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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 Number 33-85014

FIRST SUNAMERICA LIFE INSURANCE COMPANY

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

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

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 FILERS 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
DEINED IN 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 31,
2003 WAS AS FOLLOWS:

Common Stock (par value $10,000 per share) 300 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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TABLE OF CONTENTS



|               |                                                                                                |  |  |  |  |  |  | 
|-------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|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 STOCKHOLDER 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 AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     
|PART IV       
|               | ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
|EXHIBITS      
|SIGNATURES    
|Certifications



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PART I




ITEM 1. BUSINESS

GENERAL DESCRIPTION

First SunAmerica 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 is incorporated in New York and maintains its principal
offices at 733 Third Avenue, 4th Floor, New York, New York 10017, telephone
(800) 996-9786. The Company has one employee; however, employees of the Parent
and its other subsidiaries perform various services for the Company. The Parent
had approximately 2,000 employees at December 31, 2002, approximately 800 of
whom perform services for the Company as well as for certain of its affiliates.

The Company is a life insurance company principally engaged in the
business of writing fixed and variable annuities for retirement savings. 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 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 operations on the
sale of annuities.

The Companys nine affiliated broker-dealers comprise the largest network
of independent registered representatives in the nation and the fifth-largest
securities sales force, based on industry data. Its affiliated broker-dealers
accounted for approximately 4.8% of the Companys total annuity sales in 2002.
The Company also distributes its products and services through an extensive
network of independent broker-dealers, full-service securities firms,
independent general insurance agents and major financial institutions.

The Company and its affiliates have made significant investments in
technology over the past several years in order to lower operating costs and
enhance their 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 business. 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.

In recent years, the Company has enhanced its marketing efforts and
expanded its offerings of variable annuities through internal growth, resulting
in increased fee income. The Companys variable annuity business

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entails no portfolio credit risk and requires significantly less capital
support than its fixed-rate business, which generates net investment income.
The Companys fixed-rate business, comprised of fixed annuities and universal
life insurance contracts, has grown significantly in recent years through
acquisitions.

For the year ended December 31, 2002, the Companys net investment income
and net realized investment losses and fee income by primary product line or
service are as follows:

NET INVESTMENT AND FEE INCOME

|                               |                          |      |         |        |       |         |       |                            |     |   |                     |                            |                         | 
|------------------------------ | ------------------------ | ---- | ------- | ------ | ----- | ------- | ----- | -------------------------- | --- | - | ------------------- | -------------------------- | ----------------------- | 
|                               |                          |      |         | Amount |       | Percent |       | Primary Product or Service
|                               |                          |      |         |        |       |         |       |                           
|                               | (In thousands)          
|Net investment income          |                          | $    | 38,652  |        |       |         | 90.4  | %                          |     |   | Fixed-rate products |                           
|Net realized investment
losses |                          |      | (10,025 | )      |       |         | (23.4 | )%                         |     |   | Fixed-rate products |                           
|                              
|Fee income:                    |                          |      |         |        |       |         |       |                            |     |   |                     |                           
|                               | Variable annuity fees    |      |         | 9,003  |       |         |       | 21.0                       | %   |   |                     | Variable annuities         |                        
|                               | Universal life
insurance |      |         |        |       |         |       |                            |     |   |                     | Fixed-rate                 |                        
|                               |                          | fees |         |        | 3,291 |         |       |                            | 7.7 | % |                     |                            | universal life products | 
|                               | Surrender charges        |      |         | 1,854  |       |         |       | 4.3                        | %   |   |                     | Fixed and variable
annuity |                        
|                               |                          |      |         |        |       |         |       |                            |     |   |                     | products                   |                        
|                               | Total fee income         |      |         | 14,148 |       |         |       | 33.0                       | %   |   |                     | Fixed-rate and             |                        
|                               |                          |      |         |        |       |         |       |                            |     |   |                     | Variable annuity
fees      |                        
|Total                          |                          | $    | 42,775  |        |       |         | 100.0 | %                          |     |   |                     |                           
|                               |                          |      |         |        |       |         |       |                            |     |   |                     |                           

ANNUITY OPERATIONS

Founded in 1978, the Company is licensed in the States of New York, New
Mexico and Nebraska and issues a portfolio of single-premium fixed and
flexible-premium variable annuities.

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 as well as through independent general insurance agents.
In total, more than 9,900 independent sales representatives are licensed to
sell the Companys annuity products in three states.

On December 31, 1998, AIG SunAmerica Life Assurance Company (AIG SALAC), an
affiliate of 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. 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 via an assumption reinsurance agreement.

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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 variable annuity products are multimanager
variable annuities that offer investors a choice of 31 variable funds, 5 fixed
account options and 2 dollar cost averaging fixed account options for different
time periods. In January 2001, the Company introduced a new product, FSA
Advisor, which is a multimanager variable annuity that offers investors a
choice of 27 variable funds and a guaranteed fixed-rate fund. Variable annuity
product sales have increased 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. The increase in sales growth in 2002 is primarily due to
the marketing of annuities through new distribution relationships. The
increase in sales growth in 2001 is principally due to both new and enhanced
relationships with New York based investment firms as well as the addition of
four new funds offered by Polaris in December 2000.

At December 31, 2002, total variable product liabilities were $608.3
million, of which $399.0 million were held in separate accounts and $209.3
million 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, 93% of the
Companys variable annuity reserves held in the 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 $123,000.

ANNUITY OPERATIONS  GENERAL ACCOUNT

The Companys general account obligations are fixed-rate products,
including fixed annuities as well as universal life contracts issued in prior
years and fixed-rate options of its variable annuity contracts. The Company
offers single-premium and flexible-premium deferred annuities that provide one,
three, five, seven, or ten-year fixed interest rate guarantees. The Company
also offers fixed-rate account options on its variable annuity contracts with
similar guarantees. Although the Companys annuity contracts remain in force
an average of seven to ten years, a majority (approximately 87% at December 31,
2002) of the annuity and 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
assumptions and competitive industry pricing, among other factors. Its fixed
annuity products offer many of the same features as conventional certificates
of deposit from financial institutions, giving investors a choice of interest
period and yield as well as additional

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advantages particularly applicable to retirement planning, such as tax-deferred
accumulation and flexible payout options (including the option of payout over
the life of the annuitant). The average size of a new single-premium fixed
annuity contract sold by the Company in 2002 was approximately $42,000.

The Company designs its fixed-rate annuity products and conducts its
investment operations in order to closely match the duration of the assets in
its investment portfolio to its fixed annuity and universal life 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 or other restrictions in order to encourage
persistency. Approximately 65% of the Companys fixed annuity and universal
life reserves had surrender penalties or other restrictions at December 31,
2002.

Beginning in July 2002, the Company began marketing fixed annuities
through a new financial institution partner. The Companys fixed annuities
sales increased significantly in the latter half of 2002 due to the enhanced
marketing and distribution efforts.

INVESTMENT OPERATIONS

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 and
policy loans. At December 31, 2002, these assets had an aggregate fair value
of $1.73 billion with a duration of 3.9 (See further discussion of duration
under Capital Resources and Liquidity-Asset Liability Matching section). The
Companys fixed-rate liabilities include fixed annuity and universal life
insurance contracts. 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 $1.58 billion with a duration of 4.0. For the
years ended December 31, 2002, December 31, 2001 and December 31, 2000, the
Companys yields on average invested assets were 6.73%, 7.07% and 7.09%,
respectively; its average rates paid on all interest-bearing liabilities were
4.39%, 4.70% and 4.81%, respectively; and it realized net investment spreads on
average invested assets of 2.67%, 2.65% and 2.50%, respectively. Net realized
investment losses were 0.69%, 1.35% and 1.23% of average invested assets in
2002, 2001 and 2000, respectively.

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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                    |  | $              | 37,955    |            |  |  | 2.2   | %
|U.S. government securities                         |  |                | 3,208     |            |  |  | 0.2   |  
|Mortgage-backed securities                         |  |                | 471,065   |            |  |  | 27.6  |  
|Other bonds, notes and
redeemable preferred stocks |  |                | 935,780   |            |  |  | 54.8  |  
|Mortgage loans                                     |  |                | 193,035   |            |  |  | 11.3  |  
|Policy loans                                       |  |                | 36,052    |            |  |  | 2.1   |  
|Common stocks                                      |  |                | 1,140     |            |  |  | 0.1   |  
|Other invested assets                              |  |                | 29,569    |            |  |  | 1.7   |  
|                                                   |  |                |           |            |  |  |       |  
|Total investments and cash                         |  | $              | 1,707,804 |            |  |  | 100.0 | %
|                                                   |  |                |           |            |  |  |       |  

At December 31, 2002, the Bond Portfolio included $1.35 billion of bonds
rated by Standard & Poors, Moodys Investors Service, Fitch, or the Valuation
Office of the National Association of Insurance Commissioners (NAIC), and
$61.8 million of bonds rated by the Company pursuant to statutory ratings
guidelines established by the NAIC. At December 31, 2002, approximately $1.35
billion of the Bond Portfolio was investment grade, including $474.3 million of
U.S. government/agency securities and mortgage-backed securities.

At December 31, 2002, the Bond Portfolio included $55.7 million of bonds
that were non-investment grade. These non-investment-grade bonds accounted for
2.5% of the Companys total assets and 3.3% of its invested assets.

Senior secured loans (Secured Loans) are included in the Bond Portfolio
and aggregated $32.3 million at December 31, 2002. Secured Loans are senior to
subordinated debt and equity and are secured by assets of the issuer. These
Secured Loans are composed of loans to borrowers spanning 6 industries, with
53% of these assets concentrated in energy, 16% concentrated in finance
institutions, 11% concentrated in leisure and gaming. No other industry
concentration constituted more than 10% of these assets.

Mortgage loans aggregated $193.0 million at December 31, 2002 and
consisted of 88 commercial first mortgage loans with an average loan balance
of approximately $2.2 million, collateralized by properties located in 29
states. Approximately 41% of this portfolio was office, 16% was retail, 16%
was multifamily residential, 14% was industrial, and 13% was other types. At
December 31, 2002, approximately 31% of this portfolio was secured by
properties located in California, approximately 13% by properties located in
Texas, approximately 11% by properties located in Michigan and no more than
10% of this portfolio was secured by properties located in any other single state.

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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 $5.7 million, which constituted less than 1% 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 - Financial
Condition 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 a
state insurance official. The regulation and supervision relate primarily to
approval of policy forms and rates, the standards of solvency that must be met
and maintained, including risk based capital measurements, the licensing of
insurers and their agents, the nature of and limitations on investments,
restrictions on the size of risks which may be insured under a single policy,
deposits on securities for the benefit of policyholders, methods of accounting,
periodic examinations of the affairs of insurance companies, the form and
content of reports of financial condition required to be filed, and reserves
for unearned premiums, losses and other purposes. In general, such regulation
is for the protection of policyholders rather than security holders.

Risk based capital (RBC) standards are designed to measure the adequacy
of an insurers statutory capital and surplus in relation to the risks inherent
in its business. The standards are intended to help identify inadequately
capitalized companies and require specific regulatory actions in the event an
insurers RBC is deficient. The RBC formula develops a risk adjusted target
level of adjusted statutory capital and surplus by applying certain factors to
various asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus, the
target level of statutory surplus varies not only as a result of the insurers
size, but also on the risk profile of the insurers operations. The RBC Model
Law provides four incremental levels of regulatory attention for insurers whose
surplus is below the calculated RBC target. These levels of attention range
in severity from requiring the insurer to submit a plan for corrective action
to actually placing the insurer under regulatory control. The statutory
capital and surplus of the Company exceeded its RBC requirements by a
considerable margin 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
changes prescribed statutory accounting practices and has resulted in changes
to the accounting practices that the Company uses to prepare its statutory
basis financial statements. Codification has been adopted by all fifty states
as the prescribed basis of accounting. New York, however, has made certain
modifications (e.g., no deferred taxes will be recorded prior to January 1,
2002 for companies domiciled in the State of New York). The adoption of
Codification resulted in a decrease to the Companys statutory surplus of
approximately $14.2 million and was recorded as a cumulative effect of changes
in accounting principles in 2001. For periods beginning as of January 1, 2002,
the State of New York conformed to NAIC codification relating to deferred
income taxes. Accordingly, the Company recorded a charge to surplus of $4.9
million during 2002 relating to a change in accounting principle.

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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 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 competes 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. In 2001, the
Company together with its affiliates was the largest of this group. The
Company believes the primary competitive factors among life insurance
companies for investment-oriented insurance products, such as annuities,
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.

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ITEM 2. PROPERTIES

The Companys executive offices and its principal office are in leased
premises at 733 Third Avenue, New York, New York 10017. The Company, through
an affiliate, also leases office space in Los Angeles and Woodland Hills,
California.

