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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)



|[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934[NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
|--- | ---------------------------------------------------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2002

OR



|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934[No Fee Required]
For the transition period from                      to
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: None

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

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILES PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANTS KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]

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

AS THE REGISTRANT IS AN INDIRECT WHOLLY OWNED SUBSIDIARY OF AMERICAN
INTERNATIONAL GROUP, INC., NONE OF THE REGISTRANTS COMMON STOCK IS HELD BY
NON-AFFILIATES OF THE REGISTRANT.

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON MARCH
28, 2003 WAS AS FOLLOWS:

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

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT





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|               |                                                                                                |  |  |  |  |  |  | 
|-------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I        
|               | ITEM 1. BUSINESS                                                                              
|               | ITEM 2. PROPERTIES                                                                            
|               | ITEM 3. LEGAL PROCEEDINGS                                                                     
|               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS                                   
|PART II       
|               | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS            
|               | ITEM 6. SELECTED FINANCIAL DATA                                                               
|               | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
|               | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|               | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           
|               | ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.     
|PART IV       
|               | ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
|SIGNATURES    
|CERTIFICATIONS
|EXHIBIT 3(A)  



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PART I




ITEM 1. BUSINESS

GENERAL DESCRIPTION

AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance
Company), (the Company) is a direct wholly owned subsidiary of SunAmerica
Life Insurance Company (the Parent), which is a wholly owned subsidiary of
AIG SunAmerica Inc. (SAI), a wholly owned subsidiary of American
International Group, Inc. (AIG). AIG is a holding company which through its
subsidiaries is engaged in a broad range of insurance and insurance-related
activities, financial services and retirement savings and asset management.

The Company changed its name to SunAmerica National Life Insurance Company
on October 5, 2001 and further changed its name to AIG SunAmerica Life
Assurance Company on January 24, 2002. The Company continued to do business as
Anchor National Life Insurance Company until February 28, 2003, after which
time it began doing business under its new name.

The Company is incorporated in Arizona and maintains its principal
executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022,
telephone (310) 772-6000. The Company has no employees; however, employees of
SAI and its other subsidiaries perform various services for the Company. SAI
had approximately 2,000 employees at December 31, 2002, approximately 1,000 of
whom perform services for the Company as well as for certain of its affiliates.

Founded in 1965, the Company is an Arizona-chartered company licensed in
49 states and the District of Columbia. The Company is a life insurance
company principally engaged in the business of writing variable annuities
directed to the market for tax-deferred, long-term savings products. It also
administers closed blocks of fixed annuities, universal life policies (See Note
3 of Notes to Consolidated Financial Statements) and guaranteed investment
contracts (GICs) directed to the institutional marketplace. The Companys
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.

The Company ranks among the largest U.S. issuers of variable annuities.
The Company distributes its products and services through an extensive network
of independent broker-dealers, full-service securities firms and financial
institutions. In prior years, GICs were marketed directly to banks,
municipalities, asset management firms and direct plan sponsors and through
intermediaries, such as managers or consultants servicing these groups. The
Companys nine affiliated broker-dealers comprise one of the largest networks
of independent registered representatives in the nation and the sixth largest
securities sales force, based on industry data. Its affiliated broker-dealers
accounted for approximately one-third of the Companys total annuity sales in
2002.

The Company believes that demographic trends have produced strong consumer
demand for long-term, investment-oriented products. According to U.S. Census
Bureau projections, the number of individuals between the ages of

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45 to 64 grew from 47 million to 63 million from 1991 to 2001, making this
age group the fastest-growing segment of the U.S. population. Between 1991 and
2001, annual industry premiums from fixed and variable annuities and fund
deposits increased from $125.7 billion to $250.4 billion.

Benefiting from continued strong growth of the retirement savings market,
industry sales of tax-deferred savings products have represented, for a number
of years, a significantly larger source of new premiums for the U.S. life
insurance industry than have traditional life insurance products. Recognizing
the growth potential of this market, the Company focuses its life operations on
the sale of annuities. In recent years, the Company has enhanced its marketing
efforts and expanded its offerings of fee-based variable annuities. The
Companys variable annuity business entails no portfolio credit risk and
requires significantly less capital support than its fixed-rate business, which
generates net investment income.

The Company and its affiliates have made significant investments in
technology over the past several years in order to lower operating costs and
enhance marketing efforts. Its use of optical disk imaging and artificial
intelligence has substantially reduced the more traditional paper-intensive
life insurance processing procedures, reducing annuity processing and servicing
costs and improving customer service. This has also enabled the Company to
more efficiently assimilate acquired businesses. The Company has also
implemented technology to interface with both its affiliated and unaffiliated
broker-dealers, which enables the Company to more effectively market its
products and help the affiliated financial professionals to better serve their
clients.

On January 1, 2002, the Company declared a distribution to the Parent of
100% of the outstanding capital stock of its then wholly owned subsidiary,
Saamsun Holdings Corp. (Saamsun). Saamsun held the Companys asset
management and broker-dealer operations. This distribution decreased the
Companys shareholders equity by $552,384,000. Subsequent to this
distribution, the Companys earnings no longer included the asset management
and broker-dealer operations (see Note 9 of Notes to Consolidated Financial
Statements). This distribution was approved by the Arizona Department of
Insurance.

Prior to the distribution of Saamsun on January 1, 2002, the Company had
three business segments: annuity operations (as discussed above), asset
management operations and broker-dealer operations. The asset management
operations were conducted by the Companys former registered investment advisor
subsidiary, AIG SunAmerica Asset Management Corp. (SAAMCO), and its related
distributor, AIG SunAmerica Capital Services, Inc. (SACS). SAAMCO and SACS
earn fee income by distributing and managing a diversified family of mutual
funds, managing certain subaccounts within the Companys variable annuity
products and providing professional management of individual, corporate and
pension plan portfolios. The asset management operations also included SA
Affordable Housing, LLC (SAAH LLC), a direct wholly owned subsidiary of
SAAMCO. SAAH LLC was previously a direct wholly owned subsidiary of the
Parent, until January 1, 2001 at which time all of SAAH LLCs ownership
interests were contributed to the Company. All of SAAH LLCs ownership
interests were subsequently contributed by the Company to SAAMCO. SAAH LLC was
formed as a limited liability company whose primary purpose is the generation
of rehabilitation tax credits, low income housing credits and passive losses.
Realized tax credits are recognized by its direct parent, SAAMCO (see Note 9 of
Notes to Consolidated Financial Statements). The

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broker-dealer operations were conducted by the Companys former
broker-dealer subsidiary, Royal Alliance Associates, Inc. (Royal Alliance),
which sells proprietary annuities and mutual funds and non-proprietary
investment products. Royal Alliance earns income from commissions on sales of
these products, net of the portion that is passed on to the registered
representatives.

On December 31, 1998, the Company acquired the individual life business
and the individual and group annuity business of MBL Life Assurance Corporation
(MBL Life), via a 100% coinsurance transaction (the Acquisition).
The Company assumed reserves in this acquisition totaling $5,793,256,000,
including $3,460,503,000 of fixed annuity contracts, $2,308,742,000 of
universal life insurance contracts and $24,011,000 of guaranteed investment
contracts. Policyholders of MBL annuity products were required to transfer
their funds into an existing product of the Company or one of its affiliates by
December 31, 1999 in order to receive the policy enhancements due under the MBL
Life rehabilitation agreement. Over 92% of the deferred annuity reserves had
either been transferred or surrendered by December 31, 1999.

Included in the block of business acquired from MBL Life were policies
whose owners are residents of New York State (the New York Business). On
July 1, 1999, the New York Business was acquired by the Companys New York
affiliate, First SunAmerica Life Insurance Company (FSA), via an assumption
reinsurance agreement, and the remainder of the business converted to
assumption reinsurance, which superseded the coinsurance agreement. As part of
this transfer, invested assets equal to $678,272,000, universal life
reserves equal to $282,247,000, group pension reserves equal to $406,118,000,
and other net assets of $10,093,000 were transferred to FSA.

The following table shows the Companys net investment income, net
realized investment losses and fee income for the year ended December 31, 2002
by primary product line or service:

NET INVESTMENT AND FEE INCOME

|                                   |  |                |          |         |  |                            |       |   |  |                                                            
|---------------------------------- |  | -------------- | -------- | ------- |  | -------------------------- | ----- | - |  | -----------------------------------------------------------
|                                   |  | Amount         |          | Percent |  | Primary Product or Service
|                                   |  |                |          |         |  |                           
|                                   |  | (in thousands) |          |        
|Net investment income              |  |                | $143,295 |         |  |                            | 31.7  | % |  | Fixed rate products and fixed
options of variable annuities
|Net realized investment
losses     |  |                | (65,811  | )       |  |                            | (14.6 | ) |  | Fixed rate products and fixed
options of variable annuities
|Fee income:                        |  |                |          |         |  |                            |       |   |  |                                                            
|Variable annuity fees              |  |                | 318,061  |         |  |                            | 70.4  |   |  | Variable annuities                                         
|Universal life
insurance fees, net |  |                | 20,537   |         |  |                            | 4.6   |   |  | Fixed rate universal life
products                         
|Surrender charges                  |  |                | 32,507   |         |  |                            | 7.2   |   |  | Fixed and variable annuities                               
|Other fees                         |  |                | 3,305    |         |  |                            | 0.7   |   |  |                                                            
|                                   |  |                |          |         |  |                            |       |   |  |                                                            
|Total fee income                   |  |                | 374,410  |         |  |                            | 82.9  |   |  |                                                            
|                                   |  |                |          |         |  |                            |       |   |  |                                                            
|Total                              |  |                | $451,894 |         |  |                            | 100.0 | % |  |                                                            
|                                   |  |                |          |         |  |                            |       |   |  |                                                            

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ANNUITY OPERATIONS  VARIABLE ANNUITIES  SEPARATE ACCOUNT

The variable annuity products of the Company 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 through
the sale, administration and management of the variable account options of its
variable annuity products. The Company also earns investment income on monies
allocated to the fixed-rate account options of these products. Variable
annuities offer retirement planning features similar to those offered by fixed
annuities, but differ in that the contractholders rate of return is generally
dependent upon the investment performance of the particular equity,
fixed-income, money market or asset allocation fund selected by the
contractholder. Because the investment risk is borne by the customer in all
but the fixed-rate account options, these products require significantly less
capital support than fixed annuities.

The Companys flagship Polaris and Seasons variable annuity products are
multimanager variable annuities that offer investors a choice of 4 to 41
variable funds and up to 5 fixed account options and 2 dollar cost averaging
fixed account options for different time periods. Seasons sales have increased
significantly in recent years due to enhanced distribution efforts and growing
consumer demand for flexible retirement savings products that offer a variety
of equity, fixed-income and guaranteed fixed account investment choices.

In addition to distributing its variable annuity products through its nine
affiliated broker-dealers, the Company distributes its products through a vast
network of independent broker-dealers, full-service securities firms and
financial institutions. In total, more than 75,000 independent sales
representatives nationally are appointed to sell the Companys annuity
products.

At December 31, 2002, total variable product liabilities were $18.44
billion, of which $14.76 billion were held in separate accounts and $3.68
billion were the liabilities of the fixed-rate account options which are held
in the general accounts. The Companys variable annuity products incorporate
surrender charges to encourage persistency. At December 31, 2002, 78% of the
Companys variable annuity liabilities held in separate accounts were subject
to surrender penalties or other restrictions. The Companys variable annuity
products also generally limit the number of transfers made in a specified
period between account options without the assessment of a fee. The average
size of a new variable annuity contract sold by the Company in 2002 was
approximately $70,000.

ANNUITY OPERATIONS  GENERAL ACCOUNT

The Companys general account obligations are fixed-rate products,
principally fixed-rate options of its variable annuity contracts, but also
including fixed annuities, GICs and universal life contracts issued in prior
years. Such fixed-rate account options on its variable annuity contracts
provide interest rate guarantees of one, three, five, seven or ten years.
Although the Companys annuity contracts remain in force an average of seven to
ten years, a majority (approximately 83% at December 31, 2002) of the annuity
contracts, as well as the universal life contracts, reprice annually at
discretionary rates determined by the Company subject to 3% or 4% minimum rate
guarantees, depending on the contract. In repricing, the Company takes into
account yield characteristics of its investment portfolio, surrender

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assumptions and competitive industry pricing, among other factors. The
Companys small block of fixed annuities is serviced by an affiliate of the
Company. The Companys universal life products are serviced by a third party
administrator whose activities are closely monitored by the Company.

The Company in prior years augmented its retail annuity business with the
sale of institutional products. At December 31, 2002, the Company had $354.3
million of fixed-maturity, variable-rate GIC obligations that reprice
periodically based upon certain defined indices and $5.2 million of
fixed-maturity, fixed-rate GICs. Of the total GIC portfolio at December 31,
2002, approximately 89% was sold to asset management firms, 9% was sold to
state and local government entities and 2% was sold to corporations.

The Company designs its fixed-rate products and conducts its investment
operations in order to closely match the duration of the assets in its
investment portfolio to its fixed annuity, universal life and GIC obligations.
The Company seeks to achieve a predictable spread between what it earns on its
assets and what it pays on its liabilities by investing principally in
fixed-rate securities. The Companys fixed annuity and universal life products
incorporate surrender charges and its GIC products incorporate other
restrictions in order to encourage persistency. Approximately 82% of the
Companys fixed annuity, universal life and GIC reserves had surrender
penalties or other restrictions at December 31, 2002.

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. The majority of the Companys invested assets are
managed by an affiliate. 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.

As part of its asset-liability matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect
its economic value and achieve a predictable spread between what it earns on
its invested assets and what it pays on its liabilities by designing its
fixed-rate products and conducting its investment operations to closely match
the duration of the fixed-rate assets to that of its fixed-rate liabilities.
The Companys fixed-rate assets include: cash and short-term investments,
bonds, notes and redeemable preferred stocks, mortgage loans, policy loans and
investments in limited partnerships that invest primarily in fixed-rate
securities. At December 31, 2002, these assets had an aggregate fair value of
$7.19 billion with a duration of 3.8 (See further discussion of duration under
Capital Resources and Liquidity  Asset Liability Matching). The Companys
fixed-rate liabilities include fixed annuity, universal life and GIC reserves.
At December 31, 2002, these liabilities had an aggregate fair value (determined
by discounting future contractual cash flows by related market rates of
interest) of $6.47 billion with a duration of 3.8. For the years ended
December 31, 2002, 2001, and 2000, the Companys yields on average invested

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assets were 5.80%, 6.63% and 7.15%, respectively; its average rates paid
on all interest-bearing liabilities were 3.74%, 4.48% and 4.96%, respectively;
and it realized net investment spreads on average invested assets of 2.13%,
2.18% and 2.35%, respectively. Net realized investment losses were 0.98%,
1.10% and 0.28% of average invested assets in 2002, 2001 and 2000,
respectively.

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
credit quality outlook for certain securities, and the Companys need for
liquidity and other similar factors.

The following table summarizes the Companys investment portfolio at
December 31, 2002:

SUMMARY OF INVESTMENTS

|                                                   |  |                |           |            |  |  |       |  
|-------------------------------------------------- |  | -------------- | --------- | ---------- |  |  | ----- | -
|                                                   |  | Carrying       |           | Percent of
|                                                   |  | value          |           | portfolio 
|                                                   |  |                |           |           
|                                                   |  | (in thousands)
|Cash and short-term investments                    |  | $              | 65,872    |            |  |  | 0.9   | %
|U.S. government securities                         |  |                | 32,820    |            |  |  | 0.5   |  
|Mortgage-backed securities                         |  |                | 1,547,568 |            |  |  | 21.5  |  
|Other bonds, notes and redeemable
preferred stocks |  |                | 3,948,181 |            |  |  | 54.9  |  
|Mortgage loans                                     |  |                | 738,601   |            |  |  | 10.3  |  
|Policy loans                                       |  |                | 215,846   |            |  |  | 3.0   |  
|Separate account seed money                        |  |                | 25,366    |            |  |  | 0.4   |  
|Common stocks                                      |  |                | 2,609     |            |  |  | 0.0   |  
|Partnerships                                       |  |                | 8,766     |            |  |  | 0.1   |  
|Real estate                                        |  |                | 22,315    |            |  |  | 0.3   |  
|Other invested assets                              |  |                | 585,760   |            |  |  | 8.1   |  
|                                                   |  |                |           |            |  |  |       |  
|Total investments and cash                         |  | $              | 7,193,704 |            |  |  | 100.0 | %
|                                                   |  |                |           |            |  |  |       |  

At December 31, 2002, the Bond Portfolio (excluding $21.6 million of
redeemable preferred stocks) included $5.31 billion of bonds rated by Standard
& Poors, Moodys Investors Service, Fitch or the Securities Valuation Office
of the National Association of Insurance Commissioners (NAIC), and $196.6
million of bonds rated by the Company pursuant to statutory ratings guidelines
established by the NAIC. At December 31, 2002, approximately $5.18 billion of
the Bond Portfolio was investment grade, including $1.58 billion of
mortgage-backed securities and U.S. government/ agency securities.

At December 31, 2002, the Bond Portfolio included $331.8 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
approximately 1.4% of the Companys total assets and approximately 4.6% of its
invested assets.

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Senior secured loans (Secured Loans) are included in the Bond Portfolio
and aggregated $235.3 million at December 31, 2002. Secured Loans are senior
to subordinated debt and equity and are secured by assets of the issuer. At
December 31, 2002, Secured Loans consisted of $42.4 million of publicly traded
securities and $192.9 million of privately traded securities. These Secured
Loans are composed of loans to 51 borrowers spanning 19 industries, with 13% of
these assets concentrated in airlines and 13% concentrated in energy, 12%
concentrated in non-cable media, 11% concentrated in financial institutions and
11% concentrated in transportation. No other industry constituted more than
10% of these assets.

Mortgage loans aggregated $738.6 million at December 31, 2002 and
consisted of 117 commercial first mortgage loans with an average loan balance
of approximately $6.3 million, collateralized by properties located in 28
states. Approximately 34% of this portfolio was office, 19% was multifamily
residential, 16% was manufactured housing, 10% was industrial, 9% was hotels,
5% was retail and 7% was other types. At December 31, 2002, approximately 28%
and 11% of this portfolio were secured by properties located in California and
New York, respectively, and no more than 10% of this portfolio was secured by
properties located in any other single state.

At December 31, 2002, the carrying value, which approximates market value,
of all investments in default as to the payment of principal or interest
totaled $15.6 million ($8.9 million of bonds and $6.7 million of mortgage
loans), which constituted approximately 0.2% of total invested assets.

For more information concerning the Companys investments, including the
risks inherent in such investments, see Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations  Capital Resources
and Liquidity.

REGULATION

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

Risk based capital (RBC) standards are designed to measure the adequacy
of an insurers statutory capital and surplus in relation to the risks inherent
in its business. The standards are intended to help identify inadequately
capitalized companies and require specific regulatory actions in the event an
insurers RBC is deficient. The RBC formula develops a risk-adjusted target
level of adjusted statutory capital and surplus by applying certain factors to
various asset, premium and reserve items. Higher factors

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are applied to more risky items and lower factors are applied to less
risky items. Thus, the target level of statutory surplus varies not only as a
result of the insurers size, but also on the risk profile of the insurers
operations. The RBC Model Law provides four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to actually placing the insurer under regulatory
control. The statutory capital and surplus of the Company exceeded its RBC
requirements as of December 31, 2002.

In 1998, the NAIC adopted the codification of statutory accounting
principles (Codification) which replaced the NAICs previous primary guidance
on statutory accounting, which became effective January 1, 2001. Codification
changed prescribed statutory accounting practices and has resulted in changes
to the accounting practices that the Company uses to prepare its statutory
basis financial statements. Codification has been adopted by all fifty states
as the prescribed basis of accounting, including Arizona. The adoption of
Codification resulted in an increase to the Companys statutory surplus of
approximately $92.4 million and was recorded as a cumulative effect of changes
in accounting principles in 2001.

Privacy provisions of the Gramm-Leach-Bliley Act became fully effective in
2001 and establish new consumer protections regarding the security,
confidentiality, and uses of nonpublic personal information of individuals.
The law also requires financial institutions to fully disclose their privacy
policies to their customers. Additional privacy legislation pending in the
United States Congress and several states is designed to provide further
privacy protections to consumers of financial products and services. These
statutes and regulations may result in additional regulatory compliance 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.

COMPETITION

The businesses conducted by the Company are highly competitive. The
Company competes with other life insurers, and also compete for customers
funds with a variety of investment products offered by financial services
companies other than life insurance companies, such as banks, investment
advisors, mutual fund companies and other financial institutions. In 2001, net
annuity premiums written among the top 100 companies ranged from approximately
$55 million to approximately $19 billion annually. The Company together with
its affiliates is the largest of this group. The Company believes the primary
competitive factors among life insurance companies for

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investment-oriented insurance products, such as annuities and GICs,
include product flexibility, net return after fees, innovation in product
design, the insurer financial strength rating and the name recognition of the
issuing company, the availability of distribution channels and service rendered
to the customer before and after a contract is issued. Other factors affecting
the annuity business include the benefits (including before-tax and after-tax
investment returns) and guarantees provided to the customer and the commissions
paid.




ITEM 2. PROPERTIES

The Companys executive offices and its principal office are in leased
premises at 1 SunAmerica Center, Los Angeles, California 90067. The Company,
through an affiliate, also leases office space in Woodland Hills, California.

The Company believes that such properties, including the equipment located
therein, are suitable and adequate to meet the requirements of its businesses.




ITEM 3. LEGAL PROCEEDINGS

Various lawsuits against the Company have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and
other matters are not considered material in relation to the financial
position, results of operations or cash flows of the Company. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

No matters were submitted during the quarter ending December 31, 2002 to a
vote of security-holders, through the solicitation of proxies or otherwise.




