##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

|    |  |                                                                                          
|--- |  | -----------------------------------------------------------------------------------------
|box |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY
FKA and currently DBA: ANCHOR NATIONAL LIFE INSURANCE COMPANY

|                        |  |                   
|----------------------- |  | ------------------
|Incorporated in Arizona |  | 86-0198983        
|                       
|                       
|                       
|                       
|                        |  | IRS Employer      
|                       
|                       
|                       
|                       
|                        |  | Identification No.

1 SunAmerica Center, Los Angeles, California 90067-6022
Registrants telephone number, including area code: (310) 772-6000

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS      Yes    þ
      No    box

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON
AUGUST 14, 2002 WAS FOLLOWS:

|                                          |  |                         
|----------------------------------------- |  | ------------------------
|Common Stock (par value $1,000 per share) |  | 3,511 shares outstanding





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TABLE OF CONTENTS



|                               |                                                                                                            |  |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I  Financial Information
|                               | BALANCE SHEET                                                                                             
|                               | STATEMENT OF INCOME AND COMPREHENSIVE INCOME                                                              
|                               | STATEMENT OF CASH FLOWS                                                                                   
|                               | NOTES TO FINANCIAL STATEMENTS                                                                             
|                               | MANAGEMENTS DISCUSSION AND ANALYSIS                      OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                
|OTHER INFORMATION             
|SIGNATURES                    



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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY

INDEX

|                               |                             |                                                                                                                     |  |           |       | 
|------------------------------ | --------------------------- | ------------------------------------------------------------------------------------------------------------------- |  | --------- | ----- | 
|                               |                             |                                                                                                                     |  | Page     
|                               |                             |                                                                                                                     |  | Number(s)
|                               |                             |                                                                                                                     |  |          
|Part I  Financial Information |                             |                                                                                                                     |  |          
|                              
|                              
|                              
|                              
|                               |                             | Balance Sheet (Unaudited)  June 30, 2002
and December 31, 2001                                                     |  |           | 3-4   | 
|                              
|                              
|                              
|                              
|                               |                             | Statement of Income and Comprehensive Income
(Unaudited)  Three Months and Six Months
Ended June 30, 2002 and 2001 |  |           | 5-6   | 
|                              
|                              
|                              
|                              
|                               |                             | Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 2002 and 2001                                       |  |           | 7-8   | 
|                              
|                              
|                              
|                              
|                               |                             | Notes to Financial Statements (Unaudited)                                                                           |  |           | 9-16  | 
|                              
|                              
|                              
|                              
|                               |                             | Managements Discussion and Analysis of Financial
Condition and Results of Operations                               |  |           | 17-34 | 
|                              
|                              
|                              
|                              
|                               |                             | Quantitative and Qualitative Disclosures About
Market Risk                                                          |  |           | 35    | 
|                              
|                              
|                              
|                              
|                               | Part II  Other Information |                                                                                                                     |  | 36-37     |      





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##### Table of Contents









AIG SUNAMERICA LIFE ASSURANCE COMPANY
BALANCE SHEET
(Unaudited)

|                                                  |                            |                                                                                                                                                           |            |                |           |              |            |           |           | 
|------------------------------------------------- | -------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | -------------- | --------- | ------------ | ---------- | --------- | --------- | 
|                                                  |                            |                                                                                                                                                           |            | June 30,       |           | December 31,
|                                                  |                            |                                                                                                                                                           |            | 2002           |           | 2001        
|                                                  |                            |                                                                                                                                                           |            |                |           |             
|                                                  |                            |                                                                                                                                                           |            | (In thousands)
|ASSETS                                            |                            |                                                                                                                                                           |            |                |           |              |            |          
|                                                 
|                                                 
|                                                 
|                                                 
|Investments and cash:                             |                            |                                                                                                                                                           |            |                |           |              |            |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Cash and short-term investments                                                                                                                           |            | $              | 100,621   |              |            | $         | 200,064   | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost: June 30,
2002, $4,893,269;
December 31, 2001, $4,607,901) |            |                | 4,870,063 |              |            |           | 4,545,075 | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Mortgage loans                                                                                                                                            |            |                | 684,670   |              |            |           | 692,392   | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Policy loans                                                                                                                                              |            |                | 218,181   |              |            |           | 226,961   | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Separate account seed money                                                                                                                               |            |                | 25,970    |              |            |           | 50,560    | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Common stocks available for sale,
at fair value (cost: June 30, 2002
and December 31, 2001, $1,288)                                                       |            |                | 959       |              |            |           | 861       | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Partnerships                                                                                                                                              |            |                | 8,334     |              |            |           | 451,583   | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Real estate                                                                                                                                               |            |                | 20,091    |              |            |           | 20,091    | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Other invested assets                                                                                                                                     |            |                | 693,871   |              |            |           | 563,739   | 
|                                                  |                            |                                                                                                                                                           |            |                |           |              |            |          
|                                                  | Total investments and cash |                                                                                                                                                           |            | 6,622,760      |           |              |            | 6,751,326 |          
|                                                 
|Variable annuity assets held in separate
accounts |                            |                                                                                                                                                           | 16,576,980 |                |           |              | 18,526,413 |          
|                                                 
|                                                 
|                                                 
|                                                 
|Accrued investment income                         |                            |                                                                                                                                                           | 68,855     |                |           |              | 65,272     |          
|                                                 
|                                                 
|                                                 
|                                                 
|Deferred acquisition costs                        |                            |                                                                                                                                                           | 1,331,632  |                |           |              | 1,419,498  |          
|                                                 
|                                                 
|                                                 
|                                                 
|Income taxes currently receivable from Parent     |                            |                                                                                                                                                           | 57,218     |                |           |              | 61,435     |          
|                                                 
|                                                 
|                                                 
|                                                 
|Receivable from brokers                           |                            |                                                                                                                                                           | 33,352     |                |           |              |           |          
|                                                 
|                                                 
|                                                 
|                                                 
|Due from affiliates                               |                            |                                                                                                                                                           | 24,949     |                |           |              | 3,999      |          
|                                                 
|                                                 
|                                                 
|                                                 
|Goodwill                                          |                            |                                                                                                                                                           | 4,603      |                |           |              | 20,150     |          
|                                                 
|                                                 
|                                                 
|                                                 
|Other assets                                      |                            |                                                                                                                                                           | 12,934     |                |           |              | 92,012     |          
|                                                  |                            |                                                                                                                                                           |            |                |           |              |            |          
|TOTAL ASSETS                                      |                            | $                                                                                                                                                         | 24,733,283 |                |           | $            | 26,940,105 |          
|                                                  |                            |                                                                                                                                                           |            |                |           |              |            |          

See accompanying notes to financial statements

3



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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
BALANCE SHEET (Continued)
(Unaudited)

|                                                          |                                                     |   |                |           |              |   |            |           |  
|--------------------------------------------------------- | --------------------------------------------------- | - | -------------- | --------- | ------------ | - | ---------- | --------- | -
|                                                          |                                                     |   | June 30,       |           | December 31,
|                                                          |                                                     |   | 2002           |           | 2001        
|                                                          |                                                     |   |                |           |             
|                                                          |                                                     |   | (In thousands)
|LIABILITIES AND SHAREHOLDERS EQUITY                      |                                                     |   |                |           |              |   |            |          
|                                                         
|                                                         
|                                                         
|                                                         
|Reserves, payables and accrued liabilities:               |                                                     |   |                |           |              |   |            |          
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Reserves for fixed annuity contracts                |   | $              | 3,711,313 |              |   | $          | 3,498,917 |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Reserves for universal life insurance
contracts     |   |                | 1,700,312 |              |   |            | 1,738,493 |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Reserves for guaranteed investment
contracts        |   |                | 484,592   |              |   |            | 483,861   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Collateral held under securities
lending agreements |   |                | 690,884   |              |   |            | 541,899   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Modified coinsurance deposit liability              |   |                | 46,096    |              |   |            | 61,675    |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Payable to brokers                                  |   |                |          |              |   |            | 4,479     |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other liabilities                                   |   |                | 139,714   |              |   |            | 220,588   |  
|                                                          |                                                     |   |                |           |              |   |            |          
|                                                          | Total reserves, payables and accrued
liabilities    |   |                | 6,772,911 |              |   |            | 6,549,912 |  
|                                                          |                                                     |   |                |           |              |   |            |          
|Variable annuity liabilities related to
separate accounts |                                                     |   | 16,576,980     |           |              |   | 18,526,413 |          
|                                                          |                                                     |   |                |           |              |   |            |          
|Subordinated notes payable to affiliates                  |                                                     |   |               |           |              |   | 58,814     |          
|                                                          |                                                     |   |                |           |              |   |            |          
|Deferred income taxes                                     |                                                     |   | 278,650        |           |              |   | 210,970    |          
|                                                          |                                                     |   |                |           |              |   |            |          
|Shareholders equity:                                     |                                                     |   |                |           |              |   |            |          
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Common stock                                        |   |                | 3,511     |              |   |            | 3,511     |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Additional paid-in capital                          |   |                | 925,753   |              |   |            | 925,753   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Retained earnings                                   |   |                | 185,640   |              |   |            | 694,004   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accumulated other comprehensive loss                |   |                | (10,162   | )            |   |            | (29,272   | )
|                                                          |                                                     |   |                |           |              |   |            |          
|                                                          | Total shareholders equity                          |   |                | 1,104,742 |              |   |            | 1,593,996 |  
|                                                          |                                                     |   |                |           |              |   |            |          
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                |                                                     | $ | 24,733,283     |           |              | $ | 26,940,105 |          
|                                                          |                                                     |   |                |           |              |   |            |          

See accompanying notes to financial statements

4



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##### Table of Contents






AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months and six months ended June 30, 2002 and 2001
(Unaudited)