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




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
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 ended 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 STOCKHOLDER
MATTERS

Not applicable.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data of the Company 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.

|                                                            |  |                          |         |              |  |               |         |      |  |                  |         |      |  |   |         |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------- |  | ------------------------ | ------- | ------------ |  | ------------- | ------- | ---- |  | ---------------- | ------- | ---- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                            |  | Years Ended December 31, |         | Three        |  | Year Ended   
|                                                            |  |                          |         | Months Ended |  | September 30,
|                                                            |  | 2002                     |         | 2001         |  | 2000          |         | 1999 |  | December 31,1998 |         | 1998
|                                                            |  |                          |         |              |  |               |         |      |  |                  |         |     
|                                                            |  | (In thousands)          
|RESULTS OF OPERATIONS                                       |  |                          |         |              |  |               |         |      |  |                  |         |      |  |   |         |   |  |   |        |   |  |   |         |  
|                                                           
|Net investment income                                       |  | $                        | 38,652  |              |  | $             | 37,817  |      |  | $                | 42,269  |      |  | $ | 43,092  |   |  | $ | 9,323  |   |  | $ | 35,393  |  
|Net realized investment
(losses) gains                      |  |                          | (10,025 | )            |  |               | (19,266 | )    |  |                  | (20,779 | )    |  |   | (11,178 | ) |  |   | 797    |   |  |   | 4,690   |  
|Fee income                                                  |  |                          | 14,148  |              |  |               | 13,582  |      |  |                  | 15,082  |      |  |   | 11,011  |   |  |   | 1,851  |   |  |   | 7,957   |  
|General and administrative expenses                         |  |                          | (8,112  | )            |  |               | (4,341  | )    |  |                  | (4,945  | )    |  |   | (5,505  | ) |  |   | (1,268 | ) |  |   | (1,931  | )
|Amortization of
deferred
acquisition costs                  |  |                          | (16,367 | )            |  |               | (11,629 | )    |  |                  | (19,399 | )    |  |   | (22,664 | ) |  |   | (5,046 | ) |  |   | (17,120 | )
|Annual commissions                                          |  |                          | (771    | )            |  |               | (724    | )    |  |                  | (619    | )    |  |   | (450    | ) |  |   | (90    | ) |  |   | (348    | )
|Guaranteed minimum
death
benefits                           |  |                          | (1,735  | )            |  |               | (546    | )    |  |                  | (4      | )    |  |   | (13     | ) |  |   |       |   |  |   |        |  
|                                                            |  |                          |         |              |  |               |         |      |  |                  |         |      |  |   |         |   |  |   |        |   |  |   |         |  
|Pretax income before
cumulative effect of
accounting change |  |                          | 15,790  |              |  |               | 14,893  |      |  |                  | 11,605  |      |  |   | 14,293  |   |  |   | 5,567  |   |  |   | 28,641  |  
|                                                           
|Income tax expense                                          |  |                          | (9,032  | )            |  |               | (6,180  | )    |  |                  | (4,325  | )    |  |   | (6,621  | ) |  |   | (2,191 | ) |  |   | (12,106 | )
|                                                            |  |                          |         |              |  |               |         |      |  |                  |         |      |  |   |         |   |  |   |        |   |  |   |         |  
|Income before
cumulative
effect of accounting
change        |  |                          | 6,758   |              |  |               | 8,713   |      |  |                  | 7,280   |      |  |   | 7,672   |   |  |   | 3,376  |   |  |   | 16,535  |  
|                                                            |  |                          |         |              |  |               |         |      |  |                  |         |      |  |   |         |   |  |   |        |   |  |   |         |  
|Cumulative effect of
accounting change,
net of tax          |  |                          |        |              |  |               | (520    | )    |  |                  |        |      |  |   |        |   |  |   |       |   |  |   |        |  
|                                                            |  |                          |         |              |  |               |         |      |  |                  |         |      |  |   |         |   |  |   |        |   |  |   |         |  
|NET INCOME                                                  |  | $                        | 6,758   |              |  | $             | 8,193   |      |  | $                | 7,280   |      |  | $ | 7,672   |   |  | $ | 3,376  |   |  | $ | 16,535  |  
|                                                            |  |                          |         |              |  |               |         |      |  |                  |         |      |  |   |         |   |  |   |        |   |  |   |         |  

The results of operations of the Company for 1999 are affected by the
acquisition of business from MBL Life on July 1, 1999 (See Note 3 of the
accompanying financial statements).

In 2001, the Company adopted EITF 99-20 which was recorded as a cumulative
effect of accounting change (See Note 2 of the accompanying financial
statements).

The results of operations for 2002 are affected by the profit sharing
agreement with AIG SunAmerica Asset Management Corp. (See Note 10 of the
accompanying financial statements).

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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                                      |  | $              | 1,707,804 |               |  | $    | 1,367,698 |      |  | $    | 1,486,247 |      |  | $ | 1,806,742 |  |  | $ | 1,515,132 |  |  | $ | 1,554,316 | 
|Variable annuity assets
held in separate accounts         |  |                | 399,017   |               |  |      | 514,203   |      |  |      | 565,547   |      |  |   | 558,605   |  |  |   | 344,619   |  |  |   | 271,865   | 
|Deferred acquisition costs                                |  |                | 104,459   |               |  |      | 100,182   |      |  |      | 124,451   |      |  |   | 137,637   |  |  |   | 96,918    |  |  |   | 87,074    | 
|Deferred income taxes                                     |  |                |          |               |  |      | 1,947     |      |  |      | 7,914     |      |  |   | 18,275    |  |  |   |          |  |  |   |          | 
|Other assets                                              |  |                | 28,106    |               |  |      | 14,573    |      |  |      | 30,214    |      |  |   | 34,253    |  |  |   | 51,013    |  |  |   | 28,965    | 
|                                                          |  |                |           |               |  |      |           |      |  |      |           |      |  |   |           |  |  |   |           |  |  |   |           | 
|TOTAL ASSETS                                              |  | $              | 2,239,386 |               |  | $    | 1,998,603 |      |  | $    | 2,214,373 |      |  | $ | 2,555,512 |  |  | $ | 2,007,682 |  |  | $ | 1,942,220 | 
|                                                          |  |                |           |               |  |      |           |      |  |      |           |      |  |   |           |  |  |   |           |  |  |   |           | 
|                                                         
|Reserves for fixed annuity
contracts                      |  | $              | 1,290,702 |               |  | $    | 1,024,830 |      |  | $    | 1,186,996 |      |  | $ | 1,523,641 |  |  | $ | 1,432,558 |  |  | $ | 1,460,856 | 
|Reserves for universal
life insurance contracts           |  |                | 237,862   |               |  |      | 248,161   |      |  |      | 249,987   |      |  |   | 277,250   |  |  |   |          |  |  |   |          | 
|Variable annuity
liabilities related
to separate accounts |  |                | 399,017   |               |  |      | 514,203   |      |  |      | 565,547   |      |  |   | 558,605   |  |  |   | 344,619   |  |  |   | 271,865   | 
|Other payables and
accrued liabilities                    |  |                | 68,373    |               |  |      | 17,830    |      |  |      | 24,215    |      |  |   | 34,776    |  |  |   | 42,038    |  |  |   | 18,073    | 
|Deferred income taxes                                     |  |                | 30,394    |               |  |      |          |      |  |      |          |      |  |   |          |  |  |   | 3,792     |  |  |   | 5,371     | 
|Shareholders equity                                      |  |                | 213,038   |               |  |      | 193,579   |      |  |      | 187,628   |      |  |   | 161,240   |  |  |   | 184,675   |  |  |   | 186,055   | 
|                                                          |  |                |           |               |  |      |           |      |  |      |           |      |  |   |           |  |  |   |           |  |  |   |           | 
|TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY                |  | $              | 2,239,386 |               |  | $    | 1,998,603 |      |  | $    | 2,214,373 |      |  | $ | 2,555,512 |  |  | $ | 2,007,682 |  |  | $ | 1,942,220 | 
|                                                          |  |                |           |               |  |      |           |      |  |      |           |      |  |   |           |  |  |   |           |  |  |   |           | 

The financial position of the Company as of December 31, 1999 is affected by
the acquisition of business from MBL Life which occurred on July 1, 1999. (See
Note 3 of the accompanying 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 First SunAmerica 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 or
profitability of the Companys activities.

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

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

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 the
debt and equity securities available for sale amounted to $28.4 million at
December 31, 2002. In determining if and when a decline in fair value below

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amortized cost is other-than-temporary, the Company evaluates at each reporting
period the market conditions, offering prices, trends of earnings, price
multiples, and other key measures for our investments in debt and marketable
equity securities. In particular, for debt securities, the Company assesses the
probability that all amounts due are collectible according to the contractual
terms of the obligation. When such a decline in value is deemed to be
other-than-temporary, 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 $334.9
million 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) supporting the annuity obligations, the anticipated value 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. Approximately 60% of the
Companys DAC balance at December 31, 2002 related to fixed annuity products
and 40% related to variable annuity products.

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

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 approximate 9%, resulting in an
average annual growth rate of 10% during the life of the product. Similarly,
following periods of below 10% performance, the model will assume a short-term
growth rate higher than 10%. A DAC unlocking will occur if management deems
the short-term growth rate assumption (i.e., the growth rate required to revert
to the mean 10% growth rate over a five-year period) to be unreasonable. The
use of a reversion to the mean assumption is common within the industry;
however, the parameters

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used in the methodology are subject to
judgment and vary within the industry.

On December 9, 2002, the
Company entered into a profit sharing
agreement with AIG SunAmerica Asset Management Corp. (SAAMCO), whereby
SAAMCO will pay its profits earned through servicing the Companys variable
annuity contracts to the Company (SAAMCO Agreement). SAAMCO is the
investment adviser or business manager for certain trusts that hold deposits
from the Companys variable annuity products. Pursuant to the SAAMCO
Agreement, SAAMCO will pay to the Company variable annuity fee income earned
from acting as the investment adviser or business manager for certain trusts
that hold deposits from the Companys variable annuity products. The SAAMCO
Agreement is retroactive to January 1, 2002. Amounts paid or accrued to the
Company under this agreement totaled $1.8 million in 2002.

RESULTS OF OPERATIONS

NET INCOME totaled $6.8 million in 2002, compared with $8.2 million in
2001 and $7.3 million in 2000. The operating results for 2002 include $1.8
million of fees earned by the Company pursuant to the SAAMCO Agreement.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption
of EITF 99-20 in 2001. The Company recorded a loss of $520,000, net of tax,
which is recognized in the statement of income and comprehensive income as a
cumulative effect of accounting change for the year ended December 31, 2001
(see Note 2 of Notes to Financial Statements).

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $15.8
million in 2002, compared with $14.9 million in 2001 and $11.6 million in 2000.
The improvement in 2002 over 2001 primarily resulted from decreased net
realized investment losses, increased variable annuity fees and increased net
investment income partially offset by increased amortization of deferred
acquisition costs, increased general and administrative expenses and increased
guaranteed minimum death benefits on variable annuities. The improvement in
2001 over 2000 primarily resulted from decreased amortization of deferred
acquisition costs, partially offset by lower net investment income and fee
income.

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 $38.7 million in 2002, $37.8 million in 2001 and
$42.3 million in 2000. These amounts equal 2.67% on average invested assets
(computed on a daily basis) of $1.45 billion in 2002, 2.65% on average invested
assets of $1.43 billion in 2001 and 2.50% on average invested assets of $1.69
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 $108.7 million in 2002, compared with $85.6
million in 2001 and $79.6 million in 2000. The difference between the
Companys yield on average invested assets and the rate paid on average
interest-bearing liabilities (the Spread Difference) was 2.34% in 2002, 2.37%
in 2001 and 2.28% in 2000.

Investment income (and the related yields on average invested assets)
totaled $97.4 million (6.73%) in 2002, compared with $101.0 million (7.07%) in
2001 and $119.7 million (7.09%) 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 $0.6 million in 2002, $1.2 million in 2001 and $1.9
million in 2000. These expenses are included as a reduction of investment
income in the statement of income and comprehensive income.

Interest expense totaled $58.7 million in 2002, $63.1 million in 2001 and
$77.5 million in 2000. The average rate paid on all interest-bearing

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liabilities was 4.39% in 2002, compared with 4.70% in 2001 and 4.81% in 2000.
Interest-bearing liabilities averaged $1.34 billion during 2002, $1.34 billion
during 2001 and $1.61 billion during 2000. The decline in overall rates paid in
2002 compared to 2001 and 2000 resulted primarily from the impact of a
declining interest rate environment, the continued reduction of crediting rates
on certain closed blocks of business and the impact of securities lending in
2002 at short-term rates.

CHANGE IN AVERAGE INVESTED ASSETS largely resulted from the surrenders of
certain closed blocks of fixed annuity policies. Changes in average invested
assets also reflect net exchanges to fixed accounts from the separate accounts
of variable annuity contracts, sales of fixed annuities and the fixed account
options of the Companys variable annuity products (Fixed Annuity Deposits),
and renewal deposits on its universal life products (UL Deposits). Fixed
Annuity Deposits and UL Deposits totaled $400.0 million in 2002, $80.8 million
in 2001 and $63.9 million in 2000. These deposits represents 31%, 6% and 5%,
respectively, of the related reserve balances at the beginning of the
respective periods. The increase in Fixed Annuity Deposits in 2002 is due
primarily to increased sales relating to the marketing of fixed annuities
through new distribution relationships. The environment for fixed annuity
sales remains very favorable, with alternative fixed income products at very
low rates (e.g., bank CDs) and very low surrender rates as investors continue
to seek safety and quality away from the equity markets.

NET REALIZED INVESTMENT LOSSES totaled $10.0 million in 2002, compared
with $19.3 million in 2001 and $20.8 million in 2000 and include impairment
writedowns of $9.5 million, $17.3 million and $20.8 million, respectively.
Thus, net realized losses from sales and redemptions of investments totaled
$0.5 million in 2002, compared with $2.0 million of losses in 2001 and $0.03
million of gains in 2000.

The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $370.9 million in 2002, $427.5 million in 2001 and $389.1 million
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
0.04%, 0.14% and 0.00% 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 $9.5 million, $17.3 million and $20.8
million of provisions applied to bonds in 2002, 2001 and 2000, respectively.
Impairment writedowns represent 0.66%, 1.21% and 1.23% of average invested
assets for 2002, 2001 and 2000, respectively. For the five years ended
December 31, 2002, impairment writedowns as a percentage of average invested
assets have ranged from 0.03% to 1.23% and have averaged 0.67%. Such writedowns
are based upon estimates of the net realizable value of invested assets and
recorded when declines in the value of such assets are considered to be other
than temporary. Actual realization will be dependent upon future events. The
Company recorded $0.8 million ($0.5 million, net of tax) of additional
impairments in 2001 pursuant to the implementation of EITF 99-20. This
adjustment was recorded as a cumulative effect of accounting change in the
accompanying statement of income and comprehensive income for 2001.

