SECURITIES AND EXCHANGE COMMISSION ~~WASHINGTON, D.C. 20549~~

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]

~~[X]~~For ~~ANNUAL~~the ~~REPORT~~fiscal ~~PURSUANT~~year TOended ~~SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934[NO FEE REQUIRED~~December 31, ~~EFFECTIVE OCTOBER 7, 1996]~~2003

For the fiscal year ended December 31, 2002

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

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY


Incorporated in Arizona		86-0198983 IRS Employer Identification No.

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

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

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

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

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

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

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

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT’S COMMON STOCK ON MARCH 2826, ~~2003~~2004 WAS AS FOLLOWS:

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

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

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 STOCKHOLDERS MATTERS
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
	ITEM 9A. DISCLOSURE CONTROLS & PROCEDURES
PART III
	Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
	ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
	ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
Report of Independent Auditors
EXHIBIT 3(A)
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT 10.A
EXHIBIT 10.B
EXHIBIT 10.C
EXHIBIT 10.D
EXHIBIT 10.E
EXHIBIT 10.F
EXHIBIT 10.G
EXHIBIT 10.H
EXHIBIT 10.I
EXHIBIT 10.J
EXHIBITY 31.1
EXHIBITY 31.2
EXHIBIT 32

PART I

ITEM 1. BUSINESS

GENERAL DESCRIPTION

AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance Company), (the “Company”) was incorporated under the laws of the State of Arizona on April 12, 1965. The Company is a direct wholly owned subsidiary of ~~SunAmerica~~ SunAmerica Life Insurance Company (the “Parent”), which is a wholly owned subsidiary of AIG ~~SunAmerica~~Retirement Services, Inc. (“~~SAI~~AIGRS”) (formerly AIG SunAmerica Inc.), 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~~services and asset management.

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

The Company ~~is incorporated in Arizona and~~ maintains its principal executive offices at 1 SunAmerica Center, Los Angeles, California 90067-6022, telephone (310) 772-6000. The Company has no employees; however, employees of ~~SAI~~ AIGRS and ~~its~~ other ~~subsidiaries~~affiliates of the Company perform various services for the Company. ~~SAI~~ AIGRS had approximately 2 1,~~000~~800 employees at December 31, ~~2002~~2003, approximately ~~1,000~~800 of whom perform services for the Company as well as for certain of its affiliates.

~~Founded~~The ~~in 1965, the~~ Company is an Arizona-chartered company licensed in 49 states and the District of Columbia. The Company is a life insurance company principally engaged in the business of writing variable annuities directed to the market for tax-deferred, long-term savings products. It also administers closed blocks of fixed annuities, universal life policies ~~(See Note 3 of Notes to Consolidated Financial Statements)~~ and guaranteed investment contracts (“GICs”) directed to the institutional marketplace. The Company’s variable annuity products offer investors a broad spectrum of fund alternatives, with a choice of investment managers, as well as guaranteed fixed-rate account options. The Company earns fee income on investments in the variable account options and net investment income on the fixed-rate account options.

The Company ranks among the largest U.S. issuers of variable annuities. The Company distributes its products and services through an extensive network of independent broker-dealers, full-service securities firms and financial institutions. In prior years, GICs were marketed directly to banks, municipalities, asset management firms and direct plan sponsors and through intermediaries, such as managers or consultants servicing these groups. The Company’s nine affiliated broker-dealers ~~comprise~~are ~~one~~among of the largest networks of of independent registered representatives in the nation ~~and the sixth largest securities sales force, based on industry data~~. Its affiliated broker-dealers accounted for approximately one-~~third~~fifth of the Company’s total annuity sales in ~~2002~~ 2003.

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 48 million to 67 million from 1992 to 2002, making this age group the fastest-growing segment of the U.S. population. Between 1992

45and ~~to 64 grew from 47 million to 63 million from 1991 to 2001~~2002, ~~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~~ fund deposits increased from $~~125~~130.7 billion to $~~250~~268.4 billion.

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

The Company and its affiliates have made significant investments in ~~technology~~ technology over the past several years in order to lower operating costs and ~~enhance~~ enhance marketing efforts. Its use of optical disk imaging and artificial ~~intelligence~~ intelligence has substantially reduced the more traditional paper-intensive life insurance processing procedures, reducing annuity processing and servicing costs and improving customer service. ~~This has also enabled the Company to more efficiently assimilate acquired businesses.~~ The Company has also implemented technology to interface with both its affiliated and unaffiliated broker-dealers, which enables the Company to more effectively market its products and help the ~~affiliated~~ financial professionals to better serve their clients. There are administrative risks involved in converting business operations to new information technology systems; however, the Company believes these risks are outweighed by the increased efficiencies and lower operating costs the Company realizes from its investments in new technology.

On January 1, 2002, the Company declared a distribution to the Parent of 100% of the outstanding capital stock of its then wholly owned subsidiary, Saamsun Holdings Corp. (“Saamsun”). Saamsun held the Company’s asset management and broker-dealer operations. This distribution decreased the Company’s shareholder’s equity by $552~~,384,000~~.4 million. Subsequent to this distribution, the Company’s earnings no longer included the asset management and broker-dealer operations (see Note 97 of Notes to Consolidated Financial Statements). This distribution was approved by the Arizona Department of Insurance.