PART II




ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

Not applicable.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data of the Company for 2002 and
consolidated financial data of the Company and its subsidiaries for 2001 and
prior periods should be read in conjunction with the financial statements and
notes thereto and Managements Discussion and Analysis of Financial Condition
and Results of Operations, both of which are included elsewhere herein.

|                                                                 |  |                          |          |              |  |               |          |      |  |      |          |      |  |   |          |   |  |              |         |      |  |   |         |  
|---------------------------------------------------------------- |  | ------------------------ | -------- | ------------ |  | ------------- | -------- | ---- |  | ---- | -------- | ---- |  | - | -------- | - |  | ------------ | ------- | ---- |  | - | ------- | -
|                                                                 |  |                          |          |              |  |               |          |      |  |      |          |      |  |   |          |   |  | Three months |         | Year
|                                                                 |  | Years ended December 31, |          | ended        |  | ended        
|                                                                 |  |                          |          | December 31, |  | September 30,
|                                                                 |  | 2002                     |          | 2001         |  | 2000          |          | 1999 |  | 1998 |          | 1998
|                                                                 |  |                          |          |              |  |               |          |      |  |      |          |     
|                                                                 |  | (In thousands)          
|RESULTS OF OPERATIONS                                            |  |                          |          |              |  |               |          |      |  |      |          |      |  |   |          |   |  |              |         |      |  |   |         |  
|Net investment income                                            |  | $                        | 143,295  |              |  | $             | 129,294  |      |  | $    | 134,502  |      |  | $ | 158,264  |   |  | $            | 25,858  |      |  | $ | 83,699  |  
|Net realized investment
(losses) gains                           |  |                          | (65,811  | )            |  |               | (92,711  | )    |  |      | (15,177  | )    |  |   | (19,620  | ) |  |              | 271     |      |  |   | 19,482  |  
|Fee income                                                       |  |                          | 374,410  |              |  |               | 531,349  |      |  |      | 590,799  |      |  |   | 453,362  |   |  |              | 83,330  |      |  |   | 290,362 |  
|General and administrative
expenses                              |  |                          | (101,839 | )            |  |               | (149,936 | )    |  |      | (171,013 | )    |  |   | (146,297 | ) |  |              | (21,268 | )    |  |   | (92,929 | )
|Amortization of deferred
acquisition costs                       |  |                          | (187,860 | )            |  |               | (220,316 | )    |  |      | (158,007 | )    |  |   | (116,840 | ) |  |              | (27,070 | )    |  |   | (72,713 | )
|Annual commissions                                               |  |                          | (58,389  | )            |  |               | (58,278  | )    |  |      | (56,473  | )    |  |   | (40,760  | ) |  |              | (6,624  | )    |  |   | (18,209 | )
|Guaranteed minimum
death benefits, net
of reinsurance
recoveries |  |                          | (67,492  | )            |  |               | (17,839  | )    |  |      | (614     | )    |  |   | (386     | ) |  |              |        |      |  |   |        |  
|                                                                 |  |                          |          |              |  |               |          |      |  |      |          |      |  |   |          |   |  |              |         |      |  |   |         |  
|Pretax income before
cumulative effect of
accounting change      |  |                          | 36,314   |              |  |               | 121,563  |      |  |      | 324,017  |      |  |   | 287,723  |   |  |              | 54,497  |      |  |   | 209,692 |  
|Income tax expense                                               |  |                          | (2,063   | )            |  |               | (20,852  | )    |  |      | (108,445 | )    |  |   | (103,025 | ) |  |              | (20,106 | )    |  |   | (71,051 | )
|                                                                 |  |                          |          |              |  |               |          |      |  |      |          |      |  |   |          |   |  |              |         |      |  |   |         |  
|Net income before
cumulative effect of
accounting change         |  |                          | 34,251   |              |  |               | 100,711  |      |  |      | 215,572  |      |  |   | 184,698  |   |  |              | 34,391  |      |  |   | 138,641 |  
|                                                                 |  |                          |          |              |  |               |          |      |  |      |          |      |  |   |          |   |  |              |         |      |  |   |         |  
|Cumulative effect of
accounting change,
net of tax               |  |                          |         |              |  |               | (10,342  | )    |  |      |         |      |  |   |         |   |  |              |        |      |  |   |        |  
|                                                                 |  |                          |          |              |  |               |          |      |  |      |          |      |  |   |          |   |  |              |         |      |  |   |         |  
|NET INCOME                                                       |  | $                        | 34,251   |              |  | $             | 90,369   |      |  | $    | 215,572  |      |  | $ | 184,698  |   |  | $            | 34,391  |      |  | $ | 138,641 |  
|                                                                 |  |                          |          |              |  |               |          |      |  |      |          |      |  |   |          |   |  |              |         |      |  |   |         |  

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ITEM 6. SELECTED FINANCIAL DATA (continued)

Effective December 31, 1998, the Company changed its fiscal year end from
September 30 to December 31.

The results of operations of the Company for 1999 and thereafter are affected
by the acquisition of business from MBL Life on December 31, 1998 (See Note 3
of Notes to Consolidated Financial Statements).

In 2001, the Company adopted EITF 99-20, which was recorded as a cumulative
effect of accounting change (See Note 2 of Notes to Consolidated Financial
Statements).

On January 1, 2002, the Company distributed 100% of the outstanding capital
stock of its consolidated subsidiary, Saamsun Holdings Corp., to its Parent,
SunAmerica Life Insurance Company (the Parent) (See Note 9 of Notes to
Consolidated Financial Statements). Saamsun Holdings Corp. comprised two of
the Companys business segments. The Company also entered into a profit
sharing agreement with an affiliate of the Company whereby the affiliate
contributes to the Company its profits earned through the Companys variable
annuity contracts. The results of operations of the Company for 2002 are
affected by both the distribution of Saamsun Holdings Corp. and the profit
sharing agreement.

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ITEM 6. SELECTED FINANCIAL DATA (continued)

|                                                          |  |   |                |  |               |   |            |  |      |   |            |  |      |   |            |  |  |   |            |  |  |   |            |  | 
|--------------------------------------------------------- |  | - | -------------- |  | ------------- | - | ---------- |  | ---- | - | ---------- |  | ---- | - | ---------- |  |  | - | ---------- |  |  | - | ---------- |  | 
|                                                          |  |   | December 31,   |  |               |   |           
|                                                          |  |   |                |  | September 30,
|                                                          |  |   | 2002           |  | 2001          |   | 2000       |  | 1999 |   | 1998       |  | 1998
|                                                          |  |   |                |  |               |   |            |  |      |   |            |  |     
|                                                          |  |   | (In thousands)
|FINANCIAL POSITION                                        |  |   |                |  |               |   |            |  |      |   |            |  |      |   |            |  |  |   |            |  |  |   |            | 
|Investments and cash                                      |  | $ | 7,193,704      |  |               | $ | 6,751,326  |  |      | $ | 5,262,734  |  |      | $ | 5,554,701  |  |  | $ | 8,306,943  |  |  | $ | 2,734,742  | 
|Variable annuity
assets held in
separate accounts         |  |   | 14,758,642     |  |               |   | 18,526,413 |  |      |   | 20,393,820 |  |      |   | 19,949,145 |  |  |   | 13,767,213 |  |  |   | 11,133,569 | 
|Deferred acquisition
costs                                |  |   | 1,364,748      |  |               |   | 1,419,498  |  |      |   | 1,286,456  |  |      |   | 1,089,979  |  |  |   | 866,053    |  |  |   | 539,850    | 
|Deferred income taxes                                     |  |   |               |  |               |   |           |  |      |   |           |  |      |   | 53,445     |  |  |   |           |  |  |   |           | 
|Other assets                                              |  |   | 221,738        |  |               |   | 242,868    |  |      |   | 246,468    |  |      |   | 227,224    |  |  |   | 206,124    |  |  |   | 142,107    | 
|                                                          |  |   |                |  |               |   |            |  |      |   |            |  |      |   |            |  |  |   |            |  |  |   |            | 
|TOTAL ASSETS                                              |  | $ | 23,538,832     |  |               | $ | 26,940,105 |  |      | $ | 27,189,478 |  |      | $ | 26,874,494 |  |  | $ | 23,146,333 |  |  | $ | 14,550,268 | 
|                                                          |  |   |                |  |               |   |            |  |      |   |            |  |      |   |            |  |  |   |            |  |  |   |            | 
|Reserves for fixed
annuity contracts                      |  | $ | 4,285,098      |  |               | $ | 3,498,917  |  |      | $ | 2,778,229  |  |      | $ | 3,254,895  |  |  | $ | 5,500,157  |  |  | $ | 2,189,272  | 
|Reserves for universal
life insurance
contracts           |  |   | 1,676,073      |  |               |   | 1,738,493  |  |      |   | 1,832,667  |  |      |   | 1,978,332  |  |  |   | 2,339,194  |  |  |   |           | 
|Reserves for guaranteed
investment contracts              |  |   | 359,561        |  |               |   | 483,861    |  |      |   | 610,672    |  |      |   | 305,570    |  |  |   | 306,461    |  |  |   | 282,267    | 
|Variable annuity
liabilities related
to separate accounts |  |   | 14,758,642     |  |               |   | 18,526,413 |  |      |   | 20,393,820 |  |      |   | 19,949,145 |  |  |   | 13,767,213 |  |  |   | 11,133,569 | 
|Other payables and
accrued liabilities                    |  |   | 785,947        |  |               |   | 828,641    |  |      |   | 304,324    |  |      |   | 413,610    |  |  |   | 171,143    |  |  |   | 157,551    | 
|Subordinated notes
payable to affiliates                  |  |   |               |  |               |   | 58,814     |  |      |   | 55,119     |  |      |   | 37,816     |  |  |   | 209,367    |  |  |   | 39,182     | 
|Deferred income taxes                                     |  |   | 351,872        |  |               |   | 210,970    |  |      |   | 85,978     |  |      |   |           |  |  |   | 105,772    |  |  |   | 95,758     | 
|Shareholders equity                                      |  |   | 1,321,639      |  |               |   | 1,593,996  |  |      |   | 1,128,669  |  |      |   | 935,126    |  |  |   | 747,026    |  |  |   | 652,669    | 
|                                                          |  |   |                |  |               |   |            |  |      |   |            |  |      |   |            |  |  |   |            |  |  |   |            | 
|TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY                |  | $ | 23,538,832     |  |               | $ | 26,940,105 |  |      | $ | 27,189,478 |  |      | $ | 26,874,494 |  |  | $ | 23,146,333 |  |  | $ | 14,550,268 | 
|                                                          |  |   |                |  |               |   |            |  |      |   |            |  |      |   |            |  |  |   |            |  |  |   |            | 

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ITEM 6. SELECTED FINANCIAL DATA (continued)

The financial position of the Company as of December 31, 1998 and thereafter is
affected by the acquisition of business from MBL Life (See Note 3 of the Notes
to Consolidated Financial Statements).

The financial position of the Company as of December 31, 2002 reflects the
impact of the distribution its consolidated subsidiary, Saamsun Holdings Corp.,
to the Parent on January 1, 2002 (See Note 9 of the Notes to Consolidated
Financial Statements).

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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Managements discussion and analysis of financial condition and results of
operations of AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance Company) (the Company) for the three years
ended December 31, 2002 (2002), 2001 (2001) and 2000 (2000) follows.
Certain prior period amounts have been reclassified to conform to the current
periods presentation.

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

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

CRITICAL ACCOUNTING POLICIES

The Company considers among its most critical accounting policies those
policies with respect to valuation of certain financial instruments and
amortization of deferred acquisition costs. In the implementation of each of
the aforementioned policies, management is required to exercise its judgment on
both a quantitative and qualitative basis. Further explanation of how
management exercises that judgment follows:

VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on
debt and equity securities available for sale amounted to $170.7 million at
December 31, 2002. In determining if and when a decline in fair value below
amortized cost is other-than-temporary, the Company evaluates at each reporting
period the market conditions, offering prices, trends of earnings,

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price multiples, and other key measures for 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, the Company recognizes an impairment loss in the
current period operating results to the extent of the decline.

Securities in our portfolio with a carrying value of approximately $1.15
billion at December 31, 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: We amortize our deferred
acquisition costs (DAC) based on a percentage of expected gross profits
(EGPs) over the life of the underlying policies. EGPs are computed based on
assumptions related to the underlying policies written, including their
anticipated duration, the growth rate of the separate account assets (with
respect to variable annuities) or general account assets (with respect to fixed
annuities and fixed options of variable annuities) supporting the annuity
obligations, the anticipated volume of guaranteed minimum death benefits to be
paid and the level of expenses necessary to maintain the policies. The Company
adjusts DAC amortization (a DAC unlocking) when estimates of current or
future gross profits to be realized from its annuity policies are revised.

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

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BUSINESS SEGMENTS

On January 1, 2002, the Company declared a distribution to its Parent,
SunAmerica Life Insurance Company (the Parent), of 100% of the outstanding
capital stock of its then wholly owned subsidiary, Saamsun Holdings Corp.
(Saamsun). Saamsun was comprised of the Companys asset management and
broker-dealer segments. This distribution decreased the Companys
shareholders equity by approximately $552.4 million (see Note 9 of Notes to
Consolidated Financial Statements). Effective January 1, 2002, the Companys
earnings no longer include the asset management and broker-dealer operations.
This distribution was approved by the Arizona Department of Insurance.

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

Prior to the distribution of Saamsun as discussed above, the Company had
three business segments: annuity operations (as discussed above), asset
management operations and broker-dealer operations (see Note 12 of Notes to
Consolidated Financial Statements). The asset management operations were
conducted by the Companys former registered investment advisor subsidiary, AIG
SunAmerica Asset Management Corp. (SAAMCO), and its related distributor, AIG
SunAmerica Capital Services, Inc. (SACS). SAAMCO and SACS earn fee income by
distributing and managing a diversified family of mutual funds, managing
certain subaccounts within the Companys variable annuity products and
providing professional management of individual, corporate and pension plan
portfolios. The asset management operations also included SA Affordable
Housing, LLC (SAAH LLC). SAAH LLC was previously a direct wholly owned
subsidiary of the Parent, until January 1, 2001, at which time all of SAAH
LLCs ownership interests were contributed to the Company. All of SAAH LLCs
ownership interests were subsequently contributed by the Company to SAAMCO.
SAAH LLC was formed as a limited liability company whose primary purpose is the
generation of rehabilitation tax credits, low income housing credits and
passive losses. Realized tax credits are recognized by its direct Parent,
SAAMCO. The broker-dealer operations were conducted by the Companys former
broker-dealer subsidiary, Royal Alliance Associates, Inc. (Royal Alliance),
which sells proprietary annuities and mutual funds and non-proprietary
investment products. Royal Alliance earns income from commissions on sales of
these products, net of the portion that is passed on to the registered
representatives.

On June 10, 2002, the Company entered into a profit sharing agreement with
SAAMCO whereby SAAMCO will contribute to the Company on a quarterly basis its
profits earned in connection with its role as investment advisor and/or
business manager to several open-end investment management companies registered
under the Investment Company Act of 1940, as amended, that fund the variable
investment options available to investors through the Companys variable
annuity contracts (the SAAMCO Agreement). The SAAMCO Agreement is
retroactive to January 1, 2002. Amounts paid to or accrued by the Company
under this agreement totaled $62.6 million in 2002.

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RESULTS OF OPERATIONS

NET INCOME totaled $34.3 million in 2002, compared with $90.4 million in
2001 and $215.6 million in 2000. The operating results of 2001 and 2000
include those of the asset management and broker-dealer operations. Assuming
the Saamsun distribution had occurred on January 1, 2000, the beginning of the
prior year periods discussed herein, net income would have been $99.9 million
for 2001 and $176.0 million for the 2000.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption
of EITF 99-20 in 2001. The Company recorded a loss of $10.3 million, net of
tax, which is recognized in the consolidated statement of income and
comprehensive income as a cumulative effect of accounting change for the year
ended December 31, 2001 (see Note 2 of Notes to Consolidated Financial
Statements).

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $36.3
million in 2002, compared with $121.6 million in 2001 and $324.0 million in
2000. Assuming the Saamsun distribution had occurred on January 1, 2000, the
beginning of the prior year periods discussed herein, pretax income before
cumulative effect of accounting change would have been $142.8 million for 2001
and $258.0 million for 2000. The decline in 2002 results compared to 2001
primarily resulted from lower fee income and increased guaranteed minimum death
benefits on variable annuities, partially offset by decreased general and
administrative expenses, decreased amortization of deferred acquisition costs,
decreased net realized investment losses and increased net investment income.
The decline in 2001 from 2000 primarily resulted from increased net realized
investment losses, increased amortization of deferred acquisition costs and
lower fee income.

INCOME TAX EXPENSE totaled $2.1 million in 2002, $20.9 million in 2001 and
$108.4 million in 2000, representing effective tax rates of 6%, 17% and 33% in
2002, 2001 and 2000, respectively. The decrease in the effective tax rate for
2002 is due primarily to the lower relative pretax income without corresponding
reductions in permanent tax differences. Assuming that the Saamsun
distribution had occurred on January 1, 2000, the beginning of the prior year
periods discussed herein, income tax expense would have been $32.6 million for
2001 and $82.0 million for 2000, representing effective tax rates of 23% and
32%, respectively. The lower tax rate in 2001 is due to tax credits generated
by SAAH LLC, a wholly-owned subsidiary of SAAMCO which reduced the effective
tax rate by approximately 13% (see Note 9 of Notes to Consolidated Financial
Statements).

As discussed above and in Note 12 of Notes to Consolidated Financial
Statements, effective January 1, 2002, the Company has one business segment,
annuity operations.

ANNUITY OPERATIONS

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $36.3
million in 2002, compared with $142.8 million in 2001 and $258.0 million in
2000. The decline in 2002 results compared to 2001 primarily resulted from
increased guaranteed minimum death benefits on variable annuities, increased
amortization of deferred acquisition costs, lower fee income, increased general
and administrative expenses and increased net realized investment losses
partially offset by higher net investment income.

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The decline in 2001 from 2000 primarily resulted from increased net
realized investment losses, lower fee income, increased amortization of
deferred acquisition costs, increased guaranteed minimum death benefits on
variable annuities, and lower net investment income partially offset by lower
general and administrative expenses.

NET INVESTMENT INCOME, which is the spread between the income earned on
invested assets and the interest paid on fixed annuities and other
interest-bearing liabilities, totaled $143.3 million in 2002, $118.2 million in
2001 and $127.7 million in 2000. These amounts equal 2.13% on average invested
assets (computed on a daily basis) of $6.72 billion in 2002, 2.18% on average
invested assets of $5.43 billion in 2001 and 2.35% on average invested assets
of $5.43 billion in 2000.

Net investment spreads include the effect of income earned or interest
paid on the difference between average invested assets and average
interest-bearing liabilities. Average invested assets exceeded average
interest-bearing liabilities by $124.0 million in 2002, compared with $32.3
million in 2001 and $169.9 million in 2000. The increase in 2002 reflects a
$200.0 million capital contribution from the Parent in the third quarter of
2002 and $120.5 million of net income tax refunds received from the Parent in
the fourth quarter of 2001. The decrease in 2001 from 2000 reflects the impact
of $94.1 million in dividends paid to the Parent and realized investment losses
of $59.8 million recorded in 2001. The difference between the Companys yield
on average invested assets and the rate paid on average interest-bearing
liabilities was 2.06% in 2002, 2.15% in 2001 and 2.19% in 2000.

Investment income (and the related yields on average invested assets)
totaled $390.1 million (5.80%) in 2002, compared with $359.7 million (6.63%) in
2001 and $388.4 million (7.15%) in 2000. The decrease in the investment yield
in 2002 compared to 2001 and 2000 primarily reflects a lower prevailing
interest rate environment. Expenses incurred to manage the investment
portfolio amounted to $2.4 million in 2002, $5.0 million in 2001 and $7.1
million in 2000. These expenses are included as a reduction of investment
income in the consolidated statement of income and comprehensive income.

Interest expense totaled $246.8 million in 2002, $241.4 million in 2001
and $260.7 million in 2000. The average rate paid on all interest-bearing
liabilities was 3.74% in 2002, compared with 4.48% in 2001 and 4.96% in 2000.
Interest-bearing liabilities averaged $6.60 billion during 2002, $5.39 billion
during 2001 and $5.26 billion during 2000. The decline in the overall rates
paid in 2002 compared to 2001 resulted primarily from the impact of a declining
interest rate environment and the impact of securities lending in 2002 at
short-term rates. As discussed in Notes 2 and 11 of Notes to Consolidated
Financial Statements, the Company participates in a securities lending program
with an affiliated agent in which it lends its securities and primarily takes
cash as collateral with respect to the securities lent. Income on the
securities lending collateral is recorded as net investment income while it
pays interest on the securities lending agreements and related management fees
to administer the program. Excluding the impact of the securities lending
program, the average rate paid would have been 3.93% in 2002. The decline in
the overall rates paid in 2001 compared to 2000 resulted primarily from the
impact of a declining interest rate environment.

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Growth in average invested assets resulted from cash received from the
securities lending program and from sales of the fixed account options of the
Companys variable annuity products (Fixed Annuity Deposits), and renewal
deposits on its universal life product (UL Deposits), partially offset by net
exchanges from fixed accounts into the separate accounts of variable annuity
contracts. Fixed Annuity Deposits and UL Deposits totaled $1.78 billion in
2002, $2.33 billion in 2001 and $1.82 billion in 2000, and are largely deposits
for the fixed accounts of variable annuities. These deposits represent 34%,
51%, and 35%, respectively, of the related reserve balances at the beginning of
the respective periods. Fixed Annuity Deposits were higher by approximately
$550 million in 2001 due to low margin Anchor Advisor sales allocated to
one-year fixed accounts in 2001. The one-year fixed account was discontinued
from the product line in September 2001.

No GIC deposits were received in 2002. GIC deposits totaled $40.0 million
in 2001 and $350.0 million in 2000. GIC surrenders and maturities totaled
$135.1 million in 2002, $191.9 million in 2001 and $78.3 million in 2000. The
GICs issued by the Company are generally variable rate contracts which
guarantee the payment of principal and interest for a term of three to five
years. GICs purchased by asset management firms for their short-term
portfolios (which represent 89% of the Companys GIC liabilities) either
prohibit withdrawals or permit withdrawals with notice ranging from 90 to 270
days. GICS that are purchased by banks for their long-term portfolios or by
state and local governmental entities either prohibit withdrawals or permit
scheduled book value withdrawals subject to the terms of the underlying
indenture or agreement. In pricing GICs, the Company analyzes cash flow
information and prices accordingly so that it is compensated for possible
withdrawals prior to maturity.

NET REALIZED INVESTMENT LOSSES totaled $65.8 million in 2002, compared
with $59.8 million in 2001 and $15.2 million in 2000 and include impairment
writedowns of $57.3 million, $68.0 million and $20.6 million, respectively.
Thus, net realized losses from sales and redemptions of investments totaled
$8.5 million in 2002, compared with net realized gains of $8.2 million in 2001
and $5.4 million in 2000.

The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $1.60 billion in 2002, $1.77 billion in 2001 and $1.14 billion in
2000. Sales of investments result from the active management of the Companys
investment portfolio. Because redemptions of investments are generally
involuntary and sales of investments are made in both rising and falling
interest rate environments, net gains and losses from sales and redemptions of
investments fluctuate from period to period, and represent 0.13%, 0.15% and
0.10% of average invested assets for 2002, 2001 and 2000, 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 $57.3 million, $68.0 million and $20.6
million of provisions principally applied to bonds in 2002, 2001 and 2000,
respectively. Impairment writedowns represent 0.85%, 1.25% and 0.38% of
average invested assets for 2002, 2001 and 2000, respectively. For the five
years ended December 31, 2002, impairment writedowns as a percentage of

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average invested assets have ranged from 0.06% to 1.25% and have averaged
0.56%. Such writedowns are based upon estimates of the net realizable value of
invested assets and recorded when declines in value of such assets are
considered to be other than temporary. Actual realization will be dependent
upon future events. The Company recorded $15.9 million ($10.3 million, net of
tax) of additional impairments in 2001 pursuant to the implementation of EITF
99-20. This adjustment was recorded as a cumulative effect of accounting
change in the accompanying consolidated statement of income and comprehensive
income for 2001.

VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $318.1
million in 2002, $350.4 million in 2001 and $385.4 million in 2000. The 2002
amounts include $62.6 million of fees relating to the SAAMCO Agreement. In
consolidation, comparable fees totaling $63.2 million in 2001 and $68.7 million
in 2000 were included in the annuity operations segment in those years. The
decreased fees in 2002 and 2001 as compared to 2000 reflect the unfavorable
equity market conditions in 2002 and 2001, and the resulting unfavorable impact
on market values of assets in the separate accounts. Variable annuity fees
represent 1.9% of average variable annuity assets in 2002, 1.9% of average
variable annuity assets in 2001 and 1.8% of average variable annuity assets in
2000. Variable annuity assets averaged $16.46 billion, $18.87 billion and
$21.07 billion during the respective periods. Variable annuity deposits, which
exclude deposits allocated to the fixed accounts of variable annuity products,
totaled $1.18 billion in 2002, $1.41 billion in 2001 and $1.88 billion in 2000.
These amounts represent 6%, 7% and 9% of separate account liabilities at the
beginning of the respective periods. The decrease in variable annuity deposits
in 2002 reflected lower demand for the variable account options of the
Companys variable annuity products due to the unfavorable equity market
conditions discussed above. Transfers from the fixed accounts of the Companys
variable annuity products to the separate accounts are not classified as
variable annuity deposits. Accordingly, changes in variable annuity deposits
are not necessarily indicative of the ultimate allocation by customers among
fixed and variable account options of the Companys variable annuity products.