VARIABLE ANNUITY FEES are based on the market value of assets in separate
accounts supporting variable annuity contracts. Such fees totaled $9.0 million
in 2002, $8.0 million in 2001 and $9.1 million in 2000. The 2002 amount
includes $1.8 million of fees relating to the SAAMCO Agreement. Excluding the
impact of the SAAMCO Agreement, the decreased fees in 2002 as compared to 2001
and 2000 reflect the unfavorable equity market conditions

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in 2002, and the resulting unfavorable impact on market values of assets in the separate
accounts and additionally from net exchanges from the separate accounts to the
fixed accounts of variable annuity contracts. The decline in fees during 2001
is partially offset by net exchanges to the separate accounts from the fixed
accounts of variable annuity contracts. Variable annuity fees represent 1.9%
of average variable annuity assets in 2002 and 1.5% of average variable annuity
assets in 2001 and 2000. The increase in fees as a percentage of average
variable assets is due primarily to the $1.8 million in fees related to the
SAAMCO Agreement. Excluding the impact of the SAAMCO Agreement, variable
annuity fees would have represented 1.6% of
average variable annuity assets in 2002. Variable annuity assets averaged
$462.3 million, $517.1 million and $591.9 million during the respective
periods. Variable annuity deposits, which exclude deposits allocated to the
fixed accounts of variable annuity products, totaled $65.0 million in 2002,
$34.6 million in 2001 and $39.6 million in 2000. These amounts represent 13%,
6% and 7% of variable annuity reserves at the beginning of the respective
periods. The increase in variable annuity deposits in 2002 reflected increased
demand for a new product, FSA Advisor, initially marketed in January 2001. The
decrease in variable annuity deposits in 2001 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
(see Change in Average Invested Assets) 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 $101.3
million, $90.5 million, $72.0 million in 2002, 2001 and 2000, respectively.
Such sales primarily reflect those of FSA Advisor as well as the Companys
flagship variable annuity line, Polaris. FSA Advisor is a multimanager
variable annuity that offers investors a choice of 27 variable funds and a
guaranteed fixed-rate fund. Polaris is a multimanager variable annuity that
offers investors a choice of 31 variable funds and a number of guaranteed
fixed-rate funds. Variable Annuity Product Sales have increased in 2002 and
2001, primarily due to increased demand for the new product, FSA Advisor, which
was initially marketed in January 2001. FSA Advisor product sales were
approximately $51.3 million in 2002 as compared to $15.9 million in 2001 and
zero in 2000. Annuity Product Sales have increased in 2001, primarily due to
both new and enhanced relationships with New York based investment firms as
well as the addition of four new funds offered by Polaris in December 2000.

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).

UNIVERSAL LIFE INSURANCE FEES, NET amounted to $3.3 million, $3.4 million
and $2.2 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 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 of business from MBL Life
which occurred on July 1, 1999 and does not actively market such contracts.
Such fees represent 1.34%, 1.39% and 0.84% of average reserves for universal
life insurance contracts in the respective periods. The increase in such fees
for 2001 resulted principally from improved mortality experience (See Note 3
of the accompanying financial statements.)

SURRENDER CHARGES on fixed annuity, variable annuity and universal life
contracts totaled $1.9 million in 2002, $2.1 million in 2001 and $3.8 million
in 2000. Surrender charges generally are assessed on withdrawals at

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declining rates during the first seven years of a contract. Withdrawal payments, which
exclude claims and lump-sum annuity benefits, totaled $212.9 million in 2002,
compared with $257.3 million in 2001 and $409.2 million in 2000. These
payments, when expressed as a percentage of average related reserves, represent
12.1%, 14.2% and 19.1% for 2002, 2001 and 2000, respectively. Withdrawal rates
declined in 2002 and 2001 principally due to a lower level of surrenders on
certain closed blocks of fixed annuity business due to consumer preference for
guaranteed fixed rate investments in light of uncertainty regarding U.S. equity
market performance. Withdrawals include variable annuity payments from the
separate accounts totaling $61.5 million (13.3% of average variable annuity
liabilities), $38.6 million (7.5% of average variable annuity liabilities) and $36.6 million (6.2% of
average variable annuity liabilities) in 2002, 2001 and 2000, respectively.
The increases in variable annuity withdrawal rates in 2002 and 2001 are due to
unfavorable equity market conditions in both years.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $8.1 million in 2002, $4.3
million in 2001 and $5.0 million in 2000. General and administrative costs
were unusually low in 2001 due to certain guarantee fund credits which reduced
overall expenses. Excluding the impact of this item, general and
administrative expenses increased approximately 20% in 2002, representing the
additional costs of selling and servicing a growing fixed annuity block of
business. 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 $16.4 million in 2002,
compared with $11.6 million in 2001 and $19.4 million in 2000. The increase in
amortization in 2002 was primarily related to the impact of decreased net
investment losses while the decrease in amortization in 2001 is principally due
to the impact of increased amortization during 2000 of certain closed blocks of
fixed annuities.

ANNUAL COMMISSIONS totaled $0.8 million in 2002, compared with $0.7
million in 2001 and $0.6 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 8% of the average balances of its variable annuity
products is currently subject to such annual commissions. Based on current
sales, this percentage is expected to increase in future periods.

GUARANTEED MINIMUM DEATH BENEFITS totaled $1.7 million in 2002, compared
with $0.5 million in 2001 and $4,000 in 2000. The increase in guaranteed
minimum death benefits related to the Companys variable annuity contracts
reflects the downturn in the equity markets since 2000. Further downturns in
the equity markets could increase these expenses.

A majority of the Companys variable annuity products are issued with a
death benefit feature which provides that, upon the death of a contractholder,
the contractholders beneficiary will receive the greater of (1) the
contractholders account value, or (2) a guaranteed minimum death benefit that
varies by product (the GMDB). Depending on the product, the GMDB may equal
the principal invested, adjusted for withdrawals; or an amount equal to the
highest account value in effect on any anniversary date under the contract.
These benefits have issue age and other restrictions to reduce mortality risk
exposure. The Company bears the risk that death claims following a decline in
the financial markets may exceed contractholder account balances, and that the
fees collected under the contract are insufficient to cover the costs of the
benefit to be provided. In accordance with Generally Accepted Accounting
Principles, the Company expenses such benefits in the period incurred, and
therefore does not provide reserves for future benefits.

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INCOME TAX EXPENSE totaled $9.0 million in 2002, $6.2 million in 2001 and
$4.3 million in 2000, representing effective tax rates of 57%, 41% and 37%,
respectively. The higher rate in 2002 was principally due to the impact of a
deferred tax liability adjustment. The lower rate in 2000 was principally due
to the impact of lower state income taxes. See Note 9 of the accompanying
financial statements for a reconciliation of income tax expense to the federal
statutory rate.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDERS EQUITY increased to $213.0 million at December 31, 2002 from
$193.6 million at December 31, 2001, due principally to $12.7 million in other
comprehensive income and $6.8 million of net income recorded in 2002.

INVESTED ASSETS at December 31, 2002 totaled $1.71 billion, compared with
$1.37 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 83% of the Companys total
investment portfolio at December 31, 2002, had an aggregate fair value that was
$35.0 million greater than its amortized cost at December 31, 2002, compared
with an aggregate fair value that was $5.6 million greater than its amortized
cost at December 31, 2001. The 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 included $1.35 billion of bonds
rated by Standard & Poors (S&P),
Moodys Investors Service (Moodys), Fitch (Fitch) or the National Association of Insurance
Commissioners (NAIC), and $61.8 million of bonds rated by the Company
pursuant to statutory ratings guidelines established by the NAIC. At December
31, 2002, approximately $1.35 billion of the Bond Portfolio was investment
grade, including $474.3 million of U.S. government/agency securities and
mortgage-backed securities (MBS).

At December 31, 2002, the Bond Portfolio included $55.7 million of bonds
that were not investment grade. These non-investment-grade bonds accounted for
approximately 2.5% of the Companys total assets and approximately 3.3% 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 22 industries with 13% of these assets concentrated in
telecommunications and 12% of these assets concentrated in energy. No other
industry concentration constituted more than 10% of these assets.

The table on the following page summarizes the Companys rated bonds by
rating classification as of 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
|                                           |  |                                   |           |                        
|                                           |  |                                   |           |                         |  | Estimated |           | NAIC      |  |                                  |   |  |  | Estimated
|S&P/Moodys/Fitch                          |  | Amortized                         |           | fair                    |  | category  |           | Amortized |  | fair                            
|Category (1)                               |  | cost                              |           | value                   |  | (2)       |           | cost      |  | value                           
|                                           |  |                                   |           |                         |  |           |           |           |  |                                 
|AAA + to A-
(Aaa to A3)
[AAA to A-]        |  | $                                 | 838,082   |                         |  | $         | 871,008   |           |  |                                  | 1 |  |  | $         | 177,853 |  |  | $ | 187,691 | 
|BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-] |  |                                   | 230,778   |                         |  |           | 230,011   |           |  |                                  | 2 |  |  |           | 64,393  |  |  |   | 65,630  | 
|BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]       |  |                                   | 29,405    |                         |  |           | 26,804    |           |  |                                  | 3 |  |  |           | 1,000   |  |  |   | 680     | 
|B+ to B-
(B1 to B3)
[B+ to B-]             |  |                                   | 18,189    |                         |  |           | 13,276    |           |  |                                  | 4 |  |  |           | 2,000   |  |  |   | 1,990   | 
|CCC+ to C
(Caa to C)
[CCC]                 |  |                                   | 3,704     |                         |  |           | 1,855     |           |  |                                  | 5 |  |  |           | 7,034   |  |  |   | 6,513   | 
|CI to D
[DD]
{D}                           |  |                                   |          |                         |  |           |          |           |  |                                  | 6 |  |  |           | 2,588   |  |  |   | 4,595   | 
|                                           |  |                                   |           |                         |  |           |           |           |  |                                  |   |  |  |           |         |  |  |   |         | 
|TOTAL RATED
ISSUES                         |  | $                                 | 1,120,158 |                         |  | $         | 1,142,954 |           |  |                                  |   |  |  | $         | 254,868 |  |  | $ | 267,099 | 
|                                           |  |                                   |           |                         |  |           |           |           |  |                                  |   |  |  |           |         |  |  |   |         | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                           |  |           |           |       |  |           |           |          |  |         |       |  
|------------------------------------------ |  | --------- | --------- | ----- |  | --------- | --------- | -------- |  | ------- | ----- | -
|                                           |  | Total    
|                                           |  |          
|                                           |  |           |           |       |  |           |           |          |  | Percent
|                                           |  |           |           |       |  | Estimated |           | of total
|S&P/Moodys/Fitch                          |  | Amortized |           | fair  |  | invested 
|Category (1)                               |  | cost      |           | value |  | assets   
|                                           |  |           |           |       |  |          
|AAA + to A-
(Aaa to A3)
[AAA to A-]        |  | $         | 1,015,935 |       |  | $         | 1,058,699 |          |  |         | 61.99 | %
|BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-] |  |           | 295,171   |       |  |           | 295,641   |          |  |         | 17.31 | %
|BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]       |  |           | 30,405    |       |  |           | 27,484    |          |  |         | 1.61  | %
|B+ to B-
(B1 to B3)
[B+ to B-]             |  |           | 20,189    |       |  |           | 15,266    |          |  |         | 0.89  | %
|CCC+ to C
(Caa to C)
[CCC]                 |  |           | 10,738    |       |  |           | 8,368     |          |  |         | 0.49  | %
|CI to D
[DD]
{D}                           |  |           | 2,588     |       |  |           | 4,595     |          |  |         | 0.27  | %
|                                           |  |           |           |       |  |           |           |          |  |         |       |  
|TOTAL RATED
ISSUES                         |  | $         | 1,375,026 |       |  | $         | 1,410,053 |          |  |         |       |  
|                                           |  |           |           |       |  |           |           |          |  |         |       |  



Footnotes appear on the following page.

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| |  | Footnotes to the table of Rated Bonds by Rating Classification
| |  | --------------------------------------------------------------



|(1) |  | S&P and Fitch rate debt securities in rating categories ranging from AAA
(the highest) to D (in payment default). A plus (+) or minus (-)
indicates the debts relative standing within the rating category. A
security rated BBB- or higher is considered investment grade. Moodys
rates debt securities in rating categories ranging from Aaa (the highest)
to C (extremely poor prospects of ever attaining any real investment
standing). The number 1,2 or 3 (with 1 the highest and 3 the lowest)
indicates the debts relative standing within the rating category. A
security rated Baa3 or higher is considered investment grade. Issues are
categorized based on the highest of the S&P, Moodys, and Fitch ratings if
rated by multiple agencies.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Bonds and short-term promissory instruments are divided into six quality
categories for NAIC rating purposes, ranging from 1 (highest) to 5
(lowest) for nondefaulted bonds plus one category, 6, for bonds in or near
default. These six categories correspond with the S&P/Moodys/Fitch
rating groups listed above, with categories 1 and 2 considered investment
grade. The NAIC categories include $61.8 million of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines.                                                                                                                                                                                                                                                

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At December 31, 2002, approximately $194.1 million of the Bond Portfolio
had an aggregate unrealized loss of $27.9 million. The gross unrealized losses
in the bond portfolio included the following concentrations:

|                                      |  |                   |        | 
|------------------------------------- |  | ----------------- | ------ | 
|                                      |  | Gross            
|Concentration                         |  | Unrealized Losses
|                                      |  |                  
|                                      |  | (In thousands)   
|Investment Grade:                     |  |                   |        | 
|Finance Companies                     |  | $                 | 13,400 | 
|Media Cable                           |  |                   |       | 
|Airlines                              |  |                   | 2,052  | 
|Public Utility                        |  |                   | 312    | 
|Energy                                |  |                   |       | 
|                                     
|Not rated and Below Investment Grade: |  |                   |        | 
|Finance Companies                     |  |                   | 627    | 
|Media Cable                           |  |                   | 2,825  | 
|Airlines                              |  |                   |       | 
|Public Utility                        |  |                   | 1,702  | 
|Energy                                |  |                   | 1,465  | 

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                |  | $              | 5,502   | 
|Due after one year through five years  |  |                | 53,391  | 
|Due after five years through ten years |  |                | 115,057 | 
|Due after ten years                    |  |                | 48,086  | 
|                                       |  |                |         | 
|Total                                  |  | $              | 222,036 | 
|                                       |  |                |         | 

Senior secured loans (Secured Loans) are included in the Bond Portfolio
and aggregated $32.3 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 $30.9 million of privately traded
securities and $1.4 million of publicly traded securities. These Secured Loans
are composed of loans to borrowers spanning 6 industries, with 53% of these
assets concentrated in energy, 16% concentrated in finance institutions and 11%
concentrated in leisure and gaming. No other industry concentration constituted
more than 10% of these assets.

