##### Table of Contents



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 September 30, 2002

Commission File No. 33-5014

FIRST SUNAMERICA LIFE INSURANCE COMPANY

|                         |  |                                           
|------------------------ |  | ------------------------------------------
|Incorporated in New York |  | 06-0992729
IRS Employer
Identification No.

733 Third Avenue, 4th Floor, New York, New York 10017
Registrants telephone number, including area code: (800) 272-3007

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 [   ]

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON
NOVEMBER 12, 2002 WAS AS FOLLOWS:

|                                              |  |                       
|--------------------------------------------- |  | ----------------------
|Common Stock (par value $10,000.00 per share) |  | 300 shares outstanding





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TABLE OF CONTENTS



|                            |                                                                                                                                 |  |  |  |  |  |  | 
|--------------------------- | ------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                            | BALANCE SHEET (Unaudited)                                                                                                      
|                            | STATEMENT OF INCOME AND COMPREHENSIVE INCOME For the three months and nine months ended September 30, 2002 and 2001 (Unaudited)
|                            | STATEMENT OF CASH FLOWS For the nine months ended September 30, 2002 and 2001 (Unaudited)                                      
|                            | NOTES TO FINANCIAL STATEMENTS (Unaudited)                                                                                      
|                            | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                          
|                            | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                     
|PART II  OTHER INFORMATION
|SIGNATURES                 
|Certifications             



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

INDEX

|                               |                                                                                                                          |  |           |      | 
|------------------------------ | ------------------------------------------------------------------------------------------------------------------------ |  | --------- | ---- | 
|                               |                                                                                                                          |  | Page     
|                               |                                                                                                                          |  | Number(s)
|                               |                                                                                                                          |  |          
|Part I  Financial Information |                                                                                                                          |  |           |     
|                              
|                              
|                              
|                              
|                               | Balance Sheet (Unaudited) -
September 30, 2002 and December 31, 2001                                                     |  |           | 3    | 
|                              
|                              
|                              
|                              
|                               | Statement of Income and Comprehensive Income (Unaudited)-
Three Months and Nine Months Ended September 30, 2002 and
2001 |  |           | 4    | 
|                              
|                              
|                              
|                              
|                               | Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2002 and 2001                                      |  |           | 5-6  | 
|                              
|                              
|                              
|                              
|                               | Notes to Financial Statements (Unaudited)                                                                                |  |           | 7    | 
|                              
|                              
|                              
|                              
|                               | Managements Discussion and Analysis of Financial
Condition and Results of Operations                                    |  |           | 8-23 | 
|                              
|                              
|                              
|                              
|                               | Quantitative and Qualitative Disclosures About Market Risk                                                               |  |           | 24   | 
|                              
|                              
|                              
|                              
|                               | Controls & Procedures                                                                                                    |  |           | 24   | 
|                              
|                              
|                              
|                              
|Part II  Other Information    |                                                                                                                          |  | 25-30     |     





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##### Table of Contents






FIRST SUNAMERICA LIFE INSURANCE COMPANY
BALANCE SHEET
(Unaudited)

|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 
|--------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------- | --------- | ------------ | - | --------- | --------- | 
|                                                          |                                                                                                                                                                |   | September 30,  |           | December 31,
|                                                          |                                                                                                                                                                |   | 2002           |           | 2001        
|                                                          |                                                                                                                                                                |   |                |           |             
|                                                          |                                                                                                                                                                |   | (In thousands)
|ASSETS                                                    |                                                                                                                                                                |   |                |           |              |   |           |          
|                                                         
|                                                         
|                                                         
|                                                         
|Investments and cash:                                     |                                                                                                                                                                |   |                |           |              |   |           |          
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Cash and short-term investments                                                                                                                                |   | $              | 146,381   |              |   | $         | 28,982    | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Bonds, notes and redeemable preferred
stocks available for sale, at fair
value (amortized cost: September 30, 2002,
$1,179,875; December 31, 2001, $1,122,577) |   |                | 1,218,539 |              |   |           | 1,128,203 | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Common stocks available for sale, at fair
value (cost: September 30, 2002, $1,648;
December 31, 2001, $871)                                                    |   |                | 1,228     |              |   |           | 544       | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Mortgage loans                                                                                                                                                 |   |                | 180,327   |              |   |           | 172,626   | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Policy loans                                                                                                                                                   |   |                | 36,720    |              |   |           | 37,343    | 
|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 
|                                                          | Total investments and cash                                                                                                                                     |   |                | 1,583,195 |              |   |           | 1,367,698 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Variable annuity assets held in separate accounts         |                                                                                                                                                                |   | 412,032        |           |              |   | 514,203   |          
|                                                         
|                                                         
|                                                         
|                                                         
|Accrued investment income                                 |                                                                                                                                                                |   | 9,538          |           |              |   | 12,312    |          
|                                                         
|                                                         
|                                                         
|                                                         
|Deferred acquisition costs                                |                                                                                                                                                                |   | 100,396        |           |              |   | 100,182   |          
|                                                         
|                                                         
|                                                         
|                                                         
|Income taxes currently receivable from Parent             |                                                                                                                                                                |   | 4,368          |           |              |   |          |          
|                                                         
|                                                         
|                                                         
|                                                         
|Deferred income taxes                                     |                                                                                                                                                                |   |               |           |              |   | 1,947     |          
|                                                         
|                                                         
|                                                         
|                                                         
|Receivable from brokers                                   |                                                                                                                                                                |   | 887            |           |              |   |          |          
|                                                         
|                                                         
|                                                         
|                                                         
|Other assets                                              |                                                                                                                                                                |   | 779            |           |              |   | 2,261     |          
|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 
|TOTAL ASSETS                                              |                                                                                                                                                                | $ | 2,111,195      |           |              | $ | 1,998,603 |          
|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 
|LIABILITIES AND SHAREHOLDERS EQUITY                      |                                                                                                                                                                |   |                |           |              |   |           |          
|                                                         
|                                                         
|                                                         
|                                                         
|Reserves, payables and accrued liabilities:               |                                                                                                                                                                |   |                |           |              |   |           |          
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Reserves for fixed annuity contracts                                                                                                                           |   | $              | 1,166,479 |              |   | $         | 1,024,830 | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Reserves for universal life insurance contracts                                                                                                                |   |                | 241,084   |              |   |           | 248,161   | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Income taxes currently payable to Parent                                                                                                                       |   |                |          |              |   |           | 3,719     | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Payable to brokers                                                                                                                                             |   |                | 7,848     |              |   |           |          | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other liabilities                                                                                                                                              |   |                | 51,524    |              |   |           | 14,111    | 
|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 
|                                                          | Total reserves, payables and accrued liabilities                                                                                                               |   |                | 1,466,935 |              |   |           | 1,290,821 | 
|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 
|Variable annuity liabilities related to
separate accounts |                                                                                                                                                                |   | 412,032        |           |              |   | 514,203   |          
|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 
|Deferred income taxes                                     |                                                                                                                                                                |   | 16,796         |           |              |   |          |          
|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 
|Shareholders equity:                                     |                                                                                                                                                                |   |                |           |              |   |           |          
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Common stock                                                                                                                                                   |   |                | 3,000     |              |   |           | 3,000     | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Additional paid-in capital                                                                                                                                     |   |                | 144,428   |              |   |           | 144,428   | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Retained earnings                                                                                                                                              |   |                | 51,206    |              |   |           | 44,982    | 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accumulated other comprehensive income                                                                                                                         |   |                | 16,798    |              |   |           | 1,169     | 
|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 
|                                                          | Total shareholders equity                                                                                                                                     |   |                | 215,432   |              |   |           | 193,579   | 
|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                |                                                                                                                                                                | $ | 2,111,195      |           |              | $ | 1,998,603 |          
|                                                          |                                                                                                                                                                |   |                |           |              |   |           |           | 

