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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



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

OR



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

For the quarterly period ended March 31, 2003

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE 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 [X] No [   ]

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED BY RULE 12b-2 OF THE SECURITIES EXCHANGE ACT OF 1934). Yes [   ] No [X]

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON MAY
14, 2003 WAS AS FOLLOWS:

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





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TABLE OF CONTENTS



|                                                           |  |                                                                                       |  |  |  |  |  | 
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  |  |  |  |  | 
|                                                           |  | 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
|CONTROLS & PROCEDURES                                     
|OTHER INFORMATION                                         
|SIGNATURES                                                



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AIG SUNAMERICA LIFE ASSURANCE COMPANY

INDEX

|                               |                                                                                                       |  |           |       | 
|------------------------------ | ----------------------------------------------------------------------------------------------------- |  | --------- | ----- | 
|                               |                                                                                                       |  | Page     
|                               |                                                                                                       |  | Number(s)
|                               |                                                                                                       |  |          
|Part I  Financial Information |                                                                                                       |  |           |      
|                              
|                               | Balance Sheet (Unaudited)  March 31, 2003
and December 31, 2002                                      |  |           | 3-4   | 
|                              
|                               | Statement of Income and Comprehensive Income
(Unaudited)  Three Months Ended March 31,
2003 and 2002 |  |           | 5     | 
|                              
|                               | Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 2003 and 2002                      |  |           | 6-7   | 
|                              
|                               | Notes to Financial Statements (Unaudited)                                                             |  |           | 8-9   | 
|                              
|                               | Managements Discussion and Analysis of Financial
Condition and Results of Operations                 |  |           | 10-29 | 
|                              
|                               | Quantitative and Qualitative Disclosures About
Market Risk                                            |  |           | 30    | 
|                              
|                               | Controls and Procedures                                                                               |  |           | 31    | 
|                              
|Part II  Other Information    |                                                                                                       |  | 32        |      





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##### Table of Contents






AIG SUNAMERICA LIFE ASSURANCE COMPANY
BALANCE SHEET
(Unaudited)

|                                                  |                                                                                                                                                            |   |                |           |              |   |            |           | 
|------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------- | --------- | ------------ | - | ---------- | --------- | 
|                                                  |                                                                                                                                                            |   | March 31,      |           | December 31,
|                                                  |                                                                                                                                                            |   | 2003           |           | 2002        
|                                                  |                                                                                                                                                            |   |                |           |             
|                                                  |                                                                                                                                                            |   | (in thousands)
|ASSETS                                            |                                                                                                                                                            |   |                |           |              |   |            |          
|Investments and cash:                             |                                                                                                                                                            |   |                |           |              |   |            |          
|                                                  | Cash and short-term investments                                                                                                                            |   | $              | 305,577   |              |   | $          | 65,872    | 
|                                                  | Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized cost:
March 31, 2003, $5,845,877;
December 31, 2002, $5,492,677) |   |                | 5,909,993 |              |   |            | 5,528,569 | 
|                                                  | Mortgage loans                                                                                                                                             |   |                | 727,901   |              |   |            | 738,601   | 
|                                                  | Policy loans                                                                                                                                               |   |                | 211,089   |              |   |            | 215,846   | 
|                                                  | Separate account seed money                                                                                                                                |   |                | 25,029    |              |   |            | 25,366    | 
|                                                  | Common stocks available for sale, at
fair value (cost: March 31, 2003,
$4,173; December 31, 2002, $4,111)                                                  |   |                | 3,923     |              |   |            | 2,609     | 
|                                                  | Partnerships                                                                                                                                               |   |                | 5,714     |              |   |            | 8,766     | 
|                                                  | Real estate                                                                                                                                                |   |                | 22,091    |              |   |            | 22,315    | 
|                                                  | Securities lending collateral                                                                                                                              |   |                | 551,025   |              |   |            | 585,760   | 
|                                                  | Other invested assets                                                                                                                                      |   |                | 6,607     |              |   |            |          | 
|                                                  |                                                                                                                                                            |   |                |           |              |   |            |          
|                                                  | Total investments and cash                                                                                                                                 |   |                | 7,768,949 |              |   |            | 7,193,704 | 
|                                                 
|Variable annuity assets held in separate
accounts |                                                                                                                                                            |   | 14,365,805     |           |              |   | 14,758,642 |          
|Accrued investment income                         |                                                                                                                                                            |   | 83,344         |           |              |   | 75,326     |          
|Deferred acquisition costs                        |                                                                                                                                                            |   | 1,377,253      |           |              |   | 1,364,748  |          
|Income taxes currently receivable from
Parent     |                                                                                                                                                            |   | 120,130        |           |              |   | 100,123    |          
|Due from affiliates                               |                                                                                                                                                            |   |               |           |              |   | 26,304     |          
|Goodwill                                          |                                                                                                                                                            |   | 4,603          |           |              |   | 4,603      |          
|Other assets                                      |                                                                                                                                                            |   | 18,524         |           |              |   | 15,382     |          
|                                                  |                                                                                                                                                            |   |                |           |              |   |            |          
|TOTAL ASSETS                                      |                                                                                                                                                            | $ | 23,738,608     |           |              | $ | 23,538,832 |          
|                                                  |                                                                                                                                                            |   |                |           |              |   |            |          

See accompanying notes to financial statements

3



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

|                                                          |                                                 |   |            |                |  |              |            |           |  | 
|--------------------------------------------------------- | ----------------------------------------------- | - | ---------- | -------------- |  | ------------ | ---------- | --------- |  | 
|                                                          |                                                 |   |            | March 31,      |  | December 31,
|                                                          |                                                 |   |            | 2003           |  | 2002        
|                                                          |                                                 |   |            |                |  |             
|                                                          |                                                 |   |            | (in thousands)
|LIABILITIES AND SHAREHOLDERS EQUITY                      |                                                 |   |            |                |  |              |            |          
|Reserves, payables and accrued
liabilities:               |                                                 |   |            |                |  |              |            |          
|                                                          | Reserves for fixed annuity contracts            |   | $          | 4,532,874      |  |              | $          | 4,285,098 | 
|                                                          | Reserves for universal life insurance
contracts |   |            | 1,656,656      |  |              |            | 1,676,073 | 
|                                                          | Reserves for guaranteed investment
contracts    |   |            | 356,824        |  |              |            | 359,561   | 
|                                                          | Securities lending payable                      |   |            | 551,025        |  |              |            | 585,760   | 
|                                                          | Modified coinsurance deposit liability          |   |            | 26,531         |  |              |            | 31,393    | 
|                                                          | Due to affiliates                               |   |            | 5,571          |  |              |            |          | 
|                                                          | Payable to brokers                              |   |            | 344,897        |  |              |            | 8,529     | 
|                                                          | Other liabilities                               |   |            | 172,651        |  |              |            | 160,265   | 
|                                                          |                                                 |   |            |                |  |              |            |          
|Total reserves, payables and accrued
liabilities          |                                                 |   | 7,647,029  |                |  |              | 7,106,679  |          
|                                                         
|Variable annuity liabilities related to
separate accounts |                                                 |   | 14,365,805 |                |  |              | 14,758,642 |          
|Deferred income taxes                                     |                                                 |   | 380,710    |                |  |              | 351,872    |          
|                                                          |                                                 |   |            |                |  |              |            |          
|Total liabilities                                         |                                                 |   | 22,393,544 |                |  |              | 22,217,193 |          
|                                                          |                                                 |   |            |                |  |              |            |          
|Shareholders equity:                                     |                                                 |   |            |                |  |              |            |          
|                                                          | Common stock                                    |   |            | 3,511          |  |              |            | 3,511     | 
|                                                          | Additional paid-in capital                      |   |            | 1,125,753      |  |              |            | 1,125,753 | 
|                                                          | Retained earnings                               |   |            | 186,377        |  |              |            | 175,871   | 
|                                                          | Accumulated other comprehensive income          |   |            | 29,423         |  |              |            | 16,504    | 
|                                                          |                                                 |   |            |                |  |              |            |          
|                                                          | Total shareholders equity                      |   |            | 1,345,064      |  |              |            | 1,321,639 | 
|                                                          |                                                 |   |            |                |  |              |            |          
|TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY                |                                                 | $ | 23,738,608 |                |  | $            | 23,538,832 |          
|                                                          |                                                 |   |            |                |  |              |            |          