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

MORTGAGE LOANS aggregated $193.0 million at December 31, 2002 and
consisted of 88 commercial first mortgage loans with an average loan balance

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of approximately $2.2 million, collateralized by properties located in 29
states. Approximately 41% of this portfolio was office, 16% was retail, 16%
was multifamily residential, 14% was industrial, and 13% was other types. At
December 31, 2002, approximately 31% of this portfolio was secured by
properties located in California, approximately 13% by properties located in
Texas, approximately 11% by properties located in Michigan and no more than 10%
of this portfolio was secured by properties located in any other single state.
At December 31, 2002, 3 mortgage loans have an outstanding balance of $10.0
million or more, which collectively aggregated approximately 25% of this
portfolio. At December 31, 2002, approximately 28% 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.

At December 31, 2002, approximately 32% of the mortgage loans were
seasoned loans underwritten to the Companys standards and purchased at or near
par from other financial institutions. Such loans generally have higher
average interest rates than loans that could be originated today. The balance
of the mortgage loan portfolio has been originated by the Company under strict
underwriting standards. Commercial mortgage loans on properties such as
offices, hotels and shopping centers generally represent a higher level of risk
than do mortgage loans secured by multifamily residences. This greater risk is
due to several factors, including the larger size of such loans and the more
immediate effects of general economic conditions on these commercial property
types. However, due to the seasoned nature of the Companys mortgage loan
portfolio and its strict underwriting standards, the Company believes that it
has prudently managed the risk attributable to its mortgage loan portfolio
while maintaining attractive yields.

POLICY LOANS totaled $36.1 million at December 31, 2002, compared to $37.3
million at December 31, 2001 and primarily represent loans taken against
universal life insurance policies.

OTHER INVESTED ASSETS aggregated $29.6 million at December 31, 2002 and
principally included collateral held under a securities lending agreement with
an affiliated agent. The Company has entered into such 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 Company monitors the daily market value of
securities loaned with respect to the collateral value and obtains additional
collateral when necessary to ensure that collateral is maintained at a minimum
of 102% of the value of the loaned securities. Such collateral is not
available for the general use of the Company.

ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks
of interest rate fluctuations and disintermediation. 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 65% of the Companys fixed annuity and universal life reserves
had surrender penalties or other restrictions at December 31, 2002.

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As part of its asset-liability
 matching discipline, the Company conducts
detailed computer simulations that model its fixed-rate assets and liabilities
under commonly used stress-test interest rate scenarios. With the results of
these computer simulations, the Company can measure the potential gain or loss
in fair value of its interest-rate sensitive instruments and seek to protect
its economic value and achieve a predictable spread between what it earns on
its invested assets and what it pays on its liabilities by designing its
fixed-rate products and conducting its investment operations to closely match
the duration of the fixed-rate assets to that of its fixed-rate liabilities.
The Companys fixed-rate assets include: cash and short-term investments;
bonds, notes and redeemable preferred stocks; mortgage loans; and policy loans.
At December 31, 2002, these assets had an aggregate fair value of $1.73
billion with a duration of 3.9. The Companys fixed-rate liabilities include
fixed annuity and universal life insurance contracts. 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 $1.58 billion
with a duration of 4.0. The Companys potential exposure due to a relative 10%
decrease in prevailing interest rates from their December 31, 2002 levels is a
loss of approximately $1.2 million, representing the increase in fair value of
its fixed rate liabilities that is not offset by an increase in fair value of
its fixed rate assets. Because the Company actively manages its assets and
liabilities and has strategies in place to minimize its exposure to loss as
interest rate changes occur, it expects that actual losses would be less than
the estimated potential loss.

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

The Company also seeks to provide liquidity by investing in MBSs. MBSs
are generally investment-grade securities collateralized by large pools of
mortgage loans. MBSs generally pay principal and interest monthly. The amount
of principal and interest payments may fluctuate as a result of prepayments of
the underlying mortgage loans.

There are risks associated with some of the techniques the Company uses to
provide liquidity, enhance its spread income and match its assets and
liabilities. The primary risk associated with MBSs is that a changing interest
rate environment might cause prepayment of the underlying obligations at speeds
slower or faster than anticipated at the time of their purchase. As part of
its decision to purchase an MBS, the Company assesses the risk of prepayment by
analyzing the securitys projected performance over an array of interest-rate
scenarios. Once an MBS is purchased, the Company monitors its actual
prepayment experience monthly to reassess the relative attractiveness of the
security with the intent to maximize total return.

INVESTED ASSETS EVALUATION is routinely conducted by the Company.
Management identifies monthly those investments that require additional
monitoring and carefully reviews the carrying values of such investments at
least quarterly to determine whether specific investments should be placed on a
nonaccrual basis and to determine declines in value that may be other than
temporary. In making these reviews for bonds, management principally considers
the adequacy of any collateral, compliance with contractual

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covenants, the borrowers recent financial performance, news reports and other
externally generated information concerning the creditors affairs. In the case
of publicly traded bonds, management also considers market value quotations, if
available. For mortgage loans, management generally considers information
concerning the mortgaged property and, among other things, factors impacting
the current and expected payment status of the loan and, if available, the
current fair value of the underlying collateral.

The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to net realizable value and, in
the case of bonds, no further accruals of interest are made. The provisions
for impairment on mortgage loans are based on losses expected by management to
be realized on transfers of mortgage loans to real estate, on the disposition
and settlement of mortgage loans and on mortgage loans that management believes
may not be collectible in full. Accrual of interest is suspended when principal
and interest payments on mortgage loans are past due more than 90 days.
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 $5.7 million of bonds at
December 31, 2002, and constituted less than 0.3% of total invested assets. At
December 31, 2001, defaulted investments totaled $3.4 million of bonds and
constituted less than 0.3% of total invested assets.

SOURCES OF LIQUIDITY are readily available to the Company in the form of
the Companys existing portfolio of cash and short-term investments, and if
required, proceeds from invested asset sales. The Companys liquidity is
primarily derived from operating cash flows. At December 31, 2002,
approximately $1.22 billion of the Bond Portfolio had an aggregate unrealized
gain of $62.9 million while approximately $194.1 million of the Companys Bond
Portfolio had an aggregate unrealized loss of $27.9 million. In addition, the
Companys investment portfolio currently provides approximately $13.2 million
of monthly cash flow from scheduled principal and interest payments.
Historically, cash flows from operations and from the sale of the Companys
annuity products have been more than sufficient in amount to satisfy the
Companys liquidity needs.

Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Companys average cost of funds would increase over time as it prices its new
and renewing annuities to maintain a generally competitive market 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. 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
23Table of Contentsevents that may cause such a liquidity strain could be the result of economic
collapse or terrorist acts.GUARANTEES AND OTHER COMMITMENTS: In the ordinary course of business, the
Company is obligated to purchase approximately $16.0 million of asset backed
securities as of December 31, 2002. The expiration dates of these commitments
are as follows: $7.0 million in 2003, $4.0 million in 2004 and $5.0 million in
2006.RECENTLY ISSUED ACCOUNTING STANDARDS are discussed in Note 2 of the
accompanying financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe 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 21 and
22 herein.CONTROLS & PROCEDURES(A)
    
    Evaluation of disclosure controls and procedures. The conclusions of our
principal executive officer and principal financial officer about the
effectiveness of the Companys disclosure controls and procedures based on
their evaluation of these controls and procedures within 90 days prior to
filing the 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe 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 AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.None.24Table of Contents
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KFinancial Statements and Financial Statement SchedulesReference 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), Anchor National 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)    |  | Agreement and Plan of Merger and Amended and Restated Certificate
of Incorporation are incorporated herein by reference to Exhibit 3(a)
of the Companys 1997 Annual Report on Form 10-K, filed September 22,
1997.                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                             
|3(b)    |  | Bylaws, as amended January 1, 1996, are incorporated herein by
reference to Exhibit 3(b) of the Companys annual report on Form 10-Q
for the quarter ended March 31, 1996, dated May 14, 1996.                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                             
|4(a)    |  | Agreement and Plan of Merger and Amended and Restated Certificate
of Incorporation, filed with the State of New York, Insurance
Department, effective as of October 31, 1997. See Exhibit 3(a).                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                             
|4(b)    |  | Bylaws, as amended January 1, 1996. See Exhibit 3(b).                                                                                                                                                                                                                                                       

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.

25



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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.

| |                                                                          
| | -------------------------------------------------------------------------
| | FIRST SUNAMERICA LIFE INSURANCE COMPANY                                  
| |                                                                          
| | By /s/ N. SCOTT GILLIS
N. 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/ | JAY S. WINTROB      |                         | Chief Executive Officer   |  | March 28, 2003
|    |                     | and Director (Principal |                           | 
|    | Jay S. Wintrob      |                         | Executive Officer)        |  |               
|    |                     |                         |                           |  |               
|    |                     |                         |                           |  |               
|/s/ | N. SCOTT GILLIS     |                         | Senior Vice President and |  | March 28, 2003
|    |                     | Director (Principal     |                           | 
|    | N. Scott Gillis     |                         | Financial Officer)        |  |               
|    |                     |                         |                           |  |               
|    |                     |                         |                           |  |               
|/s/ | MAURICE S. HEBERT   |                         | Vice President and        |  | March 28, 2003
|    |                     | Controller (Principal   |                           | 
|    | Maurice S. Hebert   |                         | Accounting Officer)       |  |               
|    |                     |                         |                           |  |               
|    |                     |                         |                           |  |               
|/s/ | JAMES R. BELARDI    |                         | Senior Vice President     |  | March 28, 2003
|    |                     | and Director            |                           | 
|    | James R. Belardi    |                         |                           |  |               
|    |                     |                         |                           |  |               
|/s/ | MARC H. GAMSIN      |                         | Senior Vice President     |  | March 28, 2003
|    |                     | and Director            |                           | 
|    | Marc H. Gamsin      |                         |                           |  |               
|    |                     |                         |                           |  |               
|/s/ | JANA W. GREER       |                         | President and Director    |  | March 28, 2003
|    |                     |                         |                           | 
|    | Jana W. Greer       |                         |                           |  |               
|    |                     |                         |                           |  |               
|/s/ | HOWARD I. SMITH     |                         | Director                  |  | March 28, 2003
|    |                     |                         |                           | 
|    | Howard I. Smith     |                         |                           |  |               
|    |                     |                         |                           |  |               
|/s/ | ERNEST T. PATRIKIS  |                         | Director                  |  | March 28, 2003
|    |                     |                         |                           | 
|    | Ernest T. Patrikis  |                         |                           |  |               
|    |                     |                         |                           |  |               
|/s/ | M. BERNARD AIDINOFF |                         | Director                  |  | March 28, 2003
|    |                     |                         |                           | 
|    | M. Bernard Aidinoff |                         |                           |  |               
|    |                     |                         |                           |  |               
|/s/ | EDWIN R. RAQUEL     |                         | Senior Vice President     |  | March 28, 2003
|    |                     | and Chief Actuary       |                           | 
|    | Edwin R. Raquel     |                         |                           |  |               

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FIRST SUNAMERICA LIFE INSURANCE COMPANY

INDEX TO FINANCIAL STATEMENTS

|                                                                                                                       |  |            
|---------------------------------------------------------------------------------------------------------------------- |  | -----------
|                                                                                                                       |  | Page       
|                                                                                                                       |  | Number(s)  
|                                                                                                                       |  |            
|Report of Independent Accountants                                                                                      |  | F-2        
|Balance Sheet - December 31, 2002 and December 31, 2001                                                                |  | F-3        
|Statement of Income and Comprehensive Income - Years Ended
December 31, 2002, December 31, 2001, and
December 31, 2000 |  | F-4 to F-5 
|Statement of Cash Flows - Years Ended December 31, 2002,
December 31, 2001, and
December 31, 2000                      |  | F-6 to F-7 
|Notes to Financial Statements                                                                                          |  | F-8 to F-25

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Report of Independent Accountants

To the Board of Directors and Shareholder of
First SunAmerica Life Insurance Company:

In our opinion, the accompanying balance sheet and the related statements of
income and comprehensive income and of cash flows present fairly, in all
material respects, the financial position of First SunAmerica Life Insurance
Company, an indirect wholly owned subsidiary of American International Group,
Inc., at December 31, 2002 and 2001, and the results of its operations and its
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 financial statements, the Company changed its
method of accounting for interest income and impairment of certain beneficial
interests in securitized financial assets in 2001.