See accompanying notes to financial statements.

3



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##### Table of Contents






FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months and nine months ended September 30, 2002 and 2001
(Unaudited)

|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |         |  
|----------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------- | ------- | ----------- | - | ------ | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                            |                                                                                                                                                                                                                                                                                                                              |   | Three Months   |         | Nine months
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |            
|                                                            |                                                                                                                                                                                                                                                                                                                              |   | 2002           |         | 2001        |   | 2002   |         | 2001
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |     
|                                                            |                                                                                                                                                                                                                                                                                                                              |   | (In thousands)
|Investment income                                           |                                                                                                                                                                                                                                                                                                                              | $ | 22,753         |         |             | $ | 24,165 |         |      | $ | 69,981  |         |   | $ | 78,051  |        
|                                                           
|                                                           
|                                                           
|                                                           
|Interest expense on:                                        |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Fixed annuity contracts                                                                                                                                                                                                                                                                                                      |   |                | (11,591 | )           |   |        | (12,518 | )    |   |         | (34,048 | ) |   |         | (39,507 | )
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Universal life insurance contracts                                                                                                                                                                                                                                                                                           |   |                | (2,884  | )           |   |        | (2,991  | )    |   |         | (8,644  | ) |   |         | (8,849  | )
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|                                                            | Total interest expense                                                                                                                                                                                                                                                                                                       |   |                | (14,475 | )           |   |        | (15,509 | )    |   |         | (42,692 | ) |   |         | (48,356 | )
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|NET INVESTMENT INCOME                                       |                                                                                                                                                                                                                                                                                                                              |   | 8,278          |         |             |   | 8,656  |         |      |   | 27,289  |         |   |   | 29,695  |        
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|NET REALIZED INVESTMENT LOSSES                              |                                                                                                                                                                                                                                                                                                                              |   | (1,943         | )       |             |   | (2,379 | )       |      |   | (6,164  | )       |   |   | (15,872 | )      
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|Fee income:                                                 |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Variable annuity fees                                                                                                                                                                                                                                                                                                        |   |                | 1,722   |             |   |        | 1,971   |      |   |         | 5,604   |   |   |         | 6,118   |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Universal life insurance fees, net                                                                                                                                                                                                                                                                                           |   |                | 1,433   |             |   |        | 982     |      |   |         | 2,140   |   |   |         | 2,345   |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Surrender charges                                                                                                                                                                                                                                                                                                            |   |                | 540     |             |   |        | 446     |      |   |         | 1,288   |   |   |         | 1,657   |  
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|TOTAL FEE INCOME                                            |                                                                                                                                                                                                                                                                                                                              |   | 3,695          |         |             |   | 3,399  |         |      |   | 9,032   |         |   |   | 10,120  |        
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|GENERAL AND ADMINISTRATIVE EXPENSES                         |                                                                                                                                                                                                                                                                                                                              |   | (1,265         | )       |             |   | (957   | )       |      |   | (5,106  | )       |   |   | (3,608  | )      
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|AMORTIZATION OF DEFERRED
ACQUISITION COSTS                  |                                                                                                                                                                                                                                                                                                                              |   | (4,218         | )       |             |   | (3,174 | )       |      |   | (12,807 | )       |   |   | (10,722 | )      
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|ANNUAL COMMISSIONS                                          |                                                                                                                                                                                                                                                                                                                              |   | (188           | )       |             |   | (150   | )       |      |   | (596    | )       |   |   | (559    | )      
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|GUARANTEED MINIMUM DEATH BENEFITS                           |                                                                                                                                                                                                                                                                                                                              |   | (404           | )       |             |   | (110   | )       |      |   | (1,142  | )       |   |   | (184    | )      
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|PRETAX INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE |                                                                                                                                                                                                                                                                                                                              |   | 3,955          |         |             |   | 5,285  |         |      |   | 10,506  |         |   |   | 8,870   |        
|                                                           
|                                                           
|                                                           
|                                                           
|Income tax expense                                          |                                                                                                                                                                                                                                                                                                                              |   | (1,642         | )       |             |   | (2,186 | )       |      |   | (4,282  | )       |   |   | (3,711  | )      
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE        |                                                                                                                                                                                                                                                                                                                              |   | 2,313          |         |             |   | 3,099  |         |      |   | 6,224   |         |   |   | 5,159   |        
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAX          |                                                                                                                                                                                                                                                                                                                              |   |               |         |             |   |       |         |      |   |        |         |   |   | (520    | )      
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|NET INCOME                                                  |                                                                                                                                                                                                                                                                                                                              |   | 2,313          |         |             |   | 3,099  |         |      |   | 6,224   |         |   |   | 4,639   |        
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|OTHER COMPREHENSIVE INCOME, NET OF TAX:                     |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Net unrealized gains on debt and
equity securities available for sale
identified in the current period (net of
income tax expense of $7,208 and $3,066 for
the three months ended September 30, 2002
and 2001, respectively, and income tax
expense of $7,655 and $4,134 for the nine
months of 2002 and 2001, respectively) |   |                | 13,386  |             |   |        | 5,694   |      |   |         | 14,218  |   |   |         | 7,677   |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Less reclassification adjustment for net
realized losses included in net income
(net of income tax benefit of $238 and $338
for the three months ended 2002 and 2001,
respectively, and $760 and $2,680 for the
nine months of 2002 and 2001, respectively                                                                   |   |                | 441     |             |   |        | 627     |      |   |         | 1,411   |   |   |         | 4,977   |  
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|                                                            | OTHER COMPREHENSIVE INCOME                                                                                                                                                                                                                                                                                                   |   |                | 13,827  |             |   |        | 6,321   |      |   |         | 15,629  |   |   |         | 12,654  |  
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        
|COMPREHENSIVE INCOME                                        |                                                                                                                                                                                                                                                                                                                              | $ | 16,140         |         |             | $ | 9,420  |         |      | $ | 21,853  |         |   | $ | 17,293  |        
|                                                            |                                                                                                                                                                                                                                                                                                                              |   |                |         |             |   |        |         |      |   |         |         |   |   |         |        

See accompanying notes to financial statements.