Prior to the distribution of Saamsun on January 1, 2002, the Company had three business segments: annuity operations (as discussed above), asset management operations and broker-dealer operations. The asset management operations were conducted by the Company’s former registered investment advisor subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCO”), and its related distributor, AIG SunAmerica Capital Services, Inc. (“SACS”). SAAMCO and SACS earn fee income by distributing and managing a diversified family of mutual funds, managing certain subaccounts within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios. The asset management operations also included SA Affordable Housing, LLC (“SAAH LLC”), a direct wholly owned subsidiary of SAAMCO. SAAH LLC was previously a direct wholly owned subsidiary of the Parent, until January 1, 2001 at which time all of SAAH LLC’s ownership interests were contributed to the Company. All of SAAH LLC’s ownership interests were subsequently contributed by the Company to SAAMCO. SAAH LLC was formed as a limited liability company whose primary purpose is the generation of rehabilitation tax credits, low -income housing credits and passive losses. Realized tax credits are recognized by its direct parent, SAAMCO (see Note 97 of Notes to Consolidated Financial Statements). The

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

OnThe ~~December 31,~~following ~~1998,~~table ~~the~~shows ~~Company acquired~~ the ~~individual life business and the individual and group annuity business of MBL Life Assurance Corporation (“MBL Life”), via a 100% coinsurance transaction (the “Acquisition”). The~~ Company’s ~~assumed~~investment ~~reserves in this acquisition totaling $5~~income,~~793,256,000, including~~ ~~$3,460,503,000~~net ~~of fixed annuity contracts, $2,308,742,000 of~~realized ~~universal~~investment ~~life~~losses ~~insurance contracts~~ and ~~$24,011,000~~fee ofincome ~~guaranteed~~for ~~investment contracts. Policyholders of MBL annuity products were required to transfer their funds into an existing product of~~ the ~~Company~~year orended ~~one of its affiliates by~~ December 31, ~~1999~~2003 ~~in order to receive the policy enhancements due under the MBL~~by ~~Life~~primary ~~rehabilitation~~product ~~agreement.~~line ~~Over 92% of the deferred annuity reserves had either been transferred~~ or ~~surrendered by December 31, 1999.~~service:

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

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

NET INVESTMENT AND FEE INCOME

	Amount			Percent			Primary Product or Service
	(in thousands)
	(In thousands)
Net investment income		$143,295			31.7	%	Fixed rate products and fixed options of variable annuities
Net realized investment losses		(65,811	)		(14.6	)	Fixed rate products and fixed options of variable annuities
Fee income:
Variable annuity fees		318,061			70.4		Variable annuities
Variable annuity policy fees, net of reinsurance	$	290,132			40.2	%	Variable annuities
Universal life insurance fees, net		20,537			4.6		Fixed rate universal life products
Universal life insurance fees, net of reinsurance		35,816			5.0		Fixed-rate universal life products
Surrender charges		3227,~~507~~733			73.28		Fixed and variable annuities
Other fees		3,305			0.7
Total fee income		353,681			49.0
Total fee income		374,410			82.9
Investment income		398,304			55.2		Fixed-rate products and fixed options of variable annuities
Total		$451,894			100.0	%
Net realized investment losses		(30,354	)		(4.2	)	Fixed-rate products and fixed options of variable annuities
Total	$	721,631			100.0	%

ANNUITY OPERATIONS — SEPARATE ACCOUNT

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

The Company’s flagship Polaris and Seasons variable annuity products are multimanager variable annuities that offer investors a choice of several variable funds and up to 5 fixed account options and 2 dollar cost averaging fixed account options for different time periods. Seasons sales have

~~ANNUITY~~increased ~~OPERATIONS~~significantly —in ~~VARIABLE~~recent ~~ANNUITIES~~years —due ~~SEPARATE~~to ~~ACCOUNT~~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~~In ~~variable~~addition ~~annuity~~to ~~products~~distributing ofits ~~the~~variable ~~Company~~annuity ~~offer~~products ~~investors~~through aits ~~broad~~nine ~~spectrum~~affiliated ~~of fund alternatives, with a choice of investment managers, as well as guaranteed fixed~~broker-~~rate account options. The Company earns fee income through the sale~~dealers, ~~administration and management of~~ the ~~variable~~Company ~~account~~distributes ~~options of~~ its ~~variable~~ ~~annuity~~ products. ~~The~~through ~~Company~~a ~~also earns investment income on monies~~vast ~~allocated~~network toof ~~the~~independent ~~fixed~~broker-~~rate~~dealers, ~~account~~full-service ~~options~~securities offirms ~~these~~and financial ~~products~~institutions. ~~Variable annuities~~In ~~offer retirement planning features similar to those offered by fixed annuities~~total, ~~but~~more ~~differ~~than ~~in that the contractholder’s rate of return is generally dependent upon the investment performance of the particular equity~~82, ~~fixed-income,~~000 ~~money~~independent ~~market or asset allocation fund selected by the~~sales ~~contractholder.~~representatives ~~Because~~nationally ~~the~~are ~~investment~~appointed ~~risk~~to issell ~~borne by~~ the ~~customer~~Company’s ~~in all~~annuity ~~but the fixed-rate account options, these~~ products ~~require significantly less capital support than fixed annuities~~.

~~The~~At ~~Company’s~~December 31, ~~flagship~~2003, ~~Polaris~~total ~~and Seasons~~ variable ~~annuity~~product ~~products~~liabilities ~~are~~were $22.90 ~~multimanager~~billion, ~~variable~~of ~~annuities~~which ~~that~~$19.18 billion ~~offer~~were ~~investors~~held ain ~~choice~~separate ofaccounts 4and ~~to 41~~$3.72 ~~variable~~billion ~~funds~~were ~~and~~the upliabilities toof 5the fixed-rate account options, ~~and~~which 2are ~~dollar~~held in ~~cost~~the ~~averaging fixed~~general account. ~~options~~The ~~for~~Company’s ~~different~~variable ~~time~~annuity ~~periods~~products incorporate surrender charges to encourage persistency. ~~Seasons~~At ~~sales~~December 31, ~~have~~2003, ~~increased~~75% of the ~~significantly~~Company’s variable annuity liabilities held in ~~recent~~separate ~~years~~accounts ~~due~~were subject to ~~enhanced~~surrender ~~distribution~~penalties ~~efforts~~or ~~and~~other ~~growing~~restrictions. The Company’s variable annuity ~~consumer~~products ~~demand~~also ~~for~~generally ~~flexible~~limit ~~retirement~~the ~~savings~~number ~~products~~of ~~that~~transfers ~~offer~~made in a ~~variety~~specified period between account options without the assessment of ~~equity,~~a ~~fixed-income~~fee. ~~and~~The ~~guaranteed~~average size ~~fixed~~of ~~account~~a ~~investment~~new ~~choices~~variable annuity contract sold by the Company in 2003 was approximately $70,000.