PricewaterhouseCoopers LLP
Los Angeles, California
February 11, 2003

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FIRST SUNAMERICA LIFE INSURANCE COMPANY

BALANCE SHEET

|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |           |           | 
|--------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | -------------- | --------- | ---- | --------- | --------- | --------- | 
|                                                          |                                                                                                    |                                                                                                                                                       |           | December 31,  
|                                                          |                                                                                                    |                                                                                                                                                       |           |               
|                                                          |                                                                                                    |                                                                                                                                                       |           | 2002           |           | 2001
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |     
|                                                          |                                                                                                    |                                                                                                                                                       |           | (In thousands)
|ASSETS                                                    |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|Investments and cash:                                     |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|                                                          | Cash and short-term investments                                                                    |                                                                                                                                                       | $         | 37,955         |           |      | $         | 28,982    |          
|                                                          |                                                                                                    | Bonds, notes and redeemable preferred stocks
available for sale, at fair value
(amortized cost: December 2002, $1,375,026;
December 2001, $1,122,577) |           |                | 1,410,053 |      |           |           | 1,128,203 | 
|                                                          | Mortgage loans                                                                                     |                                                                                                                                                       |           | 193,035        |           |      |           | 172,626   |          
|                                                          | Policy loans                                                                                       |                                                                                                                                                       |           | 36,052         |           |      |           | 37,343    |          
|                                                          | Common stocks available for sale,
at fair value (cost: December 2002, $1,629;
December 2001, $871) |                                                                                                                                                       |           | 1,140          |           |      |           | 544       |          
|                                                          | Other invested assets                                                                              |                                                                                                                                                       |           | 29,569         |           |      |           |          |          
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|                                                          | Total investments and cash                                                                         |                                                                                                                                                       |           | 1,707,804      |           |      |           | 1,367,698 |          
|                                                         
|Variable annuity assets held in separate
accounts         |                                                                                                    |                                                                                                                                                       | 399,017   |                |           |      | 514,203   |          
|Accrued investment income                                 |                                                                                                    |                                                                                                                                                       | 15,849    |                |           |      | 12,312    |          
|Deferred acquisition costs                                |                                                                                                    |                                                                                                                                                       | 104,459   |                |           |      | 100,182   |          
|Income taxes currently receivable from Parent             |                                                                                                    |                                                                                                                                                       | 9,831     |                |           |      |          |          
|Deferred income taxes                                     |                                                                                                    |                                                                                                                                                       |          |                |           |      | 1,947     |          
|Receivable from brokers                                   |                                                                                                    |                                                                                                                                                       | 1,025     |                |           |      |          |          
|Other assets                                              |                                                                                                    |                                                                                                                                                       | 1,401     |                |           |      | 2,261     |          
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|TOTAL ASSETS                                              |                                                                                                    | $                                                                                                                                                     | 2,239,386 |                |           | $    | 1,998,603 |          
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY                      |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|Reserves, payables and accrued liabilities:               |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|                                                          | Reserves for fixed annuity contracts                                                               |                                                                                                                                                       | $         | 1,290,702      |           |      | $         | 1,024,830 |          
|                                                          | Reserves for universal life insurance
contracts                                                    |                                                                                                                                                       |           | 237,862        |           |      |           | 248,161   |          
|                                                          | Income taxes currently payable to Parent                                                           |                                                                                                                                                       |           |               |           |      |           | 3,719     |          
|                                                          | Securities loaned under collateral agreements                                                      |                                                                                                                                                       |           | 29,569         |           |      |           |          |          
|                                                          | Other liabilities                                                                                  |                                                                                                                                                       |           | 38,804         |           |      |           | 14,111    |          
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|Total reserves, payables
and accrued liabilities          |                                                                                                    |                                                                                                                                                       | 1,596,937 |                |           |      | 1,290,821 |          
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|Variable annuity liabilities related
to separate accounts |                                                                                                    |                                                                                                                                                       | 399,017   |                |           |      | 514,203   |          
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|Deferred income taxes                                     |                                                                                                    |                                                                                                                                                       | 30,394    |                |           |      |          |          
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|Shareholders equity:                                     |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|                                                          | Common stock                                                                                       |                                                                                                                                                       |           | 3,000          |           |      |           | 3,000     |          
|                                                          | Additional paid-in capital                                                                         |                                                                                                                                                       |           | 144,428        |           |      |           | 144,428   |          
|                                                          | Retained earnings                                                                                  |                                                                                                                                                       |           | 51,740         |           |      |           | 44,982    |          
|                                                          | Accumulated other comprehensive income                                                             |                                                                                                                                                       |           | 13,870         |           |      |           | 1,169     |          
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|                                                          | Total shareholders equity                                                                         |                                                                                                                                                       |           | 213,038        |           |      |           | 193,579   |          
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |          
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                |                                                                                                    | $                                                                                                                                                     | 2,239,386 |                |           | $    | 1,998,603 |          
|                                                          |                                                                                                    |                                                                                                                                                       |           |                |           |      |           |           |          

See accompanying notes to financial statements

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FIRST SUNAMERICA LIFE INSURANCE COMPANY

STATEMENT OF INCOME AND COMPREHENSIVE INCOME

|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |         |  
|----------------------------------------------------------- | ---------------------------------- | - | ------------------------ | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                            |                                    |   | Years Ended December 31,
|                                                            |                                    |   |                         
|                                                            |                                    |   | 2002                     |         | 2001 |   | 2000   
|                                                            |                                    |   |                          |         |      |   |        
|                                                            |                                    |   | (In thousands)          
|Investment income                                           |                                    | $ | 97,380                   |         |      | $ | 100,952 |         |   | $ | 119,729 |        
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|Interest expense on:                                        |                                    |   |                          |         |      |   |         |         |   |   |         |        
|                                                            | Fixed annuity contracts            |   |                          | (47,186 | )    |   |         | (51,320 | ) |   |         | (65,097 | )
|                                                            | Universal life insurance contracts |   |                          | (11,489 | )    |   |         | (11,815 | ) |   |         | (12,363 | )
|                                                            | Securities lending agreements      |   |                          | (53     | )    |   |         |        |   |   |         |        |  
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|                                                            | Total interest expense             |   |                          | (58,728 | )    |   |         | (63,135 | ) |   |         | (77,460 | )
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|NET INVESTMENT INCOME                                       |                                    |   | 38,652                   |         |      |   | 37,817  |         |   |   | 42,269  |        
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|NET REALIZED INVESTMENT LOSSES                              |                                    |   | (10,025                  | )       |      |   | (19,266 | )       |   |   | (20,779 | )      
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|Fee income:                                                 |                                    |   |                          |         |      |   |         |         |   |   |         |        
|                                                            | Variable annuity fees              |   |                          | 9,003   |      |   |         | 8,041   |   |   |         | 9,140   |  
|                                                            | Universal life insurance fees, net |   |                          | 3,291   |      |   |         | 3,400   |   |   |         | 2,166   |  
|                                                            | Surrender charges                  |   |                          | 1,854   |      |   |         | 2,141   |   |   |         | 3,776   |  
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|TOTAL FEE INCOME                                            |                                    |   | 14,148                   |         |      |   | 13,582  |         |   |   | 15,082  |        
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|GENERAL AND ADMINISTRATIVE EXPENSES                         |                                    |   | (8,112                   | )       |      |   | (4,341  | )       |   |   | (4,945  | )      
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|AMORTIZATION OF DEFERRED ACQUISITION COSTS                  |                                    |   | (16,367                  | )       |      |   | (11,629 | )       |   |   | (19,399 | )      
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|ANNUAL COMMISSIONS                                          |                                    |   | (771                     | )       |      |   | (724    | )       |   |   | (619    | )      
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|GUARANTEED MINIMUM DEATH BENEFITS                           |                                    |   | (1,735                   | )       |      |   | (546    | )       |   |   | (4      | )      
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|PRETAX INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE |                                    |   | 15,790                   |         |      |   | 14,893  |         |   |   | 11,605  |        
|                                                           
|Income tax expense                                          |                                    |   | (9,032                   | )       |      |   | (6,180  | )       |   |   | (4,325  | )      
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE        |                                    |   | 6,758                    |         |      |   | 8,713   |         |   |   | 7,280   |        
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAX          |                                    |   |                         |         |      |   | (520    | )       |   |   |        |        
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        
|NET INCOME                                                  |                                    | $ | 6,758                    |         |      | $ | 8,193   |         |   | $ | 7,280   |        
|                                                            |                                    |   |                          |         |      |   |         |         |   |   |         |        

See accompanying notes to financial statements

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FIRST SUNAMERICA LIFE INSURANCE COMPANY

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 on debt and equity
securities available for sale identified
in the current period (net of income tax
expense of $5,643, $2,515, and $4,855 for
the years ended December 31, 2002,
2001 and 2000, respectively) |   | $                        | 10,480 |      |   | $      | 4,669 |  |   | $      | 9,019  | 
|                                      
|                                       | Less reclassification adjustment for net
realized losses included in net income
(net of income tax benefit of $1,196,
$3,225 and $5,433 for the years ended
December 31, 2002, 2001, and 2000,
respectively)                        |   |                          | 2,221  |      |   |        | 5,989 |  |   |        | 10,089 | 
|                                       |                                                                                                                                                                                                                                     |   |                          |        |      |   |        |       |  |   |        |       
|OTHER COMPREHENSIVE INCOME             |                                                                                                                                                                                                                                     |   | 12,701                   |        |      |   | 10,658 |       |  |   | 19,108 |       
|                                       |                                                                                                                                                                                                                                     |   |                          |        |      |   |        |       |  |   |        |       
|COMPREHENSIVE INCOME                   |                                                                                                                                                                                                                                     | $ | 19,459                   |        |      | $ | 18,851 |       |  | $ | 26,388 |       
|                                       |                                                                                                                                                                                                                                     |   |                          |        |      |   |        |       |  |   |        |       

See accompanying notes to financial statements

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FIRST SUNAMERICA LIFE INSURANCE COMPANY

STATEMENT OF CASH FLOWS

|                                                    |                                                                                                                                                                                |                                                     |            |                                                           |          |                          |         |       |          |      |         |         |         |   |        |  
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------- | ---------- | --------------------------------------------------------- | -------- | ------------------------ | ------- | ----- | -------- | ---- | ------- | ------- | ------- | - | ------ | -
|                                                    |                                                                                                                                                                                |                                                     |            |                                                           |          | Years Ended December 31,
|                                                    |                                                                                                                                                                                |                                                     |            |                                                           |          |                         
|                                                    |                                                                                                                                                                                |                                                     |            |                                                           |          | 2002                     |         | 2001  |          | 2000
|                                                    |                                                                                                                                                                                |                                                     |            |                                                           |          |                          |         |       |          |     
|                                                    |                                                                                                                                                                                |                                                     |            |                                                           |          | (In thousands)          
|CASH FLOWS FROM OPERATING ACTIVITIES:               |                                                                                                                                                                                |                                                     |            |                                                           |          |                          |         |       |          |      |         |        
|                                                    | Net income                                                                                                                                                                     |                                                     | $          | 6,758                                                     |          |                          | $       | 8,193 |          |      | $       | 7,280   |        
|                                                    | Adjustments to reconcile net
income to net cash provided
by operating activities:                                                                                              |                                                     |            |                                                           |          |                          |         |       |          |      |         |         |        
|                                                    |                                                                                                                                                                                |                                                     |            | Cumulative effect of
accounting change, net of tax        |          |                          |        |       |          |      | 520     |         |         |   |       |  
|                                                    |                                                                                                                                                                                |                                                     |            | Interest credited to:                                     |          |                          |         |       |          |      |         |         |         |   |        |  
|                                                    |                                                                                                                                                                                |                                                     |            | Fixed annuity contracts                                   |          |                          | 47,186  |       |          |      | 51,320  |         |         |   | 65,097 |  
|                                                    |                                                                                                                                                                                |                                                     |            | Universal life insurance contracts                        |          |                          | 11,489  |       |          |      | 11,815  |         |         |   | 12,363 |  
|                                                    |                                                                                                                                                                                |                                                     |            | Net realized investment losses                            |          |                          | 10,025  |       |          |      | 19,266  |         |         |   | 20,779 |  
|                                                    |                                                                                                                                                                                |                                                     |            | Accretion of net discounts on investments                 |          |                          | (1,241  | )     |          |      | (2,999  | )       |         |   | (4,538 | )
|                                                    |                                                                                                                                                                                |                                                     |            | Amortization of deferred acquisition costs                |          |                          | 16,367  |       |          |      | 11,629  |         |         |   | 19,399 |  
|                                                    |                                                                                                                                                                                |                                                     |            | Acquisition costs deferred                                |          |                          | (30,345 | )     |          |      | (8,160  | )       |         |   | (9,113 | )
|                                                    |                                                                                                                                                                                |                                                     |            | Provision for deferred income taxes                       |          |                          | 25,503  |       |          |      | 507     |         |         |   | 73     |  
|                                                    |                                                                                                                                                                                |                                                     | Change in: |                                                           |          |                          |         |       |          |      |         |         |         |   |       
|                                                    |                                                                                                                                                                                |                                                     |            | Accrued investment income                                 |          |                          | (3,537  | )     |          |      | 2,497   |         |         |   | 9,267  |  
|                                                    |                                                                                                                                                                                |                                                     |            | Income taxes currently receivable from/
payable to Parent |          |                          | (13,550 | )     |          |      | 11,786  |         |         |   | (1,429 | )
|                                                    |                                                                                                                                                                                |                                                     |            | Other liabilities                                         |          |                          | (3,955  | )     |          |      | (8,447  | )       |         |   | (1,938 | )
|                                                    |                                                                                                                                                                                |                                                     |            | Other, net                                                |          |                          | 510     |       |          |      | 1,100   |         |         |   | 868    |  
|                                                    |                                                                                                                                                                                |                                                     |            |                                                           |          |                          |         |       |          |      |         |        
|NET CASH PROVIDED BY OPERATING ACTIVITIES           |                                                                                                                                                                                |                                                     | 65,210     |                                                           |          |                          | 99,027  |       |          |      | 118,108 |        
|                                                    |                                                                                                                                                                                |                                                     |            |                                                           |          |                          |         |       |          |      |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES:               |                                                                                                                                                                                |                                                     |            |                                                           |          |                          |         |       |          |      |         |        
|                                                    | Purchases of:                                                                                                                                                                  |                                                     |            |                                                           |          |                          |         |       |          |      |         |         |        
|                                                    |                                                                                                                                                                                | Bonds, notes and redeemable preferred stock         |            |                                                           | (604,280 | )                        |         |       | (266,757 | )    |         |         | (33,317 | )
|                                                    |                                                                                                                                                                                | Mortgage loans                                      |            |                                                           | (45,944  | )                        |         |       | (31,540  | )    |         |         | (7,158  | )
|                                                    |                                                                                                                                                                                | Common stock                                        |            |                                                           | (845     | )                        |         |       | (58      | )    |         |         | (813    | )
|                                                    |                                                                                                                                                                                | Other investments, excluding
short-term investments |            |                                                           | (417     | )                        |         |       | (229     | )    |         |         |        |  
|                                                    | Sales of:                                                                                                                                                                      |                                                     |            |                                                           |          |                          |         |       |          |      |         |         |        
|                                                    |                                                                                                                                                                                | Bonds, notes and redeemable preferred stock         |            |                                                           | 219,856  |                          |         |       | 246,769  |      |         |         | 171,702 |  
|                                                    |                                                                                                                                                                                |                                                     |            | Other investments, excluding
short-term investments       |          |                          | 49      |       |          |      | 42      |         |         |   | 487    |  
|                                                    | Redemptions and maturities of:                                                                                                                                                 |                                                     |            |                                                           |          |                          |         |       |          |      |         |         |        
|                                                    |                                                                                                                                                                                | Bonds, notes and redeemable preferred stock         |            |                                                           | 121,907  |                          |         |       | 149,150  |      |         |         | 162,464 |  
|                                                    |                                                                                                                                                                                | Mortgage loans                                      |            |                                                           | 25,833   |                          |         |       | 26,813   |      |         |         | 51,998  |  
|                                                    |                                                                                                                                                                                | Other investments, excluding
short-term investments |            |                                                           | 1,709    |                          |         |       | 2,767    |      |         |         | 2,324   |  
|                                                    | Short-term investments received from (transferred to) AIG SunAmerica
Life Assurance Company relating to assumption
reinsurance transaction with MBL Life
Assurance Corporation |                                                     |            |                                                          |          |                          |         |      |          |      |         | (16,741 | )      
|                                                    |                                                                                                                                                                                |                                                     |            |                                                           |          |                          |         |       |          |      |         |        
|NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES |                                                                                                                                                                                | $                                                   | (282,132   | )                                                         |          | $                        | 126,957 |       |          | $    | 330,946 |        
|                                                    |                                                                                                                                                                                |                                                     |            |                                                           |          |                          |         |       |          |      |         |         |        