4



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##### Table of Contents






FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2002 and 2001
(Unaudited)

|                                                                                  |                                                     |                                                     |                                    |         |                |        |        |         |          |        | 
|--------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ---------------------------------- | ------- | -------------- | ------ | ------ | ------- | -------- | ------ | 
|                                                                                  |                                                     |                                                     |                                    |         | 2002           |        | 2001  
|                                                                                  |                                                     |                                                     |                                    |         |                |        |       
|                                                                                  |                                                     |                                                     |                                    |         | (In thousands)
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |                                                     |                                                     |                                    |         |                |        |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                     | $                                                   | 6,224                              |         |                | $      | 4,639  |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to
net cash provided by operating activities: |                                                     |                                                     |                                    |         |                |        |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     | Cumulative effect of accounting change,
net of tax  |                                    |         |               |        |        |         | 520      |       
|                                                                                  |                                                     | Interest credited to:                               |                                    |         |                |        |        |         |          |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     |                                                     | Fixed annuity contracts            |         |                | 34,048 |        |         |          | 39,507 | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     |                                                     | Universal life insurance contracts |         |                | 8,644  |        |         |          | 8,849  | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     | Net realized investment losses                      |                                    |         | 6,164          |        |        |         | 15,872   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     | Accretion of net discounts on investments           |                                    |         | (1,191         | )      |        |         | (2,465   | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     | Amortization of deferred acquisition costs          |                                    |         | 12,807         |        |        |         | 10,722   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     | Acquisition costs deferred                          |                                    |         | (21,921        | )      |        |         | (7,279   | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     | Provision for deferred income taxes                 |                                    |         | 10,327         |        |        |         | 3,919    |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Change in:                                                                        |                                                     |                                                     |                                    |         |                |        |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Accrued investment income                           |                                                     |                                    | 2,774   |                |        |        | 2,687   |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Income taxes currently payable to Parent            |                                                     |                                    | (8,087  | )              |        |        | 5,651   |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Other liabilities                                   |                                                     |                                    | 24,421  |                |        |        | (1,173  | )       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Other, net                                          |                                                     |                                    | 1,986   |                |        |        | 1,234   |         
|                                                                                  |                                                     |                                                     |                                    |         |                |        |        |        
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |                                                     |                                                     | 76,196                             |         |                |        | 82,683 |        
|                                                                                  |                                                     |                                                     |                                    |         |                |        |        |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |                                                     |                                                     |                                    |         |                |        |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchases of:                                                                     |                                                     |                                                     |                                    |         |                |        |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     | Bonds, notes and redeemable preferred stocks        |                                    |         | (295,184       | )      |        |         | (164,847 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     | Mortgage loans                                      |                                    |         | (30,839        | )      |        |         | (29,890  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     | Common Stocks                                       |                                    |         | (777           | )      |        |         |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                     | Other investments, excluding short-term investments |                                    |         | (270           | )      |        |         | (139     | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Sales of:                                                                         |                                                     |                                                     |                                    |         |                |        |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Bonds, notes and redeemable preferred stocks        |                                                     |                                    | 153,273 |                |        |        | 164,407 |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Other investments, excluding short-term investments |                                                     |                                    |        |                |        |        | 14      |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Redemptions and maturities of:                                                    |                                                     |                                                     |                                    |         |                |        |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Bonds, notes and redeemable preferred stocks        |                                                     |                                    | 86,304  |                |        |        | 94,175  |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Mortgage loans                                      |                                                     |                                    | 23,436  |                |        |        | 19,785  |         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Other investments, excluding short-term investments |                                                     |                                    | 894     |                |        |        | 2,401   |         
|                                                                                  |                                                     |                                                     |                                    |         |                |        |        |        
|NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                               |                                                     | $                                                   | (63,163                            | )       |                | $      | 85,906 |        
|                                                                                  |                                                     |                                                     |                                    |         |                |        |        |        

See accompanying notes to financial statements.

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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
For the nine months ended September 30, 2002 and 2001
(Unaudited)

|                                                                         |                                    |   |                |          |      |   |          |          |  
|------------------------------------------------------------------------ | ---------------------------------- | - | -------------- | -------- | ---- | - | -------- | -------- | -
|                                                                         |                                    |   | 2002           |          | 2001
|                                                                         |                                    |   |                |          |     
|                                                                         |                                    |   | (In thousands)
|CASH FLOWS FROM FINANCING ACTIVITIES:                                    |                                    |   |                |          |      |   |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Deposits received on:                                                    |                                    |   |                |          |      |   |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Fixed annuity contracts            |   | $              | 211,091  |      |   | $        | 46,154   |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Universal life insurance contracts |   |                | 7,489    |      |   |          | 8,211    |  
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Net exchanges to (from) the fixed accounts
of variable annuity contracts |                                    |   | 24,996         |          |      |   | (23,494  | )       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Withdrawal payments on:                                                  |                                    |   |                |          |      |   |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Fixed annuity contracts            |   |                | (105,458 | )    |   |          | (157,634 | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Universal life insurance contracts |   |                | (7,479   | )    |   |          | (18,831  | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Claims and annuity payments on:                                          |                                    |   |                |          |      |   |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Fixed annuity contracts            |   |                | (23,936  | )    |   |          | (22,435  | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Universal life insurance contracts |   |                | (15,328  | )    |   |          | (12,697  | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Net receipts from (repayments of) other
short term financings            |                                    |   | 12,991         |          |      |   | (1,971   | )       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Dividend paid to Parent                                                  |                                    |   |               |          |      |   | (12,900  | )       
|                                                                         |                                    |   |                |          |      |   |          |         
|NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES                      |                                    |   | 104,366        |          |      |   | (195,597 | )       
|                                                                         |                                    |   |                |          |      |   |          |         
|NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS               |                                    |   | 117,399        |          |      |   | (27,008  | )       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD                   |                                    |   | 28,982         |          |      |   | 40,704   |         
|                                                                         |                                    |   |                |          |      |   |          |         
|CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD                         |                                    | $ | 146,381        |          |      | $ | 13,696   |         
|                                                                         |                                    |   |                |          |      |   |          |         
|SUPPLEMENTAL CASH FLOW INFORMATION:                                      |                                    |   |                |          |      |   |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Net income taxes paid to (received from)
Parent                          |                                    | $ | 2,042          |          |      | $ | (5,858   | )       
|                                                                         |                                    |   |                |          |      |   |          |         

See accompanying notes to financial statements.