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

AtThe ~~December 31,~~Company’s ~~2002,~~general ~~total~~account ~~variable~~obligations ~~product~~are ~~liabilities~~fixed-rate ~~were $18.44 billion~~products, principally fixed-rate options of ~~which~~its ~~$14.76 billion~~variable ~~were~~annuity ~~held~~contracts, inbut ~~separate~~also including ~~accounts~~fixed annuities, GICs and ~~$3.68 billion~~universal ~~were~~life ~~the~~contracts ~~liabilities~~issued ofin ~~the~~prior years. Such fixed-rate account options ~~which~~on ~~are~~its ~~held~~variable annuity contracts inprovide ~~the~~interest ~~general~~rate ~~accounts~~guarantees of one, three, five, seven or ten years. Although ~~The~~the Company’s ~~variable~~ annuity ~~products~~contracts ~~incorporate surrender~~remain ~~charges~~in force an average of seven to ten ~~encourage~~years, ~~persistency.~~a Atmajority (approximately 81% at December 31, ~~2002,~~2003) ~~78%~~ of the annuity ~~Company’s~~contracts, ~~variable~~as ~~annuity~~well ~~liabilities~~as ~~held~~the inuniversal ~~separate~~life ~~accounts~~contracts, ~~were~~reprice ~~subject~~annually at todiscretionary ~~surrender~~rates ~~penalties~~determined orby ~~other~~the ~~restrictions.~~Company ~~The~~subject ~~Company’s~~to ~~variable~~3% ~~annuity products~~or ~~also~~4% ~~generally~~minimum ~~limit~~rate guarantees, depending on the ~~number~~contract. ofIn ~~transfers~~repricing, ~~made~~the inCompany atakes ~~specified~~into ~~period~~account ~~between~~yield ~~account~~characteristics ~~options~~of ~~without~~its ~~the~~investment ~~assessment~~portfolio, ofsurrender assumptions aand ~~fee~~competitive industry pricing, among other factors. The ~~average~~ ~~size~~Company’s ofsmall ablock ~~new~~of ~~variable~~fixed ~~annuity~~annuities ~~contract~~is ~~sold~~serviced by an affiliate of the Company. The Company’s inuniversal ~~2002~~life ~~was~~products are serviced by a third party ~~approximately~~administrator ~~$70,000~~whose activities are closely monitored by the Company.

~~ANNUITY~~The ~~OPERATIONS~~Company —in ~~GENERAL~~prior ~~ACCOUNT~~years augmented its retail annuity business with the sale of institutional products. At December 31, 2003, the Company had $213.5 million of fixed-maturity, variable-rate GIC obligations that reprice periodically based upon certain defined indices and $4.5 million of fixed-maturity, fixed-rate GICs.

The Company’s ~~general~~has ~~account~~had ~~obligations~~the ~~are fixed-rate products~~ability, ~~principally~~ ~~fixed-rate~~limited ~~options~~by ofminimum ~~its~~interest ~~variable annuity contracts, but also~~rate ~~including fixed annuities~~guarantees, ~~GICs~~to ~~and~~respond ~~universal~~to ~~life~~the ~~contracts~~generally ~~issued~~declining ininterest ~~prior years. Such fixed-~~rate ~~account~~environment ~~options on its variable annuity contracts~~in ~~provide~~the ~~interest~~last ~~rate~~five ~~guarantees~~years ofby ~~one,~~lowering ~~three,~~crediting ~~five,~~rates ~~seven~~in orresponse ~~ten~~to ~~years.~~lower investment ~~Although~~returns. ~~the~~See ~~Company~~“Management’s ~~annuity~~Discussion ~~contracts~~and ~~remain~~Analysis inof ~~force~~Financial anCondition ~~average~~and Results of ~~seven~~Operations” ~~to ten~~for ~~years,~~additional ainformation ~~majority~~on ~~(approximately~~the ~~83%~~calculation ~~at December 31, 2002)~~ of ~~the annuity~~ ~~contracts,~~investment asyield ~~well~~used asby the ~~universal~~Company. ~~life~~The ~~contracts,~~trends ~~reprice~~experienced ~~annually~~during atthe three ~~discretionary~~years ~~rates~~ended ~~determined~~December 31, by2003 in the Company’s ~~subject~~average toyield 3%on orits 4%portfolio of ~~minimum~~bonds, ~~rate guarantees~~notes, ~~depending~~and onredeemable ~~the~~preferred ~~contract.~~stocks ~~In repricing,~~ (the ~~Company~~“Bond ~~takes~~Portfolio”) ~~into~~and ~~account~~rate ~~yield characteristics~~ of ~~its~~interest ~~investment~~credited ~~portfolio,~~on ~~surrender~~average interest-bearing

