Great American Financial Resources, Inc. ("GAFRI" or "the Company") markets retirement products, primarily fixed and variable annuities, and various forms of life and supplemental health insurance through independent agents, payroll deduction plans, financial institutions and in-home sales.

American Financial Group, Inc. ("AFG") and its subsidiaries owned 83% of GAFRI's Common Stock at May 1, 2001.

Certain reclassifications have been made to prior periods to conform to the current period's presentation. All significant intercompany balances and transactions have been eliminated. All acquisitions have been treated as purchases. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements.

The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in circumstances could cause actual results to differ materially from those estimates.

Gains or losses on sales of securities are recognized at the time of disposition with the amount of gain or loss determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other than temporary, a provision for impairment is charged to earnings and the carrying value of that investment is reduced.

Due to Chiquita's announced intention to pursue a plan to restructure its public debt, GAFRI wrote down its investment in Chiquita common stock to market value at December 31, 2000, and may suspend accounting for Chiquita under the equity method pending resolution of the current uncertainty.

DPAC related to annuities and universal life insurance products is amortized, with interest, in relation to the present value of expected gross profits on the policies. These expected gross profits consist principally of estimated future net investment income and surrender, mortality and other policy charges, less estimated future interest on policyholders' funds, policy administration expenses and death benefits in excess of account values. DPAC is reported net of unearned revenue relating to certain policy charges that represent compensation for future services. These unearned revenues are recognized as income using the same assumptions and factors used to amortize DPAC.

To the extent that realized gains and losses result in adjustments to the amortization of DPAC, such adjustments are reflected as components of realized gains. To the extent that unrealized gains (losses) from securities would result in adjustments to DPAC, unearned revenues and policyholder liabilities had those gains (losses) actually been realized, such balance sheet amounts are adjusted, net of deferred taxes.

DPAC related to traditional life and health insurance is amortized over the expected premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues were estimated using the same assumptions used for computing liabilities for future policy benefits.

These amounts are amortized with interest over the estimated remaining life of the acquired policies for annuities and universal life products and over the expected premium paying period for traditional life and health insurance products.

The liability for future policy benefits for interest sensitive life and universal life policies is equal to the sum of the accumulated fund balances under such policies.

For interest sensitive life and universal life products, premiums are recorded in a policyholder account which is reflected as a liability. Revenue is recognized as amounts are assessed against the policyholder account for mortality coverage and contract expenses. Surrender benefits reduce the account value. Death benefits are expensed when incurred, net of the account value.

Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis and are measured using enacted tax rates. The Company recognizes deferred tax assets if it is more likely than not that a benefit will be realized. Current and deferred tax assets and liabilities of companies in AFC's consolidated tax group are aggregated with other amounts receivable from or payable to affiliates.

Qualified employees having vested rights in the plan are entitled to benefit payments at age 60.

GAFRI and certain of its subsidiaries provide certain benefits to eligible retirees. The projected future cost of providing these benefits is expensed over the period the employees earn such benefits.

Derivatives included in GAFRI's balance sheet consist primarily of investments in common stock warrants (included in other stocks), the equity-based component of certain annuity products (included in annuity benefits accumulated) and call options (included in other assets) used to mitigate the risk embedded in the equity-indexed annuity products.

GAFRI's life and annuity operations offer fixed and variable annuity products and traditional life insurance products.  GAFRI's annuity products are sold through managing general agents and independent agents to employees of primary and secondary educational institutions, hospitals and in the non-qualified markets.  Traditional term, universal and whole life insurance products are sold through national marketing organizations.   Approximately one-fourth of GAFRI's annuity premiums came from California in the first three months of 2001 and in the comparable period in 2000.  Approximately 11% of GAFRI's annuity premiums came from Ohio in the first quarter of 2001.  No other state accounted for more than 10% in either the first quarter of 2001 or the first quarter of 2000.  Sales from GAFRI's top two Managing General Agencies accounted for one-eighth of retirement annuity premiums in the first three months of 2001.