|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |          |  
|---------------------------------------------------------------- | ---------------------------------------- | - | -------------- | ------- | ---------- | - | ------- | ------- | ---- | - | -------- | -------- | - | - | ------- | -------- | -
|                                                                 |                                          |   | Three Months   |         | Six Months
|                                                                 |                                          |   |                |         |           
|                                                                 |                                          |   | 2002           |         | 2001       |   | 2002    |         | 2001
|                                                                 |                                          |   |                |         |            |   |         |         |     
|                                                                 |                                          |   | (In thousands)
|Investment income                                                |                                          | $ | 94,886         |         |            | $ | 101,202 |         |      | $ | 191,220  |          |   | $ | 188,983 |         
|                                                                
|                                                                
|                                                                
|                                                                
|Interest expense on:                                             |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Fixed annuity contracts                  |   |                | (33,866 | )          |   |         | (31,018 | )    |   |          | (67,835  | ) |   |         | (63,116  | )
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Universal life insurance contracts       |   |                | (20,048 | )          |   |         | (20,326 | )    |   |          | (39,634  | ) |   |         | (40,788  | )
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Guaranteed investment contracts          |   |                | (3,072  | )          |   |         | (6,385  | )    |   |          | (6,097   | ) |   |         | (16,104  | )
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Security lending agreements              |   |                | (3,417  | )          |   |         |        |      |   |          | (6,035   | ) |   |         |         |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Subordinated notes payable to
affiliates |   |                |        |            |   |         | (1,118  | )    |   |          |         |   |   |         | (2,235   | )
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|                                                                 | Total interest expense                   |   |                | (60,403 | )          |   |         | (58,847 | )    |   |          | (119,601 | ) |   |         | (122,243 | )
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|NET INVESTMENT INCOME                                            |                                          |   | 34,483         |         |            |   | 42,355  |         |      |   | 71,619   |          |   |   | 66,740  |         
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|NET REALIZED INVESTMENT LOSSES                                   |                                          |   | (10,679        | )       |            |   | (14,719 | )       |      |   | (13,714  | )        |   |   | (39,583 | )       
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|Fee income:                                                      |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Variable annuity fees                    |   |                | 102,303 |            |   |         | 92,683  |      |   |          | 171,459  |   |   |         | 186,249  |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Net retained commissions                 |   |                |        |            |   |         | 12,599  |      |   |          |         |   |   |         | 25,036   |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Asset management fees                    |   |                |        |            |   |         | 16,998  |      |   |          |         |   |   |         | 34,196   |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Universal life insurance fees, net       |   |                | 5,583   |            |   |         | 4,845   |      |   |          | 10,346   |   |   |         | 10,074   |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Surrender charges                        |   |                | 8,353   |            |   |         | 5,926   |      |   |          | 14,858   |   |   |         | 11,825   |  
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Other fees                               |   |                | 1,004   |            |   |         | 3,117   |      |   |          | 2,032    |   |   |         | 6,944    |  
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|TOTAL FEE INCOME                                                 |                                          |   | 117,243        |         |            |   | 136,168 |         |      |   | 198,695  |          |   |   | 274,324 |         
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|GENERAL AND ADMINISTRATIVE EXPENSES                              |                                          |   | (24,822        | )       |            |   | (42,833 | )       |      |   | (48,082  | )        |   |   | (81,056 | )       
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|AMORTIZATION OF DEFERRED
ACQUISITION COSTS                       |                                          |   | (60,704        | )       |            |   | (51,152 | )       |      |   | (107,357 | )        |   |   | (93,416 | )       
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|ANNUAL COMMISSIONS                                               |                                          |   | (15,814        | )       |            |   | (14,632 | )       |      |   | (31,620  | )        |   |   | (28,565 | )       
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|GUARANTEED MINIMUM DEATH
BENEFITS, NET OF REINSURANCE RECOVERIES |                                          |   | (10,431        | )       |            |   | (2,731  | )       |      |   | (17,752  | )        |   |   | (5,175  | )       
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|PRETAX INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE      |                                          |   | 29,276         |         |            |   | 52,456  |         |      |   | 51,789   |          |   |   | 93,269  |         
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|Income tax expense                                               |                                          |   | (4,374         | )       |            |   | (13,299 | )       |      |   | (7,769   | )        |   |   | (23,317 | )       
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE             |                                          |   | 24,902         |         |            |   | 39,157  |         |      |   | 44,020   |          |   |   | 69,952  |         
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAX               |                                          |   |               |         |            |   | (10,342 | )       |      |   |         |          |   |   | (10,342 | )       
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         
|NET INCOME                                                       |                                          |   | 24,902         |         |            |   | 28,815  |         |      |   | 44,020   |          |   |   | 59,610  |         
|                                                                 |                                          |   |                |         |            |   |         |         |      |   |          |          |   |   |         |         

See accompanying notes to financial statements

5



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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued)
For the three months and six months ended June 30, 2002 and 2001
(Unaudited)

|                                               |                                                                                                                                                                                                                                                                                                                                                         |   |                |        |            |   |        |         |      |   |        |        |   |   |        |        | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------- | ------ | ---------- | - | ------ | ------- | ---- | - | ------ | ------ | - | - | ------ | ------ | 
|                                               |                                                                                                                                                                                                                                                                                                                                                         |   | Three Months   |        | Six Months
|                                               |                                                                                                                                                                                                                                                                                                                                                         |   |                |        |           
|                                               |                                                                                                                                                                                                                                                                                                                                                         |   | 2002           |        | 2001       |   | 2002   |         | 2001
|                                               |                                                                                                                                                                                                                                                                                                                                                         |   |                |        |            |   |        |         |     
|                                               |                                                                                                                                                                                                                                                                                                                                                         |   | (In thousands)
|OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX: |                                                                                                                                                                                                                                                                                                                                                         |   |                |        |            |   |        |         |      |   |        |        |   |   |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Net unrealized gains (losses) on
debt and equity securities
available for sale identified
in the current period (net of
income tax expense of $18,270
and income tax benefit of
$10,988 for the three months
ended June 30, 2002 and 2001,
respectively, and income tax
expense of $7,276 and $2,185
for the six months of 2002
and 2001, respectively) |   |                | 33,930 |            |   |        | (20,407 | )    |   |        | 13,512 |   |   |        | 4,057  | 
|                                              
|                                               | Less reclassification adjustment
for net realized losses included
in net income (net of income tax
benefit of $2,942 and $4,261 for
the three months ended June 30,
2002 and 2001, respectively, and
$3,791 and $11,396 for the six
months of 2002 and 2001,
respectively)                                                                              |   |                | 5,463  |            |   |        | 7,913   |      |   |        | 7,040  |   |   |        | 21,164 | 
|                                              
|                                               | CUMULATIVE EFFECT OF ACCOUNTING
CHANGE                                                                                                                                                                                                                                                                                                                  |   |                |       |            |   |        |        |      |   |        |       |   |   |        | 1,389  | 
|                                              
|                                               | Net change related to cash flow
hedges (net of income tax benefit
of $467 and $89 for the three
months ended June 30, 2002 and
2001, respectively and income tax
benefit of $776 and income tax
expense of and $267 for the six
months of 2002 and 2001,
respectively)                                                                                  |   |                | (868   | )          |   |        | (164    | )    |   |        | (1,442 | ) |   |        | 497    | 
|                                               |                                                                                                                                                                                                                                                                                                                                                         |   |                |        |            |   |        |         |      |   |        |        |   |   |        |       
|                                               | OTHER COMPREHENSIVE INCOME (LOSS)                                                                                                                                                                                                                                                                                                                       |   |                | 38,525 |            |   |        | (12,658 | )    |   |        | 19,110 |   |   |        | 27,107 | 
|                                               |                                                                                                                                                                                                                                                                                                                                                         |   |                |        |            |   |        |         |      |   |        |        |   |   |        |       
|COMPREHENSIVE INCOME                           |                                                                                                                                                                                                                                                                                                                                                         | $ | 63,427         |        |            | $ | 16,157 |         |      | $ | 63,130 |        |   | $ | 86,717 |       
|                                               |                                                                                                                                                                                                                                                                                                                                                         |   |                |        |            |   |        |         |      |   |        |        |   |   |        |       

See accompanying notes to financial statements

6



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##### Table of Contents






AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS
For the six months ended June 30, 2002 and 2001
(Unaudited)

|                                                    |                                                                                  |                                                                     |                                                     |         |                |          |         |         |         |          |  
|--------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------------------- | ------- | -------------- | -------- | ------- | ------- | ------- | -------- | -
|                                                    |                                                                                  |                                                                     |                                                     |         | 2002           |          | 2001   
|                                                    |                                                                                  |                                                                     |                                                     |         |                |          |        
|                                                    |                                                                                  |                                                                     |                                                     |         | (In thousands)
|                                                    | CASH FLOWS FROM OPERATING ACTIVITIES:                                            |                                                                     |                                                     |         |                |          |         |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Net income                                                                       |                                                                     | $                                                   | 44,020  |                |          | $       | 59,610  |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Adjustment to reconcile net income to net
cash provided by operating activities: |                                                                     |                                                     |         |                |          |         |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Cumulative effect of accounting change,
net of tax                  |                                                     |         |               |          |         |         | 10,342  |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Interest credited to:                                               |                                                     |         |                |          |         |         |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Fixed annuity contracts                             |         |                | 67,835   |         |         |         | 63,116   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Universal life insurance contracts                  |         |                | 39,634   |         |         |         | 40,788   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Guaranteed investment contracts                     |         |                | 6,097    |         |         |         | 16,104   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Net realized investment losses                                      |                                                     |         | 13,714         |          |         |         | 39,583  |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | (Accretion) amortization of net
(discounts) premiums on investments |                                                     |         | (391           | )        |         |         | 5,705   |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Universal life insurance fees                                       |                                                     |         | (10,346        | )        |         |         | (10,074 | )       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Amortization of goodwill                                            |                                                     |         |               |          |         |         | 695     |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Amortization of deferred acquisition costs                          |                                                     |         | 107,357        |          |         |         | 93,416  |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Provision for deferred income taxes                                 |                                                     |         | 69,885         |          |         |         | 26,494  |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Change in:                                                          |                                                     |         |                |          |         |         |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Accrued investment income                           |         |                | (3,628   | )       |         |         | (2,193   | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Deferred acquisition costs                          |         |                | (109,558 | )       |         |         | (168,417 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Other assets                                        |         |                | 4,881    |         |         |         | 17,775   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Income taxes currently receivable from Parent       |         |                | (7,566   | )       |         |         | (11,433  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Due from/to affiliates                              |         |                | (32,492  | )       |         |         | 4,480    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Other liabilities                                   |         |                | (9,749   | )       |         |         | (13,947  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Other, net                                                          |                                                     |         | 3,082          |          |         |         | (1,251  | )       
|                                                    |                                                                                  |                                                                     |                                                     |         |                |          |         |        
|                                                    | NET CASH PROVIDED BY OPERATING ACTIVITIES                                        |                                                                     |                                                     | 182,775 |                |          |         | 170,793 |        
|                                                    |                                                                                  |                                                                     |                                                     |         |                |          |         |        
|                                                    | CASH FLOWS FROM INVESTING ACTIVITIES:                                            |                                                                     |                                                     |         |                |          |         |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Purchases of:                                                       |                                                     |         |                |          |         |         |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Bonds, notes and redeemable preferred stocks        |         |                | (921,523 | )       |         |         | (509,078 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Mortgage loans                                      |         |                | (41,166  | )       |         |         | (25,769  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Other investments, excluding short-term
investments |         |                | (1,514   | )       |         |         | (5,043   | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Sales of:                                                           |                                                     |         |                |          |         |         |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Bonds, notes and redeemable preferred stocks        |         |                | 336,574  |         |         |         | 345,222  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Other investments, excluding short-term
investments |         |                | 396      |         |         |         | 3,433    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  | Redemptions and maturities of:                                      |                                                     |         |                |          |         |         |         |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Bonds, notes and redeemable preferred stocks        |         |                | 255,012  |         |         |         | 312,947  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Mortgage loans                                      |         |                | 49,933   |         |         |         | 16,926   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                  |                                                                     | Other investments, excluding short-term
investments |         |                | 99,999   |         |         |         | 53,683   |  
|                                                    |                                                                                  |                                                                     |                                                     |         |                |          |         |        
|NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES |                                                                                  |                                                                     | (222,289                                            | )       |                |          | 192,321 |        
|                                                    |                                                                                  |                                                                     |                                                     |         |                |          |         |        

