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.

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).

ITEM 6.     SELECTED FINANCIAL DATA (continued)

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, 2001 ("2001"), 2000 ("2000") and 1999 ("1999") 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 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 $21.6 million at December 31, 2001. In determining if and when a decline in fair value below amortized cost is other-than-temporary, we evaluate at each reporting period the market conditions, offering prices, trends of earnings, price multiples, and other key measures for our investments in debt and marketable equity securities. In particular, for debt securities, the Company assesses the probability that all amounts due are collectible according to the contractual terms of the obligation. When such a decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the current period operating results to the extent of the decline.

       Securities in our portfolio with a carrying value of approximately $183.2 million at December 31, 2001 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 our expected gross profits ("EGPs") over the life of the underlying policies. Our estimated EGPs are computed based on assumptions related to the underlying policies written, including the anticipated duration of the underlying policies, growth rate of the assets supporting the liabilities (management currently estimates a rate of 10% in projecting EGP), and level of expenses necessary to maintain the policies over their entire life. We amortize deferred policy acquisition costs by estimating the present value of the EGPs over the lives of the insurance policies and then calculate a percentage of the policy acquisition cost deferred as compared to the present value of the EGPs. That percentage is used to amortize the deferred policy acquisition cost such that the amount amortized over the life of the policies results in a constant percentage of amortization when related to the actual and future gross profits.

       Because the EGPs are only an estimate of the profits we expect to recognize from these policies, the EGPs are adjusted at each balance sheet date to take into consideration the actual gross profits to date and any changes in the remaining expected future gross profits. When EGPs are adjusted, we also adjust the DAC amount on the balance sheet, with a corresponding charge or credit to current period operating results, to reflect our revised estimate of DAC amortization.

RESULTS OF OPERATIONS

       NET INCOME totaled $8.2 million in 2001, compared with $7.3 million in 2000 and $7.7 million in 1999. On July 1, 1999, the Company acquired the New York individual life business and the individual and group annuity business of MBL Life Assurance Corporation (the "Acquisition"). The Acquisition was accounted for under the purchase method of accounting, and therefore results of operations include those of the Acquisition only from its date of acquisition. Consequently, the operating results for 2001, 2000 and 1999 are not comparable. On a pro forma basis, using the historical financial information of the acquired business and assuming that the Acquisition had been consummated on January 1, 1999, the beginning of the prior-year periods discussed herein, net income would have been $9.4 million for the year ended December 31, 1999.

       CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflects the adoption of EITF 99-20. 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 $14.9 million in 2001, compared with $11.6 million in 2000 and $14.3 million in 1999. The 28% year-to-date improvement in 2001 over 2000 primarily resulted from decreased amortization of deferred acquisition costs, partially offset by lower net investment income and fee income. The decline from 1999 to 2000 primarily resulted from increased net realized investment losses, partially offset by increased fee income and decreased amortization of deferred acquisition costs.

       NET INVESTMENT INCOME, which is the spread between the income earned on invested assets and the interest paid on fixed annuities and universal life contracts, totaled $37.1 million in 2001, $42.1 million in 2000 and $42.8 million in 1999. These amounts equal 2.60% on average invested assets (computed on a daily basis) of $1.43 billion in 2001, 2.49% on average invested assets of $1.69 billion in 2000 and 2.42% on average invested assets of $1.77 billion in 1999. On a pro forma basis, assuming the Acquisition had been consummated on January 1, 1999, net investment income on related average invested assets would have been 2.05% in 1999.

       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 $85.6 million in 2001, compared with $79.6 million in 2000 and $89.0 million in 1999. The difference between the Company's yield on average invested assets and the rate paid on average interest-bearing liabilities (the "Spread Difference") was 2.32% in 2001, 2.27% in 2000 and 2.18% in 1999. On a pro forma basis, assuming the Acquisition had been consummated on January 1, 1999, the Spread Difference would have been 1.87% in 1999 reflecting primarily the effect of the lower-yielding assets received in the Acquisition.

