** |
| % of total financial liabilities          |       | —                                                                  | %             | 86.6                                       | %          | 13.4                                      | %          |                       |       | 100.0                                           | %          |

 

Asrequired by SFAS No. 157, when the inputs used to measure fair value fallwithin different levels of the hierarchy, the level within which the fair valuemeasurement is categorized is based on the lowest level input that issignificant to the fair value measurement in its entirety.  Thus, a Level 3 fair value measurement mayinclude inputs that are observable (Level 1 or Level 2) and unobservable (Level3).  Gains and losses for such assets andliabilities categorized within the Level 3 table may include changes in fairvalue that are attributable to both observable inputs (Level 1 and Level 2) andunobservable inputs (Level 3).

 

8

----

 

**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

The following table provides a summary of changes infair value during the three-month period ended September 30, 2008 of Level3 financial assets and financial liabilities held at fair value on a recurringbasis at September 30, 2008.

 
| ** **                                                        | ** ** | ** **                                           | ** **  | **Total realized and unrealized  gains (losses) included in:** | ** ** | ** **                                              | ** ** | **Net**                                                           | ** ** | ** **                                                 | ** ** | **Total gains  (losses)   included in  Net Income for** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|-------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| **($ in thousands)**                                    | ** ** | **Balance as of  June 30, 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  September 30,  2008**                       | ** ** | **instruments still  held at  September 30,  2008 (1)** | ** ** |
| **Financial assets**                                         |       |                                                 |        |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                        |       |   |   |
| Fixed income securities                                 |       | $                                                    |  7,487 |                                                                                         | $          |  (1                                                | )          | $                                                                 |  (108 | )                                                          | $          |  —                                                                |       | $ |  — |   | $ |  7,378 |   | $ |  (1 | ) |
| **Total recurring level 3  financial assets** |       | $                                                    |  7,487 |                                                                                         | $          |  (1                                                | )          | $                                                                 |  (108 | )                                                          | $          |  —                                                                |       | $ |  — |   | $ |  7,378 |   | $ |  (1 | ) |
|                                                              |       |                                                 |        |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                        |       |   |   |
| **Financial liabilities**                                         |       |                                                 |        |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                        |       |   |   |
| Contractholder  funds:                                            |       |                                                 |        |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                        |       |   |   |
| Derivatives embedded in annuity contracts                         |       | $                                                    | (2,301      | )                                                                                            | $          | (4,176                                                  | )          | $                                                                 | —     |                                                       | $          | 47                                                                          |       | $ | — |   | $ | (6,430 | ) | $ | (4,176 | ) |
| **Total recurring level 3 financial liabilities**                 |       | $                                                    | (2,301      | )                                                                                            | $          | (4,176                                                  | )          | $                                                                 | —     |                                                       | $          | 47                                                                          |       | $ | — |   | $ | (6,430 | ) | $ | (4,176 | ) |

 

----

(1)   The amounts above attributableto fixed income securities are reported as a component of net investment incomein the Condensed Statements of Operations. The amounts above attributable to derivatives embedded in annuitycontracts are reported as a component of contract benefits and are ceded inaccordance with the Company’s reinsurance agreements.

 

The following table provides a summary of changes in fair value duringthe nine-month period ended September 30, 2008 of Level 3 financial assetsand financial liabilities held at fair value on a recurring basis at September 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  September 30,  2008**                          | ** ** | **instruments still  held at  September 30,  2008 (2)** | ** ** |
| **Financial assets**                          |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                           |       |   |   |
| Fixed income securities                            |       | $                                                  | 11,984     |                                                                                         | $          | 181                                                     |       | $                                                                 | (366       | )                                                          | $          | (4,421                                                                         | )          | $ | — |   | $ | 7,378 |   | $ | (2 | ) |
| **Total recurring level 3 financial assets**       |       | $                                                  | 11,984     |                                                                                         | $          | 181                                                     |       | $                                                                 | (366       | **)**                                                      | $          | (4,421                                                                         | )          | $ | — |   | $ | 7,378 |   | $ | (2 | ) |
|                                               |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                           |       |   |   |
| **Financial liabilities**                          |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                           |       |   |   |
| Contractholder funds:                              |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                       |       |                                                                           |       |   |   |
| Derivatives embedded in annuity contracts          |       | $                                                  | (256       | )                                                                                            | $          | (6,262                                                  | )          | $                                                                 | —     |                                                       | $          | 88                                                                             |       | $ | — |   | $ | (6,430 | ) | $ | (6,262 | ) |
| **Total recurring level 3 financial  liabilities** |       | $                                                  | (256       | )                                                                                            | $          | (6,262                                                  | )          | $                                                                 | —     |                                                       | $          | 88                                                                             |       | $ | — |   | $ | (6,430 | ) | $ | (6,262 | ) |

 

----

(1)   The amounts above attributableto fixed income securities are reported in the Condensed Statements ofOperations as follows:  $185 thousand inrealized capital gains and losses, and $(4) thousand in net investmentincome.  The amounts above attributableto derivatives embedded in annuity contracts are reported as a component ofcontract benefits and are ceded in accordance with the Company’s reinsuranceagreements.

(2)   The amounts above attributableto fixed income securities are reported as a component of net investment incomein the Condensed Statements of Operations. The amounts above attributable to derivatives embedded in annuitycontracts are reported as a component of contract benefits and are ceded inaccordance with the Company’s reinsurance agreements.

 

9

----

 

**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

## **3.  Reinsurance**

##  

The Company has reinsuranceagreements under which it reinsures all of its business to ALIC or othernon-affiliated reinsurers. Under the agreements, premiums, contract charges,interest credited to contractholder funds, contract benefits and substantiallyall expenses are reinsured.  The Companycontinues to have primary liability as the direct insurer for risks reinsured.

 

Investment income earned on theassets which support contractholder funds and the reserve for life-contingentcontract benefits is not included in the condensed financial statements asthose assets are owned and managed by ALIC or third party reinsurers underterms of the reinsurance agreements.  Thetiming of the transfer of funds under the reinsurance agreements may result influctuations in net cash provided by operating activities in the CondensedStatements of Cash Flows.