See accompanying notes to financial statements

4



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months ended March 31, 2003 and 2002
(Unaudited)

|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |        |        | 
|--------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------- | ------- | -------------- | ------ | ---- | ------- | ------ | ------ | 
|                                                                                                                |                                                                   |                                                         |         | 2003           |        | 2002
|                                                                                                                |                                                                   |                                                         |         |                |        |     
|                                                                                                                |                                                                   |                                                         |         | (In thousands)
|REVENUES                                                                                                        |                                                                   |                                                         |         |                |        |      |         |       
|                                                                                                                | Fee income:                                                       |                                                         |         |                |        |      |         |        |       
|                                                                                                                |                                                                   | Variable annuity policy fees                            |         | $              | 63,956 |      |         | $      | 64,723 | 
|                                                                                                                |                                                                   | Universal life insurance policy fees                    |         |                | 8,970  |      |         |        | 9,225  | 
|                                                                                                                |                                                                   | Surrender charges                                       |         |                | 7,570  |      |         |        | 6,505  | 
|                                                                                                                |                                                                   | Other fees                                              |         |                |       |      |         |        | 1,028  | 
|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |       
|                                                                                                                | Total fee income                                                  |                                                         |         | 80,496         |        |      |         | 81,481 |       
|                                                                                                               
|                                                                                                                | Investment income                                                 |                                                         |         | 98,686         |        |      |         | 96,334 |       
|                                                                                                                | Net realized investment losses                                    |                                                         |         | (3,272         | )      |      |         | (3,035 | )     
|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |       
|Total revenues                                                                                                  |                                                                   |                                                         | 175,910 |                |        |      | 174,780 |       
|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |       
|BENEFITS AND EXPENSES                                                                                           |                                                                   |                                                         |         |                |        |      |         |       
|                                                                                                                | Interest expense:                                                 |                                                         |         |                |        |      |         |        |       
|                                                                                                                |                                                                   | Interest credited to fixed annuity contracts            |         |                | 38,765 |      |         |        | 33,969 | 
|                                                                                                                |                                                                   | Interest credited to universal life insurance contracts |         |                | 19,102 |      |         |        | 19,586 | 
|                                                                                                                |                                                                   | Interest credited to guaranteed investment contracts    |         |                | 2,016  |      |         |        | 3,025  | 
|                                                                                                                |                                                                   | Interest expense on securities lending agreements       |         |                | 1,901  |      |         |        | 2,618  | 
|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |       
|                                                                                                                | Total interest expense                                            |                                                         |         | 61,784         |        |      |         | 59,198 |       
|                                                                                                               
|                                                                                                                | General and administrative expenses                               |                                                         |         | 21,259         |        |      |         | 18,827 |       
|                                                                                                                | Amortization of deferred acquisition costs                        |                                                         |         | 38,821         |        |      |         | 46,653 |       
|                                                                                                                | Annual commissions                                                |                                                         |         | 14,178         |        |      |         | 15,806 |       
|                                                                                                                | Claims on universal life contracts, net of reinsurance
recoveries |                                                         |         | 5,513          |        |      |         | 4,462  |       
|                                                                                                                | Guaranteed minimum death benefits, net of reinsurance
recoveries  |                                                         |         | 21,976         |        |      |         | 7,321  |       
|Total benefits and expenses                                                                                     |                                                                   |                                                         | 163,531 |                |        |      | 152,267 |       
|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |       
|PRETAX INCOME                                                                                                   |                                                                   |                                                         | 12,379  |                |        |      | 22,513  |       
|                                                                                                               
|Income tax expense                                                                                              |                                                                   |                                                         | 1,873   |                |        |      | 3,395   |       
|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |       
|NET INCOME                                                                                                      |                                                                   |                                                         | 10,506  |                |        |      | 19,118  |       
|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |       
|OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:                                                                  |                                                                   |                                                         |         |                |        |      |         |       
|Net unrealized gains (losses) on debt and equity
securities available for sale identified in the
current period |                                                                   |                                                         | 18,520  |                |        |      | (31,412 | )     
|Less reclassification adjustment for net realized
losses included in net income                                 |                                                                   |                                                         | 1,355   |                |        |      | 2,426   |       
|Net change related to cash flow hedges                                                                          |                                                                   |                                                         |        |                |        |      | (883    | )     
|Income tax (expense) benefit                                                                                    |                                                                   |                                                         | (6,956  | )              |        |      | 10,454  |       
|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |       
|OTHER COMPREHENSIVE INCOME (LOSS)                                                                               |                                                                   |                                                         | 12,919  |                |        |      | (19,415 | )     
|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |       
|COMPREHENSIVE INCOME (LOSS)                                                                                     |                                                                   | $                                                       | 23,425  |                |        | $    | (297    | )     
|                                                                                                                |                                                                   |                                                         |         |                |        |      |         |       

See accompanying notes to financial statements

5



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS
For the three months ended March 31, 2003 and 2002
(Unaudited)