Sales of variable annuity products (which include deposits allocated to
the fixed accounts) (Variable Annuity Product Sales) amounted to $2.92
billion, $3.69 billion and $3.64 billion in 2002, 2001 and 2000, respectively.
Such sales primarily reflect those of the Companys Polaris and Seasons
variable annuity product lines. Sales were higher by approximately $550
million in 2001 due to low margin Anchor Advisor sales allocated to one-year
fixed accounts in the third quarter of 2001 before the one-year fixed account
was discontinued from the product line at the end of September 2001. The
Companys variable annuity products are multi-manager variable annuities that
offer investors a choice of several variable funds as well as a number of
guaranteed fixed-rate funds. Investors can select from a choice of 4 to 41
variable funds and up to 7 guaranteed fixed-rate funds depending on the
product.

The Company has encountered increased competition in the variable annuity
marketplace during recent years and anticipates that the market will remain
highly competitive for the foreseeable future. Also, from time to time,
Federal initiatives are proposed that could affect the taxation of annuities
(See Regulation in Item 1).

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UNIVERSAL LIFE INSURANCE FEES, NET amounted to $20.5 million, $18.9
million and $20.3 million in 2002, 2001 and 2000, respectively. 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 acquired its
universal life contracts as part of the Acquisition and does not actively
market such contracts. Such fees represent 1.23%, 1.06% and 1.08% of average
reserves for universal life insurance contracts in the respective periods.

SURRENDER CHARGES on fixed and variable annuity contracts and universal
life contracts totaled $32.5 million in 2002, $24.9 million in 2001 and $21.0
million in 2000. 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 $2.37
billion in 2002, compared with $2.10 billion in 2001 and $2.22 billion in 2000.
These payments when expressed as a percentage of average related reserves
represent 11.0%, 9.0% and 8.7% for 2002, 2001 and 2000, respectively.
Withdrawals include variable annuity payments from the separate accounts
totaling $1.78 billion (10.8% of average variable annuity liabilities), $1.73
billion (9.2% of average variable annuity liabilities) and $1.76 billion (8.4%
of average variable annuity liabilities) in 2001, 2000, and 1999, respectively.
The increase in withdrawal rates in 2002 reflects an increase in surrenders of
the Companys Anchor Advisor product allocated to one-year fixed accounts.
Excluding such surrenders, the surrender rate would have been 10.2% in 2002.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $101.8 million in 2002, $93.0
million in 2001 and $102.8 million in 2000. General and administrative
expenses increased in 2002 due to higher reinsurance premiums paid to reinsure
the GMDB, EEB and GMIB features of the Companys variable annuity products (see
discussion below). Such premiums totaled $22.6 million in 2002, $13.2 million
in 2001 and $6.8 million in 2000. General and administrative expenses
decreased in 2001 due to lower costs associated with servicing its fixed
annuities and universal life policies. General and administrative expenses
remain closely controlled through a company-wide cost containment program and
continue to represent less than 1% of average total assets.

AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $187.9 million in 2002,
compared with $144.3 million in 2001 and $125.0 million in 2000. The increases
in amortization in both 2002 and 2001 was primarily related to lower estimates
of future gross profits on variable annuity contracts compared to the prior
years in light of the downturn in the equity markets in 2001 and 2002, and
additional variable annuity product sales over the last twelve months and the
subsequent amortization of related deferred commissions and other direct
selling costs.

ANNUAL COMMISSIONS totaled $58.4 million in 2002, compared with $58.3
million in 2001 and $56.5 million in 2000. Annual commissions represent
renewal commissions paid quarterly in arrears to maintain the persistency of
certain of the Companys variable annuity contracts. Substantially all of the
Companys currently available variable annuity products allow for an annual
commission payment option in return for a lower immediate commission. The
Company estimates that approximately 56% of the average balances of its
variable annuity products is currently subject to such annual commissions.

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Based on current sales, this percentage is expected to increase in future
periods.

GUARANTEED MINIMUM DEATH BENEFITS, NET OF REINSURANCE RECOVERIES (Net
GMDB) totaled $67.5 million in 2002, compared with $17.8 million in 2001 and
$0.6 million in 2000 (net of reinsurance recoveries of $8.4 million in 2002,
$3.8 million in 2001 and $0.9 million in 2000). Net GMDB consists primarily of
guaranteed minimum death benefits as well as immaterial amounts of earnings
enhancement benefits, guaranteed minimum income benefits and guaranteed minimum
account value benefits. These guarantees are described in more detail in the
following paragraphs. The increase in Net GMDB related to the Companys
variable annuity separate account contracts in 2002 and 2001 reflects the
downturn in the equity markets in 2001 and 2002. Further downturns in the
equity markets could increase these expenses.

GUARANTEED MINIMUM DEATH BENEFITS (GMDB): A majority of the Companys
variable annuity products are issued with a death benefit feature which
provides that, upon the death of a contractholder, the contractholders
beneficiary will receive the greater of (1) the contractholders account value,
or (2) a guaranteed minimum death benefit that varies by product (the GMDB).
The Company bears the risk that death claims following a decline in the
financial markets may exceed contractholder account balances, and that the fees
collected under the contract are insufficient to cover the costs of the benefit
to be provided. At December 31, 2002, a portion of the GMDB risk on
approximately 28% (calculated based on current account value) of the contracts
with such features had been reinsured. Approximately half of this reinsurance
will cease at the time the modified coinsurance deposit liability is fully paid
down, which is presently estimated to occur in early 2004. However, a
substantial majority of all new contracts sold have reinsurance coverage.
Reinsurance coverage is subject to limitations such as caps and deductibles.
GMDB-related contractholder benefits incurred, net of related reinsurance, were
$67.5 million (net of $8.4 million of reinsurance recoveries), $17.8 million
(net of $3.8 million of reinsurance recoveries) and $0.6 million (net of $0.9
million of reinsurance recoveries) for 2002, 2001 and 2000, respectively. In
accordance with Generally Accepted Accounting Principles, the Company expenses
such benefits in the period incurred, and therefore does not provide reserves
for future benefits.

EARNINGS ENHANCEMENT BENEFIT (EEB): The Company issues certain variable
annuity products that offer an optional Earnings Enhancement Benefit (EEB)
feature. For contractholders who elect the feature, the EEB provides an
additional death benefit amount equal to a fixed percentage of earnings in the
contract, subject to certain maximums. The Company bears the risk that account
values following favorable performance of the financial markets will result in
greater EEB death claims and that the fees collected under the contract are
insufficient to cover the costs of the benefit to be provided. At December 31,
2002, approximately 7% of inforce contracts include EEB coverage, with 96% of
the EEB risk fully reinsured.

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

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collected under the contract are insufficient to cover the costs of the
benefit to be provided. Substantially all of the Companys GMIB risk has been
reinsured as of December 31, 2002.

GUARANTEED MINIMUM ACCOUNT VALUE (GMAV): In the third quarter of 2002,
the Company began issuing certain variable annuity products which offer an
optional Guaranteed Minimum Account Value (GMAV) living benefit. If elected by
the policyholder at the time of contract issuance, this feature guarantees that
the account value under the contract will equal or exceed the amount of the
initial principal invested, adjusted for withdrawals, at the end of a ten-year
waiting period. The Company bears the risk that protracted under-performance
of the financial markets could result in GMAV benefits being higher than the
underlying contractholder account balance and that the fees collected under the
contract are insufficient to cover the costs of the benefit to be provided. As
of December 31, 2002, the premiums subject to guarantee totaled approximately
$100 million, and the estimated fair values of the GMAV were not material.

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

Prior to the distribution of Saamsun on January 1, 2002, the Company had
asset management operations and broker-dealer operations. The following
discussions pertained to these two business segments for 2001 and 2000.

ASSET MANAGEMENT OPERATIONS

PRETAX LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $38.9
million in 2001 compared to pretax income of $36.5 million in 2000. The
decrease in 2001 from 2000 primarily resulted from increased amortization of
deferred acquisition costs, increased net realized investment losses and a
reduction in fee income, partially offset by lower general and administrative
expenses.

NET REALIZED INVESTMENT LOSSES totaled $32.9 million in 2001 and represent
impairment writedowns applied to limited partnerships held by SAAH LLC (See
Note 9 of Notes to Consolidated Financial Statements). There were no realized
investment losses in 2000. Such writedowns are based upon estimates of the net
realizable value of invested assets and recorded declines in value of such
assets are considered to be other than temporary. Actual realization will be
dependent upon future events.

VARIABLE ANNUITY FEES totaled $11.5 million in 2001, compared to $15.1
million in 2000. The decreased fees in 2001 reflect a decline in average
variable annuity assets under management, principally resulting from a decline
in market values.

ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1
distribution fees, are based on the market value of assets managed in mutual
funds by SAAMCO. Such fees totaled $63.5 million on average assets managed of
$6.74 billion in 2001 and $73.9 million on average assets managed of $6.62
billion in 2000. Asset management fees are not necessarily proportionate to

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average assets managed, principally due to changes in product mix. Mutual
fund sales, excluding sales of money market accounts, totaled $1.83 billion in
2001, compared to $2.89 billion in 2000. Redemptions of mutual funds,
excluding redemptions of money market accounts, amounted to $1.17 billion in
2001 and $819.9 million in 2000, which represent 20.5% and 14.3%, respectively,
of average related mutual fund assets. The decrease in sales and the increase
in redemptions in 2001 principally reflect lower demand for growth-oriented
mutual funds, which have been out of favor with investors due to unfavorable
equity market conditions since late 2000 and throughout 2001.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $27.4 million in 2001,
compared to $36.1 million in 2000. The decrease in expenses in 2001
principally reflects lower sales of mutual funds and related marketing costs.

AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $76.0 million in 2001,
compared to $33.0 million in 2000. The increase in amortization in 2001 is
principally due to a $34.0 million writedown of deferred acquisition costs
which was required following the 2001 downturn in the equity markets, so that
deferred and unamortized costs would not exceed the estimated distribution fee
and contingent deferred sales charge revenues on certain mutual fund contracts.
The remaining increase in amortization was due to increased mutual fund sales
and the impact of a full year of subsequent amortization of such related
deferred commissions and other direct selling costs.

BROKER DEALER OPERATIONS

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $17.7
million in 2001 and $29.5 million in 2000. The decline in 2001 from 2000
primarily resulted from a decline in net retained commissions.

NET RETAINED COMMISSIONS totaled $45.4 million in 2001 and $58.3 million
in 2000. Net retained commissions are derived from commissions on the sales of
proprietary and nonproprietary investment products, after deducting
approximately 90% of such commissions that is passed on to registered
representatives. Such commissions declined as a result of lower sales in 2001.
Fluctuations in net retained commissions may not necessarily be related to
fluctuations in sales primarily due to changes in sales mix. Broker-dealer
sales (mainly sales of general securities, mutual funds and annuities) totaled
$9.78 billion in 2001 and $13.25 billion in 2000. The decreases in
broker-dealer sales in 2001 reflected lower demand for mutual funds and other
investments due to unfavorable equity market conditions throughout 2001.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $29.5 million in 2001,
compared to $32.1 million in 2000. The decrease in expenses in 2001 as
compared to 2000 reflect lower marketing-related expenses.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDERS EQUITY decreased to $1.32 billion at December 31, 2002 from
$1.59 billion at December 31, 2001, due to a $552.4 million distribution to the
Parent of 100% of the common stock of the Companys wholly-owned subsidiary,
Saamsun, on January 1, 2002 (see Note 9 of Notes to Consolidated Financial
Statements). The impact of this distribution was partially offset by a $200.0
million capital contribution from its Parent, net income of $34.3 million and
other comprehensive income of $45.8 million.

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INVESTED ASSETS at December 31, 2002 totaled $7.19 billion, compared with
$6.75 billion at December 31, 2001. The majority of the Companys invested
assets are managed by an affiliate. The Companys general investment
philosophy is to hold fixed-rate assets for long-term investment. Thus, it
does not have a trading portfolio. However, the Company has determined that
all of 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 December 31, 2002, had an aggregate fair value that was
$35.9 million greater than its amortized cost at December 31, 2002, compared
with an amortized cost that was $62.8 million greater than its aggregate fair
value 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 decline in prevailing interest rates and the corresponding effect on the
fair value of the Bond Portfolio at December 31, 2002.

At December 31, 2002, the Bond Portfolio (excluding $21.6 million of
redeemable preferred stocks) included $5.31 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 $196.6 million of bonds rated by the Company
pursuant to statutory ratings guidelines established by the NAIC. At December
31, 2002, approximately $5.18 billion of the Bond Portfolio was investment
grade, including $1.58 billion of mortgage-backed securities (MBS) and U.S.
government/agency securities.

At December 31, 2002, the Bond Portfolio included $331.8 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
approximately 1.4% of the Companys total assets and approximately 4.6% 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 30 industries with 23% of these assets concentrated in financial
institutions and 14% concentrated in telecommunications. No other industry
concentration constituted more than 10% of these assets.

The table on the next page summarizes the Companys rated bonds by rating
classification as of December 31, 2002.

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RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)

|                                           |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |         |          |  |   |         |           |  |          |           |  |  |   |           |  |  |         |       |  
|------------------------------------------ |  | ----------------------- | --------- | ----- |  | --------- | --------- | --------- |  | -------------------------------- | - | --------- |  | --------- | ------- | -------- |  | - | ------- | --------- |  | -------- | --------- |  |  | - | --------- |  |  | ------- | ----- | -
|                                           |  |                         |           |       |  |           |           |           |  | Issues not rated by S&P/Moody's/ |   |           |  |           |         |          |  |   |         |           |  |         
|Issues rated by S&P/Moody's/Fitch          |  | Fitch, by NAIC category |           | Total
|                                           |  |                         |           |      
|                                           |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |         |          |  |   |         |           |  |          |           |  |  |   |           |  |  | Percent
|                                           |  |                         |           |       |  | Estimated |           | NAIC      |  |                                  |   |           |  | Estimated |         |          |  |   |         | Estimated |  | of total
|S&P/Moody's/Fitch                          |  | Amortized               |           | fair  |  | category  |           | Amortized |  | fair                             |   | Amortized |  | fair      |         | invested
|Category (1)                               |  | cost                    |           | value |  | (2)       |           | cost      |  | value                            |   | cost      |  | value     |         | assets  
|                                           |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |         |         
|AAA+ to A-
(Aaa to A3)
[AAA to A-]         |  | $                       | 3,187,888 |       |  | $         | 3,269,229 |           |  |                                  | 1 |           |  | $         | 493,556 |          |  | $ | 513,847 |           |  | $        | 3,681,444 |  |  | $ | 3,783,076 |  |  |         | 52.59 | %
|BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-] |  |                         | 1,112,451 |       |  |           | 1,115,445 |           |  |                                  | 2 |           |  |           | 275,308 |          |  |   | 276,630 |           |  |          | 1,387,759 |  |  |   | 1,392,075 |  |  |         | 19.35 | %
|BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]       |  |                         | 187,096   |       |  |           | 164,737   |           |  |                                  | 3 |           |  |           | 15,077  |          |  |   | 12,364  |           |  |          | 202,173   |  |  |   | 177,101   |  |  |         | 2.46  | %
|B+ to B-
(B1 to B3)
[B+ to B-]             |  |                         | 68,031    |       |  |           | 55,056    |           |  |                                  | 4 |           |  |           | 5,705   |          |  |   | 5,815   |           |  |          | 73,736    |  |  |   | 60,871    |  |  |         | 0.85  | %
|CCC+ to C
(Caa to C)
[CCC]                 |  |                         | 64,589    |       |  |           | 34,159    |           |  |                                  | 5 |           |  |           | 61,377  |          |  |   | 59,394  |           |  |          | 125,966   |  |  |   | 93,553    |  |  |         | 1.30  | %
|CI to D
[DD]
{D}                           |  |                         |          |       |  |           |          |           |  |                                  | 6 |           |  |           | 83      |          |  |   | 319     |           |  |          | 83        |  |  |   | 319       |  |  |         | 0.00  | %
|                                           |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |         |          |  |   |         |           |  |          |           |  |  |   |           |  |  |         |       |  
|TOTAL RATED
ISSUES                         |  | $                       | 4,620,055 |       |  | $         | 4,638,626 |           |  |                                  |   |           |  | $         | 851,106 |          |  | $ | 868,369 |           |  | $        | 5,471,161 |  |  | $ | 5,506,995 |  |  |         |       |  
|                                           |  |                         |           |       |  |           |           |           |  |                                  |   |           |  |           |         |          |  |   |         |           |  |          |           |  |  |   |           |  |  |         |       |  

Footnotes appear on the following page.

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Footnotes to the table of Rated Bonds by Rating Classification



|(1) |  | S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-)
indicates the debts relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Moodys
rates debt securities in rating categories ranging from Aaa (the highest)
to C (extremely poor prospects of ever attaining any real investment
standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest)
indicates the debts relative standing within the rating category. A
security rated Baa3 or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moodys and Fitch ratings if
rated by multiple agencies.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5
(lowest) for non-defaulted bonds plus one category, 6, for bonds in or
near default. These six categories correspond with the S&P/Moodys/Fitch
rating groups listed above, with categories 1 and 2 considered investment
grade. The NAIC categories include $196.6 million of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines.                                                                                                                                                                                                                                              

27



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##### Table of Contents



At December 31, 2002, approximately $1.10 billion of the Companys Bond
Portfolio had an aggregate unrealized loss of $169.1 million. The gross
unrealized losses in the Bond Portfolio included the following concentrations:

|                                      |  |                |        | 
|------------------------------------- |  | -------------- | ------ | 
|                                      |  | Gross         
|                                      |  | Unrealized    
|Concentration                         |  | Losses        
|                                      |  |               
|                                      |  | (In thousands)
|Investment Grade:                     |  |                |        | 
|Finance companies                     |  | $              | 42,607 | 
|Airlines                              |  |                | 14,447 | 
|Public utilities                      |  |                | 5,873  | 
|Securitizations                       |  |                | 18,747 | 
|Not Rated and Below Investment Grade: |  |                |        | 
|Finance companies                     |  |                | 10,639 | 
|Airlines                              |  |                | 23,383 | 
|Public utilities                      |  |                | 15,273 | 
|Securitizations                       |  |                | 258    | 

The amortized cost of the Bond Portfolio in an unrealized loss position at
December 31, 2002, by contractual maturity, is shown below.

|                                       |  |                |           | 
|-------------------------------------- |  | -------------- | --------- | 
|                                       |  | Amortized     
|                                       |  | Cost          
|                                       |  |               
|                                       |  | (In thousands)
|Due in one year or less                |  | $              | 69,930    | 
|Due after one year through five years  |  |                | 504,872   | 
|Due after five years through ten years |  |                | 481,152   | 
|Due after ten years                    |  |                | 213,687   | 
|                                       |  |                |           | 
|Total                                  |  | $              | 1,269,641 | 
|                                       |  |                |           | 

Senior secured loans (Secured Loans) are included in the Bond Portfolio
and aggregated $235.3 million at December 31, 2002. Secured Loans are senior
to subordinated debt and equity and are secured by assets of the issuer. At
December 31, 2002, Secured Loans consisted of $42.4 million of publicly traded
securities and $192.9 million of privately traded securities. These Secured
Loans are composed of loans to 51 borrowers spanning 19 industries, with 13% of
these assets concentrated in airlines and 13% concentrated in energy, 12%
concentrated in non-cable media, 11% concentrated in financial institutions and
11% concentrated in transportation. No other industry constituted more than
10% of these assets.

While the trading market for the Companys privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
participation in these transactions has enabled the Company to improve its
investment yield. As a result of restrictive financial covenants, these
Secured Loans involve greater risk of technical default than do publicly traded
investment-grade securities. However, management believes that the risk of
loss upon default for these Secured Loans is mitigated by such

28



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##### Table of Contents



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 $738.6 million at December 31, 2002 and
consisted of 117 commercial first mortgage loans with an average loan balance
of approximately $6.3 million, collateralized by properties located in 28
states. Approximately 34% of this portfolio was office, 19% was multifamily
residential, 16% was manufactured housing, 10% was industrial, 9% was hotels,
5% was retail, and 7% was other types. At December 31, 2002, approximately 28%
and 11% of this portfolio were secured by properties located in California and
New York, respectively, and no more than 10% of this portfolio was secured by
properties located in any other single state. At December 31, 2002, 16
mortgage loans have an outstanding balances of $10 million or more, which
collectively aggregated approximately 49% of this portfolio. At December 31,
2002, approximately 21% of the mortgage loan portfolio consisted of loans with
balloon payments due before January 1, 2006. During 2002, 2001 and 2000, loans
delinquent by more than 90 days, foreclosed loans and restructured loans have
not been significant in relation to the total mortgage loan portfolio.

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

POLICY LOANS totaled $215.8 million at December 31, 2002, compared to
$227.0 million at December 31, 2001, and primarily represent loans taken
against universal life insurance policies.

SEPARATE ACCOUNT SEED MONEY totaled $25.4 million at December 31, 2002,
compared to $50.6 million at December 31, 2001, and consists principally of
seed money for mutual funds used as investment vehicles for the Companys
variable annuity separate accounts. The decrease in 2002 is due primarily to
redemptions and amounts related to SAAMCO which was distributed to the Parent
effective January 1, 2002. At December 31, 2001, separate account seed money
included $5.0 million of investments related to SAAMCOs mutual funds.

PARTNERSHIPS totaled $8.8 million at December 31, 2002, constituting
investments in 5 partnerships with an average size of approximately $1.8
million. These partnerships are managed by independent money managers that
invest in a broad selection of equity and fixed-income securities, currently
including 358 separate issuers. The risks generally associated with
partnerships include those related to their underlying investments (i.e.,
equity securities and debt securities), plus a level of illiquidity, which is
mitigated, to some extent, by the existence of contractual termination
provisions. At December 31, 2001, partnerships totaled $451.6 million,
including $443.4 million which were partnership assets of SA Affordable
Housing, LLC, an indirect wholly owned subsidiary of Saamsun, which was
29Table of Contents

transferred to the Parent as part of the distribution of Saamsun on
January 1, 2002.

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

ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation (i.e. the risk of being
forced to sell investments during unfavorable market conditions). The Company
believes that its fixed-rate liabilities should be backed by a portfolio
principally composed of fixed-rate investments that generate predictable rates
of return. The Company does not have a specific target rate of return.
Instead, its rates of return vary over time depending on the current interest
rate environment, the slope of the yield curve, the spread at which fixed-rate
investments are priced over the yield curve, default rates and general economic
conditions. Its portfolio strategy is constructed with a view to achieve
adequate risk-adjusted returns consistent with its investment objectives of
effective asset-liability matching, liquidity and safety. The Companys
fixed-rate products incorporate surrender charges or other restrictions in
order to encourage persistency. Approximately 82% of the Companys fixed
annuity, universal life and GIC reserves had surrender penalties or other
restrictions at December 31, 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; policy loans; and
investments in limited partnerships that invest primarily in fixed-rate
securities. At December 31, 2002, these assets had an aggregate fair value of
$7.19 billion with a duration of 3.8. The Companys fixed-rate liabilities
include fixed annuity, universal life and GIC reserves. At December 31, 2002,
these liabilities had an aggregate fair value (determined by discounting future
contractual cash flows by related market rates of interest) of $6.47 billion
with a duration of 3.8. The Companys potential exposure due to a 10% decrease
in prevailing interest rates from their December 31, 2002 levels is a loss of
approximately $6.2 million, representing an increase in fair value of its
fixed-rate liabilities that is not offset by a increase in fair value of its
fixed-rate assets. Because the Company actively manages its assets and
liabilities and has strategies in place to minimize its exposure to loss as
interest rate
30Table of Contents

changes occur, it expects that actual losses would be less than the
estimated potential loss.