 

The effects of reinsurance onpremiums and contract charges are as follows:

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in thousands)**                     | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Premiums and contract charges**                  |       |                             |       |                            |       |   |   |   |   |
| Direct                                             |       | $                                | 286,952    |                            | $          | 260,836 |   | $ | 836,853 |   | $ | 761,739 |   |
| Assumed - non-affiliate                            |       | 2,197                            |       | 2,394                           |       | 6,140 |   | 6,491 |   |
| Ceded                                              |       |                             |       |                            |       |   |   |   |   |
| Affiliate                                          |       | (176,030                         | )          | (154,294                        | )          | (509,416 | ) | (459,410 | ) |
| Non-affiliate                                      |       | (113,119                         | )          | (108,936                        | )          | (333,577 | ) | (308,820 | ) |
| Premiums and contract charges, net of  reinsurance |       | $                                | —     |                            | $          | — |   | $ | — |   | $ | — |   |

 

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

 
| ** **                                                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in thousands)**                                                                 | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Interest credited to contractholder funds,  contract benefits and expenses**                 |       |                             |       |                            |       |   |   |   |   |
| Direct                                                                                         |       | $                                | 569,665    |                            | $          | 512,083 |   | $ | 1,512,355 |   | $ | 1,521,152 |   |
| Assumed - non-affiliate                                                                        |       | 2,673                            |       | 2,430                           |       | 6,816 |   | 8,070 |   |
| Ceded                                                                                          |       |                             |       |                            |       |   |   |   |   |
| Affiliate                                                                                      |       | (400,421                         | )          | (367,732                        | )          | (1,052,183 | ) | (1,118,106 | ) |
| Non-affiliate                                                                                  |       | (171,917                         | )          | (146,781                        | )          | (466,988 | ) | (411,116 | ) |
| Interest credited to contractholder funds,  contract benefits and expenses, net of reinsurance |       | $                                | —     |                            | $          | — |   | $ | — |   | $ | — |   |

 

10

----

 

**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

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

##  

## **Guarantees**

##  

In the normal course ofbusiness, the Company provides standard indemnifications to contractualcounterparties in connection with numerous transactions, including acquisitionsand divestitures.  The types ofindemnifications 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 aggregate liability balancerelated to all guarantees was not material as of September 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”subsection below, please note the following:

 

·      These matters raise difficult and complicatedfactual and legal issues and are subject to many uncertainties andcomplexities, including the underlying facts of each matter; novel legalissues; variations between jurisdictions in which matters are being litigated,heard or investigated; differences in applicable laws and judicialinterpretations; the length of time before many of these matters might beresolved by settlement, through litigation or otherwise; the fact that some ofthe lawsuits are putative class actions in which a class has not been certifiedand in which the purported class may not be clearly defined; the fact that someof the lawsuits involve multi-state class actions in which the applicable law(s) forthe claims at issue is in dispute and therefore unclear; and the currentchallenging legal environment faced by large corporations and insurancecompanies.

·      The outcome on these matters may also be affectedby decisions, verdicts, and settlements, and the timing of such decisions,verdicts, and settlements, in other individual and class action lawsuits thatinvolve the Company, other insurers, or other entities and by other legal,governmental, and regulatory actions that involve the Company, other insurers,or other entities.

·      In the lawsuits, plaintiffs seek a variety ofremedies including equitable relief in the form of injunctive and otherremedies and monetary relief in the form of contractual and extra-contractualdamages.  In some cases, the monetarydamages sought include punitive damages. Often specific information about the relief sought, such as the amountof damages, is not available because plaintiffs have not requested specificrelief in their pleadings.  In theCompany’s experience, when specific monetary demands are made in pleadings,they bear little relation to the ultimate loss, if any, to the Company.

·      In connection withregulatory 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.

 

11

----

 

**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

·      For the reasons specified above, it is often notpossible to make meaningful estimates of the amount or range of loss that couldresult from the matters described below in the “Proceedings” subsection.  The Company reviews these matters on anon-going basis and follows the provisions of SFAS No. 5, “Accounting forContingencies” when making accrual and disclosure decisions.  When assessing reasonably possible andprobable outcomes, the Company bases its decisions on its assessment of theultimate outcome following all appeals.

·      Due to the complexity andscope of the matters disclosed in the “Proceedings” subsection below and themany uncertainties that exist, the ultimate outcome of these matters cannot bereasonably predicted.  In the event of anunfavorable outcome in one or more of these matters, the ultimate liability maybe in excess of amounts currently reserved and may be material to the Company’soperating results or cash flows for a particular quarterly or annualperiod.  However, based on informationcurrently known to it, management believes that the ultimate outcome of allmatters described below as they are resolved over time is not likely to have amaterial adverse effect on the financial position of the 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 matters include a lawsuit filed in 2001 bythe U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliationunder federal civil rights laws (the “EEOCI” suit) and a class action filed in 2001 by former employee agents allegingretaliation and age discrimination under the Age Discrimination inEmployment Act (“ADEA”), breach ofcontract and ERISA violations (the “Romero I” suit).   In 2004, in the consolidated EEOC I andRomero I litigation, the trial court issued a memorandum and order that, amongother things, certified classes of agents, including a mandatory class ofagents 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.

·      The EEOCalso filed another lawsuit in 2004 alleging age discrimination with respect toa policy limiting the rehire of agents affected by the agency programreorganization (the “EEOC II” suit).  InEEOC II, in 2006, the court granted partial summary judgment to the EEOC.  Although the court did not determine that AICwas liable for age discrimination under the ADEA, it determined that the rehirepolicy resulted in a disparate impact, reserving for trial the determination onwhether AIC had reasonable factors other than age to support the rehirepolicy.  In June 2008, the EighthCircuit Court of Appeals affirmed summary judgment in the EEOC’s favor.  In September 2008, the Court of Appealsgranted AIC’s petition for rehearing *en banc* andvacated its earlier decision affirming the trial court’s grant of summaryjudgment in favor of the EEOC.  The Courtof Appeals then dismissed the appeal, determining that it lacked jurisdictionto consider the appeal at this stage in the litigation.

 

12

----

 

**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

·      AIC isalso defending a certified class action filed by former employee agents whoterminated their employment prior to the agency program reorganization.  Plaintiffs allege that they wereconstructively discharged so that AIC could avoid paying ERISA and otherbenefits offered under the reorganization. They claim that the constructive discharge resulted from theimplementation of agency standards, including mandatory office hours and arequirement to have licensed staff available during business hours.  The court approved the form of class noticewhich was sent to approximately 1,800 potential class members in November 2007.  Fifteen individuals opted out.  AIC’s motions for judgment on the pleadingswere partially granted.  In May 2008,the court granted summary judgment in AIC’s favor on all class claims.  Plaintiffs moved for reconsideration and inthe alternative to decertify the class. AIC opposed this motion and filed a motion for summary judgment withrespect to the remaining non-class claim. In August 2008, the court denied plaintiffs’ motion to reconsiderand to decertify the class.