|                                                                                  |                                                     |                                               |        |                |         |      |        |          |         |  
|--------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------- | ------ | -------------- | ------- | ---- | ------ | -------- | ------- | -
|                                                                                  |                                                     |                                               |        | 2003           |         | 2002
|                                                                                  |                                                     |                                               |        |                |         |     
|                                                                                  |                                                     |                                               |        | (In thousands)
|CASH FLOW FROM OPERATING ACTIVITIES:                                              |                                                     |                                               |        |                |         |      |        |         
|Net income                                                                        |                                                     | $                                             | 10,506 |                |         | $    | 19,118 |         
|Adjustments to reconcile net income to net
cash provided by operating activities: |                                                     |                                               |        |                |         |      |        |         
|                                                                                  | Interest credited to:                               |                                               |        |                |         |      |        |          |        
|                                                                                  |                                                     | Fixed annuity contracts                       |        |                | 38,765  |      |        |          | 33,969  |  
|                                                                                  |                                                     | Universal life insurance contracts            |        |                | 19,102  |      |        |          | 19,586  |  
|                                                                                  |                                                     | Guaranteed investment contracts               |        |                | 2,016   |      |        |          | 3,025   |  
|                                                                                  | Net realized investment losses                      |                                               |        | 3,272          |         |      |        | 3,035    |        
|                                                                                  | Amortization of net discounts on investments        |                                               |        | 3,473          |         |      |        | 1,667    |        
|                                                                                  | Universal life insurance fees, net                  |                                               |        | (3,457         | )       |      |        | (4,763   | )      
|                                                                                  | Amortization of deferred acquisition costs          |                                               |        | 38,821         |         |      |        | 46,653   |        
|                                                                                  | Acquisition costs deferred                          |                                               |        | (60,926        | )       |      |        | (60,690  | )      
|                                                                                  | Provision for deferred income taxes                 |                                               |        | 21,881         |         |      |        | 17,073   |        
|                                                                                  | Change in:                                          |                                               |        |                |         |      |        |          |        
|                                                                                  |                                                     | Accrued investment income                     |        |                | (8,018  | )    |        |          | (2,512  | )
|                                                                                  |                                                     | Other assets                                  |        |                | (3,142  | )    |        |          | (2,014  | )
|                                                                                  |                                                     | Income taxes currently receivable from Parent |        |                | (20,007 | )    |        |          | (13,678 | )
|                                                                                  |                                                     | Due from/to affiliates                        |        |                | (18,125 | )    |        |          | (48,246 | )
|                                                                                  |                                                     | Other liabilities                             |        |                | 281     |      |        |          | (3,933  | )
|                                                                                  | Other, net                                          |                                               |        | 9,845          |         |      |        | 11,834   |        
|                                                                                  |                                                     |                                               |        |                |         |      |        |         
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |                                                     |                                               | 34,287 |                |         |      | 20,124 |         
|                                                                                  |                                                     |                                               |        |                |         |      |        |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |                                                     |                                               |        |                |         |      |        |         
|Purchases of:                                                                     |                                                     |                                               |        |                |         |      |        |         
|                                                                                  | Bonds, notes and redeemable preferred stocks        |                                               |        | (855,046       | )       |      |        | (411,588 | )      
|                                                                                  | Mortgage loans                                      |                                               |        | (131           | )       |      |        | (18,217  | )      
|                                                                                  | Other investments, excluding short-term investments |                                               |        | (8,171         | )       |      |        | (3,052   | )      
|Sales of:                                                                         |                                                     |                                               |        |                |         |      |        |         
|                                                                                  | Bonds, notes and redeemable preferred stocks        |                                               |        | 576,332        |         |      |        | 267,071  |        
|                                                                                  | Other investments, excluding short-term investments |                                               |        | 52             |         |      |        | 1,449    |        
|Redemptions and maturities of:                                                    |                                                     |                                               |        |                |         |      |        |         
|                                                                                  | Bonds, notes and redeemable preferred stocks        |                                               |        | 259,602        |         |      |        | 119,163  |        
|                                                                                  | Mortgage loans                                      |                                               |        | 11,213         |         |      |        | 36,519   |        
|                                                                                  | Other investments, excluding short-term investments |                                               |        | 54,973         |         |      |        | 78,986   |        
|                                                                                  |                                                     |                                               |        |                |         |      |        |         
|NET CASH PROVIDED BY INVESTING ACTIVITIES                                         |                                                     | $                                             | 38,824 |                |         | $    | 70,331 |         
|                                                                                  |                                                     |                                               |        |                |         |      |        |         

See accompanying notes to financial statements

6



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
For the three months ended March 31, 2003 and 2002
(Unaudited)

|                                                                                                            |                                    |   |         |                |   |      |          |         |   | 
|----------------------------------------------------------------------------------------------------------- | ---------------------------------- | - | ------- | -------------- | - | ---- | -------- | ------- | - | 
|                                                                                                            |                                    |   |         | 2003           |   | 2002
|                                                                                                            |                                    |   |         |                |   |     
|                                                                                                            |                                    |   |         | (In thousands)
|CASH FLOW FROM FINANCING ACTIVITIES:                                                                        |                                    |   |         |                |   |      |          |        
|Deposits received on:                                                                                       |                                    |   |         |                |   |      |          |        
|                                                                                                            | Annuity contracts                  |   | $       | 428,057        |   |      | $        | 359,933 |  
|                                                                                                            | Universal life insurance contracts |   |         | 11,310         |   |      |          | 12,407  |  
|Net exchanges from the fixed accounts of of variable
annuity contracts                                      |                                    |   | (58,019 | )              |   |      | (335,111 | )      
|Withdrawal payments on:                                                                                     |                                    |   |         |                |   |      |          |        
|                                                                                                            | Fixed annuity contracts            |   |         | (139,659       | ) |      |          | (86,844 | )
|                                                                                                            | Universal life insurance contracts |   |         | (14,100        | ) |      |          | (9,364  | )
|                                                                                                            | Guaranteed investment contracts    |   |         | (4,753         | ) |      |          | (2,869  | )
|Claims and annuity payments on:                                                                             |                                    |   |         |                |   |      |          |        
|                                                                                                            | Fixed annuity contracts            |   |         | (29,313        | ) |      |          | (17,116 | )
|                                                                                                            | Universal life insurance contracts |   |         | (34,172        | ) |      |          | (40,794 | )
|Net receipts from (repayments of) other
short-term financings                                               |                                    |   | 12,105  |                |   |      | (20,938  | )      
|Net payment related to a modified
coinsurance transaction                                                   |                                    |   | (4,862  | )              |   |      | (7,201   | )      
|Net cash and short-term investments transferred
to the Parent in the distribution of Saamsun
Holdings Corp. |                                    |   |        |                |   |      | (82,873  | )      
|                                                                                                            |                                    |   |         |                |   |      |          |        
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                                         |                                    |   | 166,594 |                |   |      | (230,770 | )      
|                                                                                                            |                                    |   |         |                |   |      |          |        
|NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS                                                  |                                    |   | 239,705 |                |   |      | (140,315 | )      
|CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD                                                      |                                    |   | 65,872  |                |   |      | 200,064  |        
|                                                                                                            |                                    |   |         |                |   |      |          |        
|CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD                                                            |                                    | $ | 305,577 |                |   | $    | 59,749   |        
|                                                                                                            |                                    |   |         |                |   |      |          |        
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                                         |                                    |   |         |                |   |      |          |        
|                                                                                                           
|Interest paid on indebtedness                                                                               |                                    | $ | 1,901   |                |   | $    | 2,618    |        
|                                                                                                            |                                    |   |         |                |   |      |          |        
|Net income taxes refunded by (paid to) Parent                                                               |                                    | $ |        |                |   | $    |         |        
|                                                                                                            |                                    |   |         |                |   |      |          |        