       Investment income (and the related yields on average invested assets) totaled $100.2 million (7.02%) in 2001, compared with $119.6 million (7.08%) in 2000 and $125.4 million (7.10%) in 1999. The decrease in the investment yield in 2001 compared to 2000 primarily reflects a lower interest rate environment in 2001. The decrease in the investment yield in 2000 compared to 1999 principally reflect the effects of lower yielding assets received in the MBL Life acquisition. The invested assets associated with the Acquisition included high-grade corporate, government and government/agency bonds, which are generally lower yielding than a significant portion of the invested assets that comprise the remainder of the Company's portfolio. On a pro forma basis, assuming the Acquisition had been consummated on January 1, 1999, the yield on related average invested assets would have been 6.83% in 1999.

       Expenses incurred to manage the investment portfolio amounted to $2.0 million in 2001, $2.0 million in 2000 and $1.9 million in 1999. These expenses are included as a reduction to investment income in the statement of income and comprehensive income.

       Interest expense totaled $63.1 million in 2001, $77.5 million in 2000 and $82.6 million in 1999. The average rate paid on all interest-bearing liabilities was 4.70% in 2001, compared with 4.81% in 2000 and 4.92% in 1999. Interest-bearing liabilities averaged $1.34 billion during 2001, $1.61 billion during 2000 and $1.68 billion during 1999. The decline in average interest rates paid in 2001 resulted primarily from the impact of a declining interest rate environment during 2001 and the continued reduction of crediting rates on certain closed blocks of business. On a pro forma basis, assuming the Acquisition had been consummated on January 1, 1999, the average rate paid on all interest-bearing liabilities would have been 4.96% in 1999 and interest-bearing liabilities would have averaged $2.10 billion during 1999.

       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 from fixed accounts into the separate accounts of variable annuity contracts partially offset by 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 product ("UL Deposits"). Fixed Annuity Deposits and UL Deposits totaled $80.8 million in 2001, $63.9 million in 2000 and $89.2 million in 1999, and are largely deposits for the fixed accounts of variable annuities. These deposits represent 6%, 5% and 6%, respectively, of the related reserve balances at the beginning of the respective periods. The increased deposits in 2001 largely reflect the increased demand for the fixed account options of the Company's variable annuity product lines. Such deposits decreased in 2000, in part, as a result of regulatory changes in the state of New York relating to non-taxable policy exchange requirements.

       NET REALIZED INVESTMENT LOSSES totaled $19.3 million in 2001, compared with $20.8 million in 2000 and $11.2 million in 1999 and include impairment writedowns of $17.3 million in 2001, $20.8 million in 2000 and $7.7 million in 1999, respectively. Thus, net realized losses from sales and redemptions of investments totaled $2.0 million in 2001, compared with $0.03 million of gains in 2000 and $3.5 million of losses in 1999.