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

As a component of its asset and liability management strategy, the Company
utilizes interest rate swap agreements (Swap Agreements) to match assets more
closely to liabilities. Swap Agreements are agreements to exchange with a
counterparty interest rate payments of differing character (for example,
variable-rate payments exchanged for fixed-rate payments) based on an
underlying principal balance (notional principal) to hedge against interest
rate changes. The Company typically utilizes Swap Agreements to create a hedge
that effectively converts floating-rate assets and liabilities into fixed-rate
instruments. At December 31, 2002, the Company had one outstanding Swap
Agreement with a notional principal of $33.4 million. This agreement matures
in December 2024.

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

There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with the Companys Reverse Repos and
Swap Agreements is counterparty risk. The Company believes, however, that the
counterparties to its Reverse Repos and Swap Agreements are financially
responsible and that the counterparty risk associated with those transactions
is minimal. It is the Companys policy that these agreements are entered into
with counterparties who have a debt rating of A/A2 or better from both S&P and
Moodys. The Company continually monitors its credit exposure with respect to
these agreements. In addition to counterparty risk, Swap Agreements also have
interest rate risk. However, the Companys Swap Agreements typically hedge
variable-rate assets or liabilities, and interest rate fluctuations that
adversely affect the net cash received or paid under the terms of a Swap
Agreement would be offset by increased interest income earned on the
variable-rate assets or reduced interest expense paid on the variable-rate
liabilities. The primary risk associated with MBSs is that a changing interest
rate environment might cause prepayment of the underlying

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obligations at speeds slower or faster than anticipated at the time of their
purchase. As part of its decision to purchase an MBS, the Company assesses the
risk of prepayment by analyzing the securitys projected performance over an
array of interest-rate scenarios. Once an MBS is purchased, the Company
monitors its actual prepayment experience monthly to reassess the relative
attractiveness of the security with the intent to maximize total return.

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

The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to net realizable value and, in
the case of bonds, no further accruals of interest are made. The provisions
for impairment on mortgage loans are based on losses expected by management to
be realized on transfers of mortgage loans to real estate, on the disposition
and settlement of mortgage loans and on mortgage loans that management believes
may not be collectible in full. Accrual of interest is suspended when principal
and interest payments on mortgage loans are past due more than 90 days.
Impairment losses on securitized assets are recognized if the fair value of the
security is less than its book value, and the net present value of expected
future cash flows is less than the net present value of expected future cash
flows at the most recent (prior) estimation date.

DEFAULTED INVESTMENTS, comprising all investments that are in default as
to the payment of principal or interest, totaled $15.6 million ($8.9 million of
bonds and $6.7 million of mortgage loans) at December 31, 2002, which
constituted approximately 0.2% of total invested assets. At December 31, 2001,
defaulted investments totaled $12.0 million ($9.8 million of bonds and $2.2
million of mortgage loans), which constituted approximately 0.4% of total
invested assets.

SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Companys existing portfolio of cash and short-term investments, Reverse
Repo capacity on invested assets and, if required, proceeds from invested asset
sales. The Companys liquidity is primarily derived from operating cash flows.
At December 31, 2002, approximately $4.43 billion of the Companys Bond
Portfolio had an aggregate unrealized gain of $205.0 million, while
approximately $1.10 billion of the Bond Portfolio had an aggregate unrealized
loss of $169.1 million. In addition, the Companys investment portfolio
currently provides approximately $51.4 million of monthly cash flow from
scheduled principal and interest payments. Historically, cash flows from
operations and from the sale of the Companys

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annuity and GIC products have been more than sufficient in amount to
satisfy the Companys liquidity needs.

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

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

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

GUARANTEES AND OTHER COMMITMENTS: The Company has entered into eight
agreements in which it has provided liquidity support for certain short-term
securities of municipalities and non-profit organizations by agreeing to
purchase such securities in the event there is no other buyer in the short-term
marketplace. In return the Company receives a fee. The maximum liability
under these guarantees at December 31, 2002 is $813.0 million. Related to each
of these agreements are participation agreements with the Companys Parent,
under which the Parent will share in $350.4 million of these liabilities in
exchange for a proportionate percentage of the fees received under these
agreements. The expiration dates of these commitments are as follows: $250.0
million in 2004, $405.0 million in 2005 and $158.0 million in 2006.

In the ordinary course of business, the Company is obligated to purchase
approximately $42.0 million of asset backed securities as of December 31, 2002.
The expiration dates of these commitments are as follows: $21.0 million in
2003, $14.0 million in 2004 and $7.0 million in 2006.

The Company has entered into an agreement whereby it is committed to
purchase the remaining principal amount, $36.4 million as of December 31, 2002,
of various mortgage backed securities at par value in March 2006.

Reserves for GICs have maturity dates as follows: $228.7 million in 2003,
$30.5 million in 2004 and $100.4 million in years subsequent to 2006.

Cash received as part of a modified coinsurance transaction is recorded as
a deposit liability. Deposits from the reinsured business are allocated to pay
down the liability pursuant to a repayment schedule. The remaining

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deposit liability of $31.4 million is expected to be fully paid down
during 2004 (see Note 7 of Notes to Consolidated Financial Statements).

RECENTLY ISSUED ACCOUNTING STANDARDS are discussed in Note 2 of Notes to
Consolidated Financial Statements.




ITEM 7A. 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 27 to 28
herein.

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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 December 31, 2002 Form 10-K 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.                                                                                                                                                                                                                                 

35



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Companys financial statements begin on page F-3. Reference is made to
the Index to Financial Statements on page F-1 herein.






|ITEM 9. | CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|------- | ---------------------------------------------------------------------------------

None.

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PART IV






|ITEM 14. | EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
|-------- | -------------------------------------------------------------------------------------

FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Reference is made to the index set forth on page F-1 of this report.

EXHIBITS

|            |  |                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|2(a)        |  | Purchase and Sale Agreement, dated as of July 15, 1998, by and
among the Company, SunAmerica Inc. (SAI), First SunAmerica Life
Insurance Company and MBL Life Assurance Corporation, is
incorporated herein by reference to Exhibit 2(e) to SAIs 1998
Annual Report on Form 10-K, filed December 21, 1998.                                              
|3(a)        |  | Articles of Amendment to the Amended and Restated Articles of
Incorporation, dated September 30, 2002, filed with the Arizona
Department of Insurance and the Arizona Corporation Commission on
October 20, 2002.                                                                                                                                          
|3(b)        |  | Amended and Restated Articles of Incorporation, dated December
19, 2001, filed with the Arizona Department of Insurance and
Arizona Corporation Commission on January 23, 2002 and January
24, 2002, respectively, is incorporated herein as Exhibit 3(a) to
the Companys 2001 Annual Report on Form 10-K, filed March 29,
2002.                          
|3(c)        |  | Amended and Restated Articles of Incorporation and Articles of
Redomestication, filed with the Arizona Department of Insurance
on December 22, 1995, is incorporated herein by reference to
Exhibit 3(a) to the Companys quarterly report on Form 10-Q for
the quarter ended December 31, 1995, filed February 14, 1996.                                  
|3(d)        |  | Amended and Restated Bylaws, as adopted January 1, 1996, is
incorporated herein by reference to Exhibit 3(b) to the Companys
quarterly report on Form 10-Q for the quarter ended December 31,
1995, filed February 14, 1996.                                                                                                                              
|3(e)        |  | Amended and Restated Bylaws, as amended January 2, 2001, is
incorporated herein as Exhibit 3(d) to the Companys 2001 Annual
Report on Form 10-K, filed March 29, 2002.                                                                                                                                                                                    
|3(f)        |  | Amended and Restated Bylaws, dated as of December 19, 2001, is
incorporated herein as Exhibit 3(e) to the Companys 2001 Annual
Report on Form 10-K, filed March 29, 2002.                                                                                                                                                                                 
|4(a)        |  | Articles of Amendment to the Amended and Restated Articles of
Incorporation. See Exhibit 3(a).                                                                                                                                                                                                                                                             
|4(b)        |  | Amended and Restated Articles of Incorporation, dated December 19, 2001.
See Exhibit 3(b).                                                                                                                                                                                                                                                                 
|4(c)        |  | Amended and Restated Bylaws, dated December 19, 2001. See Exhibit 3(f).                                                                                                                                                                                                                                                                                    
|10(a)       |  | Subordinated Loan Agreement for Equity Capital, dated August 4,
1999, between the Companys subsidiary, Royal Alliance
Associates, Inc., and SAI, defining SAIs rights with respect to
the 8.0% notes due September 23, 2002, is incorporated herein by
reference to Exhibit 10(a) to the Companys 2001 Annual report on
Form 10-K, filed March 29, 2002.

37



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##### Table of Contents





|ITEM 14. | EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K (Continued)
|-------- | -------------------------------------------------------------------------------------------------

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10(b)       |  | Second Amendment to Subordinated Loan Agreement for Equity
Capital, dated as of September 13, 1999, between the Companys
subsidiary, AIG SunAmerica Asset Management Corp., and SAI,
extending the maturity date to September 13, 2002 and adjusting
the interest rate to 8% for the unpaid principal under the
Amendment to Subordinated Loan Agreement for Equity Capital,
dated September 3, 1996, with a maturity date of September 13,
1999, is incorporated herein by reference to Exhibit 10(b) to the
Companys 2001 Annual report on Form 10-K, filed March 29, 2002.          
|10(c)       |  | Amendment to Subordinated Loan Agreement for Equity Capital,
dated as of September 30, 2000, between the Companys subsidiary,
SACS, and SAI, extending the maturity date to October 31, 2004
and changing the interest rate to 9.5% of a Subordinated Loan
Agreement for Equity Capital, dated as of August 25, 1998,
defining SAIs rights with respect to the 8.5% notes due October
30, 2001, is incorporated herein by reference to Exhibit 10(c) to
the Companys 2001 Annual report on Form 10-K, filed March 29,
2002.                                                           
|10(d)       |  | Subordinated Loan Agreement for Equity Capital, dated as of March
17, 2000, between the Companys subsidiary, SACS, and SAI,
defining SAIs rights with respect to the 8.75% notes due April
30, 2003, is incorporated herein by reference to Exhibit 10(a) to
the Companys quarterly report on Form 10-Q for the quarter ended
March 31, 2000, filed May 12, 2000.                                                                                                                                                                                                                     
|10(e)       |  | Subordinated Loan Agreement for Equity Capital, dated February
21, 2000, between the Companys subsidiary, SACS, and SAI,
defining SAIs rights with respect to the 8.5% notes due March
31, 2003, is incorporated herein by reference to Exhibit 10(b) to
the Companys quarterly report on Form 10-Q for the quarter ended
March 31, 2000, filed May 12, 2000.                                                                                                                                                                                                                         
|10(f)       |  | Amendment to Subordinated Loan Agreement for Equity Capital,
dated as of March 20, 2001, between the Companys subsidiary,
SACS, and SAI, extending the maturity date to April 30, 2003 and
adjusting the interest rate to 8% of a Subordinated Loan
Agreement for Equity Capital, dated as of March 19, 1999,
defining SAIs rights with respect to the 8.5% notes due April
30, 2002, is incorporated herein by reference to Exhibit 10(a) to
the Companys quarterly report on Form 10-Q for the quarter ended
March 31, 2001, filed May 14, 2001.                                    
|10(g)       |  | Second Amendment to Subordinated Loan Agreement for Equity
Capital, dated as of April 30, 2001, between the Companys
subsidiary, SACS, and SAI, extending the maturity date to June
30, 2003 and adjusting the interest rate from 9.5% to 7.5% per
annum for the unpaid principal under the Amendment to
Subordinated Loan Agreement for Equity Capital, dated as of May
22, 2000, with a maturity date of June 30, 2002 is incorporated
herein by reference to Exhibit 10(a) to the Companys quarterly
report on Form 10-Q for the quarter ended June 30, 2001, filed
August 13, 2001.

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|ITEM 14. | EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K (Continued)
|-------- | -------------------------------------------------------------------------------------------------

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10(h)       |  | Second Amendment to Subordinated Loan Agreement for Equity
Capital, dated as of June 5, 2001, between the Companys
subsidiary, SACS, and SAI, extending the maturity date to July
30, 2003 and adjusting the interest rate from 9.5% to 7.5% per
annum for the unpaid principal under the Amendment to
Subordinated Loan Agreement for Equity Capital, dated as of May
22, 2000, with a maturity date of July 30, 2002 is incorporated
herein by reference to Exhibit 10(b) to the Companys quarterly
report on Form 10-Q for the quarter ended June 30, 2001, filed
August 13, 2001.                               
|10(i)       |  | Amendment to Subordinated Loan Agreement for Equity Capital,
dated as of July 23, 2001, between the Companys subsidiary,
SACS, and SAI, extending the maturity date to September 30, 2005
and adjusting the interest rate from 8% to 6.75% for the unpaid
principal under the Amendment to Subordinated Loan Agreement for
Equity Capital, dated as of August 31, 1999, defining SAIs
rights with respect to 8% notes due September 30, 2002, is
incorporated herein by reference to Exhibit 10(a) to the
Companys quarterly report on Form 10-Q for the quarter ended
September 30, 2001, filed November 13, 2001.
|10(j)       |  | Asset Lease Agreement, dated June 26, 1998, between the Company
and Aurora National Life Assurance Company (Aurora), relating
to a lease from Aurora of certain information relating to single
premium deferred annuities, is incorporated herein by reference
by Exhibit 10(h) to the Companys Form 10-K, filed December 23,
1998.                                                                                                                                                                                                                                                                                

REPORTS ON FORM 8-K

A current report on 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.

39



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



| | AIG SUNAMERICA LIFE ASSURANCE COMPANY
 
 
BY /S/   N. SCOTT GILLISN. Scott Gillis
Senior Vice President and Director
| | --------------------------------------------------------------------------------------------------------------------

March 28, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:

|                                         |  |                                                                    |  |               
|---------------------------------------- |  | ------------------------------------------------------------------ |  | --------------
|Signature                                |  | Title                                                              |  | Date          
|                                         |  |                                                                    |  |               
|                                        
|/s/   N. SCOTT GILLISN. Scott Gillis     |  | Senior Vice President and
Director (Principal
Financial Officer)   |  | March 28, 2003
|                                        
|/s/   MAURICE S. HEBERTMaurice S. Hebert |  | Vice President & Controller
(Principal Accounting
Officer)         |  | March 28, 2003
|                                        
|/s/   JAY S. WINTROBJay S. Wintrob       |  | Chief Executive Officer
and Director (Principal
Executive Officer) |  | March 28, 2003
|                                        
|/s/   JANA W. GREERJana W. Greer         |  | President and Director                                             |  | March 28, 2003
|                                        
|/s/   JAMES R. BELARDIJames R. Belardi   |  | Senior Vice President
and Director                                 |  | March 28, 2003
|                                        
|/s/   MARC H. GAMSINMarc H. Gamsin       |  | Senior Vice President
and Director                                 |  | March 28, 2003
|                                        
|/s/   EDWIN R. RAQUELEdwin R. Raquel     |  | Senior Vice President
and Chief Actuary                            |  | March 28, 2003

40



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AIG SUNAMERICA LIFE ASSURANCE COMPANY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                         |  |             |     | 
|-------------------------------------------------------------------------------------------------------- |  | ----------- | --- | 
|                                                                                                         |  | Page       
|                                                                                                         |  | Number(s)  
|                                                                                                         |  |            
|Report of Independent Accountants                                                                        |  |             | F-2 | 
|Consolidated Balance Sheet  December 31, 2002 and
December 31, 2001                                     |  | F-3 to F-4 
|Consolidated Statement of Income and Comprehensive
Income  Years Ended December 31, 2002, 2001 and 2000 |  | F-5 to F-6 
|Consolidated Statement of Cash Flows  Years Ended
December 31, 2002, 2001 and 2000                      |  | F-7 to F-8 
|Notes to Consolidated Financial Statements                                                               |  | F-9 to F-39

F - 1



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Report of Independent Accountants

To the Board of Directors and Shareholder of
AIG SunAmerica Life Assurance Company:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income and of cash flows
present fairly, in all material respects, the financial position of AIG
SunAmerica Life Assurance Company and its subsidiaries (formerly, Anchor
National Life Insurance Company), an indirect wholly owned subsidiary of
American International Group, Inc., at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Companys management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities and interest income and impairment of certain beneficial interests
in securitized financial assets in 2001.

PricewaterhouseCoopers LLP
Los Angeles, California
February 11, 2003

F - 2



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET

|                                                  |                                                                                                                                                               |   |                |           |              |   |            |           | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------- | --------- | ------------ | - | ---------- | --------- | 
|                                                  |                                                                                                                                                               |   | December 31,   |           | December 31,
|                                                  |                                                                                                                                                               |   | 2002           |           | 2001        
|                                                  |                                                                                                                                                               |   |                |           |             
|                                                  |                                                                                                                                                               |   | (in thousands)
|ASSETS                                            |                                                                                                                                                               |   |                |           |              |   |            |          
|Investments and cash:                             |                                                                                                                                                               |   |                |           |              |   |            |          
|                                                  | Cash and short-term investments                                                                                                                               |   | $              | 65,872    |              |   | $          | 200,064   | 
|                                                  | Bonds, notes and redeemable
preferred stocks available for sale,
at fair value (amortized
cost: December 31, 2002, $5,492,677;
December 31, 2001, $4,607,901) |   |                | 5,528,569 |              |   |            | 4,545,075 | 
|                                                  | Mortgage loans                                                                                                                                                |   |                | 738,601   |              |   |            | 692,392   | 
|                                                  | Policy loans                                                                                                                                                  |   |                | 215,846   |              |   |            | 226,961   | 
|                                                  | Separate account seed money                                                                                                                                   |   |                | 25,366    |              |   |            | 50,560    | 
|                                                  | Common stocks available for sale, at
fair value (cost: December 31, 2002,
$4,111; December 31, 2001, $1,288)                                                  |   |                | 2,609     |              |   |            | 861       | 
|                                                  | Partnerships                                                                                                                                                  |   |                | 8,766     |              |   |            | 451,583   | 
|                                                  | Real estate                                                                                                                                                   |   |                | 22,315    |              |   |            | 20,091    | 
|                                                  | Other invested assets                                                                                                                                         |   |                | 585,760   |              |   |            | 563,739   | 
|                                                  |                                                                                                                                                               |   |                |           |              |   |            |          
|                                                  | Total investments and cash                                                                                                                                    |   |                | 7,193,704 |              |   |            | 6,751,326 | 
|                                                 
|Variable annuity assets held in separate
accounts |                                                                                                                                                               |   | 14,758,642     |           |              |   | 18,526,413 |          
|Accrued investment income                         |                                                                                                                                                               |   | 75,326         |           |              |   | 65,272     |          
|Deferred acquisition costs                        |                                                                                                                                                               |   | 1,364,748      |           |              |   | 1,419,498  |          
|Income taxes currently receivable from
Parent     |                                                                                                                                                               |   | 100,123        |           |              |   | 61,435     |          
|Due from affiliates                               |                                                                                                                                                               |   | 26,304         |           |              |   | 3,999      |          
|Goodwill                                          |                                                                                                                                                               |   | 4,603          |           |              |   | 20,150     |          
|Other assets                                      |                                                                                                                                                               |   | 15,382         |           |              |   | 92,012     |          
|                                                  |                                                                                                                                                               |   |                |           |              |   |            |          
|TOTAL ASSETS                                      |                                                                                                                                                               | $ | 23,538,832     |           |              | $ | 26,940,105 |          
|                                                  |                                                                                                                                                               |   |                |           |              |   |            |          

See accompanying notes to consolidated financial statements

F - 3



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)

|                                                          |                                                 |   |                |           |              |   |            |           |  
|--------------------------------------------------------- | ----------------------------------------------- | - | -------------- | --------- | ------------ | - | ---------- | --------- | -
|                                                          |                                                 |   | December 31,   |           | December 31,
|                                                          |                                                 |   | 2002           |           | 2001        
|                                                          |                                                 |   |                |           |             
|                                                          |                                                 |   | (in thousands)
|LIABILITIES AND SHAREHOLDERS EQUITY                      |                                                 |   |                |           |              |   |            |          
|Reserves, payables and accrued
liabilities:               |                                                 |   |                |           |              |   |            |          
|                                                          | Reserves for fixed annuity contracts            |   | $              | 4,285,098 |              |   | $          | 3,498,917 |  
|                                                          | Reserves for universal life insurance
contracts |   |                | 1,676,073 |              |   |            | 1,738,493 |  
|                                                          | Reserves for guaranteed investment
contracts    |   |                | 359,561   |              |   |            | 483,861   |  
|                                                          | Securities loaned under collateral
agreements   |   |                | 585,760   |              |   |            | 541,899   |  
|                                                          | Modified coinsurance deposit liability          |   |                | 31,393    |              |   |            | 61,675    |  
|                                                          | Payable to brokers                              |   |                | 8,529     |              |   |            | 4,479     |  
|                                                          | Other liabilities                               |   |                | 160,265   |              |   |            | 220,588   |  
|                                                          |                                                 |   |                |           |              |   |            |          
|Total reserves, payables and accrued
liabilities          |                                                 |   | 7,106,679      |           |              |   | 6,549,912  |          
|                                                          |                                                 |   |                |           |              |   |            |          
|Variable annuity liabilities related to
separate accounts |                                                 |   | 14,758,642     |           |              |   | 18,526,413 |          
|                                                          |                                                 |   |                |           |              |   |            |          
|Subordinated notes payable to affiliates                  |                                                 |   |               |           |              |   | 58,814     |          
|                                                          |                                                 |   |                |           |              |   |            |          
|Deferred income taxes                                     |                                                 |   | 351,872        |           |              |   | 210,970    |          
|                                                          |                                                 |   |                |           |              |   |            |          
|Shareholders equity:                                     |                                                 |   |                |           |              |   |            |          
|                                                          | Common stock                                    |   |                | 3,511     |              |   |            | 3,511     |  
|                                                          | Additional paid-in capital                      |   |                | 1,125,753 |              |   |            | 925,753   |  
|                                                          | Retained earnings                               |   |                | 175,871   |              |   |            | 694,004   |  
|                                                          | Accumulated other comprehensive income
(loss)   |   |                | 16,504    |              |   |            | (29,272   | )
|                                                          |                                                 |   |                |           |              |   |            |          
|                                                          | Total shareholders equity                      |   |                | 1,321,639 |              |   |            | 1,593,996 |  
|                                                          |                                                 |   |                |           |              |   |            |          
|TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY                |                                                 | $ | 23,538,832     |           |              | $ | 26,940,105 |          
|                                                          |                                                 |   |                |           |              |   |            |          