See accompanying notes to financial statements

F-6



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

STATEMENT OF CASH FLOWS (Continued)

|                                                           |                                                                          |                                    |         |                          |          |      |          |         |          |   |          |         |          |  
|---------------------------------------------------------- | ------------------------------------------------------------------------ | ---------------------------------- | ------- | ------------------------ | -------- | ---- | -------- | ------- | -------- | - | -------- | ------- | -------- | -
|                                                           |                                                                          |                                    |         | Years Ended December 31,
|                                                           |                                                                          |                                    |         |                         
|                                                           |                                                                          |                                    |         | 2002                     |          | 2001 |          | 2000   
|                                                           |                                                                          |                                    |         |                          |          |      |          |        
|                                                           |                                                                          |                                    |         | (In thousands)          
|CASH FLOWS FROM FINANCING ACTIVITIES:                      |                                                                          |                                    |         |                          |          |      |          |         |          |   |          |        
|                                                           | Premium receipts on:                                                     |                                    |         |                          |          |      |          |         |          |   |          |         |         
|                                                           |                                                                          | Fixed annuity contracts            |         | $                        | 390,318  |      |          | $       | 66,463   |   |          | $       | 41,365   |  
|                                                           |                                                                          | Universal life insurance contracts |         |                          | 9,712    |      |          |         | 10,466   |   |          |         | 10,931   |  
|                                                           | Net exchanges from (to) the fixed accounts of
variable annuity contracts |                                    |         | 23,542                   |          |      |          | (33,539 | )        |   |          | (47,090 | )       
|                                                           | Withdrawal payments on:                                                  |                                    |         |                          |          |      |          |         |          |   |          |         |         
|                                                           |                                                                          | Fixed annuity contracts            |         |                          | (137,007 | )    |          |         | (207,166 | ) |          |         | (355,023 | )
|                                                           |                                                                          | Universal life insurance contracts |         |                          | (10,740  | )    |          |         | (11,565  | ) |          |         | (17,541  | )
|                                                           | Claims and annuity payments on:                                          |                                    |         |                          |          |      |          |         |          |   |          |         |         
|                                                           |                                                                          | Fixed annuity contracts            |         |                          | (28,271  | )    |          |         | (30,242  | ) |          |         | (33,171  | )
|                                                           |                                                                          | Universal life insurance contracts |         |                          | (20,005  | )    |          |         | (17,567  | ) |          |         | (28,611  | )
|                                                           | Net repayments of other short-term
financings                            |                                    |         | (1,654                   | )        |      |          | (1,656  | )        |   |          | (8,560  | )       
|                                                           | Dividend paid to Parent                                                  |                                    |         |                         |          |      |          | (12,900 | )        |   |          |        |         
|                                                           |                                                                          |                                    |         |                          |          |      |          |         |          |   |          |        
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES        |                                                                          |                                    | 225,895 |                          |          |      | (237,706 | )       |          |   | (437,700 | )      
|                                                           |                                                                          |                                    |         |                          |          |      |          |         |          |   |          |        
|NET INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS |                                                                          |                                    | 8,973   |                          |          |      | (11,722  | )       |          |   | 11,354   |        
|                                                          
|CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD     |                                                                          |                                    | 28,982  |                          |          |      | 40,704   |         |          |   | 29,350   |        
|                                                           |                                                                          |                                    |         |                          |          |      |          |         |          |   |          |        
|CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD           |                                                                          | $                                  | 37,955  |                          |          | $    | 28,982   |         |          | $ | 40,704   |        
|                                                           |                                                                          |                                    |         |                          |          |      |          |         |          |   |          |        
|SUPPLEMENTAL CASH FLOW INFORMATION:                        |                                                                          |                                    |         |                          |          |      |          |         |          |   |          |        
|Interest paid on indebtedness                              |                                                                          | $                                  | 53      |                          |          | $    |         |         |          | $ |         |        
|                                                           |                                                                          |                                    |         |                          |          |      |          |         |          |   |          |        
|Net income taxes (refunded by) paid to Parent              |                                                                          | $                                  | (2,922  | )                        |          | $    | (6,113   | )       |          | $ | 5,681    |        
|                                                           |                                                                          |                                    |         |                          |          |      |          |         |          |   |          |        

See accompanying notes to financial statements

F-7



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS



|1. |  | NATURE OF OPERATIONS
|-- |  | --------------------

1irst SunAmerica Life Insurance Company (the Company) is a New
York-domiciled life insurance company engaged principally in the business
of selling and administering fixed and variable annuities and universal
life contracts in the State of New York.

The Companys net investment income and net realized investment losses
and fee income by primary product line or service are as follows:

|                                                      |                                                    |   |                          |        |      |   |         |        |  |   |         |        | 
|----------------------------------------------------- | -------------------------------------------------- | - | ------------------------ | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                                      |                                                    |   | Years Ended December 31,
|                                                      |                                                    |   |                         
|                                                      |                                                    |   | 2002                     |        | 2001 |   | 2000   
|                                                      |                                                    |   |                          |        |      |   |        
|                                                      |                                                    |   | (In thousands)          
|Net investment income                                 |                                                    | $ | 38,652                   |        |      |   | 37,817  |        |  | $ | 42,269  |       
|                                                      |                                                    |   |                          |        |      |   |         |        |  |   |         |       
|Net realized investment losses
on fixed rate products |                                                    |   | (10,025                  | )      |      | $ | (19,266 | )      |  |   | (20,779 | )     
|                                                      |                                                    |   |                          |        |      |   |         |        |  |   |         |       
|Fee income:                                           |                                                    |   |                          |        |      |   |         |        |  |   |         |       
|                                                      | Variable annuity fees                              |   |                          | 9,003  |      |   |         | 8,041  |  |   |         | 9,140  | 
|                                                      | Universal life insurance fees                      |   |                          | 3,291  |      |   |         | 3,400  |  |   |         | 2,166  | 
|                                                      | Surrender charges, principally
fixed-rate products |   |                          | 1,854  |      |   |         | 2,141  |  |   |         | 3,776  | 
|                                                      |                                                    |   |                          |        |      |   |         |        |  |   |         |       
|                                                      | Total fee income                                   |   |                          | 14,148 |      |   |         | 13,582 |  |   |         | 15,082 | 
|                                                      |                                                    |   |                          |        |      |   |         |        |  |   |         |       
|Total                                                 |                                                    | $ | 42,775                   |        |      | $ | 32,133  |        |  | $ | 36,572  |       
|                                                      |                                                    |   |                          |        |      |   |         |        |  |   |         |       

Substantially all of the Companys revenues are derived from the State of
New York. Products are marketed through affiliated and independent
broker-dealers, full-service securities firms and financial institutions.
One independent selling organization represented approximately 19.3% of
sales in the year ended December 31, 2002. Two independent selling
organizations represented approximately 35.7% and 8.3% of sales in the
year ended December 31, 2001 and approximately 13.7% and 10.8% of sales
in the year ended December 31, 2000. No other independent selling
organization was responsible for more than 10% of sales for any such
periods.

In addition, the Companys nine affiliated broker-dealers were
responsible for 4.8%, 17.4% and 30.5% of sales in the years ended
December 31, 2002, 2001 and 2000, respectively.

F-8



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 1. |  | NATURE OF OPERATIONS (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | 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 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, retirement services and
retirement savings and asset management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |    |  | 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 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 earnings, as they are recorded
directly to policyholder 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-9



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | 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 and redeemable preferred stocks are
reduced to estimated net realizable value when declines in value 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. Real estate is carried at the lower of cost or net realizable
value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | Other invested assets consist principally 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 list of authorized borrowers. The Company
receives primarily cash collateral in an amount in excess of the market
value of the securities loaned. The Company monitors the daily market
value of securities loaned with respect to the collateral value and
obtains additional collateral when necessary to ensure that collateral is
maintained at a minimum of 102% of the value of the loaned securities.
Such collateral is not available for the general use of the Company.
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 operations 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |    |  | 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 $30,345,000, $8,160,000 and $9,113,000 for the years ended December
31, 2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                          

F-10



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | 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 $13,200,000 and
$3,500,000 at December 31, 2002 and 2001, respectively, for this
adjustment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    |  | 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 guarantee costs and 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-11



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | RESERVES FOR FIXED ANNUITY AND UNIVERSAL LIFE INSURANCE CONTRACTS:
Reserves for fixed annuity and universal life insurance 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).                                                                                                                                                                                                                                                                                                                                                        
|
| |    |  | 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 affiliated lending
agent 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, universal life insurance fees and
surrender charges are recorded in income when earned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |    |  | 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, AIG
SunAmerica Life Assurance Company (AIG SALAC). 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 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). In accordance
with the transition provisions of EITF 99-20, the Company recorded in its
statement of income and comprehensive income for 2001 a cumulative effect
of an accounting change adjustment loss of $520,000 ($800,000 before
tax).
|
| | 3. |  | ACQUISITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |    |  | On December 31, 1998, AIG SALAC acquired the individual life business and

the individual and group annuity business of MBL Life Assurance
Corporation (MBL Life), via a 100% coinsurance transaction, for a cash
purchase price of $128,420,000. Included in the block of
business acquired from MBL Life were policies whose owners are residents
of the State of New York (the New York Business).                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-12



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 3. |  | ACQUISITION (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | The $128,420,000
purchase price was allocated between the Company and AIG SALAC based on
the estimated future gross profits of the two blocks of business. The
portion allocated to the Company was $10,000,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |    |  | As part of the Acquisition, AIG SALAC received $242,473,000 from MBL Life
to pay policy enhancements guaranteed by the MBL Life rehabilitation
agreement to policyholders meeting certain requirements. Included in the
AIG SALACs reserves transferred to the Company in 1999 were $34,657,000
of such policy enhancement reserves. 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. Based upon final actuarial calculations performed in
the first quarter of 2000, $16,741,000 of such reserves were returned to
AIG SALAC by the Company. The enhancements are 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 on June 30, 2002, June 30, 2001 and
January 1, 2000 amounted to $4,012,000, $4,369,000 and $4,911,000
respectively and were either credited to these policyholders or paid as
benefits through withdrawals or accelerated death benefits during 2002,
2001 and 2000. The Companys reserve for the remaining payments totaled
$4,066,000 at December 31, 2002.
|
| | 4. |  | INVESTMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |    |  | The amortized cost and estimated fair value of bonds, notes and
redeemable preferred stocks by major category follow:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                           |       |   |                |           |            |   |         |           | 
|------------------------------------------ | ----- | - | -------------- | --------- | ---------- | - | ------- | --------- | 
|                                           |       |   | Amortized      |           | Estimated 
|                                           |       |   | Cost           |           | Fair Value
|                                           |       |   |                |           |           
|                                           |       |   | (In thousands)
|AT DECEMBER 31, 2002:                      |       |   |                |           |            |   |         |          
|                                          
|Securities of the United States
Government |       | $ | 3,074          |           |            | $ | 3,208   |          
|Mortgage-backed securities                 |       |   | 442,675        |           |            |   | 471,065 |          
|Securities of public utilities             |       |   | 74,205         |           |            |   | 75,470  |          
|Corporate bonds and notes                  |       |   | 619,304        |           |            |   | 638,266 |          
|Other debt securities                      |       |   | 235,768        |           |            |   | 222,044 |          
|                                           |       |   |                |           |            |   |         |          
|                                           | Total |   | $              | 1,375,026 |            |   | $       | 1,410,053 | 
|                                           |       |   |                |           |            |   |         |          