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##### Table of Contents






FIRST SUNAMERICA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)



|1. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | First SunAmerica Life Insurance Company (the Company) is a direct
wholly owned subsidiary of SunAmerica Life Insurance Company (the
Parent), which is an indirect wholly owned subsidiary of American
International Group, Inc. (AIG), a holding company which through its
subsidiaries is engaged in a broad range of insurance and
insurance-related activities, financial services, retirement services and
asset management. The Company is a New York-domiciled life insurance
company engaged primarily in the sale and administration of deposit type
insurance contracts, including fixed and variable annuities and universal
life contracts in the State of New York.                                                                                                                                                                                                                                                     
|  
|   |  | 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
September 30, 2002 and December 31, 2001, the results of its operations
for the three months and nine months ended September 30, 2002 and 2001
and its cash flows for the nine months ended September 30, 2002 and 2001.
The results of operations for the three months and nine months ended
September 30, 2002 are not necessarily indicative of the results to be
expected for the full year. The accompanying unaudited financial
statements should be read in conjunction with the audited financial
statements for the year ended December 31, 2001, contained in the
Companys 2001 Annual Report on Form 10-K. Certain prior period items
have been reclassified to conform to the current periods presentation.
|  
|2. |  | CONTINGENT LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | 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 of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|3. |  | RELATED PARTY TRANSACTION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Beginning in July 2002, the Company began marketing fixed annuities
through a new financial institution partner. These annuities are
administered by AIG Annuity Insurance Company, an affiliate of the
Company. Costs charged to the Company to administer these policies were
approximately $465,000 in 2002. The Company believes these costs are
less than the Company would have incurred to administer these policies
internally. Beginning in November 2002, the remaining block of fixed
annuities will be administered by AIG Annuity Insurance Company.                                                                                                                                                                                                                                                                                                                                                                         

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FIRST SUNAMERICA LIFE INSURANCE 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 First SunAmerica Life Insurance Company (the Company) for the
three months and nine months ended September 30, 2002 and September 30, 2001
follows. Certain prior period amounts have been reclassified to conform to the
current periods presentation.

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

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

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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 $28.9 million at
September 30, 2002. In determining if and when a decline in fair value below
amortized cost is other-than-temporary, we evaluate at each reporting period
the market conditions, offering prices, trends of earnings, price multiples,
and other key measures for our investments in debt and 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, we recognize 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 $263.7
million at September 30, 2002 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: Deferred acquisition costs
(DAC) are amortized 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) supporting the annuity obligations, 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. Approximately 57% of the
Companys DAC balance at September 30, 2002 related to fixed annuity products
and 43% related to variable annuity products.

DAC amortization is sensitive to surrender rates and the actual and
assumed future growth rate of the assets supporting the Companys obligations
under annuity policies. With respect to fixed annuities, the growth rate
depends on the yield on the general account assets supporting those annuities.
With respect to variable annuities, the growth rate depends on

9



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the performance of the investment options available under the annuity contract
and the allocation of assets among these various investment options.

The assumption for the long-term annual net growth of the separate account
assets used by the Company in the determination of DAC amortization with
respect to its variable annuity policies is 10% (the long-term growth rate
assumption). The Company uses a reversion to the mean methodology which
allows the Company 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
approximate 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.

RESULTS OF OPERATIONS

NET INCOME totaled $2.3 million in the third quarter of 2002, compared to
$3.1 million in the third quarter of 2001. For the nine months, net income
amounted to $6.2 million in 2002, compared to $4.6 million in 2001.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption
of EITF 99-20 in 2001. The Company recorded a loss of $520,000, net of tax,
which is recognized in the statement of income and comprehensive income as a
cumulative effect of accounting change for nine months ended September 30,
2001.

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $4.0
million in the third quarter of 2002, compared with $5.3 million in the third
quarter of 2001. For the nine months, pretax income before cumulative effect
of accounting change totaled $10.5 million in 2002, compared with $8.9 million
in 2001. The decline in 2002 results compared to 2001 in the third quarter
primarily resulted from increased amortization of deferred acquisition costs,
increased guaranteed minimum death benefits on variable annuities and decreased
net investment income. The improvement in 2002 results compared to 2001 in the
nine months resulted from decreased net realized investment losses partially
offset by increased amortization of deferred acquisition costs, increased
general and administrative expenses, decreased net investment income, and
increased guaranteed minimum death benefits on variable annuities.

NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and universal life
contracts, totaled $8.3 million in the third quarter of 2002, down from $8.7
million in the third quarter of 2001. These amounts equal 2.28% on average
invested assets (computed on a daily basis) of $1.45 billion in the third
quarter of 2002 and 2.47% on average invested assets of $1.40 billion in the
third quarter of 2001. For the nine months, net investment income declined

10



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to $27.3 million in 2002 from $29.7 million in 2001, representing 2.61% of
average invested assets of $1.40 billion in 2002 and 2.74% of average invested
assets of $1.44 billion in 2001.

Net investment spreads include the effect of income earned or interest
paid on the difference between average invested assets and average
interest-bearing liabilities. In the third quarter of 2002, average invested
assets exceeded average interest-bearing liabilities by $116.6 million,
compared with $85.9 million in the third quarter of 2001. For the nine months,
average invested assets exceeded average interest-bearing liabilities by $102.2
million in 2002, compared with $83.8 million in 2001. The difference between
the Companys yield on average invested assets and the rate paid on average
interest-bearing liabilities (the Spread Difference) was 1.93% in the third
quarter of 2002 and 2.18% in the third quarter of 2001. For the nine months,
the spread difference was 2.28% in 2002 and 2.47% in 2001. The decrease in the
Spread Difference in the third quarter and nine months of 2002 as compared to
the third quarter and nine months of 2001 is due to a lower interest rate
environment combined with the Companys inability to reprice products downwards
beyond contractual minimums.