See accompanying notes to consolidated financial statements

F - 4



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |          |  
|---------------------------------------------------------------- | ---------------------------------------- | - | ------------------------ | -------- | ---- | - | -------- | -------- | - | - | -------- | -------- | -
|                                                                 |                                          |   | Years Ended December 31,
|                                                                 |                                          |   |                         
|                                                                 |                                          |   | 2002                     |          | 2001 |   | 2000    
|                                                                 |                                          |   |                          |          |      |   |         
|                                                                 |                                          |   | (in thousands)          
|Investment income                                                |                                          | $ | 390,086                  |          |      | $ | 375,213  |          |   | $ | 399,355  |         
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|Interest expense on:                                             |                                          |   |                          |          |      |   |          |          |   |   |          |         
|                                                                 | Fixed annuity contracts                  |   |                          | (142,973 | )    |   |          | (133,647 | ) |   |          | (140,322 | )
|                                                                 | Universal life insurance contracts       |   |                          | (80,021  | )    |   |          | (81,773  | ) |   |          | (86,263  | )
|                                                                 | Guaranteed investment contracts          |   |                          | (11,267  | )    |   |          | (25,079  | ) |   |          | (34,124  | )
|                                                                 | Securities lending agreements            |   |                          | (12,530  | )    |   |          | (945     | ) |   |          |         |  
|                                                                 | Subordinated notes payable to affiliates |   |                          |         |      |   |          | (4,475   | ) |   |          | (4,144   | )
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|                                                                 | Total interest expense                   |   |                          | (246,791 | )    |   |          | (245,919 | ) |   |          | (264,853 | )
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|NET INVESTMENT INCOME                                            |                                          |   | 143,295                  |          |      |   | 129,294  |          |   |   | 134,502  |         
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|NET REALIZED INVESTMENT LOSSES                                   |                                          |   | (65,811                  | )        |      |   | (92,711  | )        |   |   | (15,177  | )       
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|Fee income:                                                      |                                          |   |                          |          |      |   |          |          |   |   |          |         
|                                                                 | Variable annuity fees                    |   |                          | 318,061  |      |   |          | 361,877  |   |   |          | 400,495  |  
|                                                                 | Net retained commissions                 |   |                          |         |      |   |          | 47,572   |   |   |          | 62,202   |  
|                                                                 | Asset management fees                    |   |                          |         |      |   |          | 63,529   |   |   |          | 73,922   |  
|                                                                 | Universal life insurance fees, net       |   |                          | 20,537   |      |   |          | 18,909   |   |   |          | 20,258   |  
|                                                                 | Surrender charges                        |   |                          | 32,507   |      |   |          | 24,911   |   |   |          | 20,963   |  
|                                                                 | Other fees                               |   |                          | 3,305    |      |   |          | 14,551   |   |   |          | 12,959   |  
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|TOTAL FEE INCOME                                                 |                                          |   | 374,410                  |          |      |   | 531,349  |          |   |   | 590,799  |         
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|GENERAL AND ADMINISTRATIVE EXPENSES                              |                                          |   | (101,839                 | )        |      |   | (149,936 | )        |   |   | (171,013 | )       
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|AMORTIZATION OF DEFERRED ACQUISITION COSTS                       |                                          |   | (187,860                 | )        |      |   | (220,316 | )        |   |   | (158,007 | )       
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|ANNUAL COMMISSIONS                                               |                                          |   | (58,389                  | )        |      |   | (58,278  | )        |   |   | (56,473  | )       
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|GUARANTEED MINIMUM DEATH BENEFITS,
NET OF REINSURANCE RECOVERIES |                                          |   | (67,492                  | )        |      |   | (17,839  | )        |   |   | (614     | )       
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|PRETAX INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE      |                                          |   | 36,314                   |          |      |   | 121,563  |          |   |   | 324,017  |         
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|Income tax expense                                               |                                          |   | (2,063                   | )        |      |   | (20,852  | )        |   |   | (108,445 | )       
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|NET INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE         |                                          |   | 34,251                   |          |      |   | 100,711  |          |   |   | 215,572  |         
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAX               |                                          |   |                         |          |      |   | (10,342  | )        |   |   |         |         
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         
|NET INCOME                                                       |                                          | $ | 34,251                   |          |      | $ | 90,369   |          |   | $ | 215,572  |         
|                                                                 |                                          |   |                          |          |      |   |          |          |   |   |          |         

See accompanying notes to consolidated financial statements

F - 5



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued)

|                                        |                                                                                                                                                                                                                                                             |   |                          |        |      |   |         |        |   |   |         |        | 
|--------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------ | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | 
|                                        |                                                                                                                                                                                                                                                             |   | Years Ended December 31,
|                                        |                                                                                                                                                                                                                                                             |   |                         
|                                        |                                                                                                                                                                                                                                                             |   | 2002                     |        | 2001 |   | 2000   
|                                        |                                                                                                                                                                                                                                                             |   |                          |        |      |   |        
|                                        |                                                                                                                                                                                                                                                             |   | (in thousands)          
|OTHER COMPREHENSIVE INCOME, NET OF TAX: |                                                                                                                                                                                                                                                             |   |                          |        |      |   |         |        |   |   |         |       
|                                        | Net unrealized gains (losses) on debt
and equity securities available for sale
identified in the current period
(net of income tax expense of $7,125,
income tax benefit of $3,646 and income
tax expense of $20,444 for 2002, 2001
and 2000, respectively) |   | $                        | 13,233 |      |   | $       | (6,772 | ) |   | $       | 37,968 | 
|                                       
|                                        | Less reclassification adjustment for
net realized losses included in net
income (net of income tax benefit of
$18,300, $22,422 and $4,848 for 2002,
2001 and 2000, respectively)                                                                            |   |                          | 33,985 |      |   |         | 41,640 |   |   |         | 9,003  | 
|                                       
|                                        | CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAX                                                                                                                                                                                                          |   |                          |       |      |   |         | 1,389  |   |   |         |       | 
|                                       
|                                        | Net change related to cash flow hedges
(net of income tax benefit of $776
for 2002 and income tax expense of
$28 for 2001)                                                                                                                                  |   |                          | (1,442 | )    |   |         | 53     |   |   |         |       | 
|                                        |                                                                                                                                                                                                                                                             |   |                          |        |      |   |         |        |   |   |         |       
|OTHER COMPREHENSIVE INCOME              |                                                                                                                                                                                                                                                             |   | 45,776                   |        |      |   | 36,310  |        |   |   | 46,971  |       
|                                        |                                                                                                                                                                                                                                                             |   |                          |        |      |   |         |        |   |   |         |       
|COMPREHENSIVE INCOME                    |                                                                                                                                                                                                                                                             | $ | 80,027                   |        |      | $ | 126,679 |        |   | $ | 262,543 |       
|                                        |                                                                                                                                                                                                                                                             |   |                          |        |      |   |         |        |   |   |         |       

See accompanying notes to consolidated financial statements

F - 6



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                                                                                                               |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |          |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------------------------- | -------- | ------------------------ | ------- | ---- | -------- | ---------- | ------- | - | ------- | -------- | ------- | -
|                                                                                                                                               |                                                                     |                                                           |          | Years Ended December 31,
|                                                                                                                                               |                                                                     |                                                           |          |                         
|                                                                                                                                               |                                                                     |                                                           |          | 2002                     |         | 2001 |          | 2000      
|                                                                                                                                               |                                                                     |                                                           |          |                          |         |      |          |           
|                                                                                                                                               |                                                                     |                                                           |          | (in thousands)          
|CASH FLOW FROM OPERATING ACTIVITIES:                                                                                                           |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |         
|Net income                                                                                                                                     |                                                                     | $                                                         | 34,251   |                          |         | $    | 90,369   |            |         | $ | 215,572 |         
|Adjustments to reconcile net income to net
cash provided by operating activities:                                                              |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |         
|                                                                                                                                               | Cumulative effect of accounting change,
net of tax                  |                                                           |          |                         |         |      |          | 10,342     |         |   |         |         |        
|                                                                                                                                               | Interest credited to:                                               |                                                           |          |                          |         |      |          |            |         |   |         |          |        
|                                                                                                                                               |                                                                     | Fixed annuity contracts                                   |          |                          | 142,973 |      |          |            | 133,647 |   |         |          | 140,322 |  
|                                                                                                                                               |                                                                     | Universal life insurance contracts                        |          |                          | 80,021  |      |          |            | 81,773  |   |         |          | 86,263  |  
|                                                                                                                                               |                                                                     | Guaranteed investment contracts                           |          |                          | 11,267  |      |          |            | 25,079  |   |         |          | 34,124  |  
|                                                                                                                                               | Net realized investment losses                                      |                                                           |          | 65,811                   |         |      |          | 92,711     |         |   |         | 15,177   |        
|                                                                                                                                               | (Accretion) amortization of net
(discounts) premiums on investments |                                                           |          | (1,295                   | )       |      |          | 4,554      |         |   |         | (2,198   | )      
|                                                                                                                                               | Universal life insurance fees, net                                  |                                                           |          | (20,537                  | )       |      |          | (18,909    | )       |   |         | (20,258  | )      
|                                                                                                                                               | Amortization of goodwill                                            |                                                           |          |                         |         |      |          | 1,452      |         |   |         | 1,455    |        
|                                                                                                                                               | Amortization of deferred acquisition costs                          |                                                           |          | 187,860                  |         |      |          | 220,316    |         |   |         | 158,007  |        
|                                                                                                                                               | Acquisition costs deferred                                          |                                                           |          | (256,538                 | )       |      |          | (359,158   | )       |   |         | (362,084 | )      
|                                                                                                                                               | Provision for deferred income taxes                                 |                                                           |          | 128,748                  |         |      |          | 126,010    |         |   |         | 114,127  |        
|                                                                                                                                               | Change in:                                                          |                                                           |          |                          |         |      |          |            |         |   |         |          |        
|                                                                                                                                               |                                                                     | Accrued investment income                                 |          |                          | (10,099 | )    |          |            | (7,717  | ) |         |          | 3,029   |  
|                                                                                                                                               |                                                                     | Other assets                                              |          |                          | 2,433   |      |          |            | 15,042  |   |         |          | (16,628 | )
|                                                                                                                                               |                                                                     | Income taxes currently receivable from/
payable to Parent |          |                          | (50,471 | )    |          |            | 106     |   |         |          | (84,482 | )
|                                                                                                                                               |                                                                     | Due from/to affiliates                                    |          |                          | 16,153  |      |          |            | (68,844 | ) |         |          | 27,763  |  
|                                                                                                                                               |                                                                     | Other liabilities                                         |          |                          | 5,167   |      |          |            | 9,697   |   |         |          | (40,283 | )
|                                                                                                                                               | Other, net                                                          |                                                           |          | 40,518                   |         |      |          | 40,125     |         |   |         | 43,376   |        
|                                                                                                                                               |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |         
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                                                      |                                                                     |                                                           | 376,262  |                          |         |      | 396,595  |            |         |   | 313,282 |         
|                                                                                                                                               |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                          |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |         
|Purchases of:                                                                                                                                  |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |         
|                                                                                                                                               | Bonds, notes and redeemable preferred stocks                        |                                                           |          | (2,403,362               | )       |      |          | (2,178,830 | )       |   |         | (881,647 | )      
|                                                                                                                                               | Mortgage loans                                                      |                                                           |          | (128,764                 | )       |      |          | (70,295    | )       |   |         | (144,303 | )      
|                                                                                                                                               | Other investments, excluding short-term
investments                 |                                                           |          | (65,184                  | )       |      |          | (27,413    | )       |   |         | (66,722  | )      
|Sales of:                                                                                                                                      |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |         
|                                                                                                                                               | Bonds, notes and redeemable preferred stocks                        |                                                           |          | 849,022                  |         |      |          | 1,087,090  |         |   |         | 468,221  |        
|                                                                                                                                               | Other investments, excluding short-term
investments                 |                                                           |          | 825                      |         |      |          | 3,527      |         |   |         | 60,538   |        
|Redemptions and maturities of:                                                                                                                 |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |         
|                                                                                                                                               | Bonds, notes and redeemable preferred stocks                        |                                                           |          | 615,798                  |         |      |          | 549,638    |         |   |         | 429,347  |        
|                                                                                                                                               | Mortgage loans                                                      |                                                           |          | 82,825                   |         |      |          | 63,960     |         |   |         | 136,277  |        
|                                                                                                                                               | Other investments, excluding short-term
investments                 |                                                           |          | 114,347                  |         |      |          | 78,555     |         |   |         | 122,195  |        
|Net cash and short-term investments
transferred to affiliates in assumption
reinsurance transaction relating to MBL
Life Assurance Corporation |                                                                     |                                                           |         |                          |         |      |         |            |         |   | (3,314  | )       
|                                                                                                                                               |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |         
|NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES                                                                                            |                                                                     | $                                                         | (934,493 | )                        |         | $    | (493,768 | )          |         | $ | 120,592 |         
|                                                                                                                                               |                                                                     |                                                           |          |                          |         |      |          |            |         |   |         |         

See accompanying notes to consolidated financial statements

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

|                                                                                                        |                                    |   |                          |           |      |   |            |           |   |   |            |           |  
|------------------------------------------------------------------------------------------------------- | ---------------------------------- | - | ------------------------ | --------- | ---- | - | ---------- | --------- | - | - | ---------- | --------- | -
|                                                                                                        |                                    |   | Years Ended December 31,
|                                                                                                        |                                    |   |                         
|                                                                                                        |                                    |   | 2002                     |           | 2001 |   | 2000      
|                                                                                                        |                                    |   |                          |           |      |   |           
|                                                                                                        |                                    |   | (in thousands)          
|CASH FLOW FROM FINANCING ACTIVITIES:                                                                    |                                    |   |                          |           |      |   |            |           |   |   |            |          
|Deposit received on:                                                                                    |                                    |   |                          |           |      |   |            |           |   |   |            |          
|                                                                                                        | Fixed annuity contracts            |   | $                        | 1,731,597 |      |   | $          | 2,280,498 |   |   | $          | 1,764,600 |  
|                                                                                                        | Universal life insurance contracts |   |                          | 49,402    |      |   |            | 52,469    |   |   |            | 58,738    |  
|                                                                                                        | Guaranteed investment contracts    |   |                          |          |      |   |            | 40,000    |   |   |            | 350,000   |  
|Net exchanges from the fixed accounts of
variable annuity contracts                                     |                                    |   | (503,221                 | )         |      |   | (1,368,527 | )         |   |   | (1,994,710 | )        
|Withdrawal payments on:                                                                                 |                                    |   |                          |           |      |   |            |           |   |   |            |          
|                                                                                                        | Fixed annuity contracts            |   |                          | (529,466  | )    |   |            | (315,794  | ) |   |            | (320,778  | )
|                                                                                                        | Universal life insurance contracts |   |                          | (68,444   | )    |   |            | (55,361   | ) |   |            | (145,067  | )
|                                                                                                        | Guaranteed investment contracts    |   |                          | (135,084  | )    |   |            | (191,919  | ) |   |            | (78,312   | )
|Claims and annuity payments on:                                                                         |                                    |   |                          |           |      |   |            |           |   |   |            |          
|                                                                                                        | Fixed annuity contracts            |   |                          | (98,570   | )    |   |            | (52,685   | ) |   |            | (114,761  | )
|                                                                                                        | Universal life insurance contracts |   |                          | (100,995  | )    |   |            | (146,998  | ) |   |            | (118,302  | )
|Net receipts from (repayments of)
other short-term financings                                           |                                    |   | (8,025                   | )         |      |   | 15,920     |           |   |   | (33,689    | )        
|Net payment related to a modified
coinsurance transaction                                               |                                    |   | (30,282                  | )         |      |   | (35,972    | )         |   |   | (43,110    | )        
|Net receipts from issuances of subordinated
notes payable to affiliate                                  |                                    |   |                         |           |      |   |           |           |   |   | 17,303     |          
|Capital contribution received from Parent                                                               |                                    |   | 200,000                  |           |      |   |           |           |   |   |           |          
|Dividends paid to Parent                                                                                |                                    |   |                         |           |      |   | (94,095    | )         |   |   | (69,000    | )        
|Net cash and short-term investments
transferred to the Parent in distribution
of Saamsun Holdings Corp. |                                    |   | (82,873                  | )         |      |   |           |           |   |   |           |          
|                                                                                                        |                                    |   |                          |           |      |   |            |           |   |   |            |          
|NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES                                                     |                                    |   | 424,039                  |           |      |   | 127,536    |           |   |   | (727,088   | )        
|                                                                                                        |                                    |   |                          |           |      |   |            |           |   |   |            |          
|NET (DECREASE) INCREASE IN CASH AND
SHORT-TERM INVESTMENTS                                              |                                    |   | (134,192                 | )         |      |   | 30,363     |           |   |   | (293,214   | )        
|                                                                                                       
|CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD                                                  |                                    |   | 200,064                  |           |      |   | 169,701    |           |   |   | 462,915    |          
|                                                                                                        |                                    |   |                          |           |      |   |            |           |   |   |            |          
|CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD                                                        |                                    | $ | 65,872                   |           |      | $ | 200,064    |           |   | $ | 169,701    |          
|                                                                                                        |                                    |   |                          |           |      |   |            |           |   |   |            |          
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                                     |                                    |   |                          |           |      |   |            |           |   |   |            |          
|Interest paid on indebtedness                                                                           |                                    | $ | 12,530                   |           |      | $ | 1,725      |           |   | $ | 1,841      |          
|                                                                                                        |                                    |   |                          |           |      |   |            |           |   |   |            |          
|Net income taxes refunded by (paid to) Parent                                                           |                                    | $ | 76,214                   |           |      | $ | 120,504    |           |   | $ | (78,796    | )        
|                                                                                                        |                                    |   |                          |           |      |   |            |           |   |   |            |          

See accompanying notes to consolidated financial statements

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | NATURE OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance
Company), (the Company) is a direct wholly owned subsidiary of SunAmerica
Life Insurance Company (the Parent), which is a wholly owned subsidiary of
AIG SunAmerica Inc. (SAI), a wholly owned subsidiary American International
Group, Inc. (AIG). AIG is a holding company which through its subsidiaries
is engaged in a broad range of insurance and insurance-related activities,
financial services and retirement savings and asset management. The Company is
an Arizona-domiciled life insurance company principally engaged in the business
of writing variable annuities directed to the market for tax-deferred,
long-term savings products. It also administers closed blocks of fixed
annuities, universal life policies and guaranteed investment contracts (GICs)
directed to the institutional marketplace.                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The Company changed its name to SunAmerica National Life Insurance Company on
October 5, 2001 and further changed its name to AIG SunAmerica Life Assurance
Company on January 24, 2002. The Company continued to do business as Anchor
National Life Insurance Company until February 28, 2003, at which time it began
doing business under its new name.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | On January 1, 2002, the Company declared a distribution to the Parent of 100%
of the outstanding capital stock of its consolidated subsidiary, Saamsun
Holdings Corp. (Saamsun). Pursuant to this distribution, Saamsun became a
direct wholly owned subsidiary of the Parent. Prior to January 1, 2002,
Saamsun held the Companys asset management and broker-dealer segments (see
Note 12). This distribution had a material effect on the Companys
shareholders equity, reducing it by $552,384,000. This distribution had the
effect of reducing cash and short-term investments by $82,873,000, partnerships
by $443,369,000, deferred acquisition costs by $98,428,000, other assets by
$108,163,000, other liabilities by $121,635,000 and subordinated notes payable
to affiliates by $58,814,000. Pretax income in future periods will be reduced
by the earnings of the Companys asset management and broker-dealer operations,
substantially offset by a profit sharing agreement on fees earned on variable
annuity subaccounts through the asset management business. Pretax loss from
these operations, on a combined basis, totaled $21,278,000 for the year ended
December 31, 2001, compared to pretax income of $66,017,000 for the year ended
December 30, 2000.
|  
|   |  | The operations of the Company are influenced by many factors, including general
economic conditions, monetary and fiscal policies of the federal government,
and policies of state and other regulatory authorities. The level of sales of
the Companys financial products is influenced by many factors, including
general market rates of interest, the strength, weakness and volatility of
equity markets, and terms and conditions of competing financial products. The
Company is exposed to the typical risks normally associated with a portfolio of
fixed-income securities, namely interest rate, option, liquidity and credit
risk. The Company controls its exposure to these risks by, among other things,
closely monitoring and matching the duration of its assets and liabilities,
monitoring and limiting prepayment and extension risk in its portfolio,
maintaining a large percentage of its portfolio in highly liquid securities,
and engaging in a disciplined process of underwriting, reviewing and monitoring
credit risk. The Company also is                                                                                                                                                                                                               

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|1. |  | NATURE OF OPERATIONS (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | exposed to market risk, as market volatility may result in reduced fee income
in the case of assets held in separate accounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). Certain prior period items have been
reclassified to conform to the current periods presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Under GAAP, deposits collected on non-traditional life and annuity insurance
products, such as those sold by the Company, are not reflected as revenues in
the Companys statement of income, as they are recorded directly to
policyholders liabilities upon receipt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | The preparation of financial statements in conformity with GAAP requires the
use of estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. Actual results could differ
from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | INVESTMENTS: Cash and short-term investments primarily include cash,
commercial paper, money market investments and short-term bank participations.
All such investments are carried at cost plus accrued interest, which
approximates fair value, have maturities of three months or less and are
considered cash equivalents for purposes of reporting cash flows.                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | Bonds, notes and redeemable preferred stocks available for sale and common
stocks are carried at aggregate fair value and changes in unrealized gains or
losses, net of tax, are credited or charged directly to the accumulated other
comprehensive income or loss component of shareholders equity. Bonds, notes,
redeemable preferred stocks and common stocks are reduced to estimated net
realizable value when declines in such values are considered to be other than
temporary. Estimates of net realizable value are subjective and actual
realization will be dependent upon future events.                                                                                                                                              
|  
|   |  | Mortgage loans are carried at amortized unpaid balances, net of provisions for
estimated losses. Policy loans are carried at unpaid balances. Separate
account seed money consists of seed money for mutual funds used as investment
vehicles for the Companys variable annuity separate accounts and is carried at
market value. Partnership investments in affordable housing properties are
generally carried at cost, and for certain of the properties, realized tax
credits reduce the carrying value of the investment as an alternative to
reducing income tax expense. Limited partnerships are carried at equity or
cost depending on the equity ownership position. Real estate is carried at the
lower of cost or net realizable value.
|  
|   |  | Other invested assets consist of invested collateral with respect to the
Companys securities lending program. The Company has entered into a
securities lending agreement with an affiliated lending agent, which authorizes
the agent to lend securities held in the Companys portfolio to a                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | list of authorized borrowers. The Company receives primarily cash collateral
in an amount in excess of the market value of the securities loaned. The
affiliated lending agent monitors the daily market value of securities loaned
with respect to the collateral value and obtains additional collateral when
necessary to ensure that collateral is maintained at a minimum of 102% of the
value of the loaned securities. Such collateral is not available for the
general use of the Company. Income earned on the collateral is recorded as net
investment income while interest paid on the securities lending agreements and
the related management fees paid to administer the program are recorded as
interest expense in the statement of income and comprehensive income.                                            
|  
|   |  | Realized gains and losses on the sale of investments are recognized in
operations at the date of sale and are determined by using the specific cost
identification method. Premiums and discounts on investments are amortized to
investment income by using the interest method over the contractual lives of
the investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | INTEREST RATE SWAP AGREEMENTS: As a component of its asset and liability
management strategy, the Company utilizes interest rate swap agreements (Swap
Agreements) to match assets more closely to liabilities. Swap Agreements are
agreements to exchange with a counterparty interest rate payments of differing
character (for example, variable-rate payments exchanged for fixed-rate
payments) based on an underlying principal balance (notional principal) to
hedge against interest rate changes. The Company typically utilizes Swap
Agreements to create a hedge that effectively converts floating-rate assets and
liabilities into fixed-rate instruments. At December 31, 2002, the Company has
one outstanding Swap Agreement with a notional principal of $33,400,000. This
agreement matures in December 2024.
|  
|   |  | DEFERRED ACQUISITION COSTS (DAC): Policy acquisition costs are deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the estimated lives of the annuity contracts.
Estimated gross profits are composed of net investment income, net realized
investment gains and losses, variable annuity fees, universal life insurance
fees, guarantee costs, surrender charges and direct administrative expenses.
DAC consists of commissions and other costs that vary with, and are primarily
related to, the production or acquisition of new business. The Company
capitalized DAC of $256,538,000, $359,158,000, and $362,084,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.                                                                 
|  
|   |  | As debt and equity securities available for sale are carried at aggregate fair
value, an adjustment is made to DAC equal to the change in amortization that
would have been recorded if such securities had been sold at their stated
aggregate fair value and the proceeds reinvested at current yields. The change
in this adjustment, net of tax, is included with the change in net unrealized
gains or losses on debt and equity securities available for sale which is a
component of accumulated other comprehensive income (loss) and is credited or
charged directly to shareholders equity. DAC has been decreased by $9,000,000
at December 31, 2002 and increased $16,000,000 and at December 31, 2001, for
this adjustment.                                                                                        

