Management's discussion and analysis of financial condition and results of operations of First SunAmerica Life Insurance Company (the "Company") for the three months and nine months ended September 30, 2000 and September 30, 1999 follows.

      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.

RESULTS OF OPERATIONS

      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 $8.7 million for the nine months ended September 30, 1999.

      PRETAX INCOME totaled $6.9 million in the third quarter of 2000 and $1.9 million in the third quarter of 1999. For the nine months, pretax income totaled $22.0 million in 2000, compared with $11.9 million in 1999. The 84.9% year-to-date improvement in 2000 over 1999 primarily resulted from increased net investment income, increased variable annuity fee income and decreased deferred acquisition costs and general and administrative expenses, partially offset by increased net realized investment losses.

      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 $11.9 million in the third quarter of 2000, down from $12.5 million in the third quarter of 1999. These amounts equal 2.91% on average invested assets (computed on a daily basis) of $1.63 billion in the third quarter of 2000 and 2.36% on average invested assets of $2.13 billion in the third quarter of 1999. For the nine months, net investment income increased to $36.7 million in 2000 from $32.1 million in 1999, representing 2.83% of average invested assets of $1.73 billion in 2000 and 2.51% of average invested assets of $1.70 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 1.81% in the nine months of 1999. The improvement in 2000 net investment yields over both actual and pro forma 1999 yields reflects the redeployment of assets received in the Acquisition into higher yielding investment categories.

      Net investment spreads include the effect of income earned or interest paid on the difference between average invested assets and average interest-bearing liabilities. In the third quarter, average invested assets exceeded average interest-bearing liabilities by $79.3 million in 2000, compared with $116.1 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 2.68% in the third quarter of 2000 and 2.09% in the third quarter of 1999. For the nine months, average invested assets exceeded average interest-bearing liabilities by $74.4 million in 2000, compared with $90.3 million in 1999. The Spread Difference was 2.62% in 2000 and 2.25% in 1999. On a pro forma basis, assuming the Acquisition had been consummated on January 1, 1999, the Spread Difference would have been 1.63% in the nine months of 1999 reflecting primarily the effect of the lower-yielding assets received in the 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.

      resulted primarily from the surrender or rollover into a variable product of most of the fixed annuities received in the Acquisition. The increase in the investment yield in 2000 compared to 1999 is due primarily to the reinvestment of lower-yielding assets acquired in the Acquisition. 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 6.82% in the nine months of 1999.

      Total interest expense equaled $18.9 million in the third quarter of 2000 and $24.6 million in the third quarter of 1999. For the nine months, interest expense aggregated $59.6 million in 2000, compared with $59.5 million in 1999. The average rate paid on all interest-bearing liabilities was 4.87% in the third quarter of 2000, compared with 4.89% in the third quarter of 1999. For the nine months, the average rate paid on all interest-bearing liabilities was 4.80% for 2000 and 4.91% for 1999. Interest-bearing liabilities averaged $1.55 billion during the third quarter of 2000, $2.01 billion during the third quarter of 1999, $1.66 billion during the nine months of 2000 and $1.61 billion during the nine months of 1999. 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 5.19% in the nine months of 1999 and interest-bearing liabilities would have averaged $2.17 billion during the nine months of 1999. The decrease in interest rates paid in 2000 results primarily from the continued reduction of crediting rates on certain closed blocks of business and the effects of the Acquisition.

      GROWTH IN AVERAGE INVESTED ASSETS for the nine months ended September 30, 2000 largely resulted from the impact of the Acquisition, from which the Company acquired $678.3 million of invested assets. The decline in average invested assets for the three months ended September 30, 2000 reflects primarily the surrenders and rollovers to variable products of the fixed annuity liabilities related to the Acquisition. Changes in average invested assets also reflect sales of fixed annuities and the fixed account options of the Company's variable annuity products ("Fixed Annuity Premiums"), and renewal premiums on its universal life product ("UL Premiums") acquired in the Acquisition, partially offset by net exchanges from fixed accounts into the separate accounts of variable annuity contracts. Fixed Annuity Premiums and UL Premiums totaled $13.5 million in the third quarter of 2000, $36.0 million in the third quarter of 1999, $48.4 million in the nine months of 2000 and $69.9 million in the nine months of 1999 and are largely premiums for the fixed accounts of variable annuities. Such premiums have decreased, in part, as a result of regulatory changes in the state of New York relating to non-taxable policy exchange requirements. On an annualized basis, these premiums represent 3%, 10%, 4% and 7%, respectively, of the related reserve balances at the beginning of the respective periods.

      compared to net losses from sales and redemptions of investments of $1.7 million and net gains of $1.3 million in the third quarter and nine months of 1999, respectively.