·      A putative nationwide class action has also beenfiled by former employee agents alleging various violations of ERISA, including a worker classificationissue.  These plaintiffs are challengingcertain amendments to the Agents Pension Plan and are seeking to have exclusiveagent independent contractors treated as employees for benefit purposes.  This matter was dismissed with prejudice bythe trial court, was the subject of further proceedings on appeal, and was reversedand remanded to the trial court in 2005. In June 2007, the courtgranted AIC’s motion to dismiss the case. Following plaintiffs’ filing of a notice of appeal, the Third Circuitissued an order in December 2007 stating that the notice of appeal was nottaken from a final order within the meaning of the federal law and thus notappealable at this time.  In March 2008,the Third Circuit decided that the appeal should not summarily be dismissed andthat the question of whether the matter is appealable at this time will beaddressed by the Court along 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**

 

## **Various other legal, governmental, and regulatory actions, includingstate market conduct exams, and other governmental and regulatory inquiries arecurrently pending that involve the Company and specific aspects of its conductof business. Like other members of the insurance industry, the Company is thetarget of a number of lawsuits and proceedings, some of which involve claimsfor substantial or indeterminate amounts. These actions are based on a varietyof issues 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.**

 

13

----

 

**LINCOLN BENEFIT LIFE COMPANY**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

**5.  Other Comprehensive Income**

 

## **  The components of other comprehensive (loss) income on apre-tax and after-tax basis are as follows:**

 
| ** **                                                              | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| ** **                                                              | ** ** | ** **                                               | ** ** | ** ** | ** ** | **After-** | ** ** | ** ** | ** ** | ** ** | ** ** | **After-** | ** ** |
| **($ in thousands)**                                          | ** ** | **Pre-tax**                                              | ** ** | **Tax** | ** ** | **tax** | ** ** | **Pre-tax** | ** ** | **Tax** | ** ** | **tax** | ** ** |
| * *                                                                |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized net holding (losses) gains  arising during the period        |       | $                                                        | (4,628     | ) | $ | 1,620 |   | $ | (3,008 | ) | $ | 4,865 |   | $ | (1,703 | ) | $ | 3,162 |   |
| Less: reclassification adjustment of  realized capital gains and losses |       | 1,524                                                    |       | (533 | ) | 991 |   | — |   | — |   | — |   |
| Unrealized net capital gains and losses                                 |       | (6,152                                                   | )          | 2,153 |   | (3,999 | ) | 4,865 |   | (1,703 | ) | 3,162 |   |
| Other comprehensive (loss) income                                       |       | $                                                        | (6,152     | ) | $ | 2,153 |   | (3,999 | ) | $ | 4,865 |   | $ | (1,703 | ) | 3,162 |   |
|                                                                    |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                              |       |                                                     |       |   |   | 3,270 |   |   |   |   |   | 2,338 |   |
| Comprehensive (loss) income                                             |       |                                                     |       |   |   | $ | (729 | ) |   |   |   |   | $ | 5,500 |   |

 
| ** **                                                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                                                              | ** ** | ** **                                              | ** ** | ** ** | ** ** | **After-** | ** ** | ** ** | ** ** | ** ** | ** ** | **After-** | ** ** |
| **($ in thousands)**                                          | ** ** | **Pre-tax**                                             | ** ** | **Tax** | ** ** | **tax** | ** ** | **Pre-tax** | ** ** | **Tax** | ** ** | **tax** | ** ** |
| * *                                                                |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized net holding (losses) gains  arising during the period        |       | $                                                       | (7,542     | ) | $ | 2,640 |   | $ | (4,902 | ) | $ | 815 |   | $ | (285 | ) | $ | 530 |   |
| Less: reclassification adjustment of  realized capital gains and losses |       | 1,179                                                   |       | (412 | ) | 767 |   | (405 | ) | 142 |   | (263 | ) |
| Unrealized net capital gains and losses                                 |       | (8,721                                                  | )          | 3,052 |   | (5,669 | ) | 1,220 |   | (427 | ) | 793 |   |
| Other comprehensive (loss) income                                       |       | $                                                       | (8,721     | ) | $ | 3,052 |   | (5,669 | ) | $ | 1,220 |   | $ | (427 | ) | 793 |   |
|                                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                              |       |                                                    |       |   |   | 7,660 |   |   |   |   |   | 6,716 |   |
| Comprehensive income                                                    |       |                                                    |       |   |   | $ | 1,991 |   |   |   |   |   | $ | 7,509 |   |

 

14

----

** **

**Item 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THETHREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 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** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in thousands)**    | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                             |       |                            |       |   |   |   |   |
| Net investment income             |       | $                                | 3,498      |                            | $          | 3,594 |   | $ | 10,565 |   | $ | 10,727 |   |
| Realized capital gains and losses |       | 1,524                            |       | —                          |       | 1,179 |   | (405 | ) |
| Income tax expense                |       | (1,752                           | )          | (1,256                          | )          | (4,084 | ) | (3,606 | ) |
| Net income                        |       | $                                | 3,270      |                            | $          | 2,338 |   | $ | 7,660 |   | $ | 6,716 |   |

 

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 39.9% in the third quarter and 14.1%in the first nine months of 2008 compared to the same periods in 2007.  The increase in both periods was the resultof net realized capital gains partially offset by lower net investment incomeand higher income tax expense.

 

**Netinvestment income** decreased 2.7% in the third quarterof 2008 and 1.5% in the first nine months of 2008 compared to the same periodsin 2007.  The decline in both periods wasprimarily due to lower portfolio yields partially offset by higher averageinvestment balances.

 

**Realizedcapital gains and losses** reflected net gains of $1.5million and $1.2 million in the third quarter of 2008 and first nine months of2008, respectively, primarily due to realized capital gains on sales of fixedincome securities partially offset by realized capital losses on sales ofequity securities.  There were norealized capital gains and losses in the third quarter of 2007 and realized capitalgains and losses for the first nine months of 2007 reflected net losses of $405thousand, which primarily related to dispositions of fixed income securities.

 

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**FINANCIAL POSITION**

** **
| ** **                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in thousands)**                 | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Fixed income securities (1)                    |       | $                      | 265,150    |                  | $          | 273,144 |   |
| Equity securities (2)                          |       | 4,853                  |       | —                |       |
| Short-term                                     |       | 34,518                 |       | 28,057                |       |
| Total investments                              |       | $                      | 304,521    |                  | $          | 301,201 |   |
|                                           |       |                   |       |                  |       |
| Cash                                           |       | $                      | 12,945     |                  | $          | 18,612 |   |
| Reinsurance recoverable from ALIC              |       | 18,825,813             |       | 18,777,851            |       |
| Reinsurance recoverable from non-affiliates    |       | 1,573,976              |       | 1,422,931             |       |
| Contractholder funds                           |       | 17,840,821             |       | 17,820,885            |       |
| Reserve for life-contingent contract  benefits |       | 2,517,680              |       | 2,348,116             |       |
| Separate Accounts assets and liabilities       |       | 2,296,302              |       | 3,067,127             |       |
| Total shareholder’s equity                |       | 291,929                |       | 289,938               |       |

 

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(1)          Fixed income securities are carried at fair value.  Amortized cost basis for these securities was$267.6 million and $266.8 million at September 30, 2008 and December 31,2007, respectively.