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | AMORTIZATION OF DEFERRED ACQUISITION COSTS: DAC is 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,
costs of providing for policy guarantees and the level of expenses necessary to
maintain the policies. The Company adjusts DAC amortization (a DAC
unlocking) when estimates of current or future gross profits to be realized
from its annuity policies are revised.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | The assumption 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 (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.
|  
|   |  | The Company reviews the carrying value of DAC on at least an annual basis.
Management considers estimated future gross profit margins as well as expected
mortality, interest earned and credited rates, persistency and expenses in
determining whether the carrying amount is recoverable. Any amounts deemed
unrecoverable are charged to expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | VARIABLE ANNUITY ASSETS AND LIABILITIES RELATED TO SEPARATE ACCOUNTS: The
assets and liabilities resulting from the receipt of variable annuity deposits
are segregated in separate accounts. The Company receives administrative fees
for managing the funds and other fees for assuming mortality and certain
expense risks. Such fees are included in Variable Annuity Fees in the
statement of income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | GOODWILL: Goodwill amounted to $4,603,000 (net of accumulated amortization of
$7,847,000) and $20,150,000 (net of accumulated amortization of $19,852,000) at
December 31, 2002 and 2001, respectively. Pursuant to the distribution of
Saamsun to the Parent on January 1, 2002, the Company transferred $15,547,000
of goodwill belonging to the asset management operations and broker-dealer
operations to the Parent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | In accordance with Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets (SFAS 142), the Company assesses
goodwill for impairment on an annual basis, or more frequently if                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F - 12



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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | circumstances indicate that a possible impairment has occurred. The assessment
of impairment involves a two-step process whereby an initial assessment for
potential impairment is performed, followed by a measurement of the amount of
the impairment, if any. The Company has evaluated goodwill for impairment as
of December 31, 2002, and has determined that no impairment provision is
necessary. See Recently Issued Accounting Standards below for further
discussion of SFAS 142.                                                                                                                                                                                                                                    
|  
|   |  | RESERVES FOR FIXED ANNUITIES, UNIVERSAL LIFE INSURANCE AND GUARANTEED
INVESTMENT CONTRACTS (GICs): Reserves for fixed annuity, universal life
insurance and GIC contracts are accounted for in accordance with Statement of
Financial Accounting Standards No. 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments, and are recorded at accumulated value
(deposits received, plus accrued interest, less withdrawals and assessed fees).                                                                                                                                                                                
|  
|   |  | MODIFIED COINSURANCE DEPOSIT LIABILITY: Cash received as part of the modified
coinsurance transaction described in Note 7 is recorded as a deposit liability.
Deposits from the reinsured business are allocated to pay down the liability
pursuant to a repayment schedule.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | SECURITIES LOANED UNDER COLLATERAL AGREEMENTS: The Company has entered into a
securities lending agreement with an affiliated lending agent, which authorizes
the agent to lend securities held in the Companys portfolio to a list of
authorized borrowers. The Company receives primarily cash collateral in an
amount in excess of the market value of the securities loaned. The affiliated
lending agent monitors the daily market value of securities loaned with respect
to the collateral value and obtains additional collateral when necessary to
ensure that collateral is maintained at a minimum of 102% of the value of the
loaned securities. Such collateral is not available for the general use of the
Company.
|  
|   |  | FEE INCOME: Variable annuity fees, asset management fees, universal life
insurance fees and surrender charges are recorded as income when earned. Net
retained commissions are recognized as income on a trade date basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | INCOME TAXES: The Company files as a life insurance company under the
provisions of the Internal Revenue Code of 1986. Its federal income tax return
is consolidated with those of the Parent and its affiliate, First SunAmerica
Life Insurance Company (FSA). Income taxes have been calculated as if the
Company filed a separate return. Deferred income tax assets and liabilities
are recognized based on the difference between financial statement carrying
amounts and income tax basis of assets and liabilities using enacted income tax
rates and laws.                                                                                                                                                           
|  
|   |  | RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
This statement requires the Company to recognize all derivatives in the
balance sheet and measure these derivatives at fair value. The recognition of
the change in the fair value of a derivative depends on a                                                                                                                                                                                                                                                                      

F - 13



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | number of factors, including the intended use of the derivative and the extent
to which it is effective as part of a hedge transaction. SFAS 133 was
postponed by SFAS 137, Accounting for Derivative Instruments and Hedging
Activities  Deferral of the Effective Date of SFAS No. 133, and became
effective for the Company on January 1, 2001. The adoption of SFAS 133 on
January 1, 2001 resulted in an increase of $1,389,000, net of tax, in other
comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | In January 2001, the Emerging Issues Task Force of the
FASB (EITF) issued EITF 99-20, Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial Assets
(EITF 99-20). EITF 99-20 provides guidance on the calculation of interest
income and the recognition of impairments related to beneficial interests held
in an investment portfolio. Beneficial interests are investments that
represent rights to receive specified cash flows from a pool of underlying
assets (i.e. collateralized debt obligations). The Company recorded
$15,910,000 of additional impairments ($10,342,000 net of tax) pursuant to the
implementation of EITF 99-20. This adjustment was recorded as a cumulative
effect of accounting change in the consolidated statement of income and
comprehensive income for 2001.                                                                                                                                                                                                                                                         
|  
|   |  | In June 2001, FASB issued Statement of Financial Accounting Standard No. 142
Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires the
Company to discontinue the amortization of goodwill on its statement of income
and is effective as of January 1, 2002. SFAS 142 requires goodwill to be
subject to an assessment of impairment on an annual basis, or more frequently
if circumstances indicate that a possible impairment has occurred. The
assessment of impairment involves a two-step process prescribed in SFAS 142,
whereby an initial assessment for potential impairment is performed, followed
by a measurement of the amount of impairment, if any. SFAS 142 also requires
the completion of a transitional impairment test in the year of adoption, with
any identified impairments recognized as a cumulative effect of a change in
accounting principle. The Company has evaluated the impact of the impairment
provisions of SFAS 142 as of December 31, 2002, and has determined that no
impairment is required to be recorded to the carrying value of the Companys
goodwill balance.
|  
|   |  | In November 2002, FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), which requires that, for guarantees within
the scope of FIN 45 issued or amended by the Company after December 31, 2002, a
liability for the fair value of the obligation undertaken in issuing the
guarantee be recognized. FIN 45 also requires additional disclosures in
financial statements starting with the Companys 2002 year-end financial
statements. The Company believes that the impact of FIN 45 on its results from
operations and financial condition will not be significant.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The Company has entered into eight agreements in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the event
there is no other buyer in the short-term marketplace. The maximum liability
under these guarantees at December 31, 2002 is $813,000,000. These agreements
are more fully described in Note 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|3. |  | ACQUISITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On December 31, 1998, the Company acquired the individual life business and the
individual and group annuity business of MBL Life Assurance Corporation (MBL
Life) (the Acquisition), via a 100% coinsurance transaction, for a cash
purchase price of $128,420,000. The $128,420,000 purchase price was allocated
between the Company and FSA based on the estimated future gross profits of the
two blocks of business. The portion allocated to FSA was $10,000,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | As part of the Acquisition, the Company received $242,473,000 from MBL Life to
pay policy enhancements guaranteed by the MBL Life rehabilitation agreement to
policyholders meeting certain requirements. Of this amount, the Company was
required to transfer $20,055,000 to the Parent for enhancements on policies in
which customers elected to convert to fixed annuity policies of the Parent.
Included in the Companys reserves transferred to FSA in 1999 were $34,657,000
of such policy enhancement reserves. Based upon final actuarial calculations
performed in the first quarter of 2000, $16,741,000 of such reserves were
returned to the Company by FSA. A primary requirement was that annuity
policyholders must have converted their MBL Life policy to a policy type
currently offered by the Company or one of its affiliates by December 31, 1999.
Pursuant to the agreement, the enhancements were scheduled to be credited in
four installments on January 1, 2000, June 30, 2001, June 30, 2002 and June 30,
2003 to eligible policies still active on each of those dates. The Companys
portion of the payment due amounted to $58,329,000 on January 1, 2000,
$52,093,000 on June 30, 2001 and $48,939,000 on June 30, 2002, and was either
credited to the accounts of the policyholders or paid as benefits through
withdrawals or accelerated death benefits. On December 31, 2002, the remaining
enhancement reserve for such payments totaled $48,595,000.

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|4. |  | INVESTMENTS                                                                                                          
|-- |  | ---------------------------------------------------------------------------------------------------------------------
|  
|   |  | The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks by major category follow:

|                                           |       |   |                |           |       |   |           |           | 
|------------------------------------------ | ----- | - | -------------- | --------- | ----- | - | --------- | --------- | 
|                                           |       |   |                |           |       |   | Estimated
|                                           |       |   | Amortized      |           | Fair 
|                                           |       |   | Cost           |           | Value
|                                           |       |   |                |           |      
|                                           |       |   | (In thousands)
|AT DECEMBER 31, 2002:                      |       |   |                |           |       |   |           |          
|Securities of the United States Government |       | $ | 32,531         |           |       | $ | 32,820    |          
|Mortgage-backed securities                 |       |   | 1,476,100      |           |       |   | 1,547,568 |          
|Securities of public utilities             |       |   | 311,951        |           |       |   | 311,604   |          
|Corporate bonds and notes                  |       |   | 2,757,880      |           |       |   | 2,776,021 |          
|Redeemable preferred stocks                |       |   | 21,515         |           |       |   | 21,575    |          
|Other debt securities                      |       |   | 892,700        |           |       |   | 838,981   |          
|                                           |       |   |                |           |       |   |           |          
|                                           | Total |   | $              | 5,492,677 |       |   | $         | 5,528,569 | 
|                                           |       |   |                |           |       |   |           |          
|AT DECEMBER 31, 2001:                      |       |   |                |           |       |   |           |          
|Securities of the United States Government |       | $ | 24,279         |           |       | $ | 24,069    |          
|Mortgage-backed securities                 |       |   | 1,532,155      |           |       |   | 1,543,175 |          
|Securities of public utilities             |       |   | 223,006        |           |       |   | 222,815   |          
|Corporate bonds and notes                  |       |   | 2,059,160      |           |       |   | 2,002,981 |          
|Redeemable preferred stocks                |       |   | 21,515         |           |       |   | 21,515    |          
|Other debt securities                      |       |   | 747,786        |           |       |   | 730,520   |          
|                                           |       |   |                |           |       |   |           |          
|                                           | Total |   | $              | 4,607,901 |       |   | $         | 4,545,075 | 
|                                           |       |   |                |           |       |   |           |          



| |  | The amortized cost and estimated fair value of bonds, notes and redeemable
preferred stocks by contractual maturity, as of December 31, 2002, follow:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|                                       |       |   |                |           |       |   |           |           | 
|-------------------------------------- | ----- | - | -------------- | --------- | ----- | - | --------- | --------- | 
|                                       |       |   |                |           |       |   | Estimated
|                                       |       |   | Amortized      |           | Fair 
|                                       |       |   | Cost           |           | Value
|                                       |       |   |                |           |      
|                                       |       |   | (In thousands)
|Due in one year or less                |       | $ | 181,967        |           |       | $ | 180,293   |          
|Due after one year through five years  |       |   | 1,763,626      |           |       |   | 1,757,157 |          
|Due after five years through ten years |       |   | 1,497,987      |           |       |   | 1,494,157 |          
|Due after ten years                    |       |   | 572,997        |           |       |   | 549,395   |          
|Mortgage-backed securities             |       |   | 1,476,100      |           |       |   | 1,547,567 |          
|                                       |       |   |                |           |       |   |           |          
|                                       | Total |   | $              | 5,492,677 |       |   | $         | 5,528,569 | 
|                                       |       |   |                |           |       |   |           |          



| |  | Actual maturities of bonds, notes and redeemable preferred stocks may differ
from those shown above due to prepayments and redemptions.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------

F - 16



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|4. |  | INVESTMENTS (Continued)                                                                                    
|-- |  | -----------------------------------------------------------------------------------------------------------
|  
|   |  | Gross unrealized gains and losses on bonds, notes and redeemable preferred
stocks by major category follow:

|                                           |       |   |                |         |            |   |         |          |  
|------------------------------------------ | ----- | - | -------------- | ------- | ---------- | - | ------- | -------- | -
|                                           |       |   | Gross          |         | Gross     
|                                           |       |   | Unrealized     |         | Unrealized
|                                           |       |   | Gains          |         | Losses    
|                                           |       |   |                |         |           
|                                           |       |   | (In thousands)
|AT DECEMBER 31, 2002:                      |       |   |                |         |            |   |         |         
|Securities of the United States Government |       | $ | 1,174          |         |            | $ | (885    | )       
|Mortgage-backed securities                 |       |   | 72,364         |         |            |   | (896    | )       
|Securities of public utilities             |       |   | 11,514         |         |            |   | (11,861 | )       
|Corporate bonds and notes                  |       |   | 109,067        |         |            |   | (90,926 | )       
|Redeemable preferred stocks                |       |   | 60             |         |            |   |        |         
|Other debt securities                      |       |   | 10,797         |         |            |   | (64,516 | )       
|                                           |       |   |                |         |            |   |         |         
|                                           | Total |   | $              | 204,976 |            |   | $       | (169,084 | )
|                                           |       |   |                |         |            |   |         |         
|AT DECEMBER 31, 2001:                      |       |   |                |         |            |   |         |         
|Securities of the United States Government |       | $ | 105            |         |            | $ | (315    | )       
|Mortgage-backed securities                 |       |   | 16,573         |         |            |   | (5,553  | )       
|Securities of public utilities             |       |   | 1,885          |         |            |   | (2,076  | )       
|Corporate bonds and notes                  |       |   | 21,540         |         |            |   | (77,719 | )       
|Other debt securities                      |       |   | 6,226          |         |            |   | (23,492 | )       
|                                           |       |   |                |         |            |   |         |         
|                                           | Total |   | $              | 46,329  |            |   | $       | (109,155 | )
|                                           |       |   |                |         |            |   |         |         



| |  | Gross unrealized gains on equity securities aggregated $76,000 at December 31,
2002 and $12,000 at December 31, 2001. Gross unrealized losses on equity
securities aggregated $1,578,000 at December 31, 2002 and $439,000 at December
31, 2001.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|4. |  | INVESTMENTS (Continued)                                                           
|-- |  | ----------------------------------------------------------------------------------
|  
|   |  | Gross realized investment gains and losses on sales of investments are as
follows:

|                                              |                 |   |                          |         |      |   |          |         |   |   |         |        |  
|--------------------------------------------- | --------------- | - | ------------------------ | ------- | ---- | - | -------- | ------- | - | - | ------- | ------ | -
|                                              |                 |   | Years ended December 31,
|                                              |                 |   |                         
|                                              |                 |   | 2002                     |         | 2001 |   | 2000    
|                                              |                 |   |                          |         |      |   |         
|                                              |                 |   | (In thousands)          
|BONDS, NOTES AND REDEEMABLE
PREFERRED STOCKS: |                 |   |                          |         |      |   |          |         |   |   |         |       
|                                              | Realized gains  |   | $                        | 26,555  |      |   | $        | 34,026  |   |   | $       | 9,608  |  
|                                              | Realized losses |   |                          | (33,600 | )    |   |          | (25,258 | ) |   |         | (5,573 | )
|MORTGAGE LOANS:                               |                 |   |                          |         |      |   |          |         |   |   |         |       
|                                              | Realized losses |   |                          |        |      |   |          |        |   |   |         | (276   | )
|COMMON STOCKS:                                |                 |   |                          |         |      |   |          |         |   |   |         |       
|Realized gains                                |                 |   |                         |         |      |   | 164      |         |   |   | 610     |       
|Realized losses                               |                 |   | (169                     | )       |      |   |         |         |   |   |        |       
|OTHER INVESTMENTS:                            |                 |   |                          |         |      |   |          |         |   |   |         |       
|Realized gains                                |                 |   |                         |         |      |   |         |         |   |   | 1,091   |       
|Realized losses                               |                 |   | (1,324                   | )       |      |   | (685     | )       |   |   |        |       
|IMPAIRMENT WRITEDOWNS                         |                 |   | (57,273                  | )       |      |   | (100,958 | )       |   |   | (20,637 | )     
|                                              |                 |   |                          |         |      |   |          |         |   |   |         |       
|Total net realized investment
losses          |                 | $ | (65,811                  | )       |      | $ | (92,711  | )       |   | $ | (15,177 | )     
|                                              |                 |   |                          |         |      |   |          |         |   |   |         |       



| |  | The sources and related amounts of investment income (losses) are as follows:
| |  | -----------------------------------------------------------------------------

|                                             |  |                          |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                             |  | Years ended December 31,
|                                             |  |                         
|                                             |  | 2002                     |         | 2001 |  | 2000
|                                             |  |                          |         |      |  |     
|                                             |  | (In thousands)          
|Short-term investments                       |  | $                        | 3,879   |      |  | $    | 8,422   |   |  | $ | 21,683  |  
|Bonds, notes and redeemable
preferred stocks |  |                          | 305,480 |      |  |      | 285,668 |   |  |   | 290,157 |  
|Mortgage loans                               |  |                          | 55,417  |      |  |      | 58,262  |   |  |   | 60,608  |  
|Partnerships                                 |  |                          | 1,281   |      |  |      | 13,905  |   |  |   | 7,031   |  
|Policy loans                                 |  |                          | 18,796  |      |  |      | 18,218  |   |  |   | 20,200  |  
|Common stocks                                |  |                          |        |      |  |      | 2       |   |  |   |        |  
|Real estate                                  |  |                          | (276    | )    |  |      | (272    | ) |  |   | 121     |  
|Other invested assets                        |  |                          | 7,866   |      |  |      | (4,030  | ) |  |   | 6,668   |  
|Less: investment expenses                    |  |                          | (2,357  | )    |  |      | (4,962  | ) |  |   | (7,113  | )
|                                             |  |                          |         |      |  |      |         |   |  |   |         |  
|Total investment income                      |  | $                        | 390,086 |      |  | $    | 375,213 |   |  | $ | 399,355 |  
|                                             |  |                          |         |      |  |      |         |   |  |   |         |  

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|4. |  | INVESTMENTS (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | At December 31, 2002, no investments in any one entity or its affiliates
exceeded 10% of the Companys shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | At December 31, 2002, bonds, notes and redeemable preferred stocks included
$331,844,000 of bonds that were not rated investment grade. These
non-investment-grade securities are comprised of bonds spanning 30 industries
with 23% of these assets concentrated in financial institutions and 14%
concentrated in telecommunications. No other industry concentration
constituted more than 10% of these assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | At December 31, 2002, mortgage loans were collateralized by properties located
in 28 states, with loans totaling approximately 28% of the aggregate carrying
value of the portfolio secured by properties located in California and
approximately 11% by properties located in New York. No more than 10% of the
portfolio was secured by properties in any other single state.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | At December 31, 2002, the carrying value, which approximates market value, of
all investments in default as to the payment of principal or interest totaled
$15,613,000 ($8,934,000 of bonds and $6,679,000 of mortgage loans).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | As a component of its asset and liability management strategy, the Company
utilizes Swap Agreements to match assets more closely to liabilities. Swap
Agreements are agreements to exchange with a counterparty interest rate
payments of differing character (for example, variable-rate payments exchanged
for fixed-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. The Company typically
utilizes Swap Agreements to create a hedge that effectively converts
floating-rate assets and liabilities to fixed-rate instruments. At December
31, 2002, the Company had one outstanding liability Swap Agreement with a
notional principal of $33,400,000. This agreement matures in December 2024.
The net interest received or paid on the Swap Agreement is included in Interest
Expense in the Statement of Income and Comprehensive Income. The total net
interest paid amounted to $1,543,000 for the year ended December 31, 2002,
compared with net interest received of $2,599,000 for the year ended December
31, 2001 and $43,000 for the year ended December 31, 2000.
|  
|   |  | At December 31, 2002, $9,423,000 of bonds, at amortized cost, were on deposit
with regulatory authorities in accordance with statutory requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|5. |  | FAIR VALUE OF FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The following estimated fair value disclosures are limited to reasonable
estimates of the fair value of only the Companys financial instruments. The
disclosures do not address the value of the Companys recognized and
unrecognized nonfinancial assets (including its real estate investments and
other invested assets except for partnerships) and liabilities or the value of
anticipated future business. The Company does not plan to sell most of its
assets or settle most of its liabilities at these estimated fair values.                                                                                                                                                             
|  
|   |  | The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Selling expenses and potential taxes are not
included. The estimated fair value amounts were determined using available
market information, current pricing information and various valuation
methodologies. If quoted market prices were not readily available for a
financial instrument, management determined an estimated fair value.
Accordingly, the estimates may not be indicative of the amounts the financial
instruments could be exchanged for in a current or future market transaction.
|  
|   |  | The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | CASH AND SHORT-TERM INSTRUMENTS: Carrying value is considered to be a
reasonable estimate of fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS: Fair value is based principally
on independent pricing services, broker quotes and other independent
information. For securities which do not have readily determinable market
prices, 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.                                                                                               
|  
|   |  | MORTGAGE LOANS: Fair values are primarily determined by discounting future
cash flows to the present at current market rates, using expected prepayment
rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | SEPARATE ACCOUNT SEED MONEY: Fair value is considered to be the market value
of the underlying securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | POLICY LOANS: Carrying value is considered a reasonable estimate of fair
value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | PARTNERSHIPS: Fair value of partnerships that invest in debt and equity
securities is based upon the fair value of the net assets of the partnerships
as determined by the general partners.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F - 20



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|5. |  | FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets are
carried at the market value of the underlying securities.                                                                                                  
|  
|   |  | RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are assigned
a fair value equal to current net surrender value. Annuitized contracts are
valued based on the present value of future cash flows at current pricing
rates.
|  
|   |  | RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the
present value of future cash flows at current pricing rates.                                                                                                     
|  
|   |  | SECURITIES HELD/LOANED UNDER COLLATERAL AGREEMENTS: Carrying value is
considered to be a reasonable estimate of fair value.                                                                                                               
|  
|   |  | VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Variable annuity
liabilities are carried at the market value of the underlying securities of the
variable annuity assets held in separate accounts.                            
|  
|   |  | SUBORDINATED NOTES PAYABLE TO AFFILIATES: Fair value is estimated based on the
quoted market prices for similar issues.                                                                                                                   