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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 4. |  | INVESTMENTS (Continued)
| | -- |  | -----------------------

|                                           |       |   |                |           |            |   |         |           | 
|------------------------------------------ | ----- | - | -------------- | --------- | ---------- | - | ------- | --------- | 
|                                           |       |   | Amortized      |           | Estimated 
|                                           |       |   | Cost           |           | Fair Value
|                                           |       |   |                |           |           
|                                           |       |   | (In thousands)
|AT DECEMBER 31, 2001:                      |       |   |                |           |            |   |         |          
|                                          
|Securities of the United States
Government |       | $ | 1,996          |           |            | $ | 1,993   |          
|Mortgage-backed securities                 |       |   | 494,719        |           |            |   | 503,999 |          
|Securities of public utilities             |       |   | 53,423         |           |            |   | 53,817  |          
|Corporate bonds and notes                  |       |   | 417,318        |           |            |   | 415,343 |          
|Other debt securities                      |       |   | 155,121        |           |            |   | 153,051 |          
|                                           |       |   |                |           |            |   |         |          
|                                           | Total |   | $              | 1,122,577 |            |   | $       | 1,128,203 | 
|                                           |       |   |                |           |            |   |         |          



| |  |  | 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                |       | $ | 61,177         |           |       | $ | 61,198    |          
|Due after one year through five years  |       |   | 387,911        |           |       |   | 403,915   |          
|Due after five years through ten years |       |   | 378,074        |           |       |   | 368,668   |          
|Due after ten years                    |       |   | 105,189        |           |       |   | 105,207   |          
|Mortgage-backed securities             |       |   | 442,675        |           |       |   | 471,065   |          
|                                       |       |   |                |           |       |   |           |          
|                                       | Total |   | $              | 1,375,026 |       |   | $         | 1,410,053 | 
|                                       |       |   |                |           |       |   |           |          



| |  |  | Actual maturities of bonds, notes and redeemable preferred stocks may
differ from those shown above due to prepayments and redemptions.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 |       | $ | 133            |        |            | $ |        |        
|Mortgage-backed securities                 |       |   | 28,484         |        |            |   | (94     | )      
|Securities of public utilities             |       |   | 2,632          |        |            |   | (1,366  | )      
|Corporate bonds and notes                  |       |   | 30,261         |        |            |   | (11,299 | )      
|Other debt securities                      |       |   | 1,421          |        |            |   | (15,145 | )      
|                                           |       |   |                |        |            |   |         |        
|                                           | Total |   | $              | 62,931 |            |   | $       | (27,904 | )
|                                           |       |   |                |        |            |   |         |        

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FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 4. |  | INVESTMENTS (Continued)
| | -- |  | -----------------------

|                                           |  |                |        |            |  |   |         |  
|------------------------------------------ |  | -------------- | ------ | ---------- |  | - | ------- | -
|                                           |  | Gross          |        | Gross     
|                                           |  | Unrealized     |        | Unrealized
|                                           |  | Gains          |        | Losses    
|                                           |  |                |        |           
|                                           |  | (In thousands)
|AT DECEMBER 31, 2001:                      |  |                |        |            |  |   |         |  
|                                          
|Securities of the United States
Government |  | $              |       |            |  | $ | (3      | )
|Mortgage-backed securities                 |  |                | 11,270 |            |  |   | (1,990  | )
|Securities of public utilities             |  |                | 810    |            |  |   | (416    | )
|Corporate bonds and notes                  |  |                | 13,903 |            |  |   | (15,878 | )
|Other debt securities                      |  |                | 914    |            |  |   | (2,984  | )
|                                           |  |                |        |            |  |   |         |  
|Total                                      |  | $              | 26,897 |            |  | $ | (21,271 | )
|                                           |  |                |        |            |  |   |         |  



| |  |  | Gross unrealized gains on equity securities aggregated $22,000 and
$12,000 at December 31, 2002 and 2001, respectively. Gross
unrealized losses on equity securities aggregated $511,000 and
$339,000 at December 31, 2002 and 2001, respectively.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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                       |        | $                        | 8,522   |      |         | $    | 8,220   |   |         | $ | 3,221   |  
|                            |                   | Realized losses                      |        |                          | (8,677  | )    |         |      | (10,222 | ) |         |   | (3,147  | )
|                           
|OTHER INVESTMENTS:          |                   |                                      |        |                          |         |      |         |      |         |   |         |  
|                            |                   | Realized gains                       |        |                          |        |      |         |      | 42      |   |         |   |        |  
|                            |                   | Realized losses                      |        |                          | (355    | )    |         |      |        |   |         |   | (48     | )
|                           
|IMPAIRMENT WRITEDOWNS       |                   |                                      | (9,515 | )                        |         |      | (17,306 | )    |         |   | (20,805 | )
|                            |                   |                                      |        |                          |         |      |         |      |         |   |         |  
|                            |                   | Total net realized
investment losses |        | $                        | (10,025 | )    |         | $    | (19,266 | ) |         | $ | (20,779 | )
|                            |                   |                                      |        |                          |         |      |         |      |         |   |         |  



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

|                          |  |                          |        |      |  |                |         |   |  |   |         |  
|------------------------- |  | ------------------------ | ------ | ---- |  | -------------- | ------- | - |  | - | ------- | -
|                          |  | Years Ended December 31,
|                          |  |                         
|                          |  | 2002                     |        | 2001 |  | 2000          
|                          |  |                          |        |      |  |               
|                          |  |                          |        |      |  | (In thousands) |         |   |  |  
|Short-term investments    |  | $                        | 1,441  |      |  | $              | 1,661   |   |  | $ | 1,671   |  
|Bonds and notes           |  |                          | 80,518 |      |  |                | 83,449  |   |  |   | 99,241  |  
|Mortgage loans            |  |                          | 13,000 |      |  |                | 14,068  |   |  |   | 17,547  |  
|Other invested assets     |  |                          | 3,001  |      |  |                | 3,022   |   |  |   | 3,127   |  
|                          |  |                          |        |      |  |                |         |   |  |   |         |  
|Gross investment income   |  |                          | 97,960 |      |  |                | 102,200 |   |  |   | 121,586 |  
|Less: investment expenses |  |                          | (580   | )    |  |                | (1,248  | ) |  |   | (1,857  | )
|                          |  |                          |        |      |  |                |         |   |  |   |         |  
|Total investment income   |  | $                        | 97,380 |      |  | $              | 100,952 |   |  | $ | 119,729 |  
|                          |  |                          |        |      |  |                |         |   |  |   |         |  

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FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 4. |  | INVESTMENTS (Continued)                                                                                                                                      
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | The carrying value of investments in any one entity or its affiliates
exceeding 10% of the Companys shareholders equity at December 31, 2002
is as follows:

|         |                     |   |            |  |  |  |  | 
|-------- | ------------------- | - | ---------- |  |  |  |  | 
|Mortgage |                     |   |            |  |  | 
|         | Warner Center Plaza | $ | 24,387,000 | 
|Bonds    |                     |   |            |  |  | 
|         | Kroger Co.          | $ | 23,102,000 | 



| |    |  | At December 31, 2002, bonds and notes included $55,712,000 of bonds and
notes not rated investment grade. These non-investment-grade securities
are comprised of bonds spanning 22 industries with 13% concentrated in
telecommunications and 12% concentrated in energy. No other industry
concentration constituted more than 10% of these assets.                                                                                                                                                                                                                                                                                                                                                  
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | At December 31, 2002, mortgage loans were collateralized by properties
located in 29 states, with loans totaling approximately 31% of the
aggregate carrying value of the portfolio secured by properties located
in California, approximately 13% by properties located in Texas and
approximately 11% by properties located in Michigan and no more than 10%
of the portfolio was secured by properties located in any other single
state.                                                                                                                                                                                                                                                          
|
| |    |  | At December 31, 2002, the carrying value, which approximates its
estimated fair value, of all investments in default as to the payment of
principal or interest totaled $5,657,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |    |  | At December 31, 2002, $615,000 of bonds, at amortized cost, were on
deposit with regulatory authorities in accordance with statutory
requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | 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 other invested assets)
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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-16



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FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 5. |  | FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | CASH AND SHORT-TERM INVESTMENTS: 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.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    |  | POLICY LOANS: Carrying value is considered a reasonable estimate of fair
value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |    |  | COMMON STOCKS: Fair value is based principally on independent pricing
services, broker quotes and other independent information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |    |  | 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.                                                                                                                                                                                                                                                                                                                                                              
|
| |    |  | 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.                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    |  | SECURITIES HELD/LOANED UNDER COLLATERAL AGREEMENTS: Carrying value is
considered to be a reasonable estimate of fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-17



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FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO 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 December 31, 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                           |  | $              | 37,955    |       |  | $ | 37,955    | 
|                   | Bonds and notes                                           |  |                | 1,410,053 |       |  |   | 1,410,053 | 
|                   | Mortgage loans                                            |  |                | 193,035   |       |  |   | 213,212   | 
|                   | Policy loans                                              |  |                | 36,052    |       |  |   | 36,052    | 
|                   | Common stock                                              |  |                | 1,140     |       |  |   | 1,140     | 
|                   | Securities held under collateral
agreements               |  |                | 29,569    |       |  |   | 29,569    | 
|                   | Variable annuity assets held in
separate accounts         |  |                | 399,017   |       |  |   | 399,017   | 
|LIABILITIES:       |                                                           |  |                |           |       |  |   |          
|                   | Reserves for fixed annuity contracts                      |  | $              | 1,290,702 |       |  | $ | 1,255,463 | 
|                   | Securities held under collateral
Agreements               |  |                | 29,569    |       |  |   | 29,569    | 
|                   | Variable annuity liabilities related
to separate accounts |  |                | 399,017   |       |  |   | 399,017   | 

|                   |                                                           |  |                |           |       |  |   |           | 
|------------------ | --------------------------------------------------------- |  | -------------- | --------- | ----- |  | - | --------- | 
|                   |                                                           |  | Carrying       |           | Fair 
|                   |                                                           |  | Value          |           | Value
|                   |                                                           |  |                |           |      
|                   |                                                           |  | (In thousands)
|DECEMBER 31, 2001: |                                                           |  |                |           |       |  |   |          
|ASSETS:            |                                                           |  |                |           |       |  |   |          
|                   | Cash and short-term investments                           |  | $              | 28,982    |       |  | $ | 28,982    | 
|                   | Bonds and notes                                           |  |                | 1,128,203 |       |  |   | 1,128,203 | 
|                   | Mortgage loans                                            |  |                | 172,626   |       |  |   | 181,276   | 
|                   | Policy loans                                              |  |                | 37,343    |       |  |   | 37,343    | 
|                   | Common stock                                              |  |                | 544       |       |  |   | 544       | 
|                   | Variable annuity assets held in
separate accounts         |  |                | 514,203   |       |  |   | 514,203   | 
|LIABILITIES:       |                                                           |  |                |           |       |  |   |          
|                   | Reserves for fixed annuity contracts                      |  | $              | 1,024,830 |       |  | $ | 979,473   | 
|                   | Variable annuity liabilities related
to separate accounts |  |                | 514,203   |       |  |   | 514,203   | 



| | 6. |  | REINSURANCE                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | The business which was assumed from MBL Life is subject to existing
reinsurance ceded agreements. The agreements, which represent
predominantly yearly renewable term insurance, allow for maximum
retention on any single life of $2,000,000. 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, 2000 under which

F-18



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FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 6. |  | REINSURANCE (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | the Company retains no more than $100,000 of risk on any one insured
life. At December 31, 2002, a total reserve credit of $1,141,000 was
taken against the life insurance reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    |  | With respect to the Companys reinsurance, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | 7. |  | COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |    |  | Various lawsuits against the Company have arisen in the ordinary course
of business. Contingent liabilities arising from litigation, income
taxes and other matters are not considered material in relation to the
financial position of the Company. 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 member of AIG. The Guarantee is unconditional
and irrevocable, and 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 policyholders surplus of not less than $1 million
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 obligation 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 annual 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 annual reports on Form 10-Q,
which are available from the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-19