~~assumptions and competitive industry pricing~~liabilities, ~~among~~compared ~~other~~to ~~factors.~~the ~~The Company’s~~market ~~small~~trend ~~block~~in oflong-term ~~fixed~~interest ~~annuities~~rates isas illustrated ~~serviced~~ by anthe ~~affiliate~~average often-year ~~the Company~~U.S. ~~The~~Treasury ~~Company’s~~bond ~~universal~~rate, ~~life products~~ are ~~serviced~~presented ~~by a third party~~in ~~administrator whose activities are closely monitored by~~ the ~~Company.~~following table:

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


	2003			2002			2001
10-year U.S. Treasury bond rate:		4.01	%		4.61	%		5.02	%
AIG SunAmerica Life Assurance Company:
Average yield on Bond Portfolio		5.75			6.23			6.82
Rate paid on average interest- bearing liabilities		3.71			3.93			4.58

The Company designs its fixed-rate products and conducts its investment operations in order to closely match the duration and cash flows of the assets in its investment portfolio to its fixed-rate ~~annuity, universal life and GIC~~ obligations. The Company seeks to achieve a predictable spread between what it earns on its assets and what it pays on its liabilities by investing principally in fixed-rate securities. The Company’s fixed annuity and universal life products incorporate surrender charges and its GIC products incorporate other restrictions in order to encourage persistency. Approximately 8279% of the Company’s fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at December 31, ~~2002~~2003.

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 should back its fixed-rate liabilities. The Company does not have a specific target rate of of return. Instead, its rates of return vary over time depending on the ~~current~~ current interest rate environment, the slope of the yield curve, the spread at ~~which~~ 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 ana ~~affiliate~~subsidiary of AIG. 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.

AsFor ~~part~~more ofinformation ~~its~~concerning ~~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~~including ~~and redeemable preferred stocks, mortgage loans, policy loans and~~the ~~investments~~risks ininherent ~~limited partnerships that invest primarily~~ in ~~fixed-rate securities.~~such ~~At December 31~~investments, ~~2002,~~see ~~these assets had an aggregate fair value of $7.19~~Item ~~billion~~7, ~~with a duration of 3.8 (See further discussion of duration under Capital Resources and Liquidity — Asset Liability Matching). The Company~~“Management’s ~~fixed-rate~~ ~~liabilities~~Discussion ~~include fixed annuity, universal life~~ and ~~GIC reserves.~~ AtAnalysis ~~December 31, 2002, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates~~ of ~~interest)~~ ofFinancial ~~$6.47 billion~~Condition ~~with~~and aResults ~~duration~~ of ~~3.8.~~Operations ~~For~~– ~~the~~Capital ~~years ended~~Resources ~~December 31, 2002, 2001,~~ and ~~2000, the Company’s yields on average invested~~Liquidity.”

REGULATION

The Company, in common with other insurers, is subject to regulation and supervision by the states and jurisdictions in which it does business. Within the United States, the method of such regulation varies but generally has its source in statutes that delegate regulatory and supervisory powers to an insurance official. The regulation and supervision relate primarily to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk based capital measurements, the licensing of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks which may be insured under a single policy, deposits 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

~~assets~~regulation ~~were~~is ~~5.80%,~~for ~~6.63%~~the ~~and~~protection ~~7.15%, respectively; its average rates paid on all interest-bearing liabilities were 3.74%, 4.48% and 4.96%, respectively; and it realized net investment spreads on average invested assets~~ of ~~2.13%, 2.18%~~policyholders ~~and~~rather ~~2.35%,~~than ~~respectively.~~security ~~Net realized investment losses were 0~~holders.~~98%,~~ ~~1.10% and 0.28% of average invested assets in 2002, 2001 and 2000,~~ ~~respectively.~~

~~The~~Risk ~~Company~~based capital (“RBC”) standards are designed to measure the adequacy of an insurer’s ~~general~~statutory ~~investment~~capital ~~philosophy~~and issurplus in relation to ~~hold~~the ~~fixed-rate~~risks ~~assets~~inherent ~~for~~in ~~long-term~~its ~~investment~~business. ~~Thus,~~The itstandards ~~does~~are ~~not~~intended ~~have~~to ahelp ~~trading~~identify ~~portfolio.~~inadequately ~~However,~~capitalized companies and require specific regulatory actions in the ~~Company~~event ~~has~~an insurer’s ~~determined~~RBC ~~that~~is ~~all~~deficient. ofThe ~~its~~RBC ~~portfolio~~formula develops a risk-adjusted target level of ~~bonds,~~adjusted ~~notes~~statutory capital and surplus by applying certain factors to various asset, premium and ~~redeemable~~reserve ~~preferred~~items. ~~stocks~~Higher ~~(the~~factors ~~“Bond~~are ~~Portfolio”)~~applied isto ~~available~~more risky items and lower factors are applied to beless ~~sold~~risky items. Thus, the intarget ~~response~~level toof ~~changes~~statutory insurplus ~~market~~varies ~~interest~~not ~~rates~~only as a result of the insurer’s size, ~~changes~~but inalso ~~relative~~on ~~value~~the risk profile of the insurer’s operations. The RBC Model ~~asset~~Law ~~sectors~~provides ~~and~~four ~~individual~~incremental ~~securities,~~levels ~~changes~~of inregulatory ~~prepayment~~attention ~~risk,~~for ~~changes~~insurers whose surplus is below the calculated RBC target. These levels of attention range in ~~credit~~severity ~~quality~~from ~~outlook~~requiring the insurer to submit a plan for ~~certain~~corrective ~~securities,~~action to actually placing the insurer under regulatory control. The statutory capital and surplus of the Company’s ~~need~~exceeded ~~for liquidity~~its ~~and~~RBC ~~other~~requirements ~~similar~~as ~~factors~~of December 31, 2003.