Investment income (and the related yield on average invested assets)
totaled $22.8 million (6.27%) in the third quarter of 2002, $24.2 million
(6.90%) in the third quarter of 2001, $70.0 million (6.68%) in the nine months
of 2002 and $78.1 million (7.21%) in the nine months of 2001. The decrease in
the investment yield in 2002 compared to 2001 primarily reflects a lower
prevailing interest rate environment. Expenses incurred to manage the
investment portfolio amounted to $0.1 million in the third quarter of 2002,
$0.4 million in the third quarter of 2001, $0.4 million in the nine months of
2002 and $1.2 million in the nine months of 2001.

Interest expense totaled $14.5 million in the third quarter of 2002 and
$15.5 million in the third quarter of 2001. For the nine months, interest
expense aggregated $42.7 million in 2002, compared with $48.4 million in 2001.
The average rate paid on all interest-bearing liabilities was 4.34% in the
third quarter of 2002, compared with 4.72% in the third quarter of 2001. For
the nine months, the average rate paid on all interest-bearing liabilities was
4.40% for 2002 and 4.74% for 2001. Interest-bearing liabilities averaged $1.34
billion during the third quarter of 2002, $1.32 billion during the third
quarter of 2001, $1.29 billion during the nine months of 2002 and $1.36 billion
during the nine months of 2001. The increase in average liabilities for the
third quarter 2002 resulted primarily from the issuance of fixed annuities
through a new distribution channel in the third quarter of 2002. The decrease
in average liabilities in 2002 resulted primarily from withdrawals on certain
closed blocks of business. The decline in the overall rates paid in 2002
compared to 2001 resulted primarily from the impact of a declining interest
rate environment and the continued reduction of crediting rates on certain
closed blocks of business.

Change in average invested assets largely resulted from the surrenders of
certain closed blocks of fixed annuity policies. Year-to-date changes in
average invested assets also reflect net exchanges to fixed accounts from the
separate accounts of variable annuity contracts, sales of fixed annuities and
the fixed account options of the Companys variable annuity products (Fixed
Annuity Deposits), and renewal deposits on its universal life products (UL
Deposits). Fixed Annuity Deposits and UL Deposits totaled $154.7 million in

11



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the third quarter of 2002, $20.1 million in the third quarter of 2001, $218.6
million in the nine months of 2002 and $58.2 million in the nine months of
2001. The increase in Fixed Annuity Deposits in 2002 is due primarily to
increased sales relating to the marketing of fixed annuities through new
distribution channels. On an annualized basis, Fixed Annuity Deposits
represent 49%, 6%, 23% and 5%, respectively, of the related reserve balances at
the beginning of the respective periods.

NET REALIZED INVESTMENT LOSSES totaled $1.9 million in the third quarter
of 2002, compared with $2.3 million in the third quarter of 2001 and includes
impairment writedowns of $1.8 million and $2.0 million, respectively. For
the nine months, net realized investment losses totaled $6.2 million in 2002,
compared with $15.8 million in 2001 and include impairment writedowns of $2.7
million and $15.6 million, respectively. Thus, net realized losses from sales
and redemptions of investments totaled $0.1 million in the third quarter of
2002, compared to $0.3 million in the third quarter of 2001. For the nine
months, net realized losses from sales and redemptions of investments totaled
$3.4 million in 2002, compared to $0.2 million of net realized gains in 2001.

The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $120.5 million in the third quarter of 2002, $102.6 million in the
third quarter of 2001, $268.2 million in the nine months of 2002 and $293.0
million in the nine months of 2001. Sales of investments result from the
active management of the Companys investment portfolio. Because redemptions
of investments are generally involuntary and sales of investments are made in
both rising and falling interest rate environments, net gains and losses from
sales and redemptions of investments fluctuate from period to period, and, on
an annualized basis, amount to 0.03%, 0.09%, 0.33% and 0.02% of average
invested assets in the third quarter of 2002, the third quarter of 2001, the
nine months of 2002 and the nine months of 2001, respectively. Active
portfolio management involves the ongoing evaluation of asset sectors,
individual securities within the investment portfolio and the reallocation of
investments from sectors that are perceived to be relatively overvalued to
sectors that are perceived to be relatively undervalued. The intent of the
Companys active portfolio management is to maximize total returns on the
investment portfolio, taking into account credit, option, liquidity and
interest-rate risk.

Impairment writedowns include $1.8 million, $2.0 million, $2.7 million and
$15.6 million of provisions applied to bonds in the third quarter of 2002, the
third quarter of 2001, the nine months of 2002 and the nine months of 2001,
respectively. On an annualized basis, impairment writedowns totaled 0.50%,
0.58%, 0.26% and 1.44% of average invested assets in the respective periods.
For the twenty quarters ended September 30, 2002, impairment writedowns as an
annualized percentage of average invested assets have ranged up to 3.99% and
have averaged 0.69%. Such writedowns are based upon estimates of the net
realizable value of invested assets and recorded when declines in the value of
such assets are considered to be other than temporary. Actual realization will
be dependent upon future events. The Company recorded $0.8 million ($0.5
million net of tax) of additional impairments pursuant to the implementation of
EITF 99-20 in 2001. This adjustment was recorded as a cumulative effect of
accounting change in the accompanying statement of income and comprehensive
income for the nine months ended September 30, 2001.

12



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VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $1.7 million
in the third quarter of 2002 and $2.0 million in the third quarter of 2001.
For the nine months, variable annuity fees totaled $5.6 million in 2002,
compared with $6.1 million in 2001. On an annualized basis, variable annuity
fees represent 1.6% of average variable annuity assets in all periods
presented. Variable annuity assets averaged $433.7 million, $501.0 million,
$480.1 million and $526.6 million during the third quarters of 2002 and 2001
and the nine months of 2002 and 2001, respectively. Variable annuity
deposits, which exclude deposits allocated to the fixed accounts of variable
annuity products, totaled $15.1 million and $5.3 million in the third quarters
of 2002 and 2001, respectively. For the nine months, variable annuity deposits
totaled $60.6 million in 2002, compared with $17.6 million in 2001. On an
annualized basis, these amounts represent 13%, 4%, 16% and 4% of variable
annuity reserves at the beginning of the respective periods. The increase in
variable annuity deposits in 2002 reflected increased demand for a new product,
Advisor, initially marketed in January 2001. 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 $25.8
million, $18.2 million, $89.5 million, and $56.9 million in the third quarters
of 2002 and 2001 and the nine months of 2002 and 2001, respectively. Such
sales primarily reflect those of Advisor as well as the Companys flagship
variable annuity line, Polaris. Advisor is a multimanager variable annuity
that offers investors a choice of 27 variable funds and a guaranteed fixed-rate
fund. Polaris is a multimanager variable annuity that offers investors a
choice of 31 variable funds and a number of guaranteed fixed-rate funds.
Variable Annuity Product Sales have increased in 2002, primarily due to
increased demand for the new product, Advisor, which was initially marketed in
January 2001.