See accompanying notes to financial statements

7



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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
For the six months ended June 30, 2002 and 2001
(Unaudited)

|                                                       |                                                                                                         |                                    |         |                |          |      |          |          |          |  
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- | ---------------------------------- | ------- | -------------- | -------- | ---- | -------- | -------- | -------- | -
|                                                       |                                                                                                         |                                    |         | 2002           |          | 2001
|                                                       |                                                                                                         |                                    |         |                |          |     
|                                                       |                                                                                                         |                                    |         | (In thousands)
|CASH FLOWS FROM FINANCING ACTIVITIES:                  |                                                                                                         |                                    |         |                |          |      |          |         
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Deposits received on:                                                                                   |                                    |         |                |          |      |          |          |         
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                         | Fixed annuity contracts            |         | $              | 815,813  |      |          | $        | 900,743  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                         | Universal life insurance contracts |         |                | 24,128   |      |          |          | 26,155   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                         | Guaranteed investment contracts    |         |                |         |      |          |          | 40,000   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net exchanges from the fixed accounts
of variable annuity contracts                                     |                                    |         | (463,914       | )        |      |          | (781,401 | )       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Withdrawal payments on:                                                                                 |                                    |         |                |          |      |          |          |         
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                         | Fixed annuity contracts            |         |                | (180,037 | )    |          |          | (136,642 | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                         | Universal life insurance contracts |         |                | (36,849  | )    |          |          | (38,242  | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                         | Guaranteed investment contracts    |         |                | (5,365   | )    |          |          | (175,874 | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Claims and annuity payments on:                                                                         |                                    |         |                |          |      |          |          |         
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                         | Fixed annuity contracts            |         |                | (49,881  | )    |          |          | (26,093  | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                         | Universal life insurance contracts |         |                | (51,712  | )    |          |          | (74,028  | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net (repayments of) receipts from
other short-term financings                                           |                                    |         | (13,660        | )        |      |          | 912      |         
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net payment related to a modified
coinsurance transaction                                               |                                    |         | (15,579        | )        |      |          | (17,322  | )       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Dividends paid to Parent                                                                                |                                    |         |               |          |      |          | (94,095  | )       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net cash and short-term investments
transferred to the Parent in distribution
of Saamsun Holdings Corp. |                                    |         | (82,873        | )        |      |          |         |         
|                                                       |                                                                                                         |                                    |         |                |          |      |          |         
|NET CASH USED IN FINANCING ACTIVITIES                  |                                                                                                         |                                    | (59,929 | )              |          |      | (375,887 | )       
|                                                       |                                                                                                         |                                    |         |                |          |      |          |         
|NET DECREASE IN CASH AND SHORT-TERM
INVESTMENTS        |                                                                                                         |                                    | (99,443 | )              |          |      | (12,773  | )       
|                                                      
|CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD |                                                                                                         |                                    | 200,064 |                |          |      | 169,701  |         
|                                                       |                                                                                                         |                                    |         |                |          |      |          |         
|CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD       |                                                                                                         | $                                  | 100,621 |                |          | $    | 156,928  |         
|                                                       |                                                                                                         |                                    |         |                |          |      |          |         
|SUPPLEMENTAL CASH FLOW INFORMATION:                    |                                                                                                         |                                    |         |                |          |      |          |         
|                                                      
|Interest paid on indebtedness                          |                                                                                                         | $                                  | 6,035   |                |          | $    | 320      |         
|                                                       |                                                                                                         |                                    |         |                |          |      |          |         
|Net income taxes paid to Parent                        |                                                                                                         | $                                  | 54,550  |                |          | $    | 8,289    |         
|                                                       |                                                                                                         |                                    |         |                |          |      |          |         

See accompanying notes to financial statements

8



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##### Table of Contents






AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

1.  BASIS OF PRESENTATION



| |  | AIG SunAmerica Life Assurance Company (FKA and currently DBA Anchor National
Life Insurance Company) (the Company), is a direct wholly owned subsidiary of
SunAmerica Life Insurance Company (the Parent), which is an indirect wholly
owned subsidiary of American International Group, Inc. (AIG), a holding
company which through its subsidiaries is engaged in a broad range of insurance
and insurance-related activities, financial services, retirement services and
asset management. The Company is an Arizona-domiciled life insurance company
engaged in the business of writing fixed and variable annuities directed to the
market for tax-deferred, long-term savings products, administering a closed
block of universal life policies and writing guaranteed investment contracts
(GICs) directed to the institutional marketplace.                                                                                                                                                                                                                                                
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company changed its name to SunAmerica National Life Insurance Company on
October 5, 2001 and further changed its name to AIG SunAmerica Life Assurance
Company on January 24, 2002. However, the Company is continuing to do business
as Anchor National Life Insurance Company. The Company is seeking regulatory
approval to change its name in each state in which it does business to AIG
SunAmerica Life Assurance Company effective sometime in the first quarter of
2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments necessary, consisting of normal recurring items, to
present fairly the Companys financial position as of June 30, 2002 and
consolidated financial position as of December 31, 2001, the results of its
operations for the three months and six months ended June 30, 2002 and
consolidated operations for the three months and six months ended June 30, 2001
and its cash flows for the six months ended June 30, 2002 and consolidated cash
flows for the six months ended June 30, 2001. The results of operations for
the three months and six months ended June 30, 2002 are not necessarily
indicative of the results to be expected for the full year. The accompanying
unaudited financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2001,
contained in the Companys 2001 Annual Report on Form 10K/A. Certain prior
period items have been reclassified to conform to the current periods
presentation.

9



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##### Table of Contents



2.  RELATED PARTY TRANSACTIONS



| |  | The Company declared a distribution to its Parent, effective January 1, 2002,
of 100% of the outstanding capital stock of its consolidated subsidiary,
Saamsun Holdings Corporation (Saamsun). Pursuant to this distribution,
Saamsun became a direct wholly owned subsidiary of the Parent. Saamsun
comprised the Companys asset management and broker-dealer segments (see Note
3). This distribution had a material effect on the Companys shareholders
equity, reducing it by $552,384,000. This distribution had the effect of
reducing cash and short-term investments by $82,873,000, partnerships by
$443,369,000, deferred acquisition costs by $98,428,000, other assets by
$108,163,000, other liabilities by $121,635,000 and subordinated notes payable
to affiliates by $58,814,000. Pretax income in future periods will be reduced
by the earnings of the Companys asset management and broker-dealer operations,
substantially offset by a profit sharing agreement on fees earned on variable
annuity subaccounts (see below). Pretax income from these operations, on a
combined basis, totaled $5,845,000 for the three months ended June 30, 2001 and
$20,632,000 for the six months ended June 30, 2001.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On June 10, 2002, the Company entered into a profit sharing agreement with
SunAmerica Asset Management Corp. (SAAMCO), a registered investment advisor
and formerly a wholly owned subsidiary, whereby SAAMCO will pay its profits
earned through servicing the Companys variable annuity contracts to the
Company (SAAMCO Agreement). SAAMCO is the investment adviser or business
manager for certain trusts that hold deposits from the Companys variable
annuity products. Pursuant to the SAAMCO Agreement, SAAMCO will pay to the
Company variable annuity fee income earned from acting as the investment
adviser or business manager for certain trusts that hold deposits from the
Companys variable annuity products. The SAAMCO Agreement was retroactive to
January 1, 2002. Variable annuity fees of $33,790,000 were included in the
statement of income relating to the SAAMCO Agreement, approximately half of
which related to first quarter 2002 activity.                                                                                                                                                                                                                                                 

3.  SEGMENT INFORMATION



| |  | As of January 1, 2002, the Company conducted its business through one business
segment, annuity operations. Prior to January 1, 2002, the Company conducted
its business through three segments: annuity operations, asset management
operations and broker-dealer operations. Annuity operations consisted of the
sale and administration of deposit-type insurance contracts, including fixed
and variable annuities, universal life insurance contracts and GICs. Asset
management operations, which included the distribution and management of mutual
funds, were conducted by SAAMCO and its related distributor, SunAmerica Capital
Services, Inc. (SACS). Broker-dealer operations involved the sale of
securities and financial services products, and were conducted by Royal
Alliance Associates, Inc. (Royal Alliance), formerly a wholly owned
subsidiary of the Company.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



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##### Table of Contents



3.   SEGMENT INFORMATION (Continued)



| |  | Pursuant to the distribution of Saamsun to the Parent on January 1,
2002, the Company has only one business segment, annuity operations.
For the three months and six months ended June 30, 2001, the Company
had three business segments: annuity operations, asset management
operations and broker-dealer operations. The operating results of
the three months ended June 30, 2002 also include fee income
contributed by SAAMCO in accordance with the SAAMCO Agreement.
Following is selected information pertaining to the Companys
business segments.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|----------------------------------------------------------- |  | -------------- | ---------- | ---------- |  | ---------- | - | ------- |  | - | - |  |  | - | ---------- | -
|                                                            |  |                |            |            |  | Asset      |   | Broker- |  |   |   | 
|                                                            |  | Annuity        |            | Management |  | Dealer     |   |         |  |  
|                                                            |  | Operations     |            | Operations |  | Operations |   | Total  
|                                                            |  |                |            |            |  |            |   |        
|                                                            |  | (In thousands)
|THREE MONTHS ENDED
JUNE 30, 2002:                           |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|                                                           
|                                                           
|                                                           
|                                                           
|Investment income                                           |  | $              | 94,886     |            |  | $          |  |         |  | $ |  |  |  | $ | 94,886     |  
|                                                           
|                                                           
|                                                           
|                                                           
|Interest expense                                            |  |                | (60,403    | )          |  |            |  |         |  |   |  |  |  |   | (60,403    | )
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|Net investment income                                       |  |                | 34,483     |            |  |            |  |         |  |   |  |  |  |   | 34,483     |  
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|                                                           
|                                                           
|                                                           
|                                                           
|Net realized investment
losses                              |  |                | (10,679    | )          |  |            |  |         |  |   |  |  |  |   | (10,679    | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|Variable annuity fees                                       |  |                | 102,303    |            |  |            |  |         |  |   |  |  |  |   | 102,303    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Universal life insurance
fees, net                          |  |                | 5,583      |            |  |            |  |         |  |   |  |  |  |   | 5,583      |  
|                                                           
|                                                           
|                                                           
|                                                           
|Surrender charges                                           |  |                | 8,353      |            |  |            |  |         |  |   |  |  |  |   | 8,353      |  
|                                                           
|                                                           
|                                                           
|                                                           
|Other fees, net                                             |  |                | 1,004      |            |  |            |  |         |  |   |  |  |  |   | 1,004      |  
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|Total fee income                                            |  |                | 117,243    |            |  |            |  |         |  |   |  |  |  |   | 117,243    |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|General and
administrative expenses                         |  |                | (24,822    | )          |  |            |  |         |  |   |  |  |  |   | (24,822    | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|Amortization of deferred
acquisition costs                  |  |                | (60,704    | )          |  |            |  |         |  |   |  |  |  |   | (60,704    | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|Annual commissions                                          |  |                | (15,814    | )          |  |            |  |         |  |   |  |  |  |   | (15,814    | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|Guaranteed minimum
death benefits, net                      |  |                | (10,431    | )          |  |            |  |         |  |   |  |  |  |   | (10,431    | )
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|Pretax income before
cumulative effect of
accounting change |  | $              | 29,276     |            |  | $          |  |         |  | $ |  |  |  | $ | 29,276     |  
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|Total assets                                                |  | $              | 24,733,283 |            |  | $          |  |         |  | $ |  |  |  | $ | 24,733,283 |  
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  