See accompanying notes to financial statements

7



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



|1. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance
Company) (the Company), is a direct wholly owned subsidiary of SunAmerica
Life Insurance Company (the Parent), which is a wholly owned subsidiary of
AIG SunAmerica Inc. (SAI), a wholly owned subsidiary of American
International Group, Inc. (AIG). AIG is a holding company which through its
subsidiaries is engaged in a broad range of insurance and insurance-related
activities, financial services and retirement services and asset management.
The Company is an Arizona-domiciled life insurance company principally engaged
in the business of writing variable annuities directed to the market for
tax-deferred, long-term savings products. It also administers closed blocks of
fixed annuities, universal life policies and guaranteed interest 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. The Company continued to do business as Anchor
National Life Insurance Company until February 28, 2003, at which time it began
doing business under its new name.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | 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 March 31, 2003 and
December 31, 2002, the results of its operations and its cash flows for the
three months ended March 31, 2003 and 2002. The results of operations for the
three months ended March 31, 2003 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, 2002, contained in the
Companys 2002 Annual Report on Form 10-K. Certain prior period items have
been reclassified to conform to the current periods presentation.                                                             
|  
|2. |  | 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 March 31, 2003
is $794,930,000. Related to each of these agreements are participation
agreements with the Parent under which the Parent will share in $345,332,500 of
these liabilities in exchange for a proportionate percentage of the fees
received under these agreements. The expiration dates and related amounts of
these commitments are as follows: $249,000,000 in 2004, $387,930,000 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, $21,000,000 as of March 31, 2003, of various
mortgage-backed securities at par value in March 2006. As of March 31, 2003,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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|   |  | the estimated fair value exceeded the principal amount of the securities. At
the present time, management does not anticipate any material losses with
respect to this agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In the third quarter of 2002, the Company began issuing certain variable
annuity products which offer an optional Guaranteed Minimum Account Value
(GMAV) living benefit. As of March 31, 2003, the premiums subject to
guarantee totaled approximately $200,000,000, and the estimated fair values of
the GMAV were not material.                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|3. |  | RECENTLY ISSUED ACCOUNTING STANDARDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | In November 2002, FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), which requires that, for guarantees within
the scope of FIN 45 issued or amended by the Company after December 31, 2002, a
liability for the fair value of the obligation undertaken in issuing the
guarantee be recognized. FIN 45 also requires additional disclosures in
financial statements starting with the Companys 2002 year-end financial
statements. The Company believes that the impact of FIN 45 on its results from
operations and financial condition will not be significant.

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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 Anchor National Life
Insurance Company) (the Company) for the three months ended March 31, 2003
(2003) and March 31, 2002 (2002) follows. Certain prior period amounts
have been restated 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 associated 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.

CRITICAL ACCOUNTING POLICIES

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 follows:

VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on
debt and equity securities available for sale amounted to $162.4 million at
March 31, 2003. In determining if and when a decline in fair value below
amortized cost is other-than-temporary, the Company evaluates at each reporting
period the market conditions, offering prices, trends of earnings, price
multiples, and other key measures for investments in debt and

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marketable equity securities. In particular, for debt securities, the Company
assesses the probability that all amounts due are collectible according to the
contractual terms of the obligation. When such a decline in value is deemed to
be other-than-temporary, the Company recognizes an impairment loss in the
current period operating results to the extent of the decline.

Securities in our portfolio with a carrying value of approximately $1.24
billion at March 31, 2003 do not have readily determinable market prices. For
these securities, we estimate their fair value with internally prepared
valuations (including those based on estimates of future profitability).
Otherwise, we use our most recent purchases and sales of similar unquoted
securities, independent broker quotes or comparison to similar securities with
quoted prices when possible to estimate the fair value of those securities.
All such securities are classified as available for sale. Our ability to
liquidate our positions in these securities will be impacted to a significant
degree by the lack of an actively traded market, and we may not be able to
dispose of these investments in a timely manner. Although we believe our
estimates reasonably reflect the fair value of those securities, our key
assumptions about the risk-free interest rates, risk premiums, performance of
underlying collateral, if any, and other factors may not reflect those of an
active market.

AMORTIZATION OF DEFERRED ACQUISITION COSTS: We amortize our deferred
acquisition costs (DAC) based on a percentage of expected gross profits
(EGPs) over the life of the underlying policies. EGPs are computed based on
assumptions related to the underlying policies written, including their
anticipated duration, the growth rate of the separate account assets (with
respect to variable annuities) or general account assets (with respect to fixed
annuities and fixed options of variable annuities) supporting the annuity
obligations, the anticipated volume of guaranteed minimum death benefits to be
paid and the level of expenses necessary to maintain the policies. The Company
adjusts DAC amortization (a DAC unlocking) when estimates of current or
future gross profits to be realized from its annuity policies are revised.

The assumption we use for the long-term annual net growth of the separate
account assets in the determination of DAC amortization with respect to our
variable annuity policies is 10% (the long-term growth rate assumption). We
use a reversion to the mean methodology which allows us to maintain this 10%
long-term growth rate assumption, while also giving consideration to the effect
of short-term swings in the equity markets. For example, if performance were
15% during the first year following the introduction of a product, the DAC
model would assume that market returns for the following five years (the
short-term growth rate assumption) would be approximately 9%, resulting in an
average annual growth rate of 10% during the life of the product. Similarly,
following periods of below 10% performance, the model will assume a short-term
growth rate higher than 10%. A DAC unlocking will occur if management deems
the short-term growth rate assumption (i.e., the growth rate required to revert
to the mean 10% growth rate over a five-year period) to be unreasonable. The
use of a reversion to the mean assumption is common within the industry;
however, the parameters used in the methodology are subject to judgment and
vary within the industry.

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BUSINESS SEGMENTS

On 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 Corp.
(Saamsun). Saamsun was comprised of the Companys asset management and
broker-dealer segments. This distribution was approved by the Arizona
Department of Insurance. The results of 2003 and 2002 include the impact of
this distribution.

On June 10, 2002, the Company entered into a profit sharing agreement with
AIG SunAmerica Asset Management Corp. (SAAMCO), whereby SAAMCO will
contribute to the Company on a quarterly basis its profits earned in connection
with its role as investment advisor and/or business manager to several open-end
investment management companies registered under the Investment Company Act of
1940, as amended, that fund the variable investment options available to
investors through the Companys variable annuity contracts (the SAAMCO
Agreement). The SAAMCO Agreement is retroactive to January 1, 2002. Amounts
paid to or accrued by the Company under this agreement totaled $13.5 million
for 2003.

RESULTS OF OPERATIONS

NET INCOME totaled $10.5 million in 2003, compared to $19.1 million in
2002.

PRETAX INCOME totaled $12.4 million in 2003 and $22.5 million in 2002.
The decrease in 2003 primarily resulted from increased guaranteed minimum death
benefits and increased general and administrative expenses, offset by decreased
amortization of deferred acquisition costs.

INCOME TAX EXPENSE totaled $1.9 million in 2003 and $3.4 million in 2002,
representing effective tax rates of 15% in 2003 and 2002.

NET INVESTMENT SPREAD, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, totaled $36.9 million in 2003 and $37.1 million
in 2002. These amounts equal 2.04% on average invested assets (computed on a
daily basis) of $7.25 billion in 2003 and 2.37% on average invested assets of
$6.28 billion in 2002.

Growth in average invested assets resulted from 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
$439.4 million in 2003 and $373.3 million in 2002, and are largely deposits for
the fixed accounts of variable annuities. On an annualized basis, these
deposits represent 29% and 28%, respectively, of the related reserve balances
at the beginning of 2003 and 2002.

Under generally accepted accounting principles, deposits collected on
non-traditional life and annuity insurance products, such as those sold by the
Company, are not reflected as revenues in the Companys statement of income, as
they are recorded directly to reserves for fixed annuity and
universal life contracts upon receipt.