      The Company sold or redeemed invested assets, principally bonds and notes, aggregating $55.2 million in the third quarter of 2000, $104.7 million in the third quarter of 1999, $267.7 million in the nine months of 2000 and $337.7 million in the nine months of 1999. Sales of investments result from the active management of the Company's investment portfolio, including assets received as part of the Acquisition. 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, on an annualized basis, 0.21%, 0.32%, 0.09% and 0.12% of average invested assets in the third quarter of 2000, the third quarter of 1999, the nine months of 2000 and the nine months of 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 represent provisions applied to bonds in 2000 and 1999. On an annualized basis, impairment writedowns represent 0.44%, 0.59%, 0.40% and 0.55% of related average invested assets in the third quarter of 2000, the third quarter of 1999, the nine months of 2000, and the nine months of 1999, respectively. For the twenty quarters beginning October 1, 1995, impairment writedowns as an annualized percentage of average invested assets have ranged up to 0.86% and have averaged 0.21%. Such writedowns are based upon estimates of the net realizable value of the applicable assets. Actual realization will be dependent upon future events.

      variable annuity products to the separate accounts (see "Growth in Average Invested Assets") are not classified in variable annuity premiums. Accordingly, changes in variable annuity premiums 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 premiums allocated to the fixed accounts) ("Variable Annuity Product Sales") amounted to $19.4 million, $57.5 million, $54.6 million and $117.1 million in the third quarters of 2000 and 1999 and the nine months of 2000 and 1999, respectively. Variable Annuity Product Sales primarily reflect sales of the Company's flagship variable annuity line, Polaris. Polaris is a multimanager variable annuity that offers investors a choice of 27 variable funds and a number of guaranteed fixed-rate funds. Variable Annuity Product Sales have decreased in 2000, principally as a result of regulatory changes in the State of New York relating to non-taxable policy exchange requirements.

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

      UNIVERSAL LIFE INSURANCE FEES result from the universal life insurance contract reserves acquired in the Acquisition and the ongoing receipt of renewal premiums on such contracts, and consist of mortality charges, up-front fees earned on premiums received and administrative fees net of excess mortality expense on these contracts. The Company does not actively market universal life insurance contracts. Universal life insurance fees amounted to $0.9 million and $1.3 million in the third quarters of 2000 and 1999, respectively. For the nine months, universal life insurance fees totaled $1.6 million in 2000 and $1.3 million in 1999. Such fees annualized represent 1.48%, 2.00%, 0.80% and 1.97% of average reserves for universal life insurance contracts in the respective periods. The decrease in such annualized rates during 2000 results principally from differences in reinsurance charges and mortality experience.

      attributable to the Acquisition) and 17.7% (6.0% attributable to the Acquisition) for the third quarters of 2000 and 1999 and the nine months of 2000 and 1999, respectively. The increase in withdrawal rates in 2000 as compared to 1999 is due primarily to increased surrenders on certain closed blocks of fixed annuity business. Withdrawals include variable annuity payments from the separate accounts totaling $10.3 million (6.6% of average variable annuity reserves), $7.6 million (7.1% of average variable annuity reserves), $27.1 million (6.1% of average variable annuity reserves) and $20.0 million (6.8% of average variable annuity reserves) in the third quarters of 2000 and 1999 and the nine months of 2000 and 1999, respectively. Management anticipates that withdrawal rates will remain relatively stable for the foreseeable future.

      GENERAL AND ADMINISTRATIVE EXPENSES totaled $1.7 million in the third quarter of 2000 and $3.5 million in the third quarter of 1999. For the nine months, general and administrative expenses totaled $4.8 million in 2000 and $5.8 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 $4.9 million in the third quarter of 2000, compared with $6.0 million in the third quarter of 1999. For the nine months, such amortization totaled $14.5 million in 2000 and $16.8 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. Annual commissions totaled $0.2 million in the third quarter of 2000, compared with $0.2 million in the third quarter of 1999. For the nine months, annual commissions amounted to $0.5 million in 2000 and $0.3 million in 1999.

      INCOME TAX EXPENSE totaled $2.8 million in the third quarter of 2000, $0.7 million in the third quarter of 1999, $9.1 million in the nine months of 2000 and $4.9 million in the nine months of 1999. Such amounts represent effective annualized tax rates of 41%, 39%, 41% and 41%, respectively.

FINANCIAL CONDITION AND LIQUIDITY

      SHAREHOLDER'S EQUITY increased to $175.2 million at September 30, 2000 from $161.2 million at December 31, 1999, due principally to $12.9 million of net income recorded in 2000 and a $1.1 million increase in accumulated other comprehensive income.