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|5. |  | FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)                                                                                                               
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The estimated fair values of the Companys financial instruments at December
31, 2002 and 2001 compared with their respective carrying values, are as
follows:

|                   |                                                           |  |                |            |       |  |   |            | 
|------------------ | --------------------------------------------------------- |  | -------------- | ---------- | ----- |  | - | ---------- | 
|                   |                                                           |  | Carrying       |            | Fair 
|                   |                                                           |  | Value          |            | Value
|                   |                                                           |  |                |            |      
|                   |                                                           |  | (In thousands)
|DECEMBER 31, 2002: |                                                           |  |                |            |       |  |   |           
|ASSETS:            |                                                           |  |                |            |       |  |   |           
|                   | Cash and short-term investments                           |  | $              | 65,872     |       |  | $ | 65,872     | 
|                   | Bonds, notes and redeemable preferred
stocks              |  |                | 5,528,569  |       |  |   | 5,528,569  | 
|                   | Mortgage loans                                            |  |                | 738,601    |       |  |   | 818,022    | 
|                   | Policy loans                                              |  |                | 215,846    |       |  |   | 215,846    | 
|                   | Separate account seed money                               |  |                | 25,366     |       |  |   | 25,366     | 
|                   | Common stocks                                             |  |                | 2,609      |       |  |   | 2,609      | 
|                   | Partnerships                                              |  |                | 8,766      |       |  |   | 7,504      | 
|                   | Securities held under collateral
agreements               |  |                | 585,760    |       |  |   | 585,760    | 
|                   | Variable annuity assets held in
separate accounts         |  |                | 14,758,642 |       |  |   | 14,758,642 | 
|LIABILITIES:       |                                                           |  |                |            |       |  |   |           
|                   | Reserves for fixed annuity contracts                      |  | $              | 4,285,098  |       |  | $ | 4,173,950  | 
|                   | Reserves for guaranteed investment contracts              |  |                | 359,561    |       |  |   | 367,393    | 
|                   | Securities loaned under collateral
agreements             |  |                | 585,760    |       |  |   | 585,760    | 
|                   | Variable annuity liabilities related
to separate accounts |  |                | 14,758,642 |       |  |   | 14,758,642 | 

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|5. |  | FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
|-- |  | -----------------------------------------------

|                   |                                                           |  |                |            |       |  |   |            | 
|------------------ | --------------------------------------------------------- |  | -------------- | ---------- | ----- |  | - | ---------- | 
|                   |                                                           |  | Carrying       |            | Fair 
|                   |                                                           |  | Value          |            | Value
|                   |                                                           |  |                |            |      
|                   |                                                           |  | (In thousands)
|DECEMBER 31, 2001: |                                                           |  |                |            |       |  |   |           
|ASSETS:            |                                                           |  |                |            |       |  |   |           
|                   | Cash and short-term investments                           |  | $              | 200,064    |       |  | $ | 200,064    | 
|                   | Bonds, notes and redeemable preferred
stocks              |  |                | 4,545,075  |       |  |   | 4,545,075  | 
|                   | Mortgage loans                                            |  |                | 692,392    |       |  |   | 732,393    | 
|                   | Policy loans                                              |  |                | 226,961    |       |  |   | 226,961    | 
|                   | Separate account seed money                               |  |                | 50,560     |       |  |   | 50,560     | 
|                   | Common stocks                                             |  |                | 861        |       |  |   | 861        | 
|                   | Partnerships                                              |  |                | 8,214      |       |  |   | 7,527      | 
|                   | Securities held under collateral
agreements               |  |                | 541,899    |       |  |   | 541,899    | 
|                   | Variable annuity assets held in
separate accounts         |  |                | 18,526,413 |       |  |   | 18,526,413 | 
|LIABILITIES:       |                                                           |  |                |            |       |  |   |           
|                   | Reserves for fixed annuity contracts                      |  | $              | 3,498,917  |       |  | $ | 3,439,727  | 
|                   | Reserves for guaranteed investment
contracts              |  |                | 483,861    |       |  |   | 490,718    | 
|                   | Securities loaned under collateral
agreements             |  |                | 541,899    |       |  |   | 541,899    | 
|                   | Variable annuity liabilities related
to separate accounts |  |                | 18,526,413 |       |  |   | 18,526,413 | 
|                   | Subordinated notes payable to affiliates                  |  |                | 58,814     |       |  |   | 62,273     | 



|6. |  | SUBORDINATED NOTES PAYABLE TO AFFILIATES                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Subordinated notes (including accrued interest of $6,354,000) payable to
affiliates totaled $58,814,000 at interest rates ranging from 8% to 9.5% at
December 31, 2001. The notes were distributed to the Parent as part of the
Saamsun distribution on January 1, 2002.

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|7. |  | REINSURANCE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | GUARANTEED MINIMUM DEATH BENEFIT (GMDB): A majority of the Companys variable
annuity products are issued with a death benefit feature which provides that,
upon the death of a contractholder, the contractholders beneficiary will
receive the greater of (1) the contractholders account value, or (2) a
guaranteed minimum death benefit that varies by product (the GMDB). 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. At December 31, 2002, a portion of the GMDB risk on
approximately 28% (calculated based on current account value) of the contracts
with such features had been reinsured. Approximately half of this reinsurance
will cease at the time the modified coinsurance deposit liability is fully paid
down, which is presently estimated to occur in early 2004. However, a
substantial majority of all new contracts sold have reinsurance coverage.
Reinsurance coverage is subject to limitations such as caps and deductibles.
GMDB-related contractholder benefits incurred, net of related reinsurance, were
$67,492,000 (net of $8,362,000 of reinsurance recoveries), $17,839,000 (net of
$3,767,000 of reinsurance recoveries) and $614,000 (net of $937,000 of
reinsurance recoveries) for 2002, 2001 and 2000, respectively. 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. GMDB reinsurance premiums were $17,290,000, $8,200,000 and
$3,689,000 for 2002, 2001, and 2000, respectively, and are included in general
and administrative expenses in the consolidated statement of income and
comprehensive income.
|  
|   |  | EARNINGS ENHANCEMENT BENEFIT (EEB): The Company issues certain variable
annuity products that offer an optional Earnings Enhancement Benefit (EEB)
feature. This optional feature provides an additional death benefit, for which
the Company assesses a separate charge to contractholders who elect the
feature. The EEB provides an additional death benefit amount equal to a fixed
percentage of earnings in the contract, subject to certain maximums. The
percentages vary by issue age and policy duration. The Company bears the risk
that account values following favorable performance of the financial markets
will result in greater EEB death claims and that the fees collected under the
contract are insufficient to cover the costs of the benefit to be provided. At
December 31, 2002, approximately 7% of inforce contracts include EEB coverage,
with 96% of the EEB risk fully reinsured. EEB reinsurance premiums were
$360,000 for 2002 and are included in general and administrative expenses in
the consolidated statement of income and comprehensive income. There were no
EEB reinsurance premiums in 2001 or 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|7. |  | REINSURANCE (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | GUARANTEED MINIMUM INCOME BENEFIT (GMIB): The Company issues certain variable
annuity products that contain or offer a Guaranteed Minimum Income Benefit
(GMIB) living benefit feature. This feature provides a minimum annuity
payment guarantee for those contractholders who choose to receive fixed
lifetime annuity payments after a seven or ten-year waiting period in their
deferred annuity contracts. Over 90% of the contracts (calculated based on
account values) with the GMIB feature guaranteed fixed lifetime annuity
payments based on principal, adjusted for withdrawals, invested in the
contract. The remaining contracts also offer a GMIB based on principal
accumulated at 3% to 6.5% per annum. The charges for this feature vary by
contract and in certain instances there is no charge for the benefit. The
Company bears the risk that the performance of the financial markets will not
be sufficient for accumulated policyholder account balances to support GMIB
benefits and that the fees collected under the contract are insufficient to
cover the costs of the benefit to be provided. Substantially all of the
Companys GMIB risk has been reinsured as of December 31, 2002. GMIB
reinsurance premiums were $4,902,000, $5,047,000 and $3,109,000 for 2002, 2001,
and 2000, respectively, and are included in general and administrative expenses
in the consolidated statement of income and comprehensive income.
|  
|   |  | The business which was assumed from MBL Life as part of the Acquisition is
subject to existing reinsurance ceded agreements. At December 31, 1998, the
maximum retention on any single life was $2,000,000, and a total credit of
$5,057,000 was taken against the life insurance reserves, representing
predominantly yearly renewable term reinsurance. In order to limit even
further the exposure to loss on any single insured and to recover an additional
portion of the benefits paid over such limits, the Company entered into a
reinsurance treaty effective January 1, 1999 under which the Company retains no
more than $100,000 of risk on any one insured life. At December 31, 2002, a
total reserve credit of $3,641,000 was taken against the life insurance
reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | On August 1, 1999, the Company entered into a modified coinsurance transaction,
approved by the Arizona Department of Insurance, which involved the ceding of
approximately $6,000,000,000 of variable annuities to ANLIC Insurance Company
(Hawaii), a non-affiliated stock life insurer. The transaction is accounted
for as reinsurance for statutory reporting purposes. As part of the
transaction, the Company received cash in the amount of $150,000,000 and
recorded a corresponding deposit liability. As payments are made to the
reinsurer, the deposit liability is relieved. For the year ended December 31,
2002, the Company recorded income of $6,418,000 from this program, as compared
to a cost of $6,909,000 for the year ended December 31, 2001 and a cost of
$12,026,000 for the year ended December 31, 2000. These amounts are reported
as a component of general and administrative expenses in the Consolidated
Statement of Income and Comprehensive Income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | With respect to its reinsurance agreements, the Company could become liable for
all obligations of the reinsured policies if the reinsurers were to become
unable to meet the obligations assumed under the respective reinsurance
agreements. The Company monitors its credit exposure with respect to these
agreements. However, due to the high credit ratings of the reinsurers, such
risks are considered to be minimal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|8. |  | COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company has entered into eight agreements in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the event
there is no other buyer in the short-term marketplace. In return the Company
receives a fee. The maximum liability under these guarantees at December 31,
2002 is $813,000,000. Related to each of these agreements are participation
agreements with the Parent under which the Parent will share in $350,450,000 of
these liabilities in exchange for a proportionate percentage of the fees
received under these agreements. The expiration dates of these commitments are
as follows: $250,000,000 in 2004, $405,000,000 in 2005 and $158,000,000 in
2006. Management does not anticipate any material losses with respect to these
commitments.                                                                                                      
|  
|   |  | In the ordinary course of business, the Company is obligated to purchase
approximately $42,000,000 of asset backed securities as of December 31, 2002.
The expiration dates of these commitments are as follows: $21,000,000 in 2003,
$14,000,000 in 2004 and $7,000,000 in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The Company has entered into an agreement whereby it is committed to purchase
the remaining principal amount, $36,437,000 as of December 31, 2002, of various
mortgage-backed securities at par value in March 2006. As of December 31,
2002, the estimated fair value exceeded the principal amount of the securities.
At the present time, management does not anticipate any material losses with
respect to this agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | In the third quarter of 2002, the Company began issuing certain variable
annuity products which offer an optional Guaranteed Minimum Account Value
(GMAV) living benefit. If elected by the policyholder at the time of
contract issuance, this feature guarantees that the account value under the
contract will equal or exceed the amount of the initial principal invested,
adjusted for withdrawals, at the end of a ten-year waiting period. There is a
separate charge to the contractholder for this feature. The Company bears the
risk that protracted under-performance of the financial markets could result in
GMAV benefits being higher than the underlying contractholder account balance
and that the fees collected under the contract are insufficient to cover the
costs of the benefit to be provided. As of December 31, 2002, the premiums
subject to guarantee totaled approximately $100 million, and the estimated fair
values of the GMAV were not material.
|  
|   |  | Various lawsuits against the Company have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and
other matters are not considered material in relation to the financial
position, results of operations or cash flows of the Company. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The Companys current financial strength and counterparty credit ratings from
Standard & Poors are based in part on a guarantee (the Guarantee) of the
Companys insurance policy obligations by American Home Assurance Company
(American Home), a subsidiary of AIG, and a member of an AIG intercompany
pool, and the belief that the Company is viewed as a strategically important                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|8. |  | COMMITMENTS AND CONTINGENT LIABILITIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | member of AIG. The Guarantee is unconditional and irrevocable, and the
Companys policyholders have the right to enforce the Guarantee directly
against American Home.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The Companys current financial strength rating from Moodys is based in part
on a support agreement between the Company and AIG (the Support Agreement),
pursuant to which AIG has agreed that AIG will cause the Company to maintain a
policyholders surplus of not less than $1,000,000 or such greater amount as
shall be sufficient to enable the Company to perform its obligations under any
policy issued by it. The Support Agreement also provides that if the Company
needs funds not otherwise available to it to make timely payment of its
obligations under policies issued by it, AIG will provide such funds at the
request of the Company. The Support Agreement is not a direct or indirect
guarantee by AIG to any person of any obligations of the Company.AIG may
terminate the Support Agreement with respect to outstanding obligations of the
Company only under circumstances where the Company attains, without the benefit
of the Support Agreement, a financial strength rating equivalent to that held
by the Company with the benefit of the Support Agreement. Policyholders
have the right to cause the Company to enforce its rights against AIG and, if
the Company fails or refuses to take timely action to enforce the Support
Agreement or if the Company defaults in any claim or payment owed to such
policyholder when due, have the right to enforce the Support Agreement directly
against AIG.
|  
|   |  | American Home does not publish financial statements, although it files
statutory annual and quarterly reports with the New York State Insurance
Department, where such reports are available to the public. AIG is a reporting
company under the Securities Exchange Act of 1934, and publishes annual reports
on Form 10-K and quarterly reports on Form 10-Q, which are available from the
Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|9. |  | SHAREHOLDERS EQUITY                                                                                                                                
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company is authorized to issue 4,000 shares of its $1,000 par value.
Common Stock. At December 31, 2002 and 2001, 3,511 shares were outstanding.
|  
|   |  | Changes in shareholders equity are as follows:                                                                                                     

|                                              |                                                                                 |  |                          |           |      |  |      |         |   |  |   |          |  
|--------------------------------------------- | ------------------------------------------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | ------- | - |  | - | -------- | -
|                                              |                                                                                 |  | Years ended December 31,
|                                              |                                                                                 |  |                         
|                                              |                                                                                 |  | 2002                     |           | 2001 |  | 2000
|                                              |                                                                                 |  |                          |           |      |  |     
|                                              |                                                                                 |  | (In thousands)          
|ADDITIONAL PAID-IN CAPITAL:                   |                                                                                 |  |                          |           |      |  |      |         |   |  |   |         
|                                              | Beginning balances                                                              |  | $                        | 925,753   |      |  | $    | 493,010 |   |  | $ | 493,010  |  
|                                              | Capital contributions by Parent                                                 |  |                          | 200,000   |      |  |      |        |   |  |   |         |  
|                                              | Contribution of subsidiary by Parent                                            |  |                          |          |      |  |      | 432,743 |   |  |   |         |  
|                                              |                                                                                 |  |                          |           |      |  |      |         |   |  |   |         
|                                              | Ending balances                                                                 |  | $                        | 1,125,753 |      |  | $    | 925,753 |   |  | $ | 493,010  |  
|                                              |                                                                                 |  |                          |           |      |  |      |         |   |  |   |         
|RETAINED EARNINGS:                            |                                                                                 |  |                          |           |      |  |      |         |   |  |   |         
|                                              | Beginning balances                                                              |  | $                        | 694,004   |      |  | $    | 697,730 |   |  | $ | 551,158  |  
|                                              | Net income                                                                      |  |                          | 34,251    |      |  |      | 90,369  |   |  |   | 215,572  |  
|                                              | Dividends paid to Parent                                                        |  |                          |          |      |  |      | (94,095 | ) |  |   | (69,000  | )
|                                              | Distribution of subsidiary to Parent                                            |  |                          | (552,384  | )    |  |      |        |   |  |   |         |  
|                                              |                                                                                 |  |                          |           |      |  |      |         |   |  |   |         
|                                              | Ending balances                                                                 |  | $                        | 175,871   |      |  | $    | 694,004 |   |  | $ | 697,730  |  
|                                              |                                                                                 |  |                          |           |      |  |      |         |   |  |   |         
|ACCUMULATED OTHER COMPREHENSIVE
INCOME(LOSS): |                                                                                 |  |                          |           |      |  |      |         |   |  |   |         
|                                              | Beginning balances                                                              |  | $                        | (29,272   | )    |  | $    | (65,582 | ) |  | $ | (112,553 | )
|                                              | Change in net unrealized gains (losses)
on debt securities available for sale   |  |                          | 98,718    |      |  |      | 59,842  |   |  |   | 79,891   |  
|                                              | Change in net unrealized gains (losses)
on equity securities available for
sale |  |                          | (1,075    | )    |  |      | (400    | ) |  |   | (27      | )
|                                              | Change in adjustment to deferred
acquisition costs                              |  |                          | (25,000   | )    |  |      | (5,800  | ) |  |   | (7,600   | )
|                                              | Tax effects of net changes                                                      |  |                          | (25,425   | )    |  |      | (18,774 | ) |  |   | (25,293  | )
|                                              | Cumulative effect of accounting change,
net of tax                              |  |                          |          |      |  |      | 1,389   |   |  |   |         |  
|                                              | Net change related to cash flow hedges                                          |  |                          | (1,442    | )    |  |      | 53      |   |  |   |         |  
|                                              |                                                                                 |  |                          |           |      |  |      |         |   |  |   |         
|                                              | Ending balances                                                                 |  | $                        | 16,504    |      |  | $    | (29,272 | ) |  | $ | (65,582  | )
|                                              |                                                                                 |  |                          |           |      |  |      |         |   |  |   |         

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|9. |  | SHAREHOLDERS EQUITY (Continued)                                                                                                                 
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Gross unrealized gains (losses) on fixed maturity and equity securities
included in accumulated other comprehensive income (loss) are as follows:

|                                              |  |                |          |              |  |   |          |  
|--------------------------------------------- |  | -------------- | -------- | ------------ |  | - | -------- | -
|                                              |  | December 31,   |          | December 31,
|                                              |  | 2002           |          | 2001        
|                                              |  |                |          |             
|                                              |  | (In thousands)
|Gross unrealized gains                        |  | $              | 205,052  |              |  | $ | 46,341   |  
|Gross unrealized losses                       |  |                | (170,662 | )            |  |   | (109,594 | )
|Adjustment to DAC                             |  |                | (9,000   | )            |  |   | 16,000   |  
|Cash flow hedge                               |  |                |         |              |  |   | 2,218    |  
|Deferred income taxes                         |  |                | (8,886   | )            |  |   | 15,763   |  
|                                              |  |                |          |              |  |   |          |  
|Accumulated other comprehensive
income (loss) |  | $              | 16,504   |              |  | $ | (29,272  | )
|                                              |  |                |          |              |  |   |          |  



| |  | On October 30, 2002, the Company received a capital contribution of
$200,000,000 in cash from the Parent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On January 1, 2002, the Company declared a distribution to its Parent of 100%
of the outstanding capital stock of its then consolidated subsidiary, Saamsun
Holdings Corp. (Saamsun). Pursuant to this distribution, Saamsun became a
direct wholly owned subsidiary of the Parent. Saamsun held the Companys asset
management and broker-dealer segments. This distribution reduced the Companys
shareholders equity by $552,384,000, cash and short term investments by
$82,873,000, partnerships by $443,369,000, deferred acquisition costs by
$98,428,000, other assets by $108,163,000, other liabilities by $121,635,000
and subordinated notes payable to affiliates by $58,814,000. Pretax income in
future periods will be reduced by the earnings of the Companys asset
management and broker-dealer operations, substantially offset by a profit
sharing agreement on fees earned on variable annuity subaccounts (see Note 11).
Net loss from these operations, on a combined basis, totaled $9,491,000 for
the year ended December 31, 2001. Net income from these operations, on a
combined basis, totaled $39,619,000 for the year ended December 31, 2000.
|
| |  | On January 1, 2001, the Parent contributed all of its ownership interests in SA
Affordable Housing, LLC (SAAH LLC), a wholly owned subsidiary, to the
Company. The Company subsequently contributed all of its ownership interests
SAAH LLC to Saamsun. All of SAAH LLCs ownership interests were ultimately
contributed to SAAMCO. SAAH LLC has investments in limited partnership
interests whose primary purpose is the generation of rehabilitation tax
credits, low income housing credits and passive losses. Realized tax credits
are passed on to its direct Parent, SAAMCO. At the time of the contribution,
SAAH LLC had partnership assets of $432,120,000, other assets of $623,000 and
shareholders equity of $432,743,000. SAAH LLCs results of operations are
included within the asset management operations. As a result of this transfer,
additional paid-in capital was increased by $432,743,000. This contribution
was approved by the Arizona Department of Insurance.                                                                                                                                                                                

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|9. |  | SHAREHOLDERS EQUITY (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Dividends that the Company may pay to its shareholder in any year without prior
approval of the Arizona Department of Insurance are limited by statute. The
maximum amount of dividends which can be paid to shareholders of insurance
companies domiciled in the state of Arizona without obtaining the prior
approval of the Insurance Commissioner is limited to the lesser of either 10%
of the preceding years statutory surplus or the preceding years statutory net
gain from operations if, after paying the dividend, the Companys capital and
surplus would be adequate in the opinion of the Arizona Department of
Insurance. Currently, no dividends can be paid to stockholders in the year
2003 without obtaining prior approval. No dividends were paid in the year
ended December 31, 2002. Ordinary and extraordinary dividends of $94,095,000
and $69,000,000 were paid on April 2, 2001 and March 1, 2000, respectively.
|  
|   |  | Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Companys net loss totaled $180,737,000 for the
year ended December 31, 2002 and $122,322,000 for the year ended December 31,
2001. The Companys net income for the year ended December 31, 2000 was
$168,367,000. The Companys statutory capital and surplus totaled $463,905,000
at December 31, 2002 and $1,009,267,000 at December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F - 30



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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|10. |  | INCOME TAXES                                                                                        
|--- |  | ----------------------------------------------------------------------------------------------------
|   
|    |  | The components of the provisions for federal income taxes on pretax income
consist of the following:

|                                   |                                    |   |                |         |            |   |         |          |   |   |         |          |  
|---------------------------------- | ---------------------------------- | - | -------------- | ------- | ---------- | - | ------- | -------- | - | - | ------- | -------- | -
|                                   |                                    |   | Net Realized   |         |            |   |         |          |   |   |        
|                                   |                                    |   | Investment     |         |            |   |         |          |   |   |        
|                                   |                                    |   | Gains(Losses)  |         | Operations |   | Total  
|                                   |                                    |   |                |         |            |   |        
|                                   |                                    |   | (In thousands)
|YEAR ENDED DECEMBER 31, 2002:      |                                    |   |                |         |            |   |         |          |   |   |         |         
|                                   | Currently payable                  |   | $              | (18,625 | )          |   | $       | (108,060 | ) |   | $       | (126,685 | )
|                                   | Deferred                           |   |                | (4,409  | )          |   |         | 133,157  |   |   |         | 128,748  |  
|                                   |                                    |   |                |         |            |   |         |          |   |   |         |         
|                                   | Total income tax expense (benefit) |   | $              | (23,034 | )          |   | $       | 25,097   |   |   | $       | 2,063    |  
|                                   |                                    |   |                |         |            |   |         |          |   |   |         |         
|YEAR ENDED DECEMBER 31, 2001:      |                                    |   |                |         |            |   |         |          |   |   |         |         
|                                   | Currently payable                  |   | $              | (18,317 | )          |   | $       | (86,841  | ) |   | $       | (105,158 | )
|                                   | Deferred                           |   |                | (17,180 | )          |   |         | 143,190  |   |   |         | 126,010  |  
|                                   |                                    |   |                |         |            |   |         |          |   |   |         |         
|                                   | Total income tax expense (benefit) |   | $              | (35,497 | )          |   | $       | 56,349   |   |   | $       | 20,852   |  
|                                   |                                    |   |                |         |            |   |         |          |   |   |         |         
|YEAR ENDED DECEMBER 31, 2000:      |                                    |   |                |         |            |   |         |          |   |   |         |         
|                                   | Currently payable                  |   | $              | 2,791   |            |   | $       | (8,473   | ) |   | $       | (5,682   | )
|                                   | Deferred                           |   |                | (8,103  | )          |   |         | 122,230  |   |   |         | 114,127  |  
|                                   |                                    |   |                |         |            |   |         |          |   |   |         |         
|Total income tax expense (benefit) |                                    | $ | (5,312         | )       |            | $ | 113,757 |          |   | $ | 108,445 |         
|                                   |                                    |   |                |         |            |   |         |          |   |   |         |         