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The following table shows the Companys investment results for 2003 and 2002:

|                                                                                              |  |                         |           |      |  |   |           |  
|--------------------------------------------------------------------------------------------- |  | ----------------------- | --------- | ---- |  | - | --------- | -
|                                                                                              |  | 2003                    |           | 2002
|                                                                                              |  |                         |           |     
|                                                                                              |  | (In thousands,         
|                                                                                              |  | except for percentages)
|Average invested assets                                                                       |  | $                       | 7,249,465 |      |  | $ | 6,278,929 |  
|                                                                                              |  |                         |           |      |  |   |           |  
|Average annuity reserves and other
interest-bearing liabilities                               |  | $                       | 6,981,006 |      |  | $ | 6,213,052 |  
|                                                                                              |  |                         |           |      |  |   |           |  
|Average yield on average
invested assets                                                      |  |                         | 5.45      | %    |  |   | 6.14      | %
|Weighted average rate paid on
average annuity reserves and other
interest-bearing liabilities |  |                         | 3.54      |      |  |   | 3.81      |  
|                                                                                              |  |                         |           |      |  |   |           |  
|Yield spread                                                                                  |  |                         | 1.91      | %    |  |   | 2.33      | %
|                                                                                              |  |                         |           |      |  |   |           |  

Net investment spreads include the effect of income earned or interest
paid on the difference between average invested assets and average
interest-bearing liabilities. Average invested assets exceeded average
interest-bearing liabilities by $268.5 million in 2003, compared to $65.9
million in 2002. The increase in 2003 reflected a $200.0 million capital
contribution from the Parent in the third quarter of 2002. The difference
between the Companys yield on average invested assets and the rate paid on
average interest-bearing liabilities (the Spread Difference) was 1.91% in
2003 and 2.33% in 2002.

Investment income (and the related yields on average invested assets)
totaled $98.7 million (5.45%) in 2003 and $96.3 million (6.14%) in 2002. The
decrease in the investment yield in 2003 compared to 2002 primarily reflects a
lower prevailing interest rate environment. Expenses incurred to manage the
investment portfolio amounted to $0.6 million in 2003 and $0.5 million in 2002.
These expenses are included as a reduction to investment income in the
statement of income and comprehensive income.

Interest expense totaled $61.8 million in 2003 and $59.2 million in 2002.
The average rate paid on all interest-bearing liabilities was 3.54% in 2003,
compared to 3.81% in 2002. Interest-bearing liabilities averaged $6.99 billion
during 2003 and $6.21 billion during 2002. The decline in the overall rates
paid in 2003 compared to 2002 resulted primarily from the impact of a declining
interest rate environment.

NET REALIZED INVESTMENT LOSSES totaled $3.3 million in 2003 and $3.0
million in 2002 and include impairment writedowns of $5.2 in 2003 and $5.1
million in 2002. Thus, net realized gains from sales and redemptions of
investments totaled $1.9 million in 2003 and $2.1 million in 2002.

The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $837.3 million in 2003 and $426.1 million in 2002. 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

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environments, net gains and losses from sales and redemptions of
investments fluctuate from period to period, and represent 0.10% and 0.13% of
average invested assets for 2003 and 2002, 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 $5.2 million of provisions applied to bonds
and partnerships in 2003 and $5.1 million of provisions applied to bonds and
other invested assets in 2002. On an annualized basis, impairment writedowns
represent 0.28% and 0.32% of average invested assets for 2003 and 2002,
respectively. For the twenty quarters ended March 31, 2003, impairment
writedowns as an annualized percentage of average invested assets have ranged
from 0.03% to 1.95% and have averaged 0.60%. 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.

VARIABLE ANNUITY POLICY FEES are based on the market value of assets in
separate accounts supporting variable annuity contracts. Such fees totaled
$64.0 million in 2003 (including $13.5 million attributable to the SAAMCO
Agreement) and $64.7 million in 2002 and are net of reinsurance
premiums of
$6.4 million and $4.4 million in 2003 and 2002, respectively. Excluding the
impact of the SAAMCO Agreement, variable annuity fees would have been $50.5
million in 2003. The decreased fees in 2003 as compared to 2002 reflect the
unfavorable equity market conditions in 2002 and 2003, and the resulting
unfavorable impact on market values of assets in the separate accounts. On an
annualized basis, variable annuity fees represent 1.8% and 1.4% of average
variable annuity assets in 2003 and 2002, respectively. Excluding the impact
of the SAAMCO Agreement, variable annuity fees would have represented 1.4% of
average variable annuity assets in 2003. Variable annuity assets averaged
$14.48 billion during 2003 and $18.21 billion during 2002. Variable annuity
deposits, which exclude deposits allocated to the fixed accounts of variable
annuity products, totaled $328.4 million in 2003 and $325.6 million in 2002.
On an annualized basis, these amounts represent 9% and 7% of separate account
liabilities at the beginning of the respective periods. 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.

Sales of variable annuity products (which include deposits allocated to
the fixed accounts) (Variable Annuity Product Sales) amounted to $754.8
million in 2003 and $685.4 million in 2002. Such sales primarily reflect those
of the Companys Polaris, Seasons and Diversified Strategies 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 41 variable funds and up to 7 guaranteed fixed-rate funds
depending on the product. The increase in Variable Annuity Product Sales
reflected higher sales of the fixed account

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options of the Companys variable annuity products due to the unfavorable
equity market conditions discussed above.

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 annuities
(See Regulation).

UNIVERSAL LIFE INSURANCE POLICY FEES amounted to $9.0 million in 2003 and
$9.2 million in 2002. Universal life insurance fees consist of mortality
charges, up-front fees earned on deposits received and administrative fees, net
of reinsurance premiums. The administrative fees are assessed based on the
number of policies in force as of the end of each month. The Company acquired
its universal life contracts as part of the its acquisition of business from
MBL Life Assurance Corporation on December 31, 1998 and does not actively
market such contracts. Such fees annualized represent 2.2% and 2.1% of average
reserves for universal life insurance contracts in the respective periods.

SURRENDER CHARGES on fixed annuity, variable annuity and universal life
contracts totaled $7.6 million in 2003 and $6.5 million in 2002. 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 $536.3 million in 2003, compared to $501.6
million in 2002. Annualized, these payments when expressed as a percentage of
average related reserves represent 10.6% for 2003 and 8.7% for 2002.
Withdrawals include variable annuity payments from the separate accounts
totaling $384.4 million (annualized representing 10.7% of average variable
annuity liabilities) in 2003 and $405.4 million (annualized representing 8.9%
of average variable annuity liabilities) in 2002. The percentage increase in
withdrawal rates in 2003 reflects a decrease in the market value of assets in
separate accounts supporting variable annuity contracts due to continual
unfavorable equity market conditions.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $21.3 million in 2003 and
$18.9 million in 2002. 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 $38.8 million in 2003,
compared to $46.7 million in 2002. The decrease in amortization in 2003 was
due to a lower income in 2003 as a result of increased guaranteed minimum death
benefits and increased general and administrative expenses.

ANNUAL COMMISSIONS totaled $14.2 million in 2003, compared to $15.8
million in 2002. 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 55% 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 (Net
GMDB) totaled $22.0 million in 2003, compared to $7.3 million in 2002 (net

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of reinsurance recoveries of $3.0 million in 2003 and $1.4 million in
2002). Net GMDB consists primarily of guaranteed minimum death benefits as
well as immaterial amounts of earnings enhancement benefits, guaranteed minimum
income benefits and guaranteed minimum account value benefits. These
guarantees are described in more detail in the following paragraphs. The
increase in Net GMDB related to the Companys variable annuity separate account
contracts in 2003 reflects the downturn in the equity markets in 2002 and 2003.
Further downturns in the equity markets could increase these expenses.