(2)          Equity securities are carried at fair value.  Cost basis for these securities was $4.7million at September 30, 2008.

 

Total investments increased to$304.5 million at September 30, 2008 from $301.2 million at December 31,2007 due primarily to the investment of cash flows from operating activities,partially offset by an unfavorable change in unrealized capital gains andlosses on fixed income securities.

 

At September 30,2008, all investments in the fixed income securities portfolio were ratedinvestment grade, which is defined as a security having a rating from theNational Association of Insurance Commissioners (“NAIC”) of 1 or 2; a rating ofAaa, Aa, A or Baa from Moody’s or a rating of AAA, AA, A or BBB from Standardsand 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.

 

Unrealizednet capital losses totaled $2.4 million as of September 30, 2008, comparedto unrealized net capital gains of $6.4 million at December 31, 2007.

 

Unrealized net capital losseson fixed income securities of $2.5 million as of September 30, 2008comprised $4.3 million of unrealized gains and $6.8 million of unrealizedlosses.  Unrealized net capital gains onfixed income securities of $6.4 million at December 31, 2007 comprised$7.7 million of unrealized gains and $1.3 million of unrealized losses.  Unrealized net capital gains on equitysecurities of $113 thousand at September 30, 2008 were comprised of $270thousand of unrealized gains and $157 thousand of unrealized losses.  There were no unrealized capital gains andlosses on equity securities at December 31, 2007.

 

Of the gross unrealized lossesin the fixed income portfolio at September 30, 2008, $3.5 million or 52.2%were related to securities in our corporate fixed income securities portfolioand were primarily comprised of losses on securities in the banking, consumergoods, financial services and capital goods sectors.  The gross unrealized losses in these sectorswere primarily related to changes in interest rates and credit spreads, andcompany specific conditions.  Theremaining $3.3 million of unrealized losses on fixed income securities wereprimarily comprised of $1.8 million related to commercial mortgage-backedsecurities and $1.4 million related to mortgage-backed securities.  These losses were primarily the result ofliquidity declines in the financial markets.

 

Of the gross unrealized lossesin the equity securities portfolio at September 30, 2008, all were relatedto the financial services sector and were company and sector specific.

 

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 

 

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other securities for which we may have aconcern, are evaluated based on facts and circumstances for inclusion on ourwatch-list.  All investments in anunrealized loss position at September 30, 2008 were included in ourportfolio monitoring process for determining whether declines in value wereother-than-temporary.  We alsoconduct a portfolio review to recognize impairment on securities in anunrealized loss position for which we do not have the intent and ability tohold until recovery as a result of approved programs involving the dispositionof investments for reasons such as negative developments that would change theview of long term investors and their intent to continue to hold theinvestment, subsequent credit deterioration of an issuer or holding, subsequentfurther deterioration of capital markets (i.e. debt and equity) and of economicconditions, subsequent further deterioration in the financial services and realestate industries, changes in duration, revisions to strategic assetallocations, liquidity needs, unanticipated federal income tax situationsinvolving capital gains and capital loss carrybacks and carryforwards withspecific expiration dates, investment risk mitigation actions, and other newfacts and circumstances that would cause a change in our previous intent tohold a security to recovery or maturity.

 

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 September 30, 2008and December 31, 2007, we had no securities categorized as “problem”, “restructured”or “potential problem.”

 

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

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in thousands)**    | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                             |       |                            |       |   |   |   |   |
| Fixed income securities           |       | $                                | 3,355      |                            | $          | 3,412 |   | $ | 10,076 |   | $ | 10,119 |   |
| Equity securities                 |       | 17                               |       | —                          |       | 84 |   | — |   |
| Short-term                        |       | 181                              |       | 272                             |       | 663 |   | 867 |   |
| Investment income, before expense |       | 3,553                            |       | 3,684                           |       | 10,823 |   | 10,986 |   |
| Investment expense                |       | (55                              | )          | (90                             | )          | (258 | ) | (259 | ) |
| Net investment income             |       | $                                | 3,498      |                            | $          | 3,594 |   | $ | 10,565 |   | $ | 10,727 |   |

 

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

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in thousands)**                   | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                             |       |                             |       |                            |       |   |   |   |   |
| Realized capital gains and losses, pre-tax       |       | $                                | 1,524      |                            | $          | — |   | $ | 1,179 |   | $ | (405 | ) |
| Income tax (expense) benefit                     |       | (534                             | )          | —                          |       | (413 | ) | 142 |   |
| **Realized capital gains and losses, after-tax** |       | $                                | 990        |                            | $          | — |   | $ | 766 |   | $ | (263 | ) |

 

We may sell or change our assertion to hold asecurity until recovery for impaired fixed income or equity securities thatwere in an unrealized loss position at the previous reporting date insituations where significant unanticipated new facts and circumstances emergeor existing facts and circumstances increase in significance and areanticipated to adversely impact a security’s future valuations more thanpreviously expected; including negative developments that would change the viewof long term investors and their intent to continue to hold the investment,subsequent credit deterioration of an issuer or holding, subsequent 

 

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further deterioration in capital markets (i.e. debt and equity) and ofeconomic conditions, subsequent further deterioration in the financial servicesand real estate industries, liquidity needs, unanticipated federal income taxsituations involving capital gains and capital loss carrybacks and carryforwardswith specific expiration dates, investment risk mitigation actions, and othernew facts and circumstances that would cause a change in our previous intent tohold a security to recovery or maturity.

 

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

##  

Contractholderfunds increased $19.9 million to $17.84 billion at September 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 partially offset by surrenders,withdrawals and benefit payments.  Thereserve for life-contingent contract benefits increased $169.6 million to $2.52billion at September 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 increased by $48.0 million and reinsurance recoverable from non-affiliatesincreased by $151.0 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 orliabilities which we can access (Level 1); the second highest priority for similarassets or liabilities in active markets, quoted prices for identical or similarassets or liabilities in non-active markets, or valuation models whose inputsare observable (Level 2); and the lowest priority to unobservable inputs (Level3).  To distinguish among the categorieswe consider the frequency of completed transactions such as daily trading forequity securities.  If inputs used tomeasure a financial instrument fall within different levels of the fair valuehierarchy, the 

 

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categorization isbased on the lowest level input that is significant to the fair valuemeasurement of the entire instrument. Certain financial assets are not carried at fair value on a recurringbasis.  Accordingly, such investments areonly included in the fair value hierarchy disclosure when the investment issubject to remeasurement at fair value after initial recognition and theresulting measurement is reflected in the condensed financial statements.