11



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##### Table of Contents



3.   SEGMENT INFORMATION (Continued)

|                                                            |  |                |            |            |  |            |         |         |  |   |        |   |  |   |            |  
|----------------------------------------------------------- |  | -------------- | ---------- | ---------- |  | ---------- | ------- | ------- |  | - | ------ | - |  | - | ---------- | -
|                                                            |  |                |            |            |  | Asset      |         | Broker- |  |   |        |  
|                                                            |  | Annuity        |            | Management |  | Dealer     |         |         |  |  
|                                                            |  | Operations     |            | Operations |  | Operations |         | Total  
|                                                            |  |                |            |            |  |            |         |        
|                                                            |  | (In thousands)
|THREE MONTHS ENDED
JUNE 30, 2001:                           |  |                |            |            |  |            |         |         |  |   |        |   |  |   |            |  
|                                                           
|                                                           
|                                                           
|                                                           
|Investment income                                           |  | $              | 94,138     |            |  | $          | 6,920   |         |  | $ | 144    |   |  | $ | 101,202    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Interest expense                                            |  |                | (57,729    | )          |  |            | (1,028  | )       |  |   | (90    | ) |  |   | (58,847    | )
|                                                            |  |                |            |            |  |            |         |         |  |   |        |   |  |   |            |  
|Net investment income                                       |  |                | 36,409     |            |  |            | 5,892   |         |  |   | 54     |   |  |   | 42,355     |  
|                                                           
|Net realized investment
losses                              |  |                | (5,669     | )          |  |            | (9,050  | )       |  |   |       |   |  |   | (14,719    | )
|                                                           
|Variable annuity fees                                       |  |                | 89,760     |            |  |            | 2,923   |         |  |   |       |   |  |   | 92,683     |  
|                                                           
|                                                           
|                                                           
|                                                           
|Net retained commissions                                    |  |                |           |            |  |            | 683     |         |  |   | 11,916 |   |  |   | 12,599     |  
|                                                           
|                                                           
|                                                           
|                                                           
|Asset management fees                                       |  |                |           |            |  |            | 16,998  |         |  |   |       |   |  |   | 16,998     |  
|                                                           
|                                                           
|                                                           
|                                                           
|Universal life insurance
fees, net                          |  |                | 4,845      |            |  |            |        |         |  |   |       |   |  |   | 4,845      |  
|                                                           
|                                                           
|                                                           
|                                                           
|Surrender charges                                           |  |                | 5,926      |            |  |            |        |         |  |   |       |   |  |   | 5,926      |  
|                                                           
|                                                           
|                                                           
|                                                           
|Other fees, net                                             |  |                | 898        |            |  |            | 1,906   |         |  |   | 313    |   |  |   | 3,117      |  
|                                                            |  |                |            |            |  |            |         |         |  |   |        |   |  |   |            |  
|Total fee income                                            |  |                | 101,429    |            |  |            | 22,510  |         |  |   | 12,229 |   |  |   | 136,168    |  
|                                                           
|General and
administrative expenses                         |  |                | (27,377    | )          |  |            | (7,922  | )       |  |   | (7,534 | ) |  |   | (42,833    | )
|                                                           
|Amortization of deferred
acquisition costs                  |  |                | (40,818    | )          |  |            | (10,334 | )       |  |   |       |   |  |   | (51,152    | )
|                                                           
|Annual commissions                                          |  |                | (14,632    | )          |  |            |        |         |  |   |       |   |  |   | (14,632    | )
|                                                           
|Guaranteed minimum
death benefits, net                      |  |                | (2,731     | )          |  |            |        |         |  |   |       |   |  |   | (2,731     | )
|                                                            |  |                |            |            |  |            |         |         |  |   |        |   |  |   |            |  
|Pretax income before
cumulative effect of
accounting change |  | $              | 46,611     |            |  | $          | 1,096   |         |  | $ | 4,749  |   |  | $ | 52,456     |  
|                                                            |  |                |            |            |  |            |         |         |  |   |        |   |  |   |            |  
|Total assets                                                |  | $              | 25,907,152 |            |  | $          | 657,683 |         |  | $ | 67,497 |   |  | $ | 26,632,332 |  
|                                                            |  |                |            |            |  |            |         |         |  |   |        |   |  |   |            |  

12



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##### Table of Contents



3.   SEGMENT INFORMATION (Continued)

|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|----------------------------------------------------------- |  | -------------- | ---------- | ---------- |  | ---------- | - | ------- |  | - | - |  |  | - | ---------- | -
|                                                            |  |                |            |            |  | Asset      |   | Broker- |  |   |   | 
|                                                            |  | Annuity        |            | Management |  | Dealer     |   |         |  |  
|                                                            |  | Operations     |            | Operations |  | Operations |   | Total  
|                                                            |  |                |            |            |  |            |   |        
|                                                            |  | (In thousands)
|SIX MONTHS ENDED
JUNE 30, 2002:                             |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|                                                           
|                                                           
|                                                           
|                                                           
|Investment income                                           |  | $              | 191,220    |            |  | $          |  |         |  | $ |  |  |  | $ | 191,220    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Interest expense                                            |  |                | (119,601   | )          |  |            |  |         |  |   |  |  |  |   | (119,601   | )
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|Net investment income                                       |  |                | 71,619     |            |  |            |  |         |  |   |  |  |  |   | 71,619     |  
|                                                           
|Net realized investment
losses                              |  |                | (13,714    | )          |  |            |  |         |  |   |  |  |  |   | (13,714    | )
|                                                           
|Variable annuity fees                                       |  |                | 171,459    |            |  |            |  |         |  |   |  |  |  |   | 171,459    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Universal life insurance
fees, net                          |  |                | 10,346     |            |  |            |  |         |  |   |  |  |  |   | 10,346     |  
|                                                           
|                                                           
|                                                           
|                                                           
|Surrender charges                                           |  |                | 14,858     |            |  |            |  |         |  |   |  |  |  |   | 14,858     |  
|                                                           
|                                                           
|                                                           
|                                                           
|Other fees, net                                             |  |                | 2,032      |            |  |            |  |         |  |   |  |  |  |   | 2,032      |  
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|Total fee income                                            |  |                | 198,695    |            |  |            |  |         |  |   |  |  |  |   | 198,695    |  
|                                                           
|General and
administrative expenses                         |  |                | (48,082    | )          |  |            |  |         |  |   |  |  |  |   | (48,082    | )
|                                                           
|Amortization of deferred
acquisition costs                  |  |                | (107,357   | )          |  |            |  |         |  |   |  |  |  |   | (107,357   | )
|                                                           
|Annual commissions                                          |  |                | (31,620    | )          |  |            |  |         |  |   |  |  |  |   | (31,620    | )
|                                                           
|Guaranteed minimum
death benefits, net                      |  |                | (17,752    | )          |  |            |  |         |  |   |  |  |  |   | (17,752    | )
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|Pretax income before
cumulative effect of
accounting change |  | $              | 51,789     |            |  | $          |  |         |  | $ |  |  |  | $ | 51,789     |  
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|Total assets                                                |  | $              | 24,733,283 |            |  | $          |  |         |  | $ |  |  |  | $ | 24,733,283 |  
|                                                            |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  

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##### Table of Contents



3.   SEGMENT INFORMATION (Continued)

|                                                            |  |                |            |            |  |            |         |         |  |   |         |   |  |   |            |  
|----------------------------------------------------------- |  | -------------- | ---------- | ---------- |  | ---------- | ------- | ------- |  | - | ------- | - |  | - | ---------- | -
|                                                            |  |                |            |            |  | Asset      |         | Broker- |  |   |         |  
|                                                            |  | Annuity        |            | Management |  | Dealer     |         |         |  |  
|                                                            |  | Operations     |            | Operations |  | Operations |         | Total  
|                                                            |  |                |            |            |  |            |         |        
|                                                            |  | (In thousands)
|SIX MONTHS ENDED
JUNE 30, 2001:                             |  |                |            |            |  |            |         |         |  |   |         |   |  |   |            |  
|                                                           
|                                                           
|                                                           
|                                                           
|Investment income                                           |  | $              | 179,237    |            |  | $          | 9,412   |         |  | $ | 334     |   |  | $ | 188,983    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Interest expense                                            |  |                | (120,008   | )          |  |            | (2,055  | )       |  |   | (180    | ) |  |   | (122,243   | )
|                                                            |  |                |            |            |  |            |         |         |  |   |         |   |  |   |            |  
|Net investment income                                       |  |                | 59,229     |            |  |            | 7,357   |         |  |   | 154     |   |  |   | 66,740     |  
|                                                           
|Net realized investment
losses                              |  |                | (30,533    | )          |  |            | (9,050  | )       |  |   |        |   |  |   | (39,583    | )
|                                                           
|Variable annuity fees                                       |  |                | 180,356    |            |  |            | 5,893   |         |  |   |        |   |  |   | 186,249    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Net retained commissions                                    |  |                |           |            |  |            | 1,279   |         |  |   | 23,757  |   |  |   | 25,036     |  
|                                                           
|                                                           
|                                                           
|                                                           
|Asset management fees                                       |  |                |           |            |  |            | 34,196  |         |  |   |        |   |  |   | 34,196     |  
|                                                           
|                                                           
|                                                           
|                                                           
|Universal life insurance
fees, net                          |  |                | 10,074     |            |  |            |        |         |  |   |        |   |  |   | 10,074     |  
|                                                           
|                                                           
|                                                           
|                                                           
|Surrender charges                                           |  |                | 11,825     |            |  |            |        |         |  |   |        |   |  |   | 11,825     |  
|                                                           
|                                                           
|                                                           
|                                                           
|Other fees, net                                             |  |                | 1,873      |            |  |            | 4,234   |         |  |   | 837     |   |  |   | 6,944      |  
|                                                            |  |                |            |            |  |            |         |         |  |   |         |   |  |   |            |  
|Total fee income                                            |  |                | 204,128    |            |  |            | 45,602  |         |  |   | 24,594  |   |  |   | 274,324    |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|General and
administrative expenses                         |  |                | (52,679    | )          |  |            | (13,166 | )       |  |   | (15,211 | ) |  |   | (81,056    | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|Amortization of deferred
acquisition costs                  |  |                | (73,768    | )          |  |            | (19,648 | )       |  |   |        |   |  |   | (93,416    | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|Annual commissions                                          |  |                | (28,565    | )          |  |            |        |         |  |   |        |   |  |   | (28,565    | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|Guaranteed minimum
death benefits, net                      |  |                | (5,175     | )          |  |            |        |         |  |   |        |   |  |   | (5,175     | )
|                                                            |  |                |            |            |  |            |         |         |  |   |         |   |  |   |            |  
|Pretax income before
cumulative effect of
accounting change |  | $              | 72,637     |            |  | $          | 11,095  |         |  | $ | 9,537   |   |  | $ | 93,269     |  
|                                                            |  |                |            |            |  |            |         |         |  |   |         |   |  |   |            |  
|Total assets                                                |  | $              | 25,907,152 |            |  | $          | 657,683 |         |  | $ | 67,497  |   |  | $ | 26,632,332 |  
|                                                            |  |                |            |            |  |            |         |         |  |   |         |   |  |   |            |  

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##### Table of Contents



4.  DERIVATIVES



| |  | As a component of its asset and liability management strategy, the Company
utilizes interest rate swap agreements (Swap Agreements) to match assets more
closely to liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an
underlying principal balance (notional principal) to hedge against interest
rate changes. The Company typically utilizes Swap Agreements to create a hedge
that effectively converts floating-rate assets into fixed-rate instruments.
The Company had one outstanding Swap Agreement subject to the provisions of
SFAS 133 with a notional principal of $97,000,000 which matured in June 2002.
This agreement effectively converted a $97,000,000 floating rate commercial
mortgage to a fixed rate instrument. The agreement was designated as a cash
flow hedge. Changes in the market value of this Swap Agreement, net of taxes,
were recognized as a component of other comprehensive income. There was no
inefficiency associated with this Swap Agreement for the six months ended June
30, 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.  RECENTLY ISSUED ACCOUNTING STANDARDS



| |  | In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assets (SFAS 142). As of January 1, 2002, the Company adopted
SFAS 142. SFAS 142 requires the Company to discontinue the amortization of
goodwill in its income statement. Amortization expense recorded in the
Companys statement of income amounted to $332,000 for the three months ended
June 30, 2001 and $695,000 for the six months ended June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | SFAS 142 requires goodwill to be subject to an assessment of impairment on an
annual basis, or more frequently if circumstances indicate that a possible
impairment has occurred. The assessment of impairment involves a two-step
process prescribed in SFAS 142, whereby an initial assessment for potential
impairment is performed, followed by a measurement of the amount of impairment,
if any. SFAS 142 also requires the completion of a transitional impairment
test in the year of adoption, with any identified impairments recognized as a
cumulative effect of a change in accounting principle. The Company has
evaluated the impact of the impairment provisions of SFAS 142 as of January 1,
2002, and has determined that no impairment is required to be recorded to the
carrying value of the Companys goodwill balance. Pursuant to the distribution
of Saamsun to the Parent on January 1, 2002, the Company transferred
$15,547,000 of goodwill belonging to the asset management operations and
broker-dealer operations to the Parent.