CLAIMS ON UNIVERSAL LIFE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled
$5.5 million in 2003, compared to $4.5 million in 2002 (net of reinsurance
recoveries of $10.8 million in 2003 and $5.9 million in 2002).

GUARANTEED MINIMUM DEATH BENEFITS (GMDB): A majority of the Companys
variable annuity products are issued with a death benefit feature which
provides that, upon the death of a contractholder, the contractholders
beneficiary will receive the greater of (1) the contractholders account value,
or (2) a guaranteed minimum death benefit that varies by product (the GMDB).
The Company bears the risk that death claims following a decline in the
financial markets may exceed contractholder account balances, and that the fees
collected under the contract are insufficient to cover the costs of the benefit
to be provided. At March 31, 2003, a portion of the GMDB risk on approximately
29% (calculated based on current account value) of the contracts with such
features had been reinsured. Approximately half of this reinsurance will cease
at the time the modified coinsurance deposit liability is fully paid down,
which is presently estimated to occur in early 2004. A substantial majority of
all new contracts sold have reinsurance coverage. However, reinsurance
coverage on new contracts sold ceases at the end of 2003. Reinsurance coverage
is subject to limitations such as caps and deductibles. GMDB-related
contractholder benefits incurred, net of related reinsurance, were $22.0
million (net of $3.0 million of reinsurance recoveries) for 2003 and $7.3
million (net of $1.4 million of reinsurance recoveries) for 2002. In
accordance with Generally Accepted Accounting Principles, the Company expenses
such benefits in the period incurred, and therefore does not provide reserves
for future benefits.

EARNINGS ENHANCEMENT BENEFIT (EEB): The Company issues certain variable
annuity products that offer an optional Earnings Enhancement Benefit (EEB)
feature. For contractholders who elect the feature, the EEB provides an
additional death benefit amount equal to a fixed percentage of earnings in the
contract, subject to certain maximums. The Company bears the risk that account
values following favorable performance of the financial markets will result in
greater EEB death claims and that the fees collected under the contract are
insufficient to cover the costs of the benefit to be provided. At March 31,
2003, approximately 8% (calculated based on current account value) of inforce
contracts include EEB coverage, with 97% of the EEB risk fully reinsured.

GUARANTEED MINIMUM INCOME BENEFIT (GMIB): The Company issues certain
variable annuity products that contain or offer a Guaranteed Minimum Income
Benefit (GMIB) living benefit feature. This feature provides a minimum annuity
payment guarantee for those contractholders who choose to receive fixed
lifetime annuity payments after a seven or ten-year waiting period in their
deferred annuity contracts. The Company bears the risk that the performance of
the financial markets will not be sufficient for accumulated

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policyholder account balances to support GMIB benefits and that the fees
collected under the contract are insufficient to cover the costs of the benefit
to be provided. Substantially all of the Companys GMIB risk has been
reinsured as of March 31, 2003. However, the Company will not have reinsurance
coverage on contracts sold subsequent to June 2003.

GUARANTEED MINIMUM ACCOUNT VALUE (GMAV): In the third quarter of 2002,
the Company began issuing certain variable annuity products which offer an
optional Guaranteed Minimum Account Value (GMAV) living benefit. If elected by
the policyholder at the time of contract issuance, this feature guarantees that
the account value under the contract will equal or exceed the amount of the
initial principal invested, adjusted for withdrawals, at the end of a ten-year
waiting period. The Company bears the risk that protracted under-performance
of the financial markets could result in GMAV guarantees being higher than the
underlying contractholder account balance and that the fees collected under the
contract are insufficient to cover the costs of the benefit to be provided. As
of March 31, 2003, the premiums subject to guarantee totaled approximately $200
million, and the estimated fair values of the GMAV were not material.

With respect to its reinsurance agreements, the Company could become
liable for all obligations of the reinsured policies if the reinsurers were to
become unable to meet the obligations assumed under the respective reinsurance
agreements. The Company monitors its credit exposure with respect to these
agreements. However, due to the high credit ratings and continuous monitoring
of these ratings of the reinsurers, such risks are considered to be minimal.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDERS EQUITY increased to $1.35 billion at March 31, 2003 from
$1.32 billion at December 31, 2002, due to net income of $10.5 million and
other comprehensive income of $12.9 million.

INVESTED ASSETS at March 31, 2003 totaled $7.77 billion, compared with
$7.19 billion at December 31, 2002. The following table summarizes the
Companys portfolio of bonds, notes and redeemable preferred stocks (the Bond
Portfolio) at March 31, 2003 and December 31, 2002:

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|                                                   |  |                                        |           |                   |  |          |       |            |  |   |           |  |  |  |       |  
|-------------------------------------------------- |  | -------------------------------------- | --------- | ----------------- |  | -------- | ----- | ---------- |  | - | --------- |  |  |  | ----- | -
|                                                   |  | March 31, 2003                         |           | December 31, 2002
|                                                   |  |                                        |           |                  
|                                                   |  | Carrying                               |           | Percent of        |  | Carrying |       | Percent of
|                                                   |  | Value                                  |           | Portfolio         |  | Value    |       | Portfolio 
|                                                   |  |                                        |           |                   |  |          |       |           
|                                                   |  | (In thousands, except for percentages)
|BOND PORTFOLIO:                                    |  |                                        |           |                   |  |          |       |            |  |   |           |  |  |  |       |  
|U.S. government securities                         |  | $                                      | 16,717    |                   |  |          | 0.2   | %          |  | $ | 32,820    |  |  |  | 0.5   | %
|Mortgage-backed securities                         |  |                                        | 1,468,998 |                   |  |          | 18.9  |            |  |   | 1,547,568 |  |  |  | 21.5  |  
|Other bonds, notes and
redeemable preferred
stocks |  |                                        | 4,424,278 |                   |  |          | 57.0  |            |  |   | 3,948,181 |  |  |  | 54.9  |  
|                                                   |  |                                        |           |                   |  |          |       |            |  |   |           |  |  |  |       |  
|Total Bond Portfolio                               |  |                                        | 5,909,993 |                   |  |          | 76.1  |            |  |   | 5,528,569 |  |  |  | 76.9  |  
|Mortgage loans                                     |  |                                        | 727,901   |                   |  |          | 9.4   |            |  |   | 738,601   |  |  |  | 10.3  |  
|Common stocks                                      |  |                                        | 3,923     |                   |  |          | 0.0   |            |  |   | 2,609     |  |  |  | 0.0   |  
|Cash and short-term
investments                    |  |                                        | 305,577   |                   |  |          | 3.9   |            |  |   | 65,872    |  |  |  | 0.9   |  
|Partnerships                                       |  |                                        | 5,714     |                   |  |          | 0.1   |            |  |   | 8,766     |  |  |  | 0.1   |  
|Other                                              |  |                                        | 815,841   |                   |  |          | 10.5  |            |  |   | 849,287   |  |  |  | 11.8  |  
|                                                   |  |                                        |           |                   |  |          |       |            |  |   |           |  |  |  |       |  
|Total investments and cash                         |  | $                                      | 7,768,949 |                   |  |          | 100.0 | %          |  | $ | 7,193,704 |  |  |  | 100.0 | %
|                                                   |  |                                        |           |                   |  |          |       |            |  |   |           |  |  |  |       |  

The majority of the Companys invested assets are managed by an affiliate.
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 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 76% of the Companys total
investment portfolio at March 31, 2003, had an aggregate fair value that was
$64.1 million greater than its amortized cost at March 31,
2003 and $35.9 million at December 31, 2002. The increase in net unrealized gains on the Bond
Portfolio during 2003 principally reflects the impact of impairment writedowns
in 2003 as well as the decrease in prevailing interest rates and the
corresponding effect on the fair value of the Bond Portfolio at March 31, 2003.