       The Company sold or redeemed invested assets, principally bonds and notes, aggregating $427.5 million in 2001, $389.1 million in 2000 and $478.7 million in 1999. 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 0.14%, 0.00% and 0.20% of average invested assets in 2001, 2000 and 1999, 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 $17.3 million, $20.8 million and $7.7 million of provisions applied to bonds in 2001, 2000 and 1999, respectively. Impairment writedowns represent 1.21%, 1.23% and 0.44% of average invested assets for 2001, 2000 and 1999, respectively. For the five years ended December 31, 2001, impairment writedowns as a percentage of average invested assets have ranged from 0.03% to 1.23% and have averaged 0.56%. 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 the second quarter of 2001 pursuant to the implementation of EITF 99-20 (see Note 2 of Notes to Financial Statements). This adjustment was recorded as a cumulative effect of change in accounting principle 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 $8.0 million in 2001, $9.1 million in 2000 and $6.6 million in 1999. The decreased fees in 2001 reflect the recent state of the equity markets which have been in decline throughout much of 2001, partially offset by net exchanges into the separate accounts from the fixed accounts of variable annuity contracts. The increased fees in 2000 reflect growth in average variable annuity assets, principally due to the receipt of variable annuity deposits and net exchanges into the separate accounts from the fixed accounts of variable annuity contracts, partially offset by surrenders and declines in market values. Variable annuity fees represent 1.5% of average variable annuity assets in all periods presented. Variable annuity assets averaged $517.1 million, $591.9 million and $417.8 million during 2001, 2000 and 1999, respectively. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of variable annuity products, totaled $34.6 million in 2001, $39.6 million in 2000 and $66.7 million in 1999. These amounts represent 6%, 7% and 19% of variable annuity reserves at the beginning of the respective periods. 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 $90.5 million, $72.0 million, $127.7 million in 2001, 2000 and 1999, respectively. Such sales primarily reflect those of the Company's flagship variable annuity line, Polaris. 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 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. Variable Annuity Product Sales were lower in 2000 primarily due to the continued impact of regulatory changes in the State of New York relating to non-taxable policy exchange requirements, which were introduced in November 1998.

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

       UNIVERSAL LIFE INSURANCE FEES, NET amounted to $3.4 million, $2.2 million and $1.1 million in 2001, 2000 and 1999, 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 and does not actively market such contracts. Such fees represent 1.39%, 0.84% and 0.83% of average reserves for universal life insurance contracts in the respective periods, with the increase in 2001 resulting principally from improved mortality experience, which cannot necessarily be expected to continue in future periods. (See Note 3 of the accompanying financial statements.)

       SURRENDER CHARGES on fixed and variable annuity contracts and universal life contracts totaled $2.1 million in 2001, $3.8 million in 2000 and $3.3 million in 1999. Surrender charges generally are assessed on withdrawals at declining rates during the first seven years of a contract. Withdrawal payments, which exclude claims and lump-sum annuity benefits, totaled $257.3 million in 2001, compared with $409.2 million in 2000 and $392.4 million in 1999. These payments, when expressed as a percentage of average fixed and variable annuity and universal life reserves, represent 14.2%, 19.1% and 19.0% for 2001, 2000 and 1999, respectively. Withdrawal rates were higher in 2000 and 1999 principally due to the higher level of surrenders on certain closed blocks of fixed annuity business during those periods. Withdrawals include variable annuity payments from the separate accounts totaling $38.6 million (7.5% of average variable annuity reserves), $36.6 million (6.2% of average variable annuity reserves) and $28.6 million (6.9% of average variable annuity reserves) in 2001, 2000 and 1999, respectively. Management does not anticipate significant increases in the level of withdrawal payments relative to fixed and variable annuity and universal life reserves.

       GENERAL AND ADMINISTRATIVE EXPENSES totaled $3.6 million in 2001, $4.8 million in 2000 and $5.2 million in 1999. 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 $11.6 million in 2001, compared with $19.4 million in 2000 and $22.7 million in 1999. The decrease in amortization in 2001 is principally due to the impact of net realized investment losses.

       ANNUAL COMMISSIONS totaled $0.7 million in 2001, compared with $0.6 million in 2000 and $0.5 million in 1999. 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 19% 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 $0.5 million in 2001, compared with $4,000 in 2000 and $13,000 in 1999. The increase in guaranteed minimum death benefits reflects the recent downturn in the equity markets. Further downturns in the equity markets could increase these payments.

       INCOME TAX EXPENSE totaled $6.2 million in 2001, $4.3 million in 2000 and $6.6 million in 1999, representing effective tax rates of 41%, 37% and 46%, respectively. 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 $193.6 million at December 31, 2001 from $187.6 million at December 31, 2000, due principally to a $10.7 million increase in accumulated other comprehensive income and $8.2 million of net income recorded in 2001, partially offset by a $12.9 million dividend paid to its Parent on April 2, 2001.