      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 85% of the Company's total investment portfolio at September 30, 2000, had an amortized cost that was $62.5 million greater than its aggregate fair value at September 30, 2000 and $64.2 million greater than its aggregate fair value at December 31, 1999. The decrease in net unrealized losses on the Bond Portfolio during 2000 principally reflects the decline in prevailing interest rates and the corresponding effect on the fair value of the Bond Portfolio at September 30, 2000.

      At September 30, 2000 the Bond Portfolio (excluding $3.4 million of redeemable preferred stocks) included $1.29 billion of bonds rated by Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Duff & Phelps Credit Rating Co. ("DCR"), Fitch Investors Service, L.P. ("Fitch") or the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC"), and $12.7 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At September 30, 2000, approximately $1.19 billion of the Bond Portfolio was investment grade, including $543.6 million of U.S. government/agency securities and mortgage-backed securities ("MBSs").

      At September 30, 2000, the Bond Portfolio included $105.3 million of bonds that were not investment grade. These non-investment-grade bonds accounted for 4.5% of the Company's total assets and 6.9% 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. The Company had no material issuer concentrations of non-investment-grade securities at September 30, 2000.

      Senior secured loans ("Secured Loans") are included in the Bond Portfolio and aggregated $66.8 million at September 30, 2000. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At September 30, 2000, Secured Loans consisted of $18.5 million of publicly traded securities and $48.3 million of privately traded securities. These Secured Loans are composed of loans to borrowers spanning 9 industries, with 21% of these assets concentrated in utilities, 9% concentrated in technology and 8% concentrated in energy. 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, DCR, Fitch, the NAIC or by the Company, pursuant to comparable statutory ratings guidelines established by the NAIC.

      MORTGAGE LOANS aggregated $184.6 million at September 30, 2000 and consisted of 127 commercial first mortgage loans with an average loan balance of approximately $1.5 million, collateralized by properties located in 32 states. Approximately 35% of this portfolio was office, 26% was retail, 15% was industrial, 11% was multifamily residential and 13% was other types. At September 30, 2000, approximately 31% of this portfolio was secured by properties located in California, approximately 12% by properties located in Michigan, approximately 9% by properties located in New York and no more than 5% of this portfolio was secured by properties located in any other single state. At September 30, 2000, one mortgage loan had an outstanding balance of $10.0 million or more, which represented approximately 5% of this portfolio. At September 30, 2000, approximately 29% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 2003. During 2000 and 1999, loans delinquent by more than 90 days, foreclosed loans and restructured loans have not been significant in relation to the total mortgage loan portfolio.

      OTHER INVESTED ASSETS aggregated $40.4 million at September 30, 2000, compared with $42.6 million at December 31, 1999, and consist principally of policy loans.

      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 79% of the Company's fixed annuity and universal life reserves had surrender penalties or other restrictions at September 30, 2000.

      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; and mortgage loans. At September 30, 2000, these assets had an aggregate fair value of $1.5 billion with a duration of 3.7. The Company's fixed-rate liabilities are its fixed annuity and universal life insurance contracts. At September 30, 2000, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $1.4 billion with a duration of 3.2. The Company's potential exposure due to a relative 10% increase in prevailing interest rates from their September 30, 2000 levels is a loss of approximately $6.9 million, representing an increase in the fair value of its fixed-rate liabilities that is not offset by an increase in the 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.

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

      There are risks associated with some of the techniques the Company uses to provide liquidity, enhance its spread income and match its assets and liabilities. The primary risk associated with the Company's Reverse Repos is counterparty risk. The Company believes, however, that the counterparties to its Reverse Repos are financially responsible and that the counterparty risk associated with those transactions is minimal. It is the Company's policy that these agreements are entered into with counterparties who have a debt rating of A/A2 or better from both S&P and Moody's. The Company continually monitors its credit exposure with respect to these agreements. 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.

      The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in the case of bonds, no further accruals of interest are made. The provisions for impairment on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days.

      DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $16.3 million of bonds at September 30, 2000, and constituted 1.1% of total invested assets. At December 31, 1999, defaulted investments totaled $1.3 million ($0.9 million of mortgage loans and $0.4 million of bonds) and constituted less than 0.1% of total invested assets.

      SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company's existing portfolio of cash and short-term investments, Reverse Repo capacity on invested assets and, if required, proceeds from invested asset sales. At September 30, 2000, approximately $884.1 million of the Company's Bond Portfolio had an aggregate unrealized loss of $72.0 million, while approximately $417.7 million of the Bond Portfolio had an aggregate unrealized gain of $9.5 million. In addition, the Company's investment portfolio currently provides approximately $15.9 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.

REGULATION

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

      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 RBC standards consist of formulas that establish capital requirements relating to insurance, business, asset and interest rate risks. The standards are intended to help identify companies which are under-capitalized 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 statutory capital and surplus of the Company exceeded its RBC requirements by a considerable margin as of September 30, 2000.