15



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##### Table of Contents



6.  CONTINGENT LIABILITIES



| |  | The Company has entered into eight agreements in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the event
there is no other buyer in the short-term marketplace. In return the Company
receives a fee. The maximum liability under these guarantees at June 30, 2002
is $983,000,000. Related to each of these agreements are participation
agreements with the Parent under which the Parent will share in $464,350,000 of
these liabilities in exchange for a proportionate percentage of the fees
received under these agreements. The expiration dates of these commitments are
as follows: $420,000,000 in 2004, $405,000,000 in 2005 and
$158,000,000
in 2006. Management does not anticipate any material losses with respect to
these commitments.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has entered into an agreement whereby it is committed to purchase
the remaining principal amount, $96,910,000 as of June 30, 2002, of various
market value mortgage-backed securities at par value in March 2006.
As of June 30, 2002, the estimated fair value exceeds the
principal amount of the securities. At the
present time, management does not anticipate any material losses with respect
to this agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Various lawsuits against the Company have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and
other matters are not considered material in relation to the financial
position, results of operations or cash flows of the Company, with the
potential exception of McMurdie et al. v. SunAmerica et al., Case
No. BC 194082, filed on July 10, 1998 in the Superior Court for the County of Los Angeles.
The lawsuit is a representative action wherein the plaintiffs allege violations
of Californias Business and Professions Code Sections 17200 et seq. The
Company is vigorously defending the lawsuit. The probability of any particular
outcome is not reasonably estimable at this time.                                                                                                                     

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##### Table of Contents






AIG SUNAMERICA LIFE ASSURANCE COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Managements discussion and analysis of financial condition and results of
operations of AIG SunAmerica Life Assurance Company (FKA and currently DBA
Anchor National Life Insurance Company) (the Company) for the three months
and six months ended June 30, 2002 and June 30, 2001 follows. Certain prior
period amounts have been reclassified to conform to the current periods
presentation.

In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this report and in any other statements
made by, or on behalf of, the Company, whether or not in future filings with
the Securities and Exchange Commission (the SEC). Forward-looking statements
are statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. Statements
using verbs such as expect, anticipate, believe or words of similar
import generally involve forward-looking statements. Without limiting the
foregoing, forward-looking statements include statements which represent the
Companys beliefs concerning future levels of sales and redemptions of the
Companys products, investment spreads and yields, or the earnings and
profitability of the Companys activities.

Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Companys control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associates with the Companys investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the SEC. The
Company disclaims any obligation to update forward-looking information.

BUSINESS SEGMENTS

Effective January 1, 2002, the Company declared a distribution to its
Parent, SunAmerica Life Insurance Company (the Parent), of 100% of the
outstanding capital stock of its then wholly owned subsidiary, Saamsun Holdings
Corporation (Saamsun). Saamsun was comprised of the Companys asset
management and broker-dealer segments. This distribution decreased the
Companys shareholders equity by approximately $552.4 million. Subsequent to
this distribution and effective January 1, 2002, the Companys earnings will no
longer include the asset management and broker-dealer operations (see Note 2 of
Notes to Financial Statements). This distribution was approved by the Arizona
Department of Insurance. The Companys capital and surplus will

17



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##### Table of Contents



remain more than sufficient in relation to its outstanding liabilities and more
than adequate relative to its financial needs, and will exceed its regulatory
risk-based capital requirements.

Beginning January 1, 2002, the Company has one business segment, annuity
operations, which consists of the sale and administration of deposit-type
insurance contracts, such as fixed and variable annuities, universal life
insurance contracts and guaranteed investment contracts (GICs). The Company
focuses primarily on the marketing of variable annuity products and the
administration of a closed block of universal life business. The variable
annuity products offer investors a broad spectrum of fund alternatives, with a
choice of investment managers, as well as guaranteed fixed-rate account
options. The Company earns fee income on investments in the variable account
options and net investment income on the fixed-rate account options.

Prior to January 1, 2002, the Company had three business segments: annuity
operations (as discussed above), asset management operations and broker-dealer
operations. The asset management operations were conducted by the Companys
former registered investment advisor subsidiary, SunAmerica Asset Management
Corp. (SAAMCO), and its related distributor, SunAmerica Capital Services,
Inc. (SACS). SAAMCO and SACS earn fee income by distributing and managing a
diversified family of mutual funds, managing certain subaccounts within the
Companys variable annuity products and providing professional management of
individual, corporate and pension plan portfolios. The broker-dealer
operations were conducted by the Companys former broker-dealer subsidiary,
Royal Alliance Associates, Inc. (Royal Alliance), which sells proprietary
annuities and mutual funds and non-proprietary investment products. Royal
Alliance earned income from commissions on sales of these products, net of the
portion that is passed on to the registered representatives.

RESULTS OF OPERATIONS

On June 10, 2002, the Company entered into a profit sharing agreement with
SAAMCO, whereby SAAMCO will pay its profits earned through servicing the
Companys variable annuity contracts to the Company (SAAMCO Agreement).
SAAMCO is the investment adviser or business manager for certain trusts that
hold deposits from the Companys variable annuity products. Pursuant to the
SAAMCO Agreement, SAAMCO will pay to the Company variable annuity fee income
earned from acting as the investment adviser or business manager for certain
trusts that hold deposits from the Companys variable annuity products. The
SAAMCO Agreement was retroactive to January 1, 2002. As a result, the
operating results of the second quarter of 2002 include such profits
contributed to the Company for the entire six months of 2002, which amounted to
$29.8 million.

The Company considers among its most critical accounting policies those
policies with respect to valuation of certain financial instruments and
amortization of deferred acquisition costs. In the implementation of each of
the aforementioned policies, management is required to exercise its judgment on
both a quantitative and qualitative basis. Further explanation of how
management exercises that judgment is disclosed in the Companys 2001 Annual
Report on Form 10K/A.

18



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##### Table of Contents



NET INCOME totaled $24.9 million in the second quarter of 2002, compared
to $28.8 million in the second quarter of 2001. For the six months, net income
amounted to $44.0 million in 2002, compared to $59.6 million in 2001. The
operating results of the second quarter of 2002 include fees contributed to the
Company from SAAMCO pursuant to the SAAMCO Agreement for the six months of
2002. The operating results of 2001 include those of the asset management and
broker-dealer operations. Assuming the Saamsun distribution had occurred on
January 1, 2001, the beginning of the prior year periods discussed herein, net
income would have been $36.3 million for the second quarter of 2001 and $59.1
million for the six months of 2001.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption
of EITF 99-20 in 2001. The Company recorded a loss of $10.3 million, net of
tax, which is recognized in the consolidated statement of income and
comprehensive income as a cumulative effect of accounting change for the
quarter and six months ended June 30, 2001.

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $29.3
million in the second quarter of 2002 and $52.5 million in the second quarter
of 2001. The SAAMCO Agreement, effective June 10, 2002, was retroactive to
January 1, 2002. Accordingly, pretax income before cumulative effect of
accounting change for the second quarter of 2002 is increased by approximately
$15.3 million due to amounts related to the first quarter of 2002. For the six
months, pretax income before cumulative effect of accounting change totaled
$51.8 million in 2001, compared with $93.3 million in 2001. Assuming the
Saamsun distribution had occurred on January 1, 2001, the beginning of the
prior year periods discussed herein, pretax income before cumulative effect of
accounting change would have been $46.6 million for the second quarter of 2001
and $72.6 million for the six months of 2001. The decline in 2002 results
compared to 2001 primarily resulted from increased guaranteed minimum death
benefits and amortization of deferred acquisition costs, partially offset by
decreased net realized investment losses.

INCOME TAX EXPENSE totaled $4.4 million in the second quarter of 2002,
$13.3 million in the second quarter of 2001, $7.8 million in the six months of
2002 and $23.3 million in the six months of 2001, representing effective
annualized tax rates of 15%, 25%, 15% and 25%, respectively. Assuming that the
Saamsun distribution had occurred on January 1, 2001, the beginning of the
prior year periods discussed herein, income tax expense would have been $10.3
million for the second quarter of 2001 and $13.6 million for the six months of
2001, representing an effective tax rate of 22% and 19%, respectively. The
decrease in the effective tax rate for 2002 is due primarily to the lower
relative pretax income in 2002 as a result of the distribution of Saamsun to
the Parent, without corresponding reductions in permanent tax differences.

Effective January 1, 2002, the Company has one business segment.
Therefore, the following discussions include only the annuity operations for
the quarters and six months ended 2002 and 2001.

NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, totaled $34.5 million in the second quarter of
2002 and

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$36.4 million in the second quarter of 2001. These amounts equal 2.15% on
average invested assets (computed on a daily basis) of $6.42 billion in the
second quarter of 2002 and 2.86% on average invested assets of $5.08 billion in
the second quarter of 2001. For the six months, net investment income
increased to $71.6 million in 2002 from $59.2 million in 2001, representing
2.26% of average invested assets of $6.35 billion in 2002 and 2.27% of average
invested assets of $5.21 billion in 2001.

Net investment spreads include the effect of income earned or interest
paid on the difference between average invested assets and average
interest-bearing liabilities. In the second quarter of 2002, average invested
assets exceeded average interest-bearing liabilities by $85.9 million, whereas
average interest-bearing liabilities exceeded average invested assets by $7.7
million in 2001. The increase in the second quarter of 2002 reflects $120.5
million of net income tax refunds received from the Parent in the fourth
quarter of 2001. For the six months, average invested assets exceeded average
interest-bearing liabilities by $75.9 million in 2002, compared with $64.2
million in 2001. The difference between the Companys yield on average
invested assets and the rate paid on average interest-bearing liabilities (the
Spread Difference) was 2.10% in the second quarter of 2002 and 2.88% in the
second quarter of 2001. The decrease in the Spread Difference is due primarily
to the impact of gains and losses on seed money. In the second quarter, seed
money losses were $3.4 million in 2002 compared to seed money gains of $3.3
million in 2001. Excluding the impact of seed money gains and losses, the
Spread Difference would have been 2.35% in the second quarter of 2002 and 2.70%
in the second quarter of 2001. For the six months, the Spread Difference was
2.21% in both 2002 and 2001.

Investment income (and the related yields on average invested assets)
totaled $94.9 million (5.91%) in the second quarter of 2002, $94.1 million
(7.41%) in the second quarter of 2001, $191.2 million (6.02%) in the six months
of 2002 and $179.2 million (6.88%) in the six months of 2001. The decrease in
the investment yield in 2002 compared to 2001 primarily reflects a lower
prevailing interest rate environment. Expenses incurred to manage the investment portfolio amounted to $0.5
million in the second quarter of 2002, $1.4 million in the second quarter of
2001, $1.0 million in the six months of 2002 and $3.2 million in the six months
of 2001.

Interest expense totaled $60.4 million in the second quarter of 2002 and
$57.7 million in the second quarter of 2001. For the six months, interest
expense aggregated $119.6 million in 2002, compared with $120.0 million in
2001. The average rate paid on all interest-bearing liabilities was 3.81% in
the second quarter of 2002, compared with 4.53% in the second quarter of 2001.
For the six months, the average rate paid on all interest-bearing liabilities
was 3.81% in 2002 and 4.67% in 2001. Interest-bearing liabilities averaged
$6.34 billion during the second quarter of 2002, $5.09 billion during the
second quarter of 2001, $6.28 billion during the six months of 2002 and $5.14
billion during the six months of 2001. The decline in the overall rates paid
in 2002 compared to 2001 resulted primarily from the impact of a declining
interest rate environment and the impact of securities lending in 2002 at
short-term rates. Excluding the impact of the

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securities lending program, the average rate paid would have been 3.98% and
3.99% in the second quarter and six months of 2002, respectively.