       INVESTED ASSETS at December 31, 2001 totaled $1.37 billion, compared with $1.49 billion at December 31, 2000. The Company manages most of its invested assets internally. The Company's general investment philosophy is to hold fixed-rate assets for long-term investment. Thus, it does not have a trading portfolio. However, the Company has determined that all of its portfolio of bonds, notes and redeemable preferred stocks (the "Bond Portfolio") is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities, changes in prepayment risk, changes in the credit quality outlook for certain securities, the Company's need for liquidity and other similar factors.

       THE BOND PORTFOLIO, which constituted 82% of the Company's total investment portfolio at December 31, 2001, had an aggregate fair value that was $5.6 million greater than its amortized cost at December 31, 2001, compared to an amortized cost that was $31.9 million greater than its aggregate fair value at December 31, 2000. The change in net unrealized gains and losses on the Bond Portfolio during 2001 principally reflects the decline in prevailing interest rates and the corresponding effect on the fair value of the Bond Portfolio at December 31, 2001.

       At December 31, 2001, the Bond Portfolio included $1.12 billion of bonds rated by Standard & Poor's ("S&P"), Moody's Investors Service ("Moody's"), Fitch ("Fitch") or the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC"), and $11.0 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At December 31, 2001, approximately $1.07 billion of the Bond Portfolio was investment grade, including $506.0 million of U.S. government/agency securities and mortgage-backed securities ("MBSs").

       At December 31, 2001, the Bond Portfolio included $54.5 million of bonds that were not investment grade. These non-investment-grade bonds accounted for approximately 2.7% of the Company's total assets and approximately 4.0% 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 25 industries with 19% of these assets concentrated in media cable, 18% concentrated in telecommunications, and 9% concentrated in transportation services. No other industry concentration constituted more than 5% of these assets.

       The table on the following page summarizes the Company's rated bonds by rating classification as of December 31, 2001.

S&P
   category (1)

Footnotes to the table of Rated Bonds by Rating Classification

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.

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 $11.0 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.

      Senior secured loans ("Secured Loans") are included in the Bond Portfolio and aggregated $41.6 million at December 31, 2001. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At December 31, 2001, Secured Loans consisted of $12.9 million of publicly traded securities and $28.7 million of privately traded securities. These Secured Loans are composed of loans to borrowers spanning 6 industries, with 36% of these assets concentrated in energy, 30% concentrated in utilities, 12% concentrated in finance companies and 9% concentrated in leisure and gaming. No other industry concentration constituted more than 7% 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 $172.6 million at December 31, 2001 and consisted of 101 commercial first mortgage loans with an average loan balance of approximately $1.7 million, collateralized by properties located in 32 states. Approximately 26% of this portfolio was office, 24% was retail, 18% was multifamily residential, 15% was industrial, and 17% was other types. At December 31, 2001, approximately 28% of this portfolio was secured by properties located in California, approximately 13% by properties located in Michigan, approximately 7% by properties located in New York and Wisconsin, and no more than 5% of this portfolio was secured by properties located in any other single state. At December 31, 2001, two mortgage loans have an outstanding balance of $10.0 million or more, which represented approximately 13% of this portfolio. At December 31, 2001, approximately 23% of the mortgage loan portfolio consisted of loans with balloon payments due before January 1, 2005. During 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, 2001, approximately 40% 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 are included in other invested assets and totaled $37.3 million at December 31, 2001, compared to $39.9 million at December 31, 2000 and primarily represent loans taken against universal life policies.

      ASSET-LIABILITY MATCHING is utilized by the Company to minimize the risks of interest rate fluctuations and disintermediation. 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 66% of the Company's fixed annuity and universal life reserves had surrender penalties or other restrictions at December 31, 2001.