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 7. |  | COMMITMENTS AND CONTINGENT LIABILITIES (Continued)                                                                                                                                                                                                                             
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | In the ordinary course of business, the Company is obligated to purchase
approximately $16,000,000 of asset backed securities as of December 31,
2002. The expiration dates of these commitments are as follows:
$7,000,000 in 2003, $4,000,000 in 2004 and $5,000,000 in 2006.
|
| |    |  | The Company guarantees a minimum level of death benefits for the majority of
the Companys separate account contracts. If assets in these separate accounts
are insufficient to fund minimum policy benefits, the Company is obligated to
pay the difference.                  
|
| | 8. |  | SHAREHOLDERS EQUITY                                                                                                                                                                                                                                                           
|
| |    |  | The Company is authorized to issue 300 shares of its $10,000
par value Common Stock. At December 31, 2002 and December 31,
2001, 300 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      |                                                                               | $       | 144,428                  |        |      | $       | 144,428        |         |   | $       | 144,428 |        
|                                               |                         |                                                                               |         |                          |        |      |         |                |         |   |         |        
|Ending balances                                |                         | $                                                                             | 144,428 |                          |        | $    | 144,428 |                |         | $ | 144,428 |        
|                                               |                         |                                                                               |         |                          |        |      |         |                |         |   |         |        
|RETAINED EARNINGS:                             |                         |                                                                               |         |                          |        |      |         |                |         |   |         |        
|                                               | Beginning balances      |                                                                               | $       | 44,982                   |        |      | $       | 49,689         |         |   | $       | 42,409  |        
|                                               | Net income              |                                                                               |         | 6,758                    |        |      |         | 8,193          |         |   |         | 7,280   |        
|                                               | Dividend paid to Parent |                                                                               |         |                         |        |      |         | (12,900        | )       |   |         |        |        
|                                               |                         |                                                                               |         |                          |        |      |         |                |         |   |         |        
|Ending balances                                |                         | $                                                                             | 51,740  |                          |        | $    | 44,982  |                |         | $ | 49,689  |        
|                                               |                         |                                                                               |         |                          |        |      |         |                |         |   |         |        
|ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS): |                         |                                                                               |         |                          |        |      |         |                |         |   |         |        
|                                               |                         | Beginning balances                                                            |         | $                        | 1,169  |      |         | $              | (9,489  | ) |         | $       | (28,597 | )
|                                               |                         | Change in net
unrealized gains
(losses) on bonds
and notes available
for sale |         |                          | 29,401 |      |         |                | 37,497  |   |         |         | 32,324  |  
|                                               |                         | Change in net
unrealized gains
(losses) on equity
securities                  |         |                          | (161   | )    |         |                | (300    | ) |         |         | (27     | )
|                                               |                         | Change in adjustment
to deferred
acquisition costs                            |         |                          | (9,700 | )    |         |                | (20,800 | ) |         |         | (2,900  | )
|                                               |                         | Tax effects of net
changes                                                    |         |                          | (6,839 | )    |         |                | (5,739  | ) |         |         | (10,289 | )
|                                               |                         |                                                                               |         |                          |        |      |         |                |         |   |         |        
|Ending balances                                |                         | $                                                                             | 13,870  |                          |        | $    | 1,169   |                |         | $ | (9,489  | )      
|                                               |                         |                                                                               |         |                          |        |      |         |                |         |   |         |        

F-20



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 8. |  | SHAREHOLDERS EQUITY (Continued)                                                                                                          
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Gross unrealized gains (losses) on fixed maturity and equity securities
included in accumulated other comprehensive income are as follows:

|                                       |  |              |                |              |  |   |         |  
|-------------------------------------- |  | ------------ | -------------- | ------------ |  | - | ------- | -
|                                       |  | December 31, |                | December 31,
|                                       |  | 2002         |                | 2001        
|                                       |  |              |                |             
|                                       |  |              | (In thousands) |             
|Gross unrealized gains                 |  | $            | 62,953         |              |  | $ | 26,909  |  
|Gross unrealized losses                |  |              | (28,415        | )            |  |   | (21,610 | )
|Adjustment to DAC                      |  |              | (13,200        | )            |  |   | (3,500  | )
|Deferred income taxes                  |  |              | (7,468         | )            |  |   | (630    | )
|                                       |  |              |                |              |  |   |         |  
|Accumulated other comprehensive
income |  | $            | 13,870         |              |  | $ | 1,169   |  
|                                       |  |              |                |              |  |   |         |  



| |    |  | Dividends that the Company may pay to its shareholder in any year without
prior approval of the New York Department of Insurance are limited by
statute. The maximum amount of dividends which can be paid to
stockholders by a life insurance company domiciled in the State of New
York without obtaining the prior approval of the Director of Insurance is
limited to the lesser of the Companys net gain from operations of the
preceding years statutory annual statement or 10% of preceding years
statutory surplus. The Company paid a dividend of $12,900,000 to its
Parent on April 2, 2001. Currently, the maximum amount of dividends which
can be paid to the Companys stockholder in the year 2003 without prior
approval, would be 10% of the Companys December 31, 2002 surplus, or
$12,314,000.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Under statutory accounting principles utilized in filings with insurance
regulatory authorities, the Companys net loss for the year ended
December 31, 2002 was approximately $1,731,000 and the net income for the
year ended December 31, 2001 and 2000 was approximately $4,525,000 and
$21,597,000, respectively. The Companys statutory capital and surplus
totaled approximately $124,009,000 at December 31, 2002, $122,209,000 at
December 31, 2001 and $132,289,000 at December 31, 2000.                                                                                                                                                                                                                                                                                                                  
|
| | 9. |  | 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             |                                    | $ | (11,289        | )      |            | $ | (5,182         | )      |  | $ | (16,471 | )    
|Deferred                      |                                    |   | 7,780          |        |            |   | 17,723         |        |  |   | 25,503  |      
|                              |                                    |   |                |        |            |   |                |        |  |   |         |      
|                              | Total income tax (benefit)
expense |   | $              | (3,509 | )          |   | $              | 12,541 |  |   | $       | 9,032 | 
|                              |                                    |   |                |        |            |   |                |        |  |   |         |      

F-21



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 9. |  | INCOME TAXES (Continued)
| | -- |  | ------------------------

|                              |                                    |   |        |                |   |            |       |        |  |   |       |       |  | 
|----------------------------- | ---------------------------------- | - | ------ | -------------- | - | ---------- | ----- | ------ |  | - | ----- | ----- |  | 
|                              |                                    |   |        | Net realized   |   |            |       |        |  |   |       |      
|                              |                                    |   |        | Investment     |   |            |       |        |  |   |       |      
|                              |                                    |   |        | Gains (Losses) |   | Operations |       | Total 
|                              |                                    |   |        |                |   |            |       |       
|                              | (In thousands)                    
|Year ended December 31, 2001: |                                    |   |        |                |   |            |       |        |  |   |       |      
|Currently payable             |                                    | $ | (2,149 | )              |   | $          | 7,822 |        |  | $ | 5,673 |      
|Deferred                      |                                    |   | (5,371 | )              |   |            | 5,878 |        |  |   | 507   |      
|                              |                                    |   |        |                |   |            |       |        |  |   |       |      
|                              | Total income tax (benefit)
expense |   | $      | (7,520         | ) |            | $     | 13,700 |  |   | $     | 6,180 | 
|                              |                                    |   |        |                |   |            |       |        |  |   |       |      
|Year ended December 31, 2000: |                                    |   |        |                |   |            |       |        |  |   |       |      
|Currently payable             |                                    | $ | (1,751 | )              |   | $          | 6,003 |        |  | $ | 4,252 |      
|Deferred                      |                                    |   | (5,960 | )              |   |            | 6,033 |        |  |   | 73    |      
|                              |                                    |   |        |                |   |            |       |        |  |   |       |      
|                              | Total income tax (benefit)
expense |   | $      | (7,711         | ) |            | $     | 12,036 |  |   | $     | 4,325 | 
|                              |                                    |   |        |                |   |            |       |        |  |   |       |      



| |  |  | Income taxes computed at the United States federal income
tax rate of 35% and income tax expenses reflected in
the statement of income and comprehensive income differ
as follows:
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      |                                                |   |                          |       |      |   |       |       |   |   |       |       |  
|------------------------------------- | ---------------------------------------------- | - | ------------------------ | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                                      |                                                |   | Years Ended December 31,
|                                      |                                                |   |                         
|                                      |                                                |   | 2002                     |       | 2001 |   | 2000 
|                                      |                                                |   |                          |       |      |   |      
|                                      |                                                |   | (In thousands)          
|Amount computed at
statutory rate     |                                                | $ | 5,527                    |       |      | $ | 5,213 |       |   | $ | 4,062 |      
|                                     
|Increases (decreases)
resulting from: |                                                |   |                          |       |      |   |       |       |   |   |       |      
|                                      | State income taxes,
net of federal tax
benefit |   |                          | 2,103 |      |   |       | 795   |   |   |       | 541   |  
|                                      | Dividends received
deduction                   |   |                          | (144  | )    |   |       | (509  | ) |   |       | (837  | )
|                                      | Other, net                                     |   |                          | 1,546 |      |   |       | 681   |   |   |       | 559   |  
|                                      |                                                |   |                          |       |      |   |       |       |   |   |       |      
|                                      | Total income tax
expense                       |   | $                        | 9,032 |      |   | $     | 6,180 |   |   | $     | 4,325 |  
|                                      |                                                |   |                          |       |      |   |       |       |   |   |       |      

F-22



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 9. |  | 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 (receivable)
liability for Deferred Income Taxes are as follows:

|                          |                                                                       |  |                          |         |      |  |   |         |  
|------------------------- | --------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | - | ------- | -
|                          |                                                                       |  | Years Ended December 31,
|                          |                                                                       |  |                         
|                          |                                                                       |  | 2002                     |         | 2001
|                          |                                                                       |  |                          |         |     
|                          |                                                                       |  | (In thousands)          
|DEFERRED TAX LIABILITIES: |                                                                       |  |                          |         |      |  |   |        
|                          | Investments                                                           |  | $                        | 4,899   |      |  | $ |        |  
|                          | Deferred acquisition costs                                            |  |                          | 31,106  |      |  |   | 19,073  |  
|                          | Other liabilities                                                     |  |                          | 4,026   |      |  |   | 4,838   |  
|                          | Net unrealized gains on debt and
equity securities available for sale |  |                          | 7,468   |      |  |   | 630     |  
|                          |                                                                       |  |                          |         |      |  |   |        
|                          | Total deferred tax liabilities                                        |  |                          | 47,499  |      |  |   | 24,541  |  
|                          |                                                                       |  |                          |         |      |  |   |        
|DEFERRED TAX ASSETS:      |                                                                       |  |                          |         |      |  |   |        
|                          | Contractholder reserves                                               |  |                          | (9,790  | )    |  |   | (12,910 | )
|                          | Other assets                                                          |  |                          | (7,315  | )    |  |   | (13,578 | )
|                          |                                                                       |  |                          |         |      |  |   |        
|                          | Total deferred tax assets                                             |  |                          | (17,105 | )    |  |   | (26,488 | )
|                          |                                                                       |  |                          |         |      |  |   |        
|                          | Deferred income taxes                                                 |  | $                        | 30,394  |      |  | $ | (1,947  | )
|                          |                                                                       |  |                          |         |      |  |   |        



| |  |  | In the Companys opinion, the deferred taxes will be fully realized and
no valuation allowance is necessary because the Company has the ability
to generate sufficient future taxable income to realize the tax benefits.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-23



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 10. |  | RELATED-PARTY MATTERS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company pays commissions to nine affiliated companies: SunAmerica
Securities, Inc.; Advantage Capital Corp.; Financial Services Corp.;
Sentra Securities Corp.; Spelman & Co. Inc.; Royal Alliance Associates,
Inc.; VALIC Financial Advisors; VALIC Financial Advisors, Inc.; and
American General Equity Services Corporation. Commissions paid to these
broker-dealers totaled $1,143,000 in the year ended December 31, 2002,
$1,332,000 in the year ended December 31, 2001 and $2,058,000 in the year
ended December 31, 2000. These affiliated broker-dealers represent a
significant portion of the Companys business, amounting to 4.8%, 17.4%
and 30.5% of premiums for each of the respective periods.                                                                                                                                                                                                                                                             
|
| |     |  | 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 $8,399,000 for
the year ended December 31, 2002, $6,469,000 for the year ended December 31,
2001 and $8,229,000 for the year ended December 31, 2000. The component of
such costs which relate to the production or acquisition of new business during these period
amounted to $3,305,000, $1,930,000 and $3,581,000, respectively, and is
deferred and amortized as part of Deferred Acquisition Costs. The other
components of these costs are included in General and Administrative
Expenses in the statement of income.                                                                                                                                                                                                                        
|
| |     |  | Beginning in July 2002, the Company began marketing fixed annuities
through a new financial institution partner. These annuities are
administered by AIG Annuity Insurance Company, an affiliate of the
Company. Costs charged to the Company to administer these policies were
approximately $1,046,000 in 2002. Additionally, costs charged to the
Company for marketing such policies amounted to $1,103,000 and is
deferred and amortized as part of Deferred Acquisition Costs. Effective
November 2002, the responsibility for administration of the remaining
block of fixed annuities was assumed by AIG Annuity Insurance Company,
who the Company reimburses for their cost of administration. The
Company believes these costs are less than the Company would have
incurred to administer these policies internally.                                                                                                                                                   
|
| |     |  | On December 9, 2002, the Company entered into a profit sharing agreement
with AIG SunAmerica Asset Management Corp. (SAAMCO), a registered
investment advisor and affiliate of the Company, 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 was
retroactive to January 1, 2002. Variable annuity fees of $1,777,000
were included in the statement of operations relating to the SAAMCO
Agreement for the year ended December 31, 2002. Of this amount,
$1,639,000 has been paid to the Company in 2002 and $138,000 remains a
receivable from SAAMCO at December 31, 2002.

F-24



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##### Table of Contents



FIRST SUNAMERICA LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (Continued)



| | 10. |  | RELATED-PARTY MATTERS (Continued)                                                                                                                                                                                                  
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company paid $7,000 of management fees to an affiliate of the
Company to administer its securities lending program (see Note 2) for
the year ended December 31, 2002.                                                          
|
| |     |  | On April 2, 2001, the Company made a $12,900,000 dividend payment to its
Parent (See Note 8).                                                                                                                                      
|
| |     |  | During the year ended December 31, 2000, the Company transferred
$16,741,000 in cash and short-term investments to AIG SALAC related to an
actuarial adjustment on the policy enhancements related to the
Acquisition (See Note 3).

F-25



---



##### Table of Contents






Certifications

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



| | 1. |  | I have reviewed this annual report on Form 10-K of First SunAmerica
Life Insurance 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;                                                                          

|
|
|

|
|
|
|
|

|
|
|

| |  |  |                                                          
| |  |  | ---------------------------------------------------------
| |  |  | 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
First SunAmerica Life Insurance Company, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of First SunAmerica
Life Insurance 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:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | 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                                                                                                                                        

|
|
|

| |  |  |                                                                                         
| |  |  | ----------------------------------------------------------------------------------------
| |  |  | Date: March 28, 2003                                                                    
| |  |  |                                                                                         
| |  |  | /s/ N. SCOTT GILLIS
N. Scott Gillis,
Senior Vice President
(Principal Financial Officer)