The ~~following~~federal ~~table~~government ~~summarizes~~does not directly regulate the business of insurance, however, the Company’s ~~investment~~and ~~portfolio~~its atproducts are governed by federal ~~December 31~~agencies, ~~2002:~~including the Securities and Exchange Commission and the Internal Revenue Service. Federal legislation and administrative policies in several areas, including financial services regulation, pension regulation and federal taxation, can significantly and adversely affect the insurance industry. The federal government has from time to time considered legislation relating to the deferral of taxation on the accretion of value within certain annuities and life insurance products, changes in ERISA regulations, the alteration of the federal income tax structure and the availability of Section 401(k) and individual retirement accounts. Although the ultimate effect of any such changes, if implemented, is uncertain, both the persistency of our existing products and our ability to sell products may be materially impacted in the future.

~~SUMMARY~~ Recently OFthere ~~INVESTMENTS~~has been a significant increase in federal and state regulatory activity relating to financial services companies, particularly mutual fund companies and life insurers issuing variable annuity products. These inquiries have focused on a number of issues including after-hours trading, short-term trading (sometimes referred to as market timing), revenue sharing arrangements and greater transparency regarding compensation arrangements. There are several rule proposals pending at the SEC and on a federal level which, if passed, could have an impact on the business of the Company.

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

COMPETITION

AtThe ~~December 31,~~businesses ~~2002,~~conducted by the ~~Bond~~Company ~~Portfolio~~are ~~(excluding~~highly ~~$21~~competitive.~~6 million~~ ofThe ~~redeemable~~Company ~~preferred~~competes ~~stocks)~~with ~~included~~other ~~$5.31 billion~~life ofinsurers, ~~bonds~~and ~~rated~~also bycompetes ~~Standard &~~for ~~Poor~~customers’s, funds ~~Moody’s~~with ~~Investors~~a ~~Service,~~variety ~~Fitch~~of orinvestment ~~the~~products ~~Securities~~offered ~~Valuation~~by ~~Office~~financial services ofcompanies ~~the~~other ~~National~~than ~~Association~~life ofinsurance ~~Insurance~~companies, ~~Commissioners~~such ~~(“NAIC”)~~as banks, ~~and $196.6~~investment ~~million~~advisors, ofmutual ~~bonds~~fund ~~rated~~companies byand ~~the~~other ~~Company~~financial ~~pursuant~~institutions. toIn ~~statutory~~2002, ~~ratings guidelines~~net ~~established~~annuity bypremiums written among the ~~NAIC.~~top At100 ~~December~~companies ranged from approximately $73 ~~31,~~million ~~2002,~~to approximately $~~5.18~~21 billion ofannually. The Company together with ~~the~~its ~~Bond~~affiliates ~~Portfolio~~is ~~was~~the ~~investment~~largest ~~grade,~~of ~~including~~this $1group.~~58 billion~~ ofThe Company believes the primary ~~mortgage-backed~~competitive ~~securities~~factors ~~and~~among ~~U.S.~~life ~~government/~~insurance ~~agency~~companies ~~securities.~~for

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

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

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

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

For more information concerning the Company’s investments, including the risks inherent in such investments, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity.”

REGULATION

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

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

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

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

Privacy provisions of the Gramm-Leach-Bliley Act became fully effective in 2001 and establish new consumer protections regarding the security, confidentiality, and uses of nonpublic personal information of individuals. The law also requires financial institutions to fully disclose their privacy policies to their customers. Additional privacy legislation pending in the United States Congress and several states is designed to provide further privacy protections to consumers of financial products and services. These statutes and regulations may result in additional regulatory compliance costs, may limit the Company’s ability to market its products, and may otherwise constrain the nature or scope of the Company’s insurance and financial services operations. The Gramm-Leach-Bliley Act also allows combinations between insurance companies, banks and other entities. In addition, from time to time, Federal initiatives are proposed that could affect the Company’s businesses. Such initiatives include employee benefit plan regulations and tax law changes affecting the taxation of insurance companies and the tax treatment of insurance and other investment products. Proposals made in recent years to limit the tax deferral of annuities or otherwise modify the tax rules related to the treatment of annuities have not been enacted. While certain of such proposals, if implemented, could have an adverse effect on the Company’s sales of affected products, and, consequently, on its results of operations, the Company believes these proposals have a small likelihood of being enacted, because they would discourage retirement savings and there is strong public and industry opposition to them.

COMPETITION

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

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

ITEM 2. PROPERTIES

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

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

ITEM 3. LEGAL PROCEEDINGS

Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company. ~~The Company~~ ~~previously reported on a matter, McMurdie et al. v. SunAmerica et al., Case No.~~ ~~BC 194082, filed on July 10, 1998 in the Superior Court for the County of Los~~ ~~Angeles. The lawsuit was settled in September 2002.~~

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

No matters were submitted during the quarter ending December 31, ~~2002~~2003 to a vote of security-holders, through the solicitation of proxies or otherwise.

PART II

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

Not applicable.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data of the Company for 2003 and 2002 and the consolidated financial data of the Company and its subsidiaries for 2001 ~~and~~ and prior periods should be read in conjunction with the ~~financial~~consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included elsewhere herein.