 

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 sufficient observable inputs, unobservable inputs reflect ourestimates of the assumptions market participants would use in valuing financialassets and financial liabilities and are developed based on the bestinformation available in the circumstances. The degree of management judgment involved in determining fair values isinversely related to the availability of market observable information.

 

Financial assets and financial liabilities recorded on the CondensedStatements of Financial Position at fair value as of September 30, 2008are categorized based on the reliability of inputs to the valuation techniquesas 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 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 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 gain assuranceon the overall reasonableness and consistent application of input assumptions,valuation methodologies, and compliance with accounting standards for fairvalue determination through the execution of various processes and controlsdesigned to ensure that our financial assets and financial liabilities areappropriately valued.  We monitor fairvalues received from third parties and those derived internally on an ongoingbasis.

 

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 serviceproviders to gather, analyze, and interpret market information and derive fairvalues based 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 single quote or by employing internalvaluation models that are widely accepted in the financial services industry.  Changing market conditions are incorporatedinto valuation assumptions and reflected in the fair values, which arevalidated by calibration and other analytical techniques to available marketobservable data.

 

Valuation service providers typically obtain data about market transactionsand other key valuation model inputs from multiple sources and, through the useof proprietary algorithms, produce valuation information in the form of asingle fair value for individual securities for which a fair value has beenrequested under the terms of our agreements. For certain security types fair values are derived from the valuationservice providers’ proprietary valuation models.  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, liquidity spread, currency rates, and othermarket-observable information, as applicable. Credit and liquidity spreads aretypically implied from completed transactions and transactions of comparablesecurities.  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, 

 

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among otherthings, market observable information as of the measurement date, as describedabove, as well as the specific attributes of the security being valuedincluding its term, interest rate, credit rating, industry sector, and whereapplicable, collateral quality and other issue or issuer specificinformation.  Executing valuation modelseffectively requires seasoned professional judgment and experience.  In cases where market transactions or othermarket observable data is limited, the extent to which judgment is appliedvaries inversely with the availability of market observable 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 withmarket making, underwriting and distribution expertise.

 

The fair value of financial assets and financialliabilities, including certain derivatives embedded in certain contractholderliabilities, where our valuation service providers or brokersdo not provide fair value determinations, is determined using valuation methods and modelswidely 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 on models usingdiscounted cash flow methodologies that determine a single best estimate offair value for individual financial instruments.  In addition, our models use internallyassigned credit ratings as inputs (which are generally consistent with anyexternal ratings and those we use to report our holdings by credit rating) andstochastically determined cash flows for certain derivatives embedded in certaincontractholder liabilities, both of which are difficult to independentlyobserve and verify.  Instrument specificinputs used in our internal fair value determinations include: coupon rate,weighted average life, sector of the issuer, call provisions, and thecontractual elements of derivatives embedded in certain contractholderliabilities.  Market related inputs usedin these fair values, which we believe are representative of inputs othermarket participants would use to determine fair value of the same instrumentsinclude: interest rate yield curves, quoted market prices of comparablesecurities, credit spreads, estimated liquidity premiums, and other applicablemarket data including lapse and anticipated market return estimates forderivatives embedded in certain contractholder liabilities.  Credit spreads are determined using thosepublished by a commonly used industry specialist for comparable publicsecurities.  A liquidity premium is alsoadded to reflect spreads commonly required for the types of securities beingvalued and are calibrated based on actual trades or other market data.  As a result of the significance of non-marketobservable inputs, including internally assigned credit ratings and stochasticcash flow estimates as described above, judgment is required in developingthese fair values. The fair value of these financial assets and financialliabilities may differ from the amount actually received to sell an asset orthe amount paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. Moreover, the use of different valuation assumptions may have a materialeffect on the financial assets’ and financial liabilities’ fair values.

 

Fair value of our investments comprise an aggregation of numerous,single best estimates for each security in the Condensed Statements ofFinancial Position.  Because of thisdetailed approach there is no single set of assumptions that determine our fairvalue estimates.  Moreover, managementdoes not compile a range of estimates for items reported at fair value becausewe do not believe that a range would provide meaningful information.  Level 1 and Level 2 measurements representvaluations where all significant inputs are market observable.  Level 3 measurements have one or moresignificant inputs that are not market observable and as a result these fairvalue determinations have greater potential variability as it relates to theirsignificant inputs.  The Level 3 principalcomponent is asset-back securities (“ABS”). In general, the greater the reliance on significant inputs that are notmarket observable, the greater potential variability of the fair valuedeterminations. For broker quoted securities’ fair value determinations, webelieve the brokers providing the quotes may consider market observabletransactions or activity in similar securities, as applicable, and otherinformation as calibration points.

 

We believe our most significant exposure to changes in fair value isdue to market risk.  Our exposure tochanges in market conditions is discussed fully in the Market Risk section ofthe MD&A included in our 2007 Form 10-K.

 

We employ specific control processes to determine the reasonableness ofthe fair values of our financial assets and financial liabilities.  Our processes are designed to ensure that thevalues received or internally estimated are accurately recorded and that thedata inputs and the valuation techniques utilized 

 

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are appropriate,consistently applied, and that the assumptions are reasonable and consistentwith the objective of determining fair value. For example, on a continuing basis, we assess the reasonableness ofindividual security values received from valuation service providers thatexceed certain thresholds as compared to previous values received from thosevaluation service providers.  Inaddition, we may validate the reasonableness of fair values by comparinginformation obtained from our valuation service providers to other third partyvaluation sources for selected financial assets. When fair value determinationsare expected to be more variable, we validate them through reviews by membersof management who have relevant expertise and who are independent of thosecharged with executing investment transactions. We do not alter fair values provided by our valuation providers orbrokers.

 

The following table identifies investments asof September 30, 2008 by source of value determination:

 
| ** **                                                    | ** ** | **Investments**     | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|
| **($ in thousands)**                                | ** ** | **Carrying  Value** | ** ** | **Percent  to total** | ** ** |
| Fair value based on internal sources                          |       | $                   | 6,159      |   | 2.0 | % |
| Fair value based on external sources                          |       | 294,293             |       | 96.7 |   |
| Total fixed income, equity and certain  short-term securities |       | 300,452             |       | 98.7 |   |
| Short-term investments, valued at cost                        |       | 4,069               |       | 1.3 |   |
| Total                                                         |       | $                   | 304,521    |   | 100.0 | % |

 

Formore detailed information on our accounting policy for the fair value offinancial assets and financial liabilities and information on the financialassets and financial liabilities included in the Levels promulgated by SFAS No. 157,see Note 2 to the Condensed Financial Statements.