Growth in average invested assets largely resulted from cash received from
the securities lending program. Changes in average invested assets also
reflect sales of the fixed account options of the Companys variable annuity
products (Fixed Annuity Deposits), and renewal deposits on its universal life
product (UL Deposits), partially offset by net exchanges from fixed accounts
into the separate accounts of variable annuity contracts. Fixed Annuity
Deposits and UL Deposits totaled $467.6 million in the second quarter of 2002,
$453.6 million in the second quarter of 2001, $839.9 million in the six months
of 2002 and $926.9 million in the six months of 2001, and are largely deposits
for the fixed accounts of variable annuities. On an annualized basis, these
deposits represent 36%, 39%, 32% and 40%, respectively, of the related reserve
balances at the beginning of the respective periods.

No GIC deposits were received in all of 2002 or the second quarter of
2001. GIC deposits totaled $40.0 million in the six months of 2001. GIC
surrenders and maturities totaled $2.5 million in the second quarter of 2002,
$12.8 million in the second quarter of 2001, $5.4 million in the six months of
2002 and $175.9 million in the six months of 2001. The GICs issued by the
Company are generally variable rate contracts which guarantee the payment of
principal and interest for a term of three to five years. GICs purchased by
asset management firms for their short-term portfolios either prohibit
withdrawals or permit withdrawals with notice ranging from 90 to 270 days.
GICS that are purchased by banks for their long-term portfolios or by state and
local governmental entities either prohibit withdrawals or permit scheduled
book value withdrawals subject to the terms of the underlying indenture or
agreement. In pricing GICs, the Company analyzes cash flow information and
prices accordingly so that it is compensated for possible withdrawals prior to
maturity.

NET REALIZED INVESTMENT LOSSES totaled $10.7 million in the second quarter
of 2002, compared with $5.7 million in the second quarter of 2001 and include
impairment writedowns of $6.4 million and $8.9 million, respectively. For the
six months, net realized investment losses totaled $13.7 million in 2002,
compared with $30.5 million in 2001 and include impairment writedowns of $11.4
million and $34.7 million, respectively. Thus, net realized losses from sales
and redemptions of investments totaled $4.3 million in the second quarter of
2002, compared to $3.2 million of net realized gains in the second quarter of
2001. For the six months, net realized losses from sales and redemptions of
investments totaled $2.3 million in 2002, compared to $4.2 million of net
realized gains in 2001.

The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $275.7 million in the second quarter of 2002, $350.3 million in the
second quarter of 2001, $701.9 million in the six months of 2002 and $730.0
million in the six months of 2001. Sales of investments result from the active
management of the Companys investment portfolio. Because redemptions of
investments are generally involuntary and sales of investments are made in both
rising and falling interest rate environments, net gains and losses from sales
and redemptions of investments fluctuate from period to period, and represent,
on an annualized basis, 0.27%, 0.25%, 0.07% and 0.16%% of average invested
assets in the second quarter of 2002, the

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second quarter of 2001, the six months of 2002 and the six months of 2001,
respectively. Active portfolio management involves the ongoing evaluation of
asset sectors, individual securities within the investment portfolio and the
reallocation of investments from sectors that are perceived to be relatively
overvalued to sectors that are perceived to be relatively undervalued. The
intent of the Companys active portfolio management is to maximize total
returns on the investment portfolio, taking into account credit, option,
liquidity and interest-rate risk.

Impairment writedowns include $6.4 million, $8.9 million, $11.4 million
and $34.7 million of provisions applied to bonds and other invested assets in
the second quarter of 2002, the second quarter of 2001, the six months of 2002
and the six months of 2001, respectively. On an annualized basis, impairment
writedowns represent 0.40%, 0.70%, 0.36% and 1.33% of average invested assets
in the second quarter of 2002, the second quarter of 2001, the six months of
2002 and the six months of 2001, respectively. For the twenty quarters ended
June 30, 2002, impairment writedowns as an annualized percentage of average
invested assets have ranged up to 1.94% and have averaged 0.49%. Such
writedowns are based upon estimates of the net realizable value of invested
assets and recorded when declines in value of such assets are considered to be
other than temporary. Actual realization will be dependent upon future
events. The Company recorded $15.9 million ($10.3 million, net of tax) of
additional impairments in 2001 pursuant to the implementation of EITF 99-20.
This adjustment was recorded as a cumulative effect of accounting change in the
accompanying statement of income and comprehensive income for 2001.

VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $102.3
million in the second quarter 2002 and $89.8 million in the second quarter
2001, with the 2002 amount including $33.8 million of fees relating to the
SAAMCO Agreement, approximately half of which related to the first quarter.
For the six months, variable annuity fees totaled $171.5 million in 2002,
compared with $180.4 million in 2001. The decreased fees in the six months of
2002 reflect the unfavorable equity market conditions in 2002, and the
resulting unfavorable impact on market values of assets in the separate
accounts. On an annualized basis, variable annuity fees represent 2.3%, 1.8%,
1.9% and 1.8% of average variable annuity assets in the second quarter of 2002
and 2001 and the six months of 2002 and 2001, respectively. Variable annuity
assets averaged $17.75 billion, $19.44 billion, $17.98 billion and $19.63
billion during the respective periods. Variable annuity deposits, which
exclude deposits allocated to the fixed accounts of variable annuity products,
totaled $311.1 million and $427.2 in the second quarters of 2002 and 2001,
respectively. For the six months, variable annuity deposits totaled $636.7
million in 2002, compared with $839.1 million in 2001. On an annualized basis,
these amounts represent 7%, 9%, 7% and 8% of variable annuity liabilities at
the beginning of the respective periods. The decrease in variable annuity
deposits in 2002 reflected lower demand for the variable account options of the
Companys variable annuity products due to the unfavorable equity market
conditions discussed above. Transfers from the fixed accounts of the Companys
variable annuity products to the separate accounts are not classified as
variable annuity deposits. Accordingly, changes in variable annuity deposits
are not necessarily indicative of the ultimate allocation by customers among
fixed and variable account options of the Companys variable annuity products.

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Sales of variable annuity products (which include deposits allocated to
the fixed accounts) (Variable Annuity Product Sales) amounted to $766.8
million, $868.1 million, $1.45 billion and $1.74 billion in the second quarters
of 2002 and 2001 and the six months of 2002 and 2001, respectively. Such sales
primarily reflect those of the Companys Polaris and Seasons variable annuity
product lines. The Companys variable annuity products are multi-manager
variable annuities that offer investors a choice of several variable funds as
well as a number of guaranteed fixed-rate funds. Investors can select from a
choice of 4 to 37 variable funds and up to 7 guaranteed fixed-rate funds
depending on the product.

The Company has encountered increased competition in the variable annuity
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future. Also, from time to time,
Federal initiatives are proposed that could affect the taxation of variable
annuities and annuities generally (See Regulation).

UNIVERSAL LIFE INSURANCE FEES, NET amounted to $5.6 million in the second
quarter of 2002 and $4.8 million in the second quarter of 2001. For the six
months, universal life insurance fees totaled $10.3 million in 2002 and $10.1
million in 2001. Universal life insurance fees consist of mortality changes,
up-front fees earned on deposits received and administrative fees, net of the
excess mortality expense on these contracts. The administrative fees are
assessed based on the number of policies in force as of the end of each month.
The Company does not actively market universal life insurance contracts. Such
fees annualized represent 1.33%, 1.08%, 1.23% and 1.12% of average reserves for
universal life insurance contracts in the respective periods.

SURRENDER CHARGES on fixed and variable annuity contracts and universal
life contracts totaled $8.4 million in the second quarter of 2002 and $5.9
million in the second quarter of 2001. For the six months, such surrender
charges totaled $14.9 million in 2002 and $11.8 million in 2001. Surrender
charges generally are assessed on withdrawals at declining rates during the
first seven years of a contract. Withdrawal payments, which exclude claims and
lump-sum annuity benefits, totaled $548.8 million in the second quarter of
2002, compared with $491.6 million in the second quarter of 2001. For the six
months, such withdrawal payments totaled $1.05 billion in 2002 and $1.02
billion in 2001. Annualized, these payments when expressed as a percentage of
average fixed and variable annuity and universal life reserves represent 9.7%,
8.3%, 9.2% and 8.5% for the second quarters of 2002 and 2001 and the six months
of 2002 and 2001, respectively. Withdrawals include variable annuity payments
from the separate accounts totaling $428.3 million (9.7% of average variable
annuity liabilities), $402.2 million (8.3% of average variable annuity
liabilities), $833.8 million (9.3% of average variable annuity liabilities) and
$841.5 million (8.6% of average variable annuity liabilities) in the second
quarters of 2002 and 2001 and the six months of 2002 and 2001, respectively.
The increase in withdrawal rates in 2002 reflects a decrease in the market
value of assets supporting the variable contracts due to unfavorable market
conditions.

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GENERAL AND ADMINISTRATIVE EXPENSES totaled $24.8 million in the second
quarter of 2002 and $27.4 million in the second quarter of 2001. For the six
months, general and administrative expenses totaled $48.8 million in 2002 and
$52.7 million in 2001. General and administrative expenses decreased in 2002
due to lower costs associated with servicing its fixed annuities and universal
life policies. General and administrative expenses remain closely controlled
through a company-wide cost containment program and continue to represent less
than 1% of average total assets.

AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $60.7 million in the
second quarter of 2002, compared to $40.8 million in the second quarter of
2001. For the six months, such amortization totaled $107.4 million in 2002,
compared with $73.8 million in 2001. The increase in amortization was
primarily related to lower estimates of future gross profits on variable
annuity contracts in light of the downturn in the equity markets in 2002, and
additional fixed and variable annuity sales and the subsequent amortization of
related deferred commissions and other direct selling costs.

ANNUAL COMMISSIONS totaled $15.8 million in the second quarter of 2002,
compared to $14.6 million in the second quarter of 2001. For the six months,
annual commissions amounted to $31.6 million in 2002 and $28.6 million in 2001.
Annual commissions represent renewal commissions paid quarterly in arrears to
maintain the persistency of certain of the Companys variable annuity
contracts. Substantially all of the Companys currently available variable
annuity products allow for an annual commission payment option in return for a
lower immediate commission. The Company estimates that approximately 56% of
the average balances of its variable annuity products is currently subject to
such annual commissions. Based on current sales, this percentage is expected
to increase in future periods.

GUARANTEED MINIMUM DEATH BENEFITS, NET OF REINSURANCE RECOVERIES totaled
$10.4 million in the second quarter of 2002, compared to $2.7 million in the
second quarter of 2001. For the six months, guaranteed minimum death benefits
amounted to $17.8 million in 2002 and $5.2 million in 2001. Guaranteed minimum
death benefits represent the additional death benefits paid to fund minimum
policy benefits in excess of the policyholders separate account balance. The
increase in guaranteed minimum death benefits paid pursuant to the Companys
variable annuity separate account contracts reflect the downturn in the equity
markets in 2002. Further downturns in the equity markets could increase these
payments.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDERS EQUITY decreased to $1.10 billion at June 30, 2002 from
$1.59 billion at December 31, 2001, due principally to a $552.4 million
distribution to the Parent of its wholly-owned subsidiary, Saamsun, on January
1, 2002 (see Note 2 of Notes to Financial Statements), partially offset by net
income of $44.0 million and other comprehensive income of $19.1 million.

INVESTED ASSETS at June 30, 2002 totaled $6.62 billion, compared with
$6.75 billion at December 31, 2001. The Company manages most of its invested
assets internally. The Companys general investment philosophy is to hold
fixed-rate assets for long-term investment. Thus, it does not have a trading
portfolio. However, the Company has determined that all of its portfolio of

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bonds, notes and redeemable preferred stocks (the Bond Portfolio) is
available to be sold in response to changes in market interest rates, changes
in relative value of asset sectors and individual securities, changes in
prepayment risk, changes in the credit quality outlook for certain securities,
the Companys need for liquidity and other similar factors.