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

UNIVERSAL LIFE INSURANCE FEES, NET amounted to $1.4 million in the third
quarter of 2002 and $1.0 million in the third quarter of 2001. For the nine
months, universal life insurance fees totaled $2.1 million in 2002 and $2.3
million in 2001. Universal life insurance fees consist of mortality charges,
up-front fees earned on deposits received and administrative fees, net of the
excess mortality expense on these contracts. The administrative fees are
assessed based on the number of policies in force as of the end of each month.
The Company does not actively market such contracts. Such fees annualized
represent 2.38%, 1.61%, 1.17% and 1.27% of average reserves for universal life
insurance contracts in the respective periods. The changes in such fees during
2002 resulted principally from changes in mortality experience.

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SURRENDER CHARGES on fixed annuity, variable annuity and universal life
contracts totaled $0.5 million in the third quarter of 2002 and $0.4 million in
the third quarter of 2001. For the nine months, such surrender charges totaled
$1.3 million in 2002 and $1.7 million in 2001. Surrender charges generally
are assessed on withdrawals at declining rates during the first seven years of
a contract. Withdrawal payments, which exclude claims and lump-sum annuity
benefits, totaled $47.4 million in the third quarter of 2002, compared with
$58.4 million in the third quarter of 2001. For the nine months, such
withdrawal payments totaled $145.3 million in 2002 and $202.9 million in
2001. Annualized, these payments, when expressed as a percentage of related
reserves, represent 11.0%, 13.2%, 11.2% and 14.7% for the third quarters of
2002 and 2001 and the nine months of 2002 and 2001, respectively. Withdrawal
rates declined in 2002 principally due to a lower level of surrenders on
certain closed blocks of fixed annuity business. Withdrawals include variable
annuity payments from the separate accounts totaling $9.9 million (9.2% of
average variable annuity reserves), $8.5 million (6.8% of average variable
annuity reserves), $29.5 million (8.2% of average variable annuity reserves)
and $26.4 million (6.7% of average variable annuity reserves) in the third
quarters of 2002 and 2001 and the nine months of 2002 and 2001, respectively.
The increase in variable annuity withdrawal rates in 2002 reflects a decrease
in the market value of assets supporting the variable contracts due to
unfavorable equity market conditions. Management anticipates a gradual
increase in the levels of withdrawal payments relative to fixed and variable
annuity and universal life reserves over the foreseeable future.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.3 million in the third
quarter of 2002 and $1.0 million in the third quarter of 2001. For the nine months, general and
administrative expenses totaled $5.1 million in 2002 and $3.6 million in 2001.
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 $4.2 million in the
third quarter of 2002, compared with $3.2 million in the third quarter of 2001.
For the nine months, such amortization totaled $12.8 million in 2002, compared
with $10.7 million in 2001. The increase in amortization was primarily related
to increased amortization on certain closed blocks of fixed annuities as well
as additional fixed annuity sales and the subsequent amortization of related
deferred commissions and other direct selling costs.

ANNUAL COMMISSIONS totaled $0.2 million in the third quarters of 2002 and
2001. For the nine months, annual commissions amounted to $0.6 million in 2002
and 2001. Annual commissions represent renewal commissions paid quarterly in
arrears to maintain the persistency of certain of the Companys fixed and
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 8% of the average balances of its variable annuity products is
currently subject to such annual commissions. Based upon current product
offerings, this percentage is expected to increase in current periods.

GUARANTEED MINIMUM DEATH BENEFITS, which the Company expenses as incurred,
totaled $0.4 million in the third quarter of 2002, compared with

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$0.1 million in the third quarter of 2001. For the nine months, guaranteed
minimum death benefits amounted to $1.1 million in 2002 and $0.2 million in
2001. The increase in guaranteed minimum death benefits pursuant to the
Companys variable annuity separate account contracts reflects the impact of a
continued downturn in the equity markets. Further downturns in the equity
markets could increase these expenses.

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). Depending on the product, the GMDB may equal
the principal invested, adjusted for withdrawals; the principal invested,
adjusted for withdrawals, accumulated at up to 5% per annum (subject to certain
caps); or an amount equal to the highest account value in effect on any
anniversary date under the contract. These benefits have issue age and other
restrictions to reduce mortality risk exposure. 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. 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

INCOME TAX EXPENSE totaled $1.6 million in the third quarter of 2002, $2.2
million in the third quarter of 2001, $4.3 million in the nine months of 2002
and $3.7 million in the nine months of 2001, representing effective annualized
tax rate of 42%, 41%, 41% and 42%, respectively.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDERS EQUITY increased to $215.4 million at September 30, 2002
from $193.6 million at December 31, 2001, due principally to $15.6 million in
accumulated other comprehensive income and $6.2 million of net income recorded
in 2002.

INVESTED ASSETS at September 30, 2002 totaled $1.58 billion, compared with
$1.37 billion at December 31, 2001. The Company manages most of its invested
assets internally. The Companys general investment philosophy is to hold
fixed-rate assets for long-term investment. Thus, it does not have a trading
portfolio. However, the Company has determined that all of its portfolio of
bonds, notes and redeemable preferred stocks (the Bond Portfolio) is
available to be sold in response to changes in market interest rates,
changes in relative value of asset sectors and individual securities, changes
in prepayment risk, changes in the credit quality outlook for certain
securities, the Companys need for liquidity and other similar factors.

THE BOND PORTFOLIO, which constituted 77% of the Companys total
investment portfolio at September 30, 2002, had an aggregate fair value that
was $38.7 million greater than its amortized cost compared to an aggregate
fair value that was $5.6 million greater than its amortized cost at December
31, 2001. The decrease in net unrealized losses and increase in net unrealized
gains on the Bond Portfolio during 2002 principally reflects the

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decline in prevailing interest rates and the corresponding effect on the fair
value of the Bond Portfolio at September 30, 2002.

At September 30, 2002, the Bond Portfolio (excluding $12,000 of redeemable
preferred stocks) included $1.16 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 $60.7 million of bonds rated by the Company
pursuant to statutory ratings guidelines established by the NAIC. At September
30, 2002, approximately $1.18 billion of the Bond Portfolio was investment
grade, including $468.9 million of U.S. government/agency securities and
mortgage-backed securities (MBSs).