 

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Thefollowing table provides additional details regarding Level 1, 2 and 3financial assets and financial liabilities by their classification in theCondensed Statement of Financial Position at September 30, 2008.

 
| ** **                                      | ** ** | **Quoted  prices in  active  markets  for  identical  assets** | ** **    | **Significant  other  observable  inputs** | ** ** | **Significant  unobservable  inputs** | ** ** | **Other  valuations  and** | ** ** | **Balance as of  September 30** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------------|---------------|--------------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|------------------------------------------------|------------|
| **($ in thousands)**                  | ** ** | **(Level 1)**                                                  | ** **    | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** | **netting**                | ** ** | **2008**                                       | ** ** |
| **Financial assets**                            |       |                                                                |          |                                       |       |                                  |       |                       |       |                                           |       |
| Fixed income securities:                        |       |                                                                |          |                                       |       |                                  |       |                       |       |                                           |       |
| Corporate                                       |       | $                                                                   | —        |                                       | $          | 67,120                                |       | $                          | 1,307      |                                           |       |   | $ | 68,427 |   |
| Corporate privately placed securities           |       | —                                                              |          | 6,554                                      |       | —                                |       |                       |       | 6,554                                          |       |
| Municipal                                       |       | —                                                              |          | 520                                        |       | —                                |       |                       |       | 520                                            |       |
| U.S. government and agencies                    |       | 46,270                                                              |          | 69,569                                     |       | —                                |       |                       |       | 115,839                                        |       |
| ABS                                             |       | —                                                              |          | —                                     |       | 6,071                                 |       |                       |       | 6,071                                          |       |
| CMBS                                            |       | —                                                              |          | 21,081                                     |       | —                                |       |                       |       | 21,081                                         |       |
| MBS                                             |       | —                                                              |          | 45,662                                     |       | —                                |       |                       |       | 45,662                                         |       |
| ABS – Credit  card, auto and student loans |       | —                                                              |          | 996                                        |       | —                                |       |                       |       | 996                                            |       |
| Total fixed income securities                   |       | 46,270                                                              |          | 211,502                                    |       | 7,378                                 |       |                       |       | 265,150                                        |       |
| U.S. equities                                   |       | 4,853                                                               |          | —                                     |       | —                                |       |                       |       | 4,853                                          |       |
| Short-term investments:                         |       |                                                                |          |                                       |       |                                  |       |                       |       |                                           |       |
| Money market funds                              |       | 34,468                                                              |          | —                                     |       | —                                |       |                       |       | 34,468                                         |       |
| Total short–term investments               |       | 34,468                                                              |          | —                                     |       | —                                |       |                       |       | 34,468                                         |       |
| **Total recurring basis assets**                | ** ** | **85,591**                                                          | ** **    | **211,502**                                | ** ** | **7,378**                             | ** ** | ** **                 | ** ** | **304,471**                                    | ** ** |
| Valued at cost                                  |       |                                                                |          |                                       |       |                                  |       | $                          | 50         |                                           | 50         |   |
| **Total investments**                           | ** ** | **85,591**                                                          | ** **    | **211,502**                                | ** ** | **7,378**                             | ** ** | **50**                     | ** ** | **304,521**                                    | ** ** |
| Separate  account assets                        |       | 2,296,302                                                           |          | —                                     |       | —                                |       | —                     |       | 2,296,302                                      |       |
| **Total financial assets**                      | ** ** | **$**                                                               | **2,381,893** | ** **                                 | **$**      | **211,502**                           | ** ** | **$**                      | **7,378**  | ** **                                     | **$**      | **50** | ** ** | **$** | **2,600,823** | ** ** |
| % of total financial assets                     |       | 91.6                                                                | %             | 8.1                                        | %          | 0.3                                   | %          | —                     | %          | 100.0                                          | %          |
|                                            |       |                                                                |          |                                       |       |                                  |       |                       |       |                                           |       |
| **Financial liabilities**                       |       |                                                                |          |                                       |       |                                  |       |                       |       |                                           |       |
| Contractholder funds:                           |       |                                                                |          |                                       |       |                                  |       |                       |       |                                           |       |
| Derivatives embedded in annuity contracts       |       | $                                                                   | —        |                                       | $          | (41,626                               | )          | $                          | (6,430     | )                                              |       |   | $ | (48,056 | ) |
| **Total financial liabilities**                 |       | $                                                                   | —        | ** **                                 | **$**      | **(41,626**                           | **)**      | **$**                      | **(6,430** | **)**                                          | ** ** | ** ** | **$** | **(48,056** | **)** |
| % of total financial liabilities                |       | —                                                              | %             | 86.6                                       | %          | 13.4                                  | %          |                       |       | 100.0                                          | %          |

 

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The following table provides a summary of changes infair value during the three-month period ended September 30, 2008 of Level3 financial assets and financial liabilities held at fair value on a recurringbasis at September 30, 2008.

 
| ** **                                         | ** ** | ** **                                           | ** ** | **Total realized and unrealized  gains (losses) included in:** | ** ** | ** **                                              | ** ** | ** **                                                        | ** ** | ** **                                                          | ** ** | **Total  gains (losses)  included in  Net Income for** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **($ in thousands)**                     | ** ** | **Balance as of  June 30, 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  September 30,  2008**                      | ** ** | **instruments  still held at  September 30,  2008** | ** ** |
| **Financial  assets**                              |       |                                                 |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                                       |       |   |   |
| Fixed income  securities:                          |       |                                                 |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                                       |       |   |   |
| ABS                                                |       | $                                                    | 6,179      |                                                                                         | $          | —                                                  |       | $                                                                 | (108       | )                                                                   | $          | —                                                                     |       | $ | — |   | $ | 6,071 |   | $ | (1 | ) |
| Corporate                                          |       | 1,308                                                |       | (1                                                                                           | )          | —                                                  |       | —                                                            |       | —                                                              |       | 1,307                                                                      |       | — |   |
| **Total  recurring level 3 financial assets**      |       | $                                                    | 7,487      |                                                                                         | $          | (1                                                      | )          | $                                                                 | (108       | )                                                                   | $          | —                                                                     |       | $ | — |   | $ | 7,378 |   | $ | (1 | ) |
|                                               |       |                                                 |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                                       |       |   |   |
| **Financial  liabilities**                         |       |                                                 |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                                       |       |   |   |
| Contractholder  funds:                             |       |                                                 |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                                       |       |   |   |
| Derivatives  embedded in annuity contracts         |       | $                                                    | (2,301     | )                                                                                            | $          | (4,176                                                  | )          | $                                                                 | —     |                                                                | $          | 47                                                                         |       | $ | — |   | $ | (6,430 | ) | $ | (4,176 | ) |
| **Total  recurring level 3 financial liabilities** |       | $                                                    | (2,301     | )                                                                                            | $          | (4,176                                                  | )          | $                                                                 | —     |                                                                | $          | 47                                                                         |       | $ | — |   | $ | (6,430 | ) | $ | (4,176 | ) |

 

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(1)        Theamounts above attributable to fixed income securities are reported as acomponent of net investment income in the Condensed Statements ofOperations.  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.