													Three months			Year
	Years ended December 31,
	Years ended December 31,												ended			ended
	2003			2002			2001			2000			1999
													December 31,			September 30,
	(In thousands)
	2002			2001			2000			1999			1998			1998
RESULTS OF OPERATIONS
	(In thousands)
REVENUES:
RESULTS OF OPERATIONS
Fee income, net of reinsurance	$	353,681		$	367,574		$	535,921		$	603,915		$	509,239
Net investment income	$	143,295		$	129,294		$	134,502		$	158,264		$	25,858		$	83,699
Investment income		398,304			377,556			374,268			399,355			516,001
Net realized investment (losses) gains		(65,811	)		(92,711	)		(15,177	)		(19,620	)		271			19,482
Net realized investment losses		(30,354	)		(65,811	)		(92,711	)		(15,177	)		(19,620	)
Fee income		374,410			531,349			590,799			453,362			83,330			290,362
Total revenues		721,631			679,319			817,478			988,093			1,005,620
General and administrative expenses		(101,839	)		(149,936	)		(171,013	)		(146,297	)		(21,268	)		(92,929	)
BENEFITS AND EXPENSES:
Amortization of deferred acquisition costs		(187,860	)		(220,316	)		(158,007	)		(116,840	)		(27,070	)		(72,713	)
Interest expense		237,585			234,261			244,974			264,853			357,737
Annual commissions		(58,389	)		(58,278	)		(56,473	)		(40,760	)		(6,624	)		(18,209	)
General and administrative expenses		83,013			79,287			136,942			164,215			143,556
Guaranteed minimum death benefits, net of reinsurance recoveries		(67,492	)		(17,839	)		(614	)		(386	)		—			—
Amortization of deferred acquisition costs		156,906			187,860			220,316			158,007			116,840
Pretax income before cumulative effect of accounting change		36,314			121,563			324,017			287,723			54,497			209,692
Annual commissions		55,661			58,389			58,278			56,473			40,760
Income tax expense		(2,063	)		(20,852	)		(108,445	)		(103,025	)		(20,106	)		(71,051	)
Claims on UL contracts, net of reinsurance recoveries		17,766			15,716			17,566			19,914			58,618
Net income before cumulative effect of accounting change		34,251			100,711			215,572			184,698			34,391			138,641
Guaranteed minimum death benefits, net of reinsurance recoveries		63,268			67,492			17,839			614			386
Cumulative effect of accounting change, net of tax		—			(10,342	)		—			—			—			—
Total benefits and expenses		614,199			643,005			695,915			664,076			717,897
NET INCOME	$	34,251		$	90,369		$	215,572		$	184,698		$	34,391		$	138,641
Pretax income before cumulative effect of accounting change		107,432			36,314			121,563			324,017			287,723
Income tax expense		(21,760	)		(2,063	)		(20,852	)		(108,445	)		(103,025	)
Income before cumulative effect of accounting change		85,672			34,251			100,711			215,572			184,698
Cumulative effect of accounting change, net of tax		—			—			(10,342	)		—			—
NET INCOME	$	85,672		$	34,251		$	90,369		$	215,572		$	184,698

108

~~ITEM~~ In 6.2001, ~~SELECTED~~the ~~FINANCIAL~~Company ~~DATA~~adopted EITF 99-20 and FAS 133, the effect of which was recorded as a cumulative effect of accounting change (~~continued~~See Note 2 of Notes to Consolidated Financial Statements).

~~Effective~~ On ~~December~~January 311, ~~1998~~2002, the Company ~~changed~~distributed 100% of the outstanding capital stock of its ~~fiscal~~consolidated ~~year~~subsidiary, ~~end~~Saamsun ~~from~~Holdings Corp., to its ~~September 30~~Parent, SunAmerica Life Insurance Company (the “Parent”) (See Note 7 of Notes to ~~December 31~~Consolidated Financial Statements). Saamsun Holdings Corp. comprised two of the Company’s business segments. The Company also entered into a profit sharing agreement with an affiliate of the Company whereby the affiliate contributes to the Company its profits earned through the Company’s variable annuity contracts. The results of operations of the Company for 2003 and 2002 are affected by both the distribution of Saamsun Holdings Corp. and the profit sharing agreement.

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


	December 31,
	2003		2002		2001		2000		1999
	(In thousands)
FINANCIAL POSITION

Investments and cash	$	7,073,372	$	7,193,704	$	6,751,326	$	5,262,734	$	5,554,701
Variable annuity assets held in separate accounts		19,178,796		14,758,642		18,526,413		20,393,820		19,949,145
Deferred acquisition costs		1,424,317		1,364,748		1,419,498		1,286,456		1,089,979
Deferred income taxes		—		—		—		—		53,445
Other assets		105,366		221,738		242,868		246,468		227,224

TOTAL ASSETS	$	27,781,851	$	23,538,832	$	26,940,105	$	27,189,478	$	26,874,494

Reserves for fixed annuity contracts	$	4,274,329	$	4,285,098	$	3,498,917	$	2,778,229	$	3,254,895
Reserves for universal life insurance contracts		1,609,233		1,676,073		1,738,493		1,832,667		1,978,332
Reserves for guaranteed investment contracts		218,032		359,561		483,861		610,672		305,570
Variable annuity liabilities related to separate accounts		19,178,796		14,758,642		18,526,413		20,393,820		19,949,145
Other payables and accrued liabilities		756,645		785,947		828,641		304,324		413,610
Subordinated notes payable to affiliates		—		—		58,814		55,119		37,816
Deferred income taxes		281,399		351,872		210,970		85,978		—
Shareholder’s equity		1,463,417		1,321,639		1,593,996		1,128,669		935,126

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	27,781,851	$	23,538,832	$	26,940,105	$	27,189,478	$	26,874,494

~~In 2001, the Company adopted EITF 99-20, which was recorded as a cumulative~~9 ~~effect of accounting change (See Note 2 of Notes to Consolidated Financial Statements).~~

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

~~ITEM~~ The 6financial position of the Company as of December 31, 2003 and December 31, 2002 reflects the impact of the distribution of its consolidated subsidiary, Saamsun Holdings Corp., ~~SELECTED~~to ~~FINANCIAL~~the ~~DATA~~Parent on January 1, 2002 (~~continued~~See Note 7 of the Notes to Consolidated Financial Statements).