      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, 2001, these assets had an aggregate fair value of $1.37 billion with a duration of 3.9. The Company's fixed-rate liabilities include fixed annuity and universal life insurance contracts. At December 31, 2001, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $1.26 billion with a duration of 3.0. The Company's potential exposure due to a relative 10% increase in prevailing interest rates from their December 31, 2001 levels is a loss of approximately $6.8 million, representing the decrease in fair value of its fixed rate assets that is not offset by a decrease in fair value of its fixed rate liabilities. Because the Company actively manages its assets and liabilities and has strategies in place to minimize its exposure to loss as interest rate changes occur, it expects that actual losses would be less than the estimated potential loss.

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

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

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

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

      The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in the case of bonds, no further accruals of interest are made. The provisions for impairment on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. With the adoption of EITF 99-20, the Company recognizes impairment losses on securitized assets if discounted cash flows are less than its carrying value. The adoption of EITF 99-20 resulted in a loss of $0.5 million, net of tax, which is being recognized and reported in the statement of income and comprehensive income as a cumulative effect of an accounting change (see Note 2 of Notes to financial statements).

      DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $3.4 million of bonds at December 31, 2001, and constituted less than 0.3% of total invested assets. At December 31, 2000, defaulted investments totaled $7.2 million of bonds and constituted less than 0.5% 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, 2001, approximately $767.8 million of the Bond Portfolio had an aggregate unrealized gain of $26.9 million while approximately $360.4 million of the Company's Bond Portfolio had an aggregate unrealized loss of $21.3 million. In addition, the Company's investment portfolio currently provides approximately $13.6 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 events 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 $11.0 million of asset backed securities as of December 31, 2001. The expiration dates of these commitments are as follows: $7.0 million in 2003 and $4.0 million in 2004.

      RECENTLY ISSUED ACCOUNTING STANDARDS are discussed in Note 2 of the accompanying financial statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The quantitative and qualitative disclosures about market risk are contained in the Asset-Liability Matching section of Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 21 and 22 herein.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

       None.

Other Positions and

Year

Other Business

Present

Assumed

Experience Within

   Name

Age

Position (s)

Position

Last Five Years**

From-To

Chairman, and

Chief Executive

Officer of the

(Joined SAI in 1987)

Company

President and

2000

Chief Executive

2001

Officer of

SunAmerica Inc.

("SAI")

Thomas W. Baxter

47

Director

1992

Partner, O'Melveny & Myers LLP

1991 to present

James R. Belardi*

45

Senior Vice

1999

(Joined SAI in 1986)

President of the Company

Executive Vice

1995

President of  SAI

Marc H. Gamsin*

46

Senior Vice

1999

Executive Vice President,

1998 to Present

President of the Company

SunAmerica Investments, Inc. (GA)

Executive Vice President

SunAmerica Investments Inc. (DE)

Partner, O'Melveny & Myers, LLP

N. Scott Gillis*

48

Senior Vice

2000

Senior Vice President and Controller,

President of the Company

SunAmerica Life

1997

and Controller of SAI

2000

(Joined SAI in 1985)

Other Positions and

Year

Other Business

Present

Assumed

Experience Within

   Name

Age

Position (s)

Position

Last Five Years**

From-To

Lawrence M. Goldman*

40

of SAI

Senior Vice President

1995-1998

Secretary of the

2000

Co-General Counsel,

Jana W. Greer*

49

1994

Senior Vice

President of  SAI

1992

49

Director

1999

Partner, Latham & Watkins

1995 to present

1979-1995

42

Director

1996

Partner, Shearman

1991 to present

37

1999

1997-2000

and Secretary

1993-1997

2000

Co-General Counsel

and Secretary of SAI

68

Director

1987

1986 to present

Officer, Centre Partners, L.P.

1986 to present

Senior Managing

1988 to present

Director, Corporate

42

Director

1999

1988 to present

Officer, SunAmerica

Alliance Associates, Inc.