 

Thefollowing table provides a summary of changes in fair value during thenine-month period ended September 30, 2008 of Level 3 financial assets andfinancial liabilities held at fair value on a recurring basis at September 30,2008.

 
| ** **                                         | ** ** | ** **                                         | ** ** | **Total realized and unrealized  gains (losses) included in:** | ** ** | ** **                                              | ** ** | ** **                                                        | ** ** | ** **                                                          | ** ** | **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** | ** ** | **Net  transfers in  and/or (out)  of Level 3** | ** ** | **Balance as of  September 30,  2008**            | ** ** | **instruments  still held at  September 30,  2008 (2)** | ** ** |
| **Financial  assets**                              |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                             |       |   |   |
| Fixed income  securities:                          |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                             |       |   |   |
| ABS                                                |       | $                                                  | 10,484     |                                                                                         | $          | 182                                                     |       | $                                                                 | (366       | )                                                                   | $          | (4,229                                                           | )          | $ | — |   | $ | 6,071 |   | $ | (1 | ) |
| Corporate                                          |       | 1,500                                              |       | (1                                                                                           | )          | —                                                  |       | (192                                                              | )          | —                                                              |       | 1,307                                                            |       | (1 | ) |
| **Total  recurring level 3 financial assets**      |       | $                                                  | 11,984     |                                                                                         | $          | 181                                                     |       | $                                                                 | (366       | )                                                                   | $          | (4,421                                                           | )          | $ | — |   | $ | 7,378 |   | $ | (2 | ) |
|                                               |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                             |       |   |   |
| **Financial  liabilities**                         |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                             |       |   |   |
| Contractholder  funds:                             |       |                                               |       |                                                                                         |       |                                                    |       |                                                              |       |                                                                |       |                                                             |       |   |   |
| Derivatives  embedded in annuity contracts         |       | $                                                  | (256       | )                                                                                            | $          | (6,262                                                  | )          | $                                                                 | —     |                                                                | $          | 88                                                               |       | $ | — |   | $ | (6,430 | ) | $ | (6,262 | ) |
| **Total  recurring level 3 financial liabilities** |       | $                                                  | (256       | )                                                                                            | $          | (6,262                                                  | )          | $                                                                 | —     |                                                                | $          | 88                                                               |       | $ | — |   | $ | (6,430 | ) | $ | (6,262 | ) |

 

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(1)        Theamounts above attributable to fixed income securities are reported in theCondensed Statements of Operations as follows: $185 thousand in realized capital gains and losses, and $(4) thousandin net investment income.  The amountsabove attributable to derivatives embedded in annuity contracts are reported asa component of contract benefits and are ceded in accordance with the Company’sreinsurance agreements.

(2)        Theamounts above attributable to fixed income securities are reported as acomponent of net investment income in the Condensed Statements ofOperations.  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 presents fair value as a percent of amortized costfor Level 3 investments at September 30, 2008.

 
| **($ in thousands)** | ** ** | **Fair value** | ** ** | **Fair value as a  % of  Amortized cost** | ** ** |
|--------------------------------|------------|---------------------|------------|--------------------------------------------------------------------|------------|
|                           |       |                |       |                                                               |       |
| ABS                            |       | $                   | 6,071      |                                                               | 101.5      | % |
| Corporate                      |       | 1,307               |       | 100.0                                                              |       |
| **Total Level 3 investments**  |       | $                   | 7,378      |                                                               | 101.2      |   |

 

## **CAPITAL RESOURCES AND LIQUIDITY**

##  

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

 
| **($ in thousands)**                                | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Common stock, additional capital paid-in  and retained income |       | $                            | 293,469    |                        | $          | 285,809 |   |
| Accumulated other comprehensive (loss)  income                |       | (1,540                       | )          | 4,129                       |       |
| Total shareholder’s equity                               |       | $                            | 291,929    |                        | $          | 289,938 |   |

 

*Shareholder’s equity*increased in the first nine months of 2008 due to net income partially offsetby an unfavorable change in unrealized net capital gains and losses on fixedincome 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 and AIC’s ratings.  In October 2008, A.M.Best affirmed ALIC’s A+ financial strength rating.  The outlook for this rating is stable.  S&P affirmed ALIC’s rating of AA butrevised its outlook from stable to negative. Moody’s downgraded ALIC’s insurance financial strength rating to Aa3from Aa2 with a negative outlook.

 

Asof September 30, 2008, we recorded a net deferred tax asset of $776thousand, which included $1.0 million relating to unrealized and realized netcapital losses that have not yet been recognized for tax purposes.  Although realization is not assured,management believes it is more likely than not that the deferred tax asset willbe realized based on our assessment that the deductions ultimately recognizedfor tax purposes will be fully utilized.

 

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## **Item 4.    Controlsand 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 September 30, 2008, there have been no changes inour internal control over financial reporting that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

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## **PART II. OTHER INFORMATION**

##  

## **Item 1. Legal Proceedings**

##  

Informationrequired for this Part II, Item 1, is incorporated by reference to thediscussion under the heading “Regulation” and under the heading “Legal andregulatory proceedings and inquires” in Note 4 of the Condensed FinancialStatements in Part I, Item 1, of this Form 10-Q.

 

**Item 1A. Risk Factors**

 

Thisdocument contains “forward-looking statements” that anticipate results based onour estimates, assumptions and plans that are subject to uncertainty.  These statements are made subject to thesafe-harbor provisions of the Private Securities Litigation Reform Act of 1995.We assume no obligation to update any forward-looking statements as a result ofnew information or future events or developments.

 

Theseforward-looking statements do not relate strictly to historical or currentfacts and may be identified by their use of words like “plans,” “seeks,” “expects,”“will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets”and other words with similar meanings. These statements may address, among other things, our strategy forgrowth, product development, regulatory approvals, market position, expenses,financial results, litigation and reserves. We believe that these statements are based on reasonable estimates,assumptions and plans. However, if the estimates, assumptions or plansunderlying the forward-looking statements prove inaccurate or if other risks oruncertainties arise, actual results could differ materially from thosecommunicated 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-Kfor 2007.