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

ITEM 6. SELECTED FINANCIAL DATA (continued)

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

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

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations of AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance Company) (the “Company”) for the three years ended December 31, ~~2002~~ 2003 (“~~2002~~2003”), ~~2001~~2002 (“~~2001~~2002”) and ~~2000~~2001 (“~~2000~~2001”) follows. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

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

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

CRITICAL ACCOUNTING POLICIES

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

~~VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on~~10 debt and equity securities available for sale amounted to $170.7 million at December 31, 2002. In determining if and when a decline in fair value below amortized cost is other-than-temporary, the Company evaluates at each reporting period the market conditions, offering prices, trends of earnings,

VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on debt and equity securities available for sale amounted to $60.1 million at December 31, 2003 and $170.7 million at December 31, 2002. In determining if and when a decline in fair value below amortized cost is other-than-temporary, the Company evaluates at each reporting period the market conditions, offering prices, trends of earnings, 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 (See also discussion within “Capital Resources and Liquidity” herein).

Securities in ~~our~~the Company’s portfolio with a carrying value of approximately $1.15 24 billion at December 31, ~~2002~~2003 do not have readily determinable market prices. For these securities, wethe ~~estimate~~Company ~~their~~estimates the fair value with internally prepared valuations (including those based on estimates of future profitability). Otherwise, wethe ~~use~~Company ~~our~~uses ~~most~~its 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~~The Company’s ability to liquidate ~~our~~ its 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 wethe ~~believe~~Company ~~our estimates~~believes its estimates reasonably reflect the fair value of those securities, ~~our~~the key ~~assumptions~~ assumptions about the risk-free interest rates, risk premiums, performance of ~~underlying~~ underlying collateral, if any, and other factors may not reflect those of an ~~active~~ active market.

AMORTIZATION OF DEFERRED ACQUISITION COSTS: WeThe ~~amortize~~Company ~~our deferred~~amortizes deferred acquisition costs (“DAC”) based on a percentage of expected gross ~~profits~~ profits (“EGPs”) over the life of the underlying policies. EGPs are computed based on assumptions related to the underlying policies written, including ~~their~~ their anticipated duration, the growth rate of the separate account assets (with respect to variable annuities) or general account assets (with respect to ~~fixed~~ fixed annuities, ~~and~~ fixed options of variable annuities and universal life contracts) supporting the annuity obligations, ~~the~~costs ~~anticipated volume~~ of ~~guaranteed~~providing ~~minimum~~for ~~death benefits to be~~policy ~~paid~~guarantees and the level of expenses necessary to maintain the policies. The ~~Company~~ Company adjusts DAC amortization (a “DAC unlocking”) when estimates of current or or future gross profits to be realized from its annuity policies are revised. Approximately 95% of the Company’s DAC balance at December 31, 2003 related to variable annuity products and 5% related to fixed annuity and universal life products.

~~The assumption we use for the long-term annual net growth of the separate account assets in the determination of~~ DAC amortization ~~with~~is ~~respect~~sensitive to ~~our variable~~surrender ~~annuity~~rates, ~~policies~~claims iscosts, ~~10%~~and (the ~~“long-term growth rate assumption”). We~~ ~~use~~actual aand ~~“reversion~~assumed tofuture ~~the mean” methodology which allows us to maintain this 10% long-term~~ growth rate ~~assumption,~~of ~~while~~the ~~also~~assets ~~giving~~supporting ~~consideration to~~ the ~~effect~~Company’s ofobligations ~~short-term~~under ~~swings~~annuity ~~in the equity markets~~policies. ~~For~~With ~~example,~~respect ifto ~~performance~~fixed ~~were 15% during the first year following the introduction of a product~~annuities, the ~~DAC~~ ~~model would assume that market returns for the following five years (the “short-term~~ growth rate ~~assumption”)~~depends ~~would~~on ~~be approximately 9%, resulting in an average annual growth rate of 10% during~~ the ~~life~~yield ofon the ~~product.~~general ~~Similarly, following~~account ~~periods~~assets ofsupporting ~~below 10% performance, the model will assume a short-term~~those ~~growth rate higher than 10%~~annuities. AWith ~~DAC~~respect ~~unlocking~~to ~~will~~variable ~~occur if management deems the short-term growth rate assumption (i.e.~~annuities, the growth rate ~~required~~depends toon ~~revert to~~ the ~~mean 10% growth rate over a five-year period) to be unreasonable. The~~ ~~use~~performance of ~~a reversion to~~ the ~~mean~~investment ~~assumption~~options isavailable ~~common~~under ~~within~~ the ~~industry; however,~~annuity ~~the~~contract ~~parameters used in~~ and the ~~methodology~~allocation ~~are~~of ~~subject~~assets toamong ~~judgment~~these ~~and vary~~various ~~within~~investment ~~the industry~~options.

15 The assumption the Company uses for the long-term annual net growth of the separate account assets 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 that allows it 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 was 15% during the first year following the introduction of a product, the DAC model would assume that market returns for the following five years (the “short-term growth rate assumption”) would be approximately 9%, resulting in an average annual growth rate of 10% during the life of the product. Similarly, following periods of below 10% performance, the model will assume a short-term growth rate higher than 10%. A DAC unlocking will occur if management deems the short-term growth rate assumption (i.e., the growth rate required to revert to the mean 10% growth rate over a five-year period) to be unreasonable. The use of a reversion to the mean assumption is common within the industry; however, the parameters used in the methodology are subject to judgment and vary within the industry.

BUSINESS SEGMENTS

On January 1, 2002, the Company declared a distribution to its ~~Parent~~parent, SunAmerica Life Insurance Company (the “Parent”), of 100% of the outstanding capital stock of its then wholly owned subsidiary, Saamsun Holdings Corp. (“Saamsun”). Saamsun was comprised of the Company’s asset management and broker-dealer segments. This distribution decreased the Company’s shareholder’s equity by approximately $552.4 million (see Note 97 of Notes to Consolidated Financial Statements). Effective January 1, 2002, the Company’s earnings no longer include the asset management and broker-dealer operations. This distribution was approved by the Arizona Department of Insurance.