At March 31, 2003, the Bond Portfolio (excluding $21.4 million of
redeemable preferred stocks) included $5.65 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 $235.7 million of bonds rated by the Company
pursuant to statutory ratings guidelines established by the NAIC. At March 31,
2003, approximately $5.53 billion of the Bond Portfolio was investment grade,
including $929.8 billion of mortgage-backed securities (MBS) and U.S.
government/agency securities.

At March 31, 2003, the Bond Portfolio included $358.2 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
approximately 1.5% of the Companys total assets and approximately 4.6% of its
invested assets. Non-investment-grade securities generally provide

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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 24 industries with 20% of these assets concentrated
in financial institutions and 13% concentrated in telecommunications. No other
industry concentration constituted more than 10% of these assets.

The table on the next page summarizes the Companys rated bonds by rating
classification as of March 31, 2003.

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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
|                                           |  |                         |           |      
|                                           |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |         |          |  |   |         |           |  |          |           |  |  |   |           |  |  | Percent
|                                           |  |                         |           |       |  | Estimated |           | NAIC      |  |                                  |   |           |  | Estimated |         |          |  |   |         | Estimated |  | of total
|S&P/Moody's/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-]         |  | $                       | 3,278,735 |       |  | $         | 3,371,889 |           |  |                                  | 1 |           |  | $         | 534,949 |          |  | $ | 556,557 |           |  | $        | 3,813,684 |  |  | $ | 3,928,446 |  |  |         | 50.57 | %
|BBB+ to BBB-
(Baa1 to
Baa3)
[BBB+ to BBB-] |  |                         | 1,284,175 |       |  |           | 1,295,770 |           |  |                                  | 2 |           |  |           | 305,040 |          |  |   | 306,181 |           |  |          | 1,589,215 |  |  |   | 1,601,951 |  |  |         | 20.62 | %
|BB+ to BB-
(Ba1 to
Ba3)
[BB+ to BB-]       |  |                         | 171,239   |       |  |           | 160,079   |           |  |                                  | 3 |           |  |           | 14,514  |          |  |   | 14,207  |           |  |          | 185,753   |  |  |   | 174,286   |  |  |         | 2.24  | %
|B+ to B-
(B1 to B3)
[B+ to B-]             |  |                         | 99,838    |       |  |           | 82,075    |           |  |                                  | 4 |           |  |           | 4,101   |          |  |   | 4,089   |           |  |          | 103,939   |  |  |   | 86,164    |  |  |         | 1.11  | %
|CCC+ to C
(Caa to C)
[CCC]                 |  |                         | 67,755    |       |  |           | 34,756    |           |  |                                  | 5 |           |  |           | 63,861  |          |  |   | 62,885  |           |  |          | 131,616   |  |  |   | 97,641    |  |  |         | 1.26  | %
|C1 to D
[DD]
{D}                           |  |                         |          |       |  |           |          |           |  |                                  | 6 |           |  |           | 154     |          |  |   | 131     |           |  |          | 154       |  |  |   | 131       |  |  |         | 0.00  | %
|                                           |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |         |          |  |   |         |           |  |          |           |  |  |   |           |  |  |         |       |  
|TOTAL RATED
ISSUES                         |  | $                       | 4,901,742 |       |  | $         | 4,944,569 |           |  |                                  |   |           |  | $         | 922,619 |          |  | $ | 944,050 |           |  | $        | 5,824,361 |  |  | $ | 5,888,619 |  |  |         |       |  
|                                           |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |         |          |  |   |         |           |  |          |           |  |  |   |           |  |  |         |       |  

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 non-defaulted 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 $235.7 million of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines.                                                                                                                                                                                                                                              

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At March 31, 2003, approximately $1.13 billion of the Companys Bond
Portfolio had an aggregate unrealized loss of $160.4 million. The gross
unrealized losses in the Bond Portfolio included the following concentrations:

|                                      |  |                |        | 
|------------------------------------- |  | -------------- | ------ | 
|                                      |  | Gross         
|                                      |  | Unrealized    
|Concentration                         |  | Losses        
|                                      |  |               
|                                      |  | (In thousands)
|Investment Grade:                     |  |                |        | 
|Collateralized bond/debt obligations  |  | $              | 38,950 | 
|Airlines                              |  |                | 21,442 | 
|Securitizations                       |  |                | 20,744 | 
|Finance companies                     |  |                | 3,323  | 
|Not Rated and Below Investment Grade: |  |                |        | 
|Collateralized bond/debt obligations  |  |                | 4,435  | 
|Airlines                              |  |                | 22,664 | 
|Securitizations                       |  |                | 402    | 
|Finance companies                     |  |                | 7,466  | 

The amortized cost of the Bond Portfolio in an unrealized loss position at
March 31, 2003, by contractual maturity, is shown below:

|                                       |  |                |           | 
|-------------------------------------- |  | -------------- | --------- | 
|                                       |  | Amortized     
|                                       |  | Cost          
|                                       |  |               
|                                       |  | (In thousands)
|Due in one year or less                |  | $              | 65,407    | 
|Due after one year through five years  |  |                | 490,762   | 
|Due after five years through ten years |  |                | 539,223   | 
|Due after ten years                    |  |                | 190,820   | 
|                                       |  |                |           | 
|Total                                  |  | $              | 1,286,212 | 
|                                       |  |                |           | 

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The aging of the Bond Portfolio in an unrealized loss position at March
31, 2003, is shown below:

|                        |  |           |         |            |  |          |         |  |  |  |     | 
|----------------------- |  | --------- | ------- | ---------- |  | -------- | ------- |  |  |  | --- | 
|                        |  | Amortized |         | Unrealized |  | Number  
|                        |  | Cost      |         | Losses     |  | Of Items
|                        |  |           |         |            |  |         
|Investment Grade:       |  |           |         |            |  |          |         |  |  |  |     | 
|0-6 months              |  | $         | 455,733 |            |  | $        | 13,920  |  |  |  | 67  | 
|7-12 months             |  |           | 105,936 |            |  |          | 11,483  |  |  |  | 28  | 
|>12 months              |  |           | 428,832 |            |  |          | 68,735  |  |  |  | 66  | 
|Below Investment Grade: |  |           |         |            |  |          |         |  |  |  |     | 
|0-6 months              |  | $         | 64,466  |            |  | $        | 6,540   |  |  |  | 9   | 
|7-12 months             |  |           | 45,083  |            |  |          | 11,804  |  |  |  | 8   | 
|>12 months              |  |           | 186,162 |            |  |          | 47,930  |  |  |  | 44  | 
|Total:                  |  |           |         |            |  |          |         |  |  |  |     | 
|0-6 months              |  | $         | 520,199 |            |  | $        | 20,460  |  |  |  | 76  | 
|7-12 months             |  |           | 151,019 |            |  |          | 23,287  |  |  |  | 36  | 
|>12 months              |  |           | 614,994 |            |  |          | 116,665 |  |  |  | 110 | 