 

**Therealization of deferred tax assets is subject to uncertainty**

 

The realization of our deferred tax assets is based on our assumptionthat we will be able to fully utilize the deductions that are ultimatelyrecognized for tax purposes.  However,actual results may differ from our assumptions if adequate levels of taxableincome are not attained.

 

**Item5.  Other Information**

 

On September 25, 2008, Deloitte & Touche LLP (“Deloitte”)advised The Allstate Corporation (the “Corporation”) Audit Committee (the“Allstate Audit Committee”) that it had become aware that a former Deloitteadvisory partner (the “Former Advisory Partner”) traded in the Corporation’ssecurities on two occasions in 2006. Lincoln Benefit Life Company (“LBL”) is a subsidiary of Allstate LifeInsurance Company (“ALIC”) and a consolidated subsidiary of the Corporation,and Deloitte is our registered public accounting firm, and performs our audits,in addition to those of the Corporation. Deloitte concluded that these securities transactions violated the SEC’sindependence rules.  Deloitte had conductedan internal review and concluded that the Former Advisory Partner’s actions didnot impair Deloitte’s impartiality or objectivity or that of the engagementteam that has conducted both the Corporation’s and our audits.  Deloitte’s audit engagement team consisted ofa lead client service partner, who had responsibility for all substantiveissues with respect to the planning, scope and conduct of the audit, anadditional audit partner, a concurring review partner, a senior manager,additional professional staff, as well as the Former Advisory Partner, whofunctioned primarily in a client relationship and assessment role and had nosubstantive or technical role in the audit. The Former Advisory Partner attended many, but not all, of the AllstateAudit Committee meetings.  He has notattended any meetings of the Board of Directors or of the Audit Committee ofALIC or LBL.  His primary role at theCorporation level was to function in a client service role, includingconducting Deloitte’s annual client service assessments, and he did not reviewany substantive audit matters with the Allstate Audit Committee at any of thesemeetings.  Deloitte provided a draftletter on September 25 to the Allstate Audit Committee concluding theactions of its Former Advisory Partner did not impair Deloitte’s past orcontinuing independence.

 

The Allstate Audit Committee thereafter initiated its own review withthe assistance of external counsel.  TheAllstate Audit Committee and its external counsel held meetings with Deloitte andhad frequent contacts with Deloitte and its counsel.  The Allstate Audit Committee held meetingsconcerning the progress of its review on September 29, October 8, 17,and 30, 2008.  The review included anexamination of the Corporation’s relationship to the Former Advisory Partnerand his role on the engagement.  Over thecourse of the review, the Allstate Audit Committee’s counsel examined asubstantial number of documents and communications from the Corporation’s filesand Deloitte’s, including the Former Advisory Partner’s annual goals andassessments, his communication with the audit engagement team and with theCorporation’s management and Allstate Audit Committee members, his independencecertifications, and email and other documents relating to the auditengagement.  The Allstate AuditCommittee’s external counsel’s review established that the Former AdvisoryPartner had functioned in a client service role and had not been involved inthe substantive audit or influenced any substantive portion of any audit orreview of the Corporation’s financial statements.  The Allstate Audit Committee 

 

26

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members confirmed that this was their view of the role of the FormerAdvisory Partner.  The Allstate AuditCommittee and its external counsel also met with the Corporation’s financialmanagement team as well as with senior management of Deloitte, including thecurrent and former lead client service partners.  The Allstate Audit Committee’s reviewconfirmed Deloitte’s findings that the Former Advisory Partner met with theAllstate Audit Committee as well as senior management of the Corporation, forthe purpose of enhancing Deloitte’s client service to the Corporation ratherthan participating in the audit or review.

 

The Allstate Audit Committee concurred with Deloitte’s conclusion,reconfirmed in its letter to the Allstate Audit Committee issued October 31,2008, that Deloitte’s impartiality or objectivity related to its audits of theCorporation had not been compromised and therefore, notwithstanding theviolation of the independence rules, Deloitte’s independence was notimpaired.  In reaching this conclusion,the Allstate Audit Committee took into consideration the following: (i) theFormer Advisory Partner is no longer a partner or otherwise affiliated withDeloitte; (ii) it appears that the trades in the Corporation’s securitieswere isolated incidents; (iii) the Former Advisory Partner did notdisclose his investments to Deloitte, in contravention of Deloitte’sindependence policies; (iv) the problem was corrected as promptly aspossible; (v) the Former Advisory Partner had no responsibility for, andwas not involved in, the conduct of the audit of the Corporation; (vi) itappears that the Former Advisory Partner did not exercise any influence overthe conduct of the audit or Deloitte’s conclusions with respect to the audit oraccounting consultations related to the audit; (vii) there is noindication of independence issues with respect to other members of theengagement team; and (viii) Deloitte has in place a quality control systemthat meets the requirements of the SEC and the Public Company AccountingOversight Board, and provides reasonable assurance that the accounting firm andits employees do not lack independence. The Allstate Audit Committee and Deloitte separately reported theirconclusions to the SEC Staff.

 

On November 11, 2008, after the Allstate Audit Committee andDeloitte had reported their conclusions to the SEC Staff, the ALIC AuditCommittee met.  The ALIC Audit Committeeis also the audit committee for LBL. During that meeting, the ALIC AuditCommittee reviewed the Allstate Audit Committee’s conclusion that Deloitte’simpartiality or objectivity related to its audits of the Corporation had notbeen compromised and that Deloitte’s independence was not impaired.  Following that review, the ALIC AuditCommittee concurred with Deloitte’s conclusion, reconfirmed in its letter tothe Allstate Audit Committee issued October 31, 2008, that Deloitte’simpartiality or objectivity related to its audits of the Corporation, includingLBL as a consolidated subsidiary, had not been compromised and therefore,notwithstanding the violation of the independence rules, Deloitte’sindependence was not impaired with regard to LBL.

 

## **Item 6.  Exhibits**

##  

(a)  Exhibits

 

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

 

27

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## **SIGNATURE**

##  

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

 
|                    | Lincoln  Benefit Life Company      |
|-------------------------|------------------------------------|
|                    |                               |
|                    | (Registrant)                       |
|                    |                               |
| November 11,  2008 |                               |
|                    |                               |
|                    | By /s/  Samuel H. Pilch            |
|                    |                               |
|                    | Samuel H.  Pilch                   |
|                    | (Controller)                       |
|                    | (chief accounting officer and duly |
|                    | authorized officer of Registrant)  |

 

28

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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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