At September 30, 2002, the Bond Portfolio included $40.5 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
approximately 1.9% of the Companys total assets and approximately 2.6% of its
invested assets. Non-investment-grade securities generally provide higher
yields and involve greater risks than investment-grade securities because their
issuers typically are more highly leveraged and more vulnerable to adverse
economic conditions than investment-grade issuers. In addition, the trading
market for these securities is usually more limited than for investment-grade
securities. These non-investment-grade securities are comprised of bonds
spanning 19 industries with 18% of these assets concentrated in
telecommunications and 13% concentrated in transportation services. No other
industry concentration constituted more than 10% of these assets.

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

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RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)

|                                                          |  |                                   |                                                          |       |       |           |         |           |  |       |   |           |  |           |         |          |  |   |         |           |  |            |           |  |  |   |           |  |  |  |       |  
|--------------------------------------------------------- |  | --------------------------------- | -------------------------------------------------------- | ----- | ----- | --------- | ------- | --------- |  | ----- | - | --------- |  | --------- | ------- | -------- |  | - | ------- | --------- |  | ---------- | --------- |  |  | - | --------- |  |  |  | ----- | -
|                                                          |  | Issues Rated by S&P/Moody's/Fitch | Issues not rated
by S&P/Moody's/
Fitch, by NAIC Category |       | Total
|                                                          |  |                                   |                                                          |       |       |          
|                                                          |  |                                   |                                                          |       |       | Estimated |         | NAIC      |  |       |   |           |  | Estimated |         |          |  |   |         | Estimated |  | Percent of
|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-]
{AAA to A-}            |  | $                                 | 672,030                                                  |       |       | $         | 708,728 |           |  |       | 1 |           |  | $         | 175,816 |          |  | $ | 185,836 |           |  | $          | 847,846   |  |  | $ | 894,564   |  |  |  | 56.50 | %
|                                                         
|                                                         
|                                                         
|                                                         
|BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]
{BBB+ to BBB-} |  |                                   | 207,648                                                  |       |       |           | 205,287 |           |  |       | 2 |           |  |           | 77,608  |          |  |   | 78,182  |           |  |            | 285,256   |  |  |   | 283,469   |  |  |  | 17.90 | %
|                                                         
|                                                         
|                                                         
|                                                         
|BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]
{BB+ to BB-}         |  |                                   | 16,718                                                   |       |       |           | 16,369  |           |  |       | 3 |           |  |           |        |          |  |   |        |           |  |            | 16,718    |  |  |   | 16,369    |  |  |  | 1.03  | %
|                                                         
|                                                         
|                                                         
|                                                         
|B+ to B-
(B1 to B3)
[B+ to B-]
{B+ to B-}                 |  |                                   | 20,889                                                   |       |       |           | 16,015  |           |  |       | 4 |           |  |           |        |          |  |   |        |           |  |            | 20,889    |  |  |   | 16,015    |  |  |  | 1.01  | %
|                                                         
|                                                         
|                                                         
|                                                         
|CCC+ to C
(Caa to C)
[CCC]
{CCC+ to C-}                   |  |                                   | 5,747                                                    |       |       |           | 3,127   |           |  |       | 5 |           |  |           | 807     |          |  |   | 282     |           |  |            | 6,554     |  |  |   | 3,409     |  |  |  | 0.22  | %
|                                                         
|                                                         
|                                                         
|                                                         
|CI to D
[DD]
{D}                                          |  |                                   |                                                         |       |       |           |        |           |  |       | 6 |           |  |           | 2,556   |          |  |   | 4,701   |           |  |            | 2,556     |  |  |   | 4,701     |  |  |  | 0.30  | %
|                                                          |  |                                   |                                                          |       |       |           |         |           |  |       |   |           |  |           |         |          |  |   |         |           |  |            |           |  |  |   |           |  |  |  |       |  
|TOTAL RATED ISSUES                                        |  | $                                 | 923,032                                                  |       |       | $         | 949,526 |           |  |       |   |           |  | $         | 256,787 |          |  | $ | 269,001 |           |  | $          | 1,179,819 |  |  | $ | 1,218,527 |  |  |  |       |  
|                                                          |  |                                   |                                                          |       |       |           |         |           |  |       |   |           |  |           |         |          |  |   |         |           |  |            |           |  |  |   |           |  |  |  |       |  

Footnotes appear on the following page.

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|    |  | Footnotes to the table of Rated Bonds by Rating Classification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-)
indicates the debts relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Moodys
rates debt securities in rating categories ranging from Aaa (the highest)
to C (extremely poor prospects of ever attaining any real investment
standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest)
indicates the debts relative standing within the rating category. A
security rated Baa3 or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moodys and Fitch ratings if
rated by multiple agencies.
|   
|(2) |  | Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5
(lowest) for nondefaulted bonds plus one category, 6, for bonds in or near
default. These six categories correspond with the S&P/Moodys/Fitch
rating groups listed above, with categories 1 and 2 considered investment
grade. The NAIC categories include $60.7 million of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines.                                                                                                                                                                                                                                                

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Senior secured loans (Secured Loans) are included in the Bond Portfolio
and aggregated $40.0 million at September 30, 2002. Secured Loans are senior
to subordinated debt and equity and are secured by assets of the issuer. At
September 30, 2002, Secured Loans consisted of $31.5 million of privately
traded securities and $8.5 million of publicly traded securities. These Secured
Loans are composed of loans to borrowers spanning 7 industries, with 43% of
these assets concentrated in energy, 18% concentrated in utilities and 13%
concentrated in financial institutions. No other industry concentration
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 $180.3 million at September 30, 2002 and
consisted of 88 commercial first mortgage loans with an average loan balance of
approximately $2.1 million, collateralized by properties located in 31 states.
Approximately 36% of this portfolio was office, 18% was retail, 17% was
multifamily residential, 15% was industrial and 14% was other types. At
September 30, 2002, approximately 33% of this portfolio was secured by
properties located in California, approximately 12% by properties located in
Michigan, and no more than 10% of this portfolio was secured by properties
located in any other single state. At September 30, 2002, two mortgage loans
had an outstanding balance of $10.0 million or more, which collectively
aggregated approximately 19% of this portfolio. At September 30, 2002,
approximately 22% of the mortgage loan portfolio consisted of loans with
balloon payments due before October 1, 2005. During 2002 and 2001, loans
delinquent by more than 90 days, foreclosed loans and restructured loans have
not been significant in relation to the total mortgage loan portfolio.

At September 30, 2002, approximately 32% of the mortgage loans were
seasoned loans underwritten to the Companys standards and purchased at or near
par from other financial institutions. Such loans generally have higher
average interest rates than loans that could be originated today. The balance
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 seasoned nature of the Companys mortgage loan
portfolio and its strict underwriting standards, the Company believes that it
has prudently managed the risk attributable to its mortgage loan portfolio
while maintaining attractive yields.