Senior secured loans (Secured Loans) are included in the Bond Portfolio
and aggregated $300.6 million at March 31, 2003. Secured Loans are senior to
subordinated debt and equity and are secured by assets of the issuer. At March
31, 2003, Secured Loans consisted of $39.0 million of publicly traded
securities and $261.6 million of privately traded securities. These Secured
Loans are composed of loans to 62 borrowers spanning 18 industries, with 18% of
these assets concentrated in energy and 11% concentrated in food. No other
industry constituted more than 10% 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 $727.9 million at March 31, 2003 and consisted
of 114 commercial first mortgage loans with an average loan balance of
approximately $6.4 million, collateralized by properties located in 27 states.
Approximately 35% of this portfolio was office, 19% was multifamily
residential, 16% was manufactured housing, 10% was industrial, 9% was hotels,
4% was retail, and 7% was other types. At March 31, 2003, approximately 29%
and 11% of this portfolio were secured by properties located in California and
New York, respectively, and no more than 10% of this portfolio was secured by
properties located in any other single state. At March 31, 2003, 16 mortgage
loans have an outstanding balances of $10 million or more, which collectively
aggregated approximately 49% of this portfolio. At March 31, 2003,
approximately 28% of the mortgage loan portfolio consisted of loans with
balloon payments due before April 1, 2006. During 2003 and 2002, loans

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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 $211.1 million at March 31, 2003, compared to $215.8
million at December 31, 2002, and primarily represent loans taken against
universal life insurance policies.

SEPARATE ACCOUNT SEED MONEY totaled $25.0 million at March 31, 2003,
compared to $25.4 million at December 31, 2002, and consists principally of
seed money for mutual funds used as investment vehicles for the Companys
variable annuity separate accounts.

SECURITIES LENDING COLLATERAL totaled $551.0 million at March 31, 2003,
compared to $585.8 million at December 31, 2002, and consists of collateral
held under a securities lending agreement with an affiliated 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
primarily cash collateral in an amount in excess of the market value of the
securities loaned. The affiliated lending agent 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 83% of the Companys fixed
annuity, universal life and GIC reserves had surrender penalties or other
restrictions at March 31, 2003.

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

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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 March 31, 2003, these assets had an
aggregate fair value of $7.77 billion with a duration of 3.7. The Companys
fixed-rate liabilities include fixed annuity, universal life and GIC contracts.
At March 31, 2003, these liabilities had an aggregate fair value (determined
by discounting future contractual cash flows by related market rates of
interest) of $6.74 billion with a duration of 3.8. The Companys potential
exposure due to a relative 10% decrease in prevailing interest rates from its
March 31, 2003 levels is a loss of approximately $8.5 million, representing an
increase in fair value of its fixed-rate liabilities that is not offset by a
increase in fair value of its fixed-rate assets. 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.

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 prepayments of the underlying mortgage loans.

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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 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.
Impairment losses on securitized assets are recognized if the fair value of the
security is less than its book value, and the net present value of expected
future cash flows is less than the net present value of expected future cash
flows at the most recent (prior) estimation date.

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DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $21.1 million ($14.4 million
of bonds and $6.7 million of mortgage loans) at March 31, 2003, and constituted
approximately 0.3% of total invested assets. At December 31, 2002, defaulted
investments totaled $15.6 million ($8.9 million of bonds and $6.7 million of
mortgage loans), and constituted approximately 0.2% 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 March 31, 2003, approximately $4.78 billion of the Companys Bond Portfolio
had an aggregate unrealized gain of $224.5 million, while approximately $1.13
billion of the Bond Portfolio had an aggregate unrealized loss of $160.4
million. In addition, the Companys investment portfolio currently provides
approximately $53.0 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.

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 March 31, 2003
is $794.9 million. Related to each of these agreements are participation
agreements with the Companys Parent, under which the Parent will share in
$345.3 million of these liabilities in exchange for a proportionate percentage
of the fees received under these agreements. The

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expiration dates of these commitments are as follows: $249.0 million in
2004, $387.9 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 March 31, 2003.

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. 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 became 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

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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 24 to 25
herein.

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CONTROLS & PROCEDURES

The Companys
disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934, as
amended (Exchange Act), is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of
the Securities and Exchange Commission. Disclosure controls and
procedures include controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is accumulated and
communicated to the Companys management,
including the Companys Chief Executive Officer and Principal
Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. The Companys Chief Executive Officer and
Principal Financial Officer have reviewed the effectiveness of the
Companys disclosure controls and procedures within 90 days of
the filing date of this Quarterly Report on Form 10-Q and have
concluded that the disclosure controls and procedures are effective.
There were no significant changes in the Companys internal
controls or in other factors that could significantly affect these
controls subsequent to the most recent date of evaluation by the
Companys Chief Executive Officer and Principal Financial Officer.

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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.

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

None.

REPORTS FOR FORM 8-K

There were no current reports on Form 8-K filed during the three months ended
March 31, 2003.

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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.

|                      |  |                                                                                 
|--------------------- |  | --------------------------------------------------------------------------------
|                      |  | ANCHOR NATIONAL LIFE INSURANCE COMPANY
Registrant                               
|                      |  |                                                                                 
|Date:    May 14, 2003 |  | /s/   N. SCOTT GILLIS                                                           
|                      |  |                                                                                 
|                      |  | N. Scott Gillis
Senior Vice President and Director
(Principal Financial Officer)
|                      |  |                                                                                 
|Date:    May 14, 2003 |  | /s/   MAURICE S. HEBERT                                                         
|                      |  |                                                                                 
|                      |  | Maurice S. Hebert
Vice President and Controller
(Principal Accounting Officer)  

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CERTIFICATIONS

I, Jay S. Wintrob, Chief Executive Officer of AIG SunAmerica Life Assurance
Company, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of AIG SunAmerica Life
Assurance Company;                                                                                                                                                                                                                                           
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                            
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                               



| | a. |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made known
to us by others within the entity, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date"); and                                                    
|
| | c. |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                          



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and to the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies
and material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                             |  |              |  | 
|------------------------------------------------------------ |  | ------------ |  | 
|Date:                                                        |  | May 14, 2003 |  | 
|                                                             |  |              |  | 
|                                                             |  |              |  | 
|/s/   JAY S. WINTROB

Jay S. Wintrob
Chief Executive Officer |  |             

34



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##### Table of Contents



CERTIFICATIONS

I, N. Scott Gillis, Senior Vice President (Principal Financial Officer) of AIG
SunAmerica Life Assurance Company, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of AIG SunAmerica Life
Assurance Company;                                                                                                                                                                                                                                           
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                            
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                               



| | a. |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made known
to us by others within the entity, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date"); and                                                    
|
| | c. |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                          



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and to the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies
and material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                            |  |              | 
|------------------------------------------------------------------------------------------- |  | ------------ | 
|Date:                                                                                       |  | May 14, 2003
|                                                                                            |  |             
|                                                                                            |  |             
|/s/   N. Scott Gillis

N. Scott Gillis,
Senior Vice President
(Principal Financial Officer)

35