THE BOND PORTFOLIO, which constituted 74% of the Companys total
investment portfolio at June 30, 2002, had an amortized cost that was $23.2
million greater than its aggregate fair value at June 30, 2002 and $62.8
million greater than its aggregate fair value at December 31, 2001. The
decrease in net unrealized losses on the Bond Portfolio during 2002 principally
reflects the decline in prevailing interest rates and the corresponding effect
on the fair value of the Bond Portfolio at June 30, 2002.

At June 30, 2002, the Bond Portfolio (excluding $21.5 million of
redeemable preferred stocks) included $4.71 billion of bonds rated by Standard
& Poors (S&P), Moodys Investors Service (Moodys), Fitch (Fitch) or the
Securities Valuation Office of the National Association of Insurance
Commissioners (NAIC), and $163.5 million of bonds rated by the Company
pursuant to statutory ratings guidelines established by the NAIC. At June 30,
2002, approximately $4.57 billion of the Bond Portfolio was investment grade,
including $1.54 billion of mortgage-backed securities (MBS) and U.S.
government/agency securities.

At June 30, 2002, the Bond Portfolio included $277.4 million of bonds that
were not investment grade. These non-investment-grade bonds accounted for
approximately 1.1% of the Companys total assets and approximately 4.2% of its
invested assets.

Non-investment-grade securities generally provide higher yields and
involve greater risks than investment-grade securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment-grade issuers. In addition, the trading market for
these securities is usually more limited than for investment-grade securities.
These non-investment-grade securities are comprised of bonds spanning 33
industries with 11% of these assets concentrated in telecommunications. No
other industry concentration constituted more than 10% of these assets.

The table on the following page summarizes the Companys rated bonds by
rating classification as of June 30, 2002.

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RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)

|                                                          |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |           |          |  |   |           |           |  |            |           |  |  |   |           |  |  |  |       |  
|--------------------------------------------------------- |  | ----------------------- | --------- | ----- |  | --------- | --------- | --------- |  | -------------------------------- | - | --------- |  | --------- | --------- | -------- |  | - | --------- | --------- |  | ---------- | --------- |  |  | - | --------- |  |  |  | ----- | -
|                                                          |  |                         |           |       |  |           |           |           |  | Issues not rated by S&P/Moody's/ |   |           |  |           |           |          |  |   |           |           |  |           
|Issues Rated by S&P/Moody's/Fitch                         |  | Fitch, by NAIC Category |           | Total
|                                                          |  |                         |           |      
|S&P/Moody's/                                              |  |                         |           |       |  | Estimated |           | NAIC      |  |                                  |   |           |  | Estimated |           |          |  |   |           | Estimated |  | Percent of
|Fitch                                                     |  | Amortized               |           | fair  |  | category  |           | Amortized |  | fair                             |   | Amortized |  | fair      |           | invested
|category (1)                                              |  | cost                    |           | value |  | (2)       |           | cost      |  | value                            |   | cost      |  | value     |           | assets  
|                                                          |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |           |         
|AAA+ to A-
(Aaa to A3)
[AAA to A-]
{AAA to A-}            |  | $                       | 2,531,641 |       |  | $         | 2,557,074 |           |  |                                  | 1 |           |  | $         | 796,600   |          |  | $ | 814,246   |           |  | $          | 3,328,241 |  |  | $ | 3,371,320 |  |  |  | 50.91 | %
|                                                         
|                                                         
|                                                         
|                                                         
|BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} |  |                         | 969,172   |       |  |           | 944,069   |           |  |                                  | 2 |           |  |           | 253,844   |          |  |   | 255,795   |           |  |            | 1,223,016 |  |  |   | 1,199,864 |  |  |  | 18.12 | %
|                                                         
|                                                         
|                                                         
|                                                         
|BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-}         |  |                         | 120,457   |       |  |           | 111,304   |           |  |                                  | 3 |           |  |           | 6,808     |          |  |   | 6,229     |           |  |            | 127,265   |  |  |   | 117,533   |  |  |  | 1.77  | %
|                                                         
|                                                         
|                                                         
|                                                         
|B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-}                 |  |                         | 86,365    |       |  |           | 69,237    |           |  |                                  | 4 |           |  |           | 60,086    |          |  |   | 60,174    |           |  |            | 146,451   |  |  |   | 129,411   |  |  |  | 1.95  | %
|                                                         
|                                                         
|                                                         
|                                                         
|CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-}                   |  |                         | 38,833    |       |  |           | 21,512    |           |  |                                  | 5 |           |  |           | 6,558     |          |  |   | 6,060     |           |  |            | 45,391    |  |  |   | 27,572    |  |  |  | 0.42  | %
|                                                         
|                                                         
|                                                         
|                                                         
|CI to D
[DD]
{D}                                          |  |                         | 40        |       |  |           | 26        |           |  |                                  | 6 |           |  |           | 1,350     |          |  |   | 2,822     |           |  |            | 1,390     |  |  |   | 2,848     |  |  |  | 0.04  | %
|                                                          |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |           |          |  |   |           |           |  |            |           |  |  |   |           |  |  |  |       |  
|TOTAL RATED ISSUES                                        |  | $                       | 3,746,508 |       |  | $         | 3,703,222 |           |  |                                  |   |           |  | $         | 1,125,246 |          |  | $ | 1,145,326 |           |  | $          | 4,871,754 |  |  | $ | 4,848,548 |  |  |  |       |  
|                                                          |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |           |          |  |   |           |           |  |            |           |  |  |   |           |  |  |  |       |  

Footnotes appear on the following page.

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| |     |  | Footnotes to the table of Rated Bonds by Rating Classification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) |  | S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-)
indicates the debts relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Moodys
rates debt securities in rating categories ranging from Aaa (the highest)
to C (extremely poor prospects of ever attaining any real investment
standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest)
indicates the debts relative standing within the rating category. A
security rated Baa3 or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moodys and Fitch ratings if
rated by multiple agencies.
|
| | (2) |  | Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5
(lowest) for nondefaulted bonds plus one category, 6, for bonds in or near
default. These six categories correspond with the S&P/Moodys/Fitch
rating groups listed above, with categories 1 and 2 considered investment
grade. The NAIC categories include $163.5 million of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines.                                                                                                                                                                                                                                               

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Senior secured loans (Secured Loans) are included in the Bond Portfolio
and aggregated $256.9 million at June 30, 2002. Secured Loans are senior to
subordinated debt and equity and are secured by assets of the issuer. At June
30, 2002, Secured Loans consisted of $199.2 million of privately traded
securities and $57.7 million of publicly traded securities. These Secured
Loans are composed of loans to 57 borrowers spanning 18 industries, with 18% of
these assets concentrated in airlines, 16% concentrated in energy and 10%
concentrated in financial institutions and 10% concentrated in non-cable media.
No other industry constituted more than 8% of these assets.

While the trading market for the Companys privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these
Secured Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of
loss upon default for these Secured Loans is mitigated by such financial
covenants and the collateral values underlying the Secured Loans. The Companys
Secured Loans are rated by S&P, Moodys, Fitch, the NAIC or by the Company,
pursuant to comparable statutory ratings guidelines established by the NAIC.

MORTGAGE LOANS aggregated $684.7 million at June 30, 2002 and consisted of
116 commercial first mortgage loans with an average loan balance of
approximately $5.9 million, collateralized by properties located in 28 states.
Approximately 27% of this portfolio was office, 23% was multifamily
residential, 17% was manufactured housing, 11% was industrial, 10% was hotels,
5% was retail, and 7% was other types. At June 30, 2002, approximately 28% and
11% of this portfolio were secured by properties located in California and New
York, respectively, and no more than 9% of this portfolio was secured by
properties located in any other single state. At June 30, 2002, 12 mortgage
loans have an outstanding balance of $10.0 million or more, which collectively
aggregated approximately 42% of this portfolio. At June 30, 2002,
approximately 19% of the mortgage loan portfolio consisted of loans with
balloon payments due before July 1, 2005. During 2002 and 2001, loans
delinquent by more than 90 days, foreclosed loans and restructured loans have
not been significant in relation to the total mortgage loan portfolio.

Substantially all of the mortgage loan portfolio has been originated by
the Company under strict underwriting standards. Commercial mortgage loans on
properties such as offices, hotels and shopping centers generally represent a
higher level of risk than do mortgage loans secured by multifamily residences.
This greater risk is due to several factors, including the larger size of such
loans and the more immediate effects of general economic conditions on these
commercial property types. However, due to the Companys strict underwriting
standards, the Company believes that it has prudently managed the risk
attributable to its mortgage loan portfolio while maintaining attractive
yields.

POLICY LOANS totaled $218.2 million at June 30, 2002, compared to $227.0
million at December 31, 2001, and primarily represent loans taken against
universal life policies.

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SEPARATE ACCOUNT SEED MONEY totaled $26.0 million at June 30, 2002,
compared to $50.6 million at December 31, 2001, and consisted principally of
seed money for mutual funds used as investment vehicles for the Companys
variable annuity separate accounts. At December 31, 2001, separate account
seed money included $5.0 million of investments for SAAMCOs mutual funds.

PARTNERSHIPS totaled $8.3 million at June 30, 2002, constituting
investments in 5 partnerships with an average size of approximately $1.7
million. These partnerships are managed by independent money managers that
invest in a broad selection of equity and fixed-income securities, currently
including 407 separate issuers. The risks generally associated with
partnerships include those related to their underlying investments (i.e.,
equity securities and debt securities), plus a level of illiquidity, which is
mitigated to some extent by the existence of contractual termination
provisions. At December 31, 2001, partnerships totaled $451.6 million, most of
which are partnership assets of SA Affordable Housing, LLC, an indirect wholly
owned subsidiary of Saamsun which was transferred to the Parent as part of the
distribution of Saamsun on January 1, 2002.

OTHER
INVESTED ASSETS principally includes a securities lending agreement
with an affiliated lending agent. The Company has entered into a securities lending agreement with
an affiliated lending agent, which authorizes the agent to lend securities held
in the Companys portfolio to a list of authorized borrowers. The Company
receives cash collateral in an amount in excess of the market value of the
securities loaned. Other collateral received also exceeds the market value of
the securities loaned. The Company monitors the daily market value of
securities loaned with respect to the collateral value and obtains additional
collateral when necessary to ensure that collateral is maintained at a minimum
of 102% of the value of the loaned securities. Such collateral is not
available for the general use of the Company.

ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation (i.e. the risk of being
forced to sell investments during unfavorable market conditions). The Company
believes that its fixed-rate liabilities should be backed by a portfolio
principally composed of fixed-rate investments that generate predictable rates
of return. The Company does not have a specific target rate of return.
Instead, its rates of return vary over time depending on the current interest
rate environment, the slope of the yield curve, the spread at which fixed-rate
investments are priced over the yield curve, default rates and general economic
conditions. Its portfolio strategy is constructed with a view to achieve
adequate risk-adjusted returns consistent with its investment objectives of
effective asset-liability matching, liquidity and safety. The Companys
fixed-rate products incorporate surrender charges or other restrictions in
order to encourage persistency. Approximately 79% of the Companys fixed
annuity, universal life and GIC reserves had surrender penalties or other
restrictions at June 30, 2002.

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As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect
its economic value and achieve a predictable spread between what it earns on
its invested assets and what it pays on its liabilities by designing its
fixed-rate products and conducting its investment operations to closely match
the duration of the fixed-rate assets to that of its fixed-rate liabilities.
The Companys fixed-rate assets include: cash and short-term investments;
bonds, notes and redeemable preferred stocks; mortgage loans; policy loans; and
investments in limited partnerships that invest primarily in fixed-rate
securities. At June 30, 2002, these assets had an aggregate fair value of
$6.62 billion with a duration of 3.5. The Companys fixed-rate liabilities
include fixed annuity, universal life and GIC reserves. At June 30, 2002,
these liabilities had an aggregate fair value (determined by discounting future
contractual cash flows by related market rates of interest) of $6.02 billion
with a duration of 2.7. The Companys potential exposure due to a 10% increase
in prevailing interest rates from their June 30, 2002 levels is a loss of
approximately $27.9 million, representing a decrease in fair value of its
fixed-rate assets that is not offset by a decrease in fair value of its
fixed-rate liabilities. Because the Company actively manages its assets and
liabilities and has strategies in place to minimize its exposure to loss as
interest rate changes occur, it expects that actual losses would be less than
the estimated potential loss.