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POLICY LOANS are included in other invested assets and totaled $36.7
million at September 30, 2002, compared to $37.3 million at December 31, 2001
and primarily represent loans taken against universal life policies.

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 64% of the
Companys fixed annuity and universal life reserves had surrender penalties or
other restrictions at September 30, 2002.

As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect
its economic value and achieve a predictable spread between what it earns on
its invested assets and what it pays on its liabilities by designing its
fixed-rate products and conducting its investment operations to closely match
the duration of the fixed-rate assets to that of its fixed-rate liabilities.
The Companys fixed-rate assets include: cash and short-term investments;
bonds, notes and redeemable preferred stocks; mortgage loans; and policy loans.
At September 30, 2002, these assets had an aggregate fair value of $1.59
billion with a duration of 3.6. The Companys fixed-rate liabilities include
fixed annuity and universal life insurance contracts. At September 30, 2002,
these liabilities had an aggregate fair value (determined by discounting future
contractual cash flows by related market rates of interest) of $1.42 billion
with a duration of 2.9. The Companys potential exposure due to a relative 10%
increase in prevailing interest rates from their September 30, 2002 levels is a
loss of approximately $4.1 million, representing the decrease in fair value of
its fixed-rate assets that is not offset by a decrease in fair value of its
fixed-rate liabilities. Because the Company actively manages its assets and
liabilities and has strategies in place to minimize its exposure to loss as
interest rate changes occur, it expects that actual losses would be less than
the estimated potential loss.

Duration is a common option-adjusted measure for the price sensitivity of
a fixed-maturity portfolio to changes in interest rates. It measures the
approximate percentage change in the market value of a portfolio if interest
rates change by 100 basis points (i.e. 1%), recognizing the changes in cash
flows resulting from embedded options such as policy surrenders, investment
prepayments and bond calls. It also incorporates the assumption that the
Company will continue to utilize its existing strategies of pricing its fixed
annuity and universal life products, allocating its available cash flow

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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.

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.

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 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.

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.

DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $3.4 million of bonds at
September 30, 2002, and constituted approximately 0.2% of total invested
assets. At December 31, 2001, defaulted investments totaled $3.4 million of
bonds and constituted less than 0.3% of total invested assets.

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SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Companys existing portfolio of cash and short-term investments, and if
required, proceeds from invested asset sales. The Companys liquidity is
primarily derived from operating cash flows. At September 30, 2002,
approximately $1,057.7 million of the Companys Bond Portfolio had an aggregate
unrealized gain of $67.1 million while approximately $160.8 million of the Bond
Portfolio had an aggregate unrealized loss of $28.5 million. In addition, the
Companys investment portfolio currently provides approximately $12.5 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 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 to maintain a generally competitive market rates.
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. 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.

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 a
state 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 of 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.

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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 by a
considerable margin as of September 30, 2002.

In 1998, the NAIC adopted the codification of statutory accounting
principles (Codification) which replaced the NAICs previous primary guidance
on statutory accounting, which became effective January 1, 2001. Codification
changes 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. New York, however, has made certain
modifications (e.g., no deferred taxes will be recorded for companies domiciled
in the State of New York). The adoption of Codification resulted in a decrease
to the Companys statutory surplus of approximately $14.2 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 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 20 and
21 herein.

CONTROLS & PROCEDURES



|(A) |  | Evaluation of disclosure controls and procedures. The conclusions of our
principal executive officer and principal financial officer about the
effectiveness of the Companys disclosure controls and procedures based on
their evaluation of these controls and procedures within 90 days prior to
filing the September 30, 2002 Form 10-Q are as follows:                                                                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Companys disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company is recorded,
processed, summarized and reported within required timeframes. The
Companys disclosure controls and procedures include controls and
procedures designed to ensure that information required to be disclosed
is accumulated and communicated to the Companys management, including
its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
|   
|    |  | The Companys management, including its principal executive officer and
principal financial officer, assesses the adequacy of our disclosure
controls and procedures quarterly. Based on these assessments,
management has concluded that the disclosure controls and procedures have
functioned effectively.                                                                                                                                                                                                                                                             
|   
|(B) |  | Changes in internal control. There were no significant changes in the
Companys internal controls or in other factors that could significantly
affect these controls subsequent to the date of managements most recent
evaluation, including any corrective actions with regard to any
significant deficiencies and material weaknesses.                                                                                                                                                                                                                                 

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PART II  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
of the Company. The Company previously reported on a matter, McMurdie et al.
v. SunAmerica et al., Case No. BC 194082, filed on July 10, 1998 in the
Superior Court for the County of Los Angeles. The lawsuit was settled in
September 2002.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

EXHIBITS

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

REPORTS ON FORM 8-K

Current Report of Form 8-K dated August 14, 2002 was furnished under Item 9 of
Form 8-K pursuant to Regulation FD with respect to certifications made by the
Principal Executive Officer and the Principal Financial Officer of the Company
to accompany the quarterly report on Form 10-Q for the quarter ended June 30,
2002.

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##### Table of Contents






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.

|                        |  |                                                                                                     | 
|----------------------- |  | --------------------------------------------------------------------------------------------------- | 
|                        |  | FIRST SUNAMERICA LIFE INSURANCE COMPANYRegistrant                                                  
|                        |  |                                                                                                    
|                       
|Date: November 12, 2002 |  | /s/ N. SCOTT GILLISN. Scott Gillis
Senior Vice President
(Principal Financial Officer)             
|                        |  |                                                                                                    
|                       
|Date: November 12, 2002 |  | /s/ MAURICE S. HEBERTMaurice S. Hebert
Vice President and Controller
(Principal Accounting Officer)

26



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##### Table of Contents






Certifications

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



| | 1. | I have reviewed this quarterly report on Form 10-Q of First
SunAmerica Life Insurance 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 and results of
operations 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
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 of
the 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:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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                                                                                                                                        

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##### Table of Contents





| | 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: November 12, 2002

|                                                           |  | 
|---------------------------------------------------------- |  | 
|/s/ JAY S. WINTROB

Jay S. Wintrob
Chief Executive Officer |  | 

28



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##### Table of Contents



Certifications

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



| | 1. | I have reviewed this quarterly report on Form 10-Q of First
SunAmerica Life Insurance 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 and results of
operations 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
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 of
the 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:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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                                                                                                                                        

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##### Table of Contents





| | 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: November 12, 2002

|                                                                                          |  | 
|----------------------------------------------------------------------------------------- |  | 
|/s/ N. SCOTT GILLIS

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

30