GAFRI's supplemental insurance businesses, United Teacher Associates Insurance Company ("UTA") and Loyal American Life Insurance Company, offer a variety of supplemental health and life products.  Loyal's marketing strategy emphasizes third-party sponsorship, including employers and credit unions, while UTA offers its products through independent agents.

GA Life of Puerto Rico sells in-home life and supplemental health products through a network of company-employed agents.  Sales in Puerto Rico accounted for approximately 20% of GAFRI's life, accident and health premiums in the first three months of 2001 compared to 25% in the comparable period in 2000.

Corporate and other consists primarily of GAFRI (parent) and AAG Holding.

The following table shows GAFRI's revenues and operating profit by significant business segment (in millions):

Investment in affiliate reflects GAFRI's 4% ownership (2.7 million shares) of the common stock of Chiquita Brands International. AFG and its other subsidiaries own an additional 29% interest in the common stock of Chiquita. Chiquita is a leading international marketer, producer and distributor of quality fresh fruits and vegetables and processed foods.

The market value of GAFRI's investment in Chiquita was approximately $3.5 million at March 31, 2001 and $2.7 million at December 31, 2000.

In January 2001, Chiquita announced a restructuring initiative that included discontinuing all interest and principal payments on its public debt. If successful, the restructuring would result in the conversion of a significant portion of Chiquita's $862 million in public debt into common equity.

Unamortized insurance acquisition costs consisted of the following (in millions):

Notes payable consisted of the following (in millions):

In January 2001, AAG Holding replaced its existing bank line with a $155 million unsecured credit agreement. Loans under the credit agreement mature on December 31, 2004. At March 31, 2001, the weighted-average interest rate on amounts borrowed under its credit line was 6.04%.

At March 31, 2001, scheduled principal payments on debt for the remainder of 2001 and the subsequent five years were as follows (in millions):

Wholly-owned subsidiary trusts of GAFRI issued $225 million of preferred securities and, in turn, purchased a like amount of subordinated debt which provides interest and principal payments to fund the Trusts' obligations. The preferred securities are mandatorily redeemable upon maturity or redemption of the subordinated debt.  GAFRI effectively provides an unconditional guarantee of the Trusts' obligations. The three preferred securities issues are summarized as follows:

*  Trust Originated Preferred Securities

** Remarketed Par Securities

Until September 28, 2001 (the "Remarketing Date"), the obligations of GAFRI under the ROPES indenture and guarantee are senior unsecured obligations of the Company. Following the Remarketing, whereby the distribution rate on the ROPES will be reset to current market rates (not to exceed 8.8%), the obligations will be subordinate to all senior indebtedness of the Company.  Given the current interest rate environment for these types of securities, GAFRI expects to redeem its ROPES in September 2001.

The Company is authorized to issue 25,000,000 shares of Preferred Stock, par value $1.00 per share.

At March 31, 2001, there were 4.0 million shares of GAFRI Common Stock reserved for issuance under GAFRI's stock option plans. Under the plans, the exercise price of each option equals the market price of GAFRI Common Stock at the date of grant. Options generally become exercisable at the rate of 20% per year commencing one year after grant. All options expire ten years after the date of grant.

The change in net unrealized gains (losses) on marketable securities for the three months ended March 31 included the following (in millions):

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The number of common shares outstanding used in calculating diluted earnings per share in the first quarter of 2001 includes 0.5 million shares compared to 0.2 million shares for the same period in 2000 for the effect of the assumed exercise of GAFRI's stock options.

In March 2000, a jury in Dallas, Texas, returned a verdict against GALIC with total damages of $11.2 million in a lawsuit brought by two former agents of GALIC. The Company believes the verdict was contrary to both the facts and the law and expects to prevail on appeal. The ultimate outcome of this case will not have a material adverse impact on the financial condition of the Company.

The amount of dividends which can be paid by GALIC without prior approval of regulatory authorities is subject to restrictions relating to capital and surplus and statutory net income. Based on net income for the year ended December 31, 2000, GALIC may pay $52.1 million in dividends in 2001 without prior approval. In the first three months of 2001, GALIC did not pay any dividends.