Duration is a common option-adjusted measure for the price sensitivity of
a fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points (i.e. 1%), recognizing the changes in cash
flows resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the
Company will continue to utilize its existing strategies of pricing its fixed
annuity, universal life and GIC products, allocating its available cash flow
amongst its various investment portfolio sectors and maintaining sufficient
levels of liquidity. Because the calculation of duration involves estimation
and incorporates assumptions, potential changes in portfolio value indicated by
the portfolios duration will likely be different from the actual changes
experienced under given interest rate scenarios, and the differences may be
material.

As a component of its asset and liability management strategy, the Company
utilizes interest rate swap agreements (Swap Agreements) to match assets more
closely to liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an
underlying principal balance (notional principal) to hedge against interest
rate changes. The Company typically utilizes Swap Agreements to create a hedge
that effectively converts floating-rate assets and liabilities into fixed-rate
instruments. At June 30, 2002, the Company had one outstanding Swap Agreement
with a notional principal of $32.2 million. This agreement matures in December
2024.

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The Company seeks to enhance its spread income with reverse repurchase
agreements (Reverse Repos). Reverse Repos involve a sale of securities and
an agreement to repurchase the same securities at a later date at an agreed
upon price and are generally over-collateralized. The Company also seeks to
provide liquidity by investing in MBSs. MBSs are generally investment-grade
securities collateralized by large pools of mortgage loans. MBSs generally pay
principal and interest monthly. The amount of principal and interest payments
may fluctuate as a result of repayments of the underlying mortgage loans.

There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Companys Reverse Repos and
Swap Agreements is counterparty risk. The Company believes, however, that the
counterparties to its Reverse Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions
is minimal. It is the Companys policy that these agreements are entered into
with counterparties who have a debt rating of A/A2 or better from both S&P and
Moodys. The Company continually monitors its credit exposure with respect to
these agreements. In addition to counterparty risk, Swap Agreements also have
interest rate risk. However, the Companys Swap Agreements typically hedge
variable-rate assets or liabilities, and interest rate fluctuations that
adversely affect the net cash received or paid under the terms of a Swap
Agreement would be offset by increased interest income earned on the
variable-rate assets or reduced interest expense paid on the variable-rate
liabilities. The primary risk associated with MBSs is that a changing interest
rate environment might cause prepayment of the underlying obligations at speeds
slower or faster than anticipated at the time of their purchase. As part of
its decision to purchase an MBS, the Company assesses the risk of prepayment by
analyzing the securitys projected performance over an array of interest-rate
scenarios. Once an MBS is purchased, the Company monitors its actual
prepayment experience monthly to reassess the relative attractiveness of the
security with the intent to maximize total return.

INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values of such investments at
least quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In making these reviews for bonds, management principally considers
the adequacy of any collateral, compliance with contractual covenants, the
borrowers recent financial performance, news reports and other externally
generated information concerning the creditors affairs. In the case of
publicly traded bonds, management also considers market value quotations, if
available. For mortgage loans, management generally considers information
concerning the mortgaged property and, among other things, factors impacting
the current and expected payment status of the loan and, if available, the
current fair value of the underlying collateral. For investments in
partnerships, management reviews the financial statements and other information
provided by the general partners.

The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to net realizable value and, in
the case of bonds, no further accruals of interest are made. The provisions
for impairment on mortgage loans are based on losses expected by

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management to be realized on transfers of mortgage loans to real estate, on the
disposition and settlement of mortgage loans and on mortgage loans that
management believes may not be collectible in full. Accrual of interest is
suspended when principal and interest payments on mortgage loans are past due
more than 90 days.

DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $6.8 million ($4.6 million of
bonds and $2.2 million of mortgage loans) at June 30, 2002, and constituted
less than 0.2% of total invested assets. At December 31, 2001, defaulted
investments totaled $12.0 million ($9.8 million of bonds and $2.2 million of
mortgage loans), and constituted approximately 0.4% of total invested assets.

SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Companys existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. The Companys liquidity is primarily derived from operating cash flows.
At June 30, 2002, approximately $3.56 billion of the Companys Bond Portfolio
had an aggregate unrealized gain of $100.9 million, while approximately $1.31
billion of the Bond Portfolio had an aggregate unrealized loss of $124.1
million. In addition, the Companys investment portfolio currently provides
approximately $49.8 million of monthly cash flow from scheduled principal and
interest payments. Historically, cash flows from operations and from the sale
of the Companys annuity and GIC products have been more than sufficient in
amount to satisfy the Companys liquidity needs.

Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Companys average cost of funds would increase over time as it prices its new
and renewing annuities and GICs to maintain a generally competitive market
rate. Management would seek to place new funds in investments that were
matched in duration to, and higher yielding than, the liabilities assumed. The
Company believes that liquidity to fund withdrawals would be available through
incoming cash flow, the sale of short-term or floating-rate instruments or
Reverse Repos on the Companys substantial MBS segment of the Bond Portfolio,
thereby avoiding the sale of fixed-rate assets in an unfavorable bond market.

In a declining rate environment, the Companys cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities and GICs. Should increased liquidity be required for withdrawals,
the Company believes that a significant portion of its investments could be
sold without adverse consequences in light of the general strengthening that
would be expected in the bond market.

If a substantial portion of the Companys Bond Portfolio diminished
significantly in value and/or defaulted, the Company would need to liquidate
other portions of its investment portfolio and/or arrange financing. Such
events that may cause such a liquidity strain could be the result of economic
collapse or terrorist acts.

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The Company has entered into eight agreements in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the event
there is no other buyer in the short-term marketplace. In return the Company
receives a fee. The maximum liability under these guarantees at June 30, 2002
is $983.0 million. Related to each of these agreements are participation
agreements with the Parent under which the Parent will share in $464.4 million
of these liabilities in exchange for a proportionate percentage of the fees
received under these agreements. The expiration dates of these commitments are
as follows: $420.0 million in 2004, $405.0 million in 2005 and $158.0 million
in 2006.

REGULATION

The Company, in common with other insurers, is subject to regulation and
supervision by the states and other jurisdictions in which it does business.
Within the United States, the method of such regulation varies but generally
has its source in statutes that delegate regulatory and supervisory powers to
an insurance official. The regulation and supervision relate primarily to
approval of policy forms and rates, the standards of solvency that must be met
and maintained, including risk based capital measurements, the licensing of
insurers and their agents, the nature of and limitations on investments,
restrictions on the size of risks which may be insured under a single policy,
deposits on securities for the benefit of policyholders, methods of accounting,
periodic examinations of the affairs of insurance companies, the form and
content of reports of financial condition required to be filed, and reserves
for unearned premiums, losses and other purposes. In general, such regulation
is for the protection of policyholders rather than security holders.

Risk based capital (RBC) standards are designed to measure the adequacy
of an insurers statutory capital and surplus in relation to the risks inherent
in its business. The standards are intended to help identify inadequately
capitalized companies and require specific regulatory actions in the event an
insurers RBC is deficient. The RBC formula develops a risk-adjusted target
level of adjusted statutory capital and surplus by applying certain factors to
various asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus, the
target level of statutory surplus varies not only as a result of the insurers
size, but also on the risk profile of the insurers operations. The RBC Model
Law provides four incremental levels of regulatory attention for insurers whose
surplus is below the calculated RBC target. These levels of attention range in
severity from requiring the insurer to submit a plan for corrective action to
actually placing the insurer under regulatory control. The statutory capital
and surplus of the Company exceeded its RBC requirements as of June 30, 2002.

In 1998, the NAIC adopted the codification of statutory accounting
principles (Codification) which replaced the NAICs previous primary guidance
on statutory accounting, which became effective January 1, 2001. Codification
changed prescribed statutory accounting practices and has resulted in changes
to the accounting practices that the Company uses to prepare its statutory
basis financial statements. Codification has been adopted by all fifty states
as the prescribed basis of accounting, including Arizona.

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The adoption of Codification resulted in an increase to the Companys statutory
surplus of approximately $92.4 million and was recorded as a cumulative effect
of changes in accounting principles in 2001.

Privacy provisions of the Gramm-Leach-Bliley Act are fully effective in
2001 and establish new consumer protections regarding the security,
confidentiality, and uses of nonpublic personal information of individuals.
The law also requires financial institutions to fully disclose their privacy
policies to their customers. Additional privacy legislation pending in the
United States Congress and several states is designed to provide further
privacy protections to consumers of financial products and services. These
statutes and regulations may result in additional regulatory compliance costs,
may limit the Companys ability to market its products, and may otherwise
constrain the nature or scope of the Companys insurance and financial services
operations. The Gramm-Leach-Bliley Act also allows combinations between
insurance companies, banks and other entities. In addition, from time to time,
Federal initiatives are proposed that could affect the Companys businesses.
Such initiatives include employee benefit plan regulations and tax law changes
affecting the taxation of insurance companies and the tax treatment of
insurance and other investment products. Proposals made in recent years to
limit the tax deferral of annuities or otherwise modify the tax rules related
to the treatment of annuities have not been enacted. While certain of such
proposals, if implemented, could have an adverse effect on the Companys sales
of affected products, and, consequently, on its results of operations, the
Company believes these proposals have a small likelihood of being enacted,
because they would discourage retirement savings and there is strong public and
industry opposition to them.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk are
contained in the Asset-Liability Matching section of Managements Discussion
and Analysis of Financial Condition and Results of Operations on pages 29 to 31
herein.

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
OTHER INFORMATION

Item 1. Legal Proceedings



| |  | Various lawsuits against the Company have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and
other matters are not considered material in relation to the financial
position, results of operations or cash flows of the Company, with the
potential exception of McMurdie et al. v. SunAmerica et al., Case No. BC
194082, filed on July 10, 1998 in the Superior Court for the
County of Los Angeles. The lawsuit is a representative action wherein the plaintiffs
allege violations of Californias Business and Professions Code Sections
17200 et seq. The Company is vigorously defending the lawsuit. The
probability of any particular outcome is not reasonably estimable at this
time.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 2. Changes in Securities and Use of Proceeds



| |  | Not applicable.
| |  | ---------------

Item 3. Defaults Upon Senior Securities



| |  | Not applicable.
| |  | ---------------

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



| |  | Not applicable.
| |  | ---------------

Item 5. Other Information



| |  | Not applicable.
| |  | ---------------

Item 6. Exhibits and Reports on Form 8-K

EXHIBITS

There were no exhibits filed during the three months ended June 30, 2002.

REPORTS FOR FORM 8-K

There were no current reports on Form 8-K filed during the three months ended
June 30, 2002.

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SIGNATURES

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

|                       |  |                                                                                                                
|---------------------- |  | ---------------------------------------------------------------------------------------------------------------
|                       |  | AIG SUNAMERICA LIFE ASSURANCE COMPANY
Registrant                                                               
|                      
|                       |  |                                                                                                                
|                      
|Date: August 14, 2002  |  | /s/ N. SCOTT GILLISN. Scott Gillis
Senior Vice President
      (Principal Financial
      Officer)             
|                      
|                       |  |                                                                                                                
|                      
|Date:  August 14, 2002 |  | /s/ MAURICE S. HEBERTMaurice S. Hebert
Vice President and
      Controller (Principal
      Accounting Officer)

37