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|10. |  | INCOME TAXES (Continued)                                                                                              
|--- |  | ----------------------------------------------------------------------------------------------------------------------
|   
|    |  | Income taxes computed at the United States federal income tax rate of 35%
and income taxes provided differ as follows:

|                                      |                                                                               |   |                          |         |      |   |        |         |   |   |         |         |  
|------------------------------------- | ----------------------------------------------------------------------------- | - | ------------------------ | ------- | ---- | - | ------ | ------- | - | - | ------- | ------- | -
|                                      |                                                                               |   | Years ended December 31,
|                                      |                                                                               |   |                         
|                                      |                                                                               |   | 2002                     |         | 2001 |   | 2000  
|                                      |                                                                               |   |                          |         |      |   |       
|                                      |                                                                               |   | (In thousands)          
|Amount computed at statutory rate     |                                                                               | $ | 12,710                   |         |      | $ | 42,547 |         |   | $ | 113,406 |        
|Increases (decreases) resulting from: |                                                                               |   |                          |         |      |   |        |         |   |   |         |        
|                                      | Amortization of differences between
book and tax bases of net assets
acquired |   |                          |        |      |   |        | 613     |   |   |         | 597     |  
|                                      | State income taxes, net of federal
tax benefit                                |   |                          |        |      |   |        | 4,072   |   |   |         | 9,718   |  
|                                      | Dividends received deduction                                                  |   |                          | (10,117 | )    |   |        | (13,406 | ) |   |         | (10,900 | )
|                                      | Tax credits                                                                   |   |                          |        |      |   |        | (16,758 | ) |   |         | (2,382  | )
|                                      | Other, net                                                                    |   |                          | (530    | )    |   |        | 3,784   |   |   |         | (1,994  | )
|                                      |                                                                               |   |                          |         |      |   |        |         |   |   |         |        
|                                      | Total income tax expense                                                      |   | $                        | 2,063   |      |   | $      | 20,852  |   |   | $       | 108,445 |  
|                                      |                                                                               |   |                          |         |      |   |        |         |   |   |         |        



| |  | For United States federal income tax purposes, certain amounts from life
insurance operations are accumulated in a memorandum policyholders
surplus account and are taxed only when distributed to shareholders or
when such account exceeds prescribed limits. The accumulated
policyholders surplus was $14,300,000 at December 31, 2002. The Company
does not anticipate any transactions which would cause any part of this
surplus to be taxable.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|10. |  | INCOME TAXES (Continued)                                                                                                                                                                                                                                                                                        
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
reporting purposes. The significant components of the liability for
Deferred Income Taxes are as follows:

|                                                                       |  |                |          |              |  |   |          |  
|---------------------------------------------------------------------- |  | -------------- | -------- | ------------ |  | - | -------- | -
|                                                                       |  | December 31,   |          | December 31,
|                                                                       |  | 2002           |          | 2001        
|                                                                       |  |                |          |             
|                                                                       |  | (In thousands)
|DEFERRED TAX LIABILITIES:                                              |  |                |          |              |  |   |          |  
|Deferred acquisition costs                                             |  | $              | 423,823  |              |  | $ | 425,208  |  
|State income taxes                                                     |  |                |         |              |  |   | 5,978    |  
|Other liabilities                                                      |  |                | 42,289   |              |  |   | 24,247   |  
|Net unrealized gains on debt and equity
securities available for sale  |  |                | 8,885    |              |  |   |         |  
|                                                                       |  |                |          |              |  |   |          |  
|Total deferred tax liabilities                                         |  |                | 474,997  |              |  |   | 455,433  |  
|                                                                       |  |                |          |              |  |   |          |  
|DEFERRED TAX ASSETS:                                                   |  |                |          |              |  |   |          |  
|Investments                                                            |  |                | (13,591  | )            |  |   | (23,194  | )
|Contractholder reserves                                                |  |                | (84,943  | )            |  |   | (184,890 | )
|Guaranty fund assessments                                              |  |                | (3,774   | )            |  |   | (3,629   | )
|Deferred income                                                        |  |                | (16,416  | )            |  |   | (16,211  | )
|Other assets                                                           |  |                | (4,401   | )            |  |   |         |  
|Net unrealized losses on debt and equity
securities available for sale |  |                |         |              |  |   | (16,539  | )
|                                                                       |  |                |          |              |  |   |          |  
|Total deferred tax assets                                              |  |                | (123,125 | )            |  |   | (244,463 | )
|                                                                       |  |                |          |              |  |   |          |  
|Deferred income taxes                                                  |  | $              | 351,872  |              |  | $ | 210,970  |  
|                                                                       |  |                |          |              |  |   |          |  

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|11. |  | RELATED-PARTY MATTERS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | As discussed in Notes 1 and 12, the Company declared a distribution to the
Parent, effective January 1, 2002, of 100% of the outstanding common stock of
its consolidated subsidiary, Saamsun.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | For the year ended December 31, 2002, the Company paid commissions totaling
$59,058,000 to nine affiliated broker-dealers: Royal Alliance Associates, Inc.;
SunAmerica Securities, Inc.; Advantage Capital Corporation; FSC Services
Corporation; Sentra Securities Corporation; Spelman & Co., Inc.; VALIC
Financial Advisors; American General Financial Advisors and Franklin Financial
Services Corporation. As discussed in Note 9, Royal Alliance Associates, Inc.
was a wholly owned subsidiary of the Company prior to January 1, 2002. For the
years ended December 31, 2001 and 2000, the Company paid commissions totaling
$40,567,000 and $44,584,000, respectively, to six affiliated broker-dealers:
SunAmerica Securities, Inc.; Advantage Capital Corporation; FSC Services
Corporation; Sentra Securities Corporation; Spelman & Co., Inc. and VALIC
Financial Advisors. These affiliated broker-dealers, distribute a significant
portion of the Companys variable annuity products, amounting to approximately
31.2%, 26.0% and 33.8% of deposits for each of the respective periods. Of the
Companys mutual fund sales, 26.3% and 33.6% were distributed by these
affiliated broker-dealers for the years ended December 31, 2001 and 2000.
|   
|    |  | Pursuant to a cost allocation agreement, the Company purchases administrative,
investment management, accounting, marketing and data processing services from
its Parent, SAI and AIG. Amounts paid for such services totaled $119,981,000
for the year ended December 31, 2002, $130,178,000 for the year ended December
31, 2001 and $132,034,000 for the year ended December 31, 2000. The component
of such costs which relate to the production or acquisition of new business
during these periods amounted to $49,004,000, $68,757,000 and $61,954,000,
respectively, and is deferred and amortized as part of deferred acquisition
costs. The other components of such costs are included in general and
administrative expenses in the Statement of Income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | The Company paid $790,000 and $219,000 of management fees to an affiliate of
the Company to administer its securities lending program for the years ended
December 31, 2002 and 2001, respectively (see Note 2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | On June 10, 2002, the Company entered into a profit sharing agreement with AIG
SunAmerica Asset Management Corp. (SAAMCO), a former subsidiary of the
Company and registered investment advisor, whereby SAAMCO will contribute to
the Company on a quarterly basis its profits earned in connection with its role
as investment advisor and/or business manager to several open-end investment
management companies registered under the Investment Company Act of 1940, as
amended, that fund the variable investment options available to investors
through the Companys variable annuity contracts (the SAAMCO Agreement). The
SAAMCO Agreement is retroactive to January 1, 2002. Variable annuity fees of
$62,562,000 were included in the statement of income and comprehensive income
relating to the SAAMCO Agreement for the year ended December 31, 2002. Of this
amount $57,745,000 has been paid to the Company in 2002 and $4,817,000 remains
a receivable from SAAMCO at December 31, 2002.                                                                                                                                                                                                                                                  

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|11. |  | RELATED-PARTY MATTERS (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On September 26, 2001, the Company entered into a short-term financing
arrangement with SAI, whereby the Company has the right to borrow up to
$500,000,000 from SAI. Any advances made by SAI under this agreement must be
repaid within 30 days. No borrowings were outstanding under this agreement at
December 31, 2002 or December 31, 2001.                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | On December 19, 2001, the Company entered into a short-term financing
arrangement with SAI, whereby SAI has the right to borrow up to $500,000,000
from the Company. Any advances made by the Company under this agreement must
be repaid within 30 days. At December 31, 2002, $50,000,000 was due to the
Company under this agreement. This receivable was collected in January 2003
and was included in due from affiliates on the balance sheet at December 31,
2002. At December 31, 2001, $75,000,000 was due to the Company under this
agreement. This receivable was collected in January 2002 and was included in
due from affiliates on the consolidated balance sheet at December 31, 2001.
|   
|    |  | On September 26, 2001, the Company entered into a short-term financing
arrangement with an affiliate, SunAmerica Investments, Inc., whereby the
Company has the right to borrow up to $500,000,000 from SunAmerica Investments,
Inc. Any advances made by SunAmerica Investments, Inc. under this agreement
must be repaid within 30 days. No borrowings were outstanding under this
agreement at December 31, 2002 or December 31, 2001.                                                                                                                                                                                                                                                             
|   
|    |  | On December 19, 2001, the Company entered into a short-term financing
arrangement with an affiliate, SunAmerica Investments, Inc., whereby SunAmerica
Investments, Inc. has the right to borrow up to $500,000,000 from the Company.
Any advances made by the Company under this agreement must be repaid within 30
days. No borrowings were outstanding under this agreement at December 31, 2002
or December 31, 2001.                                                                                                                                                                                                                                                                              
|   
|    |  | During the year ended December 31, 2000, the Company sold various invested
assets to the Parent for cash equal to their current market value of
$6,362,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | During the year ended December 31, 2000, FSA transferred $16,741,000 of cash to
the Company related to policy enhancements on the New York Business from the
Acquisition (see Note 3). During the year ended December 31, 2000, the Company
transferred $20,055,000 of cash to the Parent related to policy enhancements
granted to annuity policyholders who converted their MBL Life policies to
policies of the Parent (see Note 3).                                                                                                                                                                                                                                                               

F - 35



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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|12. |  | BUSINESS SEGMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | As a result of the distribution of Saamsun to the Parent on January 1, 2002,
the Company has one business segment in 2002, annuity operations (see Note 9).
Prior to January 1, 2002, the Company had three business segments: annuity
operations, asset management operations and broker-dealer operations. The
accounting policies of the segments are the same as those described in Note 2 
Summary of Significant Accounting Policies. The Company evaluates performance
based on profit or loss from operations before income taxes. There were no
intersegment revenues for the years ended December 31, 2001 and 2000.
Substantially all of the Companys revenues are derived from the United States.
The Parent makes expenditures for long-lived assets for the Company and
allocates depreciation of such assets to the Company.                                                                                                                                                                                                     
|   
|    |  | Products for the annuity operations and asset management operations are
marketed through affiliated and independent broker-dealers, full-service
securities firms and financial institutions. One independent selling
organization in the annuity operations represented 11.9% of sales in the year
ended December 31, 2002, 12.2% of sales in the year ended December 31, 2001 and
16.9% of sales in the year ended December 31, 2000. No other independent
selling organization was responsible for 10% or more of sales for any such
period. For the years ended December 31, 2001 and 2000, there was no single
independent selling organization that accounted for 10% or more of sales in the
asset management operations. Registered representatives sell products offered
by the broker-dealer operations. Revenue from any single registered
representative or group of registered representatives do not compose a material
percentage of total revenues in the broker-dealer operations for the years
ended December 31, 2001 and 2000.

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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|12. |  | BUSINESS SEGMENTS (Continued)                              
|--- |  | -----------------------------------------------------------
|   
|    |  | Summarized data for the Companys business segments follow:

|                              |                                                                  |  |                |            |            |  |            |   |         |  |   |   |  |  |   |            |  
|----------------------------- | ---------------------------------------------------------------- |  | -------------- | ---------- | ---------- |  | ---------- | - | ------- |  | - | - |  |  | - | ---------- | -
|                              |                                                                  |  |                |            |            |  | Asset      |   | Broker- |  |   |   | 
|                              |                                                                  |  | Annuity        |            | Management |  | Dealer     |   |         |  |  
|                              |                                                                  |  | Operations     |            | Operations |  | Operations |   | Total  
|                              |                                                                  |  |                |            |            |  |            |   |        
|                              |                                                                  |  | (In thousands)
|YEAR ENDED DECEMBER 31, 2002: |                                                                  |  |                |            |            |  |            |   |         |  |   |   |  |  |   |           
|                              | Investment income                                                |  | $              | 390,086    |            |  | $          |  |         |  | $ |  |  |  | $ | 390,086    |  
|                              | Interest expense                                                 |  |                | (246,791   | )          |  |            |  |         |  |   |  |  |  |   | (246,791   | )
|                              |                                                                  |  |                |            |            |  |            |   |         |  |   |   |  |  |   |           
|                              | Net investment income                                            |  |                | 143,295    |            |  |            |  |         |  |   |  |  |  |   | 143,295    |  
|                             
|                              | Net realized investment
losses                                   |  |                | (65,811    | )          |  |            |  |         |  |   |  |  |  |   | (65,811    | )
|                             
|                              | Variable annuity fees                                            |  |                | 318,061    |            |  |            |  |         |  |   |  |  |  |   | 318,061    |  
|                              | Universal life insurance
fees, net                               |  |                | 20,537     |            |  |            |  |         |  |   |  |  |  |   | 20,537     |  
|                              | Surrender charges                                                |  |                | 32,507     |            |  |            |  |         |  |   |  |  |  |   | 32,507     |  
|                              | Other fees                                                       |  |                | 3,305      |            |  |            |  |         |  |   |  |  |  |   | 3,305      |  
|                              |                                                                  |  |                |            |            |  |            |   |         |  |   |   |  |  |   |           
|                              | Total fee income                                                 |  |                | 374,410    |            |  |            |  |         |  |   |  |  |  |   | 374,410    |  
|                             
|                              | General and administrative
expenses                              |  |                | (101,839   | )          |  |            |  |         |  |   |  |  |  |   | (101,839   | )
|                              | Amortization of deferred
acquisition costs                       |  |                | (187,860   | )          |  |            |  |         |  |   |  |  |  |   | (187,860   | )
|                              | Annual commissions                                               |  |                | (58,389    | )          |  |            |  |         |  |   |  |  |  |   | (58,389    | )
|                              | Guaranteed minimum death
benefits, net of
reinsurance recoveries |  |                | (67,492    | )          |  |            |  |         |  |   |  |  |  |   | (67,492    | )
|                              |                                                                  |  |                |            |            |  |            |   |         |  |   |   |  |  |   |           
|                              | Pretax income before
cumulative effect of
accounting change      |  | $              | 36,314     |            |  | $          |  |         |  | $ |  |  |  | $ | 36,314     |  
|                              |                                                                  |  |                |            |            |  |            |   |         |  |   |   |  |  |   |           
|                              | Total assets                                                     |  | $              | 23,538,832 |            |  | $          |  |         |  | $ |  |  |  | $ | 23,538,832 |  
|                              |                                                                  |  |                |            |            |  |            |   |         |  |   |   |  |  |   |           
|                              | Expenditures for
long-lived assets                               |  | $              |           |            |  | $          |  |         |  | $ |  |  |  | $ |           |  
|                              |                                                                  |  |                |            |            |  |            |   |         |  |   |   |  |  |   |           

F - 37



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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|12. |  | BUSINESS SEGMENTS (Continued)
|--- |  | -----------------------------

|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |            |  
|----------------------------- | ---------------------------------------------------------------- |  | -------------- | ---------- | ---------- |  | ---------- | ------- | ------- |  | - | ------- | - |  | - | ---------- | -
|                              |                                                                  |  |                |            |            |  | Asset      |         | Broker- |  |   |         |  
|                              |                                                                  |  | Annuity        |            | Management |  | Dealer     |         |         |  |  
|                              |                                                                  |  | Operations     |            | Operations |  | Operations |         | Total  
|                              |                                                                  |  |                |            |            |  |            |         |        
|                              |                                                                  |  | (In thousands)
|YEAR ENDED DECEMBER 31, 2001: |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Investment income                                                |  | $              | 359,655    |            |  | $          | 14,988  |         |  | $ | 570     |   |  | $ | 375,213    |  
|                              | Interest expense                                                 |  |                | (241,444   | )          |  |            | (4,115  | )       |  |   | (360    | ) |  |   | (245,919   | )
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Net investment income                                            |  |                | 118,211    |            |  |            | 10,873  |         |  |   | 210     |   |  |   | 129,294    |  
|                             
|                              | Net realized investment
losses                                   |  |                | (59,784    | )          |  |            | (32,927 | )       |  |   |        |   |  |   | (92,711    | )
|                             
|                              | Variable annuity fees                                            |  |                | 350,378    |            |  |            | 11,499  |         |  |   |        |   |  |   | 361,877    |  
|                              | Net retained commissions                                         |  |                |           |            |  |            | 2,210   |         |  |   | 45,362  |   |  |   | 47,572     |  
|                              | Asset management fees                                            |  |                |           |            |  |            | 63,529  |         |  |   |        |   |  |   | 63,529     |  
|                              | Universal life insurance
fees, net                               |  |                | 18,909     |            |  |            |        |         |  |   |        |   |  |   | 18,909     |  
|                              | Surrender charges                                                |  |                | 24,911     |            |  |            |        |         |  |   |        |   |  |   | 24,911     |  
|                              | Other fees                                                       |  |                | 3,626      |            |  |            | 9,350   |         |  |   | 1,575   |   |  |   | 14,551     |  
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Total fee income                                                 |  |                | 397,824    |            |  |            | 86,588  |         |  |   | 46,937  |   |  |   | 531,349    |  
|                             
|                              | General and administrative
expenses                              |  |                | (93,020    | )          |  |            | (27,430 | )       |  |   | (29,486 | ) |  |   | (149,936   | )
|                              | Amortization of deferred
acquisition costs                       |  |                | (144,273   | )          |  |            | (76,043 | )       |  |   |        |   |  |   | (220,316   | )
|                              | Annual commissions                                               |  |                | (58,278    | )          |  |            |        |         |  |   |        |   |  |   | (58,278    | )
|                              | Guaranteed minimum death
benefits, net of
reinsurance recoveries |  |                | (17,839    | )          |  |            |        |         |  |   |        |   |  |   | (17,839    | )
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Pretax income before
cumulative effect of
accounting change      |  | $              | 142,841    |            |  | $          | (38,939 | )       |  | $ | 17,661  |   |  | $ | 121,563    |  
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Total assets                                                     |  | $              | 26,207,279 |            |  | $          | 659,876 |         |  | $ | 72,950  |   |  | $ | 26,940,105 |  
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Expenditures for
long-lived assets                               |  | $              |           |            |  | $          | 614     |         |  | $ | 608     |   |  | $ | 1,222      |  
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           

F - 38



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##### Table of Contents



AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|13. |  | BUSINESS SEGMENTS (Continued)
|--- |  | -----------------------------

|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |            |  
|----------------------------- | ---------------------------------------------------------------- |  | -------------- | ---------- | ---------- |  | ---------- | ------- | ------- |  | - | ------- | - |  | - | ---------- | -
|                              |                                                                  |  |                |            |            |  | Asset      |         | Broker- |  |   |         |  
|                              |                                                                  |  | Annuity        |            | Management |  | Dealer     |         |         |  |  
|                              |                                                                  |  | Operations     |            | Operations |  | Operations |         | Total  
|                              |                                                                  |  |                |            |            |  |            |         |        
|                              |                                                                  |  | (In thousands)
|YEAR ENDED DECEMBER 31, 2000: |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Investment income                                                |  | $              | 388,368    |            |  | $          | 9,800   |         |  | $ | 1,187   |   |  | $ | 399,355    |  
|                              | Interest expense                                                 |  |                | (260,709   | )          |  |            | (3,784  | )       |  |   | (360    | ) |  |   | (264,853   | )
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Net investment income                                            |  |                | 127,659    |            |  |            | 6,016   |         |  |   | 827     |   |  |   | 134,502    |  
|                             
|                              | Net realized investment
losses                                   |  |                | (15,177    | )          |  |            |        |         |  |   |        |   |  |   | (15,177    | )
|                             
|                              | Variable annuity fees                                            |  |                | 385,436    |            |  |            | 15,059  |         |  |   |        |   |  |   | 400,495    |  
|                              | Net retained commissions                                         |  |                |           |            |  |            | 3,878   |         |  |   | 58,324  |   |  |   | 62,202     |  
|                              | Asset management fees                                            |  |                |           |            |  |            | 73,922  |         |  |   |        |   |  |   | 73,922     |  
|                              | Universal life insurance
fees, net                               |  |                | 20,258     |            |  |            |        |         |  |   |        |   |  |   | 20,258     |  
|                              | Surrender charges                                                |  |                | 20,963     |            |  |            |        |         |  |   |        |   |  |   | 20,963     |  
|                              | Other fees                                                       |  |                | 3,832      |            |  |            | 6,708   |         |  |   | 2,419   |   |  |   | 12,959     |  
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Total fee income                                                 |  |                | 430,489    |            |  |            | 99,567  |         |  |   | 60,743  |   |  |   | 590,799    |  
|                             
|                              | General and administrative
expenses                              |  |                | (102,849   | )          |  |            | (36,106 | )       |  |   | (32,058 | ) |  |   | (171,013   | )
|                              | Amortization of deferred
acquisition costs                       |  |                | (125,035   | )          |  |            | (32,972 | )       |  |   |        |   |  |   | (158,007   | )
|                              | Annual commissions                                               |  |                | (56,473    | )          |  |            |        |         |  |   |        |   |  |   | (56,473    | )
|                              | Guaranteed minimum death
benefits, net of
reinsurance recoveries |  |                | (614       | )          |  |            |        |         |  |   |        |   |  |   | (614       | )
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Pretax income before
cumulative effect of
accounting change      |  | $              | 258,000    |            |  | $          | 36,505  |         |  | $ | 29,512  |   |  | $ | 324,017    |  
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Total assets                                                     |  | $              | 26,908,888 |            |  | $          | 199,075 |         |  | $ | 81,515  |   |  | $ | 27,189,478 |  
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           
|                              | Expenditures for
long-lived assets                               |  | $              |           |            |  | $          | 454     |         |  | $ | 1,600   |   |  | $ | 2,054      |  
|                              |                                                                  |  |                |            |            |  |            |         |         |  |   |         |   |  |   |           

F - 39



---



##### Table of Contents






CERTIFICATIONS

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



|1. |  | I have reviewed this annual report on Form 10-K of AIG SunAmerica Life
Assurance Company;                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual 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 annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the Evaluation Date"]; and                                                                 
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                          



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



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



|6. |  | The registrants other certifying officer and I have indicated in this
annual 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:                                                        |  | March 28, 2003 |  | 
|                                                             |  |                |  | 
|                                                             |  |                |  | 
|/s/   JAY S. WINTROB

Jay S. Wintrob
Chief Executive Officer |  |               





---



##### Table of Contents



CERTIFICATIONS

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



|1. |  | I have reviewed this annual report on Form 10-K of AIG SunAmerica Life
Assurance Company;                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual 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 annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the Evaluation Date"]; and                                                                 
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                          



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



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



|6. |  | The registrants other certifying officer and I have indicated in this
annual 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:                                                                                       |  | March 28, 2003 |  | 
|                                                                                            |  |                |  | 
|                                                                                            |  |                |  | 
|/s/   N. SCOTT GILLIS

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