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

Prior to the distribution of Saamsun as discussed above, the Company had three business segments: annuity operations (as discussed above), asset management operations and broker-dealer operations (see Note 1210 of Notes to Consolidated Financial Statements). The asset management operations were conducted by the Company’s former registered investment advisor subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCO”), and its related distributor, AIG SunAmerica Capital Services, Inc. (“SACS”). SAAMCO and SACS earn fee income by distributing and managing a diversified family of mutual funds, managing certain subaccounts within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios. The asset management operations also included SA Affordable Housing, LLC (“SAAH LLC”). SAAH LLC was previously a direct wholly owned subsidiary of the Parent, until January 1, 2001, at which time all of SAAH LLC’s ownership interests were contributed to the Company. All of SAAH LLC’s ownership interests were subsequently contributed by the Company to SAAMCO. SAAH LLC was formed as a limited liability company whose primary purpose is the generation of rehabilitation tax credits, low -income housing credits and passive losses. Realized tax credits are recognized by ~~its direct Parent,~~ ~~SAAMCO. The broker-dealer operations were conducted by the Company’s former~~ ~~broker-dealer subsidiary, Royal Alliance Associates, Inc. (“Royal Alliance”),~~ which sells proprietary annuities and mutual funds and non-proprietary investment products. Royal Alliance earns income from commissions on sales of these products, net of the portion that is passed on to the registered representatives.

~~On June 10, 2002, the Company entered into a profit sharing agreement with~~12 SAAMCO whereby SAAMCO will contribute to the Company on a quarterly basis its profits earned in connection with its role as investment advisor and/or business manager to several open-end investment management companies registered under the Investment Company Act of 1940, as amended, that fund the variable investment options available to investors through the Company’s variable annuity contracts (the “SAAMCO Agreement”). The SAAMCO Agreement is retroactive to January 1, 2002. Amounts paid to or accrued by the Company under this agreement totaled $62.6 million in 2002.

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

On June 10, 2002, the Company entered into a profit sharing agreement with SAAMCO whereby SAAMCO contributes 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. Amounts paid to or accrued by the Company under this agreement totaled $60.5 million in 2003 and $62.6 million in 2002.

RESULTS OF OPERATIONS

NET INCOME totaled $3485.37 million in ~~2002~~2003, compared ~~with~~to $9034.43 million in ~~2001~~2002 and $~~215~~90.64 million in ~~2000~~2001. The operating results of 2001 ~~and 2000~~ include those of the asset management and broker-dealer operations. Assuming the Saamsun distribution had occurred on January 1, ~~2000~~2001, the beginning of the ~~prior~~ ~~year~~ prior periods discussed herein, net income would have been $99.9 million for 2001 ~~and $176~~.~~0 million for the 2000.~~

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

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $36107.34 million in ~~2002~~2003, compared ~~with~~to $~~121~~36.63 million in ~~2001~~2002 and $~~324~~121.06 million in ~~2000.~~ 2001. Assuming the Saamsun distribution had occurred on January 1, ~~2000~~2001, the beginning of the prior ~~year~~ periods discussed herein, pretax income before cumulative effect of accounting change would have been $142.8 million for 2001. ~~and~~The ~~$258.0 million~~increase ~~for~~in ~~2000~~2003 compared to 2002 was primarily due to a reduction in net realized investment losses. The decline in 2002 results compared to 2001 primarily resulted from lower fee income and increased guaranteed minimum death benefits on variable annuities, partially offset by ~~decreased general and administrative expenses, decreased amortization of deferred acquisition costs, decreased net realized investment losses and~~ increased net investment ~~income.~~ ~~The decline in 2001 from 2000 primarily resulted from increased net realized investment losses, increased amortization of deferred acquisition costs and lower fee~~ income.

INCOME TAX EXPENSE totaled $221.18 million in ~~2002~~2003, $202.91 million in ~~2001~~2002 and $~~108~~20.49 million in ~~2000~~2001, representing effective tax rates of 620%, 176% and 3317% in ~~2002~~2003, ~~2001~~2002 and ~~2000~~2001, respectively. The ~~decrease~~unusually inlow ~~the~~ effective tax rate for 2002 is due primarily to the lower relative pretax income without corresponding reductions in permanent tax differences. Assuming that the Saamsun distribution had occurred on January 1, ~~2000~~2001, the beginning of the prior year ~~periods~~period discussed herein, income tax expense would have been $32.6 million for 2001 ~~and $82.0 million for 2000~~, representing an effective tax ~~rates~~rate of 23% ~~and 32%, respectively~~. The lower tax rate in 2001 is due to tax credits generated by SAAH LLC, a wholly-owned subsidiary of SAAMCO which reduced the effective tax rate by approximately 13% (see Note 97 of Notes to Consolidated Financial Statements).

~~As discussed above and in Note 12 of Notes to Consolidated Financial~~13 ~~Statements, effective January 1, 2002, the Company has one business segment, annuity operations.~~

As discussed above and in Note 10 of Notes to Consolidated Financial Statements, effective January 1, 2002, the Company has one business segment, annuity operations.

ANNUITY OPERATIONS

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $36107.34 million in ~~2002~~2003, compared with $~~142~~36.83 million in ~~2001~~2002 and $~~258~~142.08 million in ~~2000~~2001. The increase in 2003 compared to 2002 was primarily due to lower net realized investment losses and improved net investment income as customers allocated more dollars to the fixed-rate portion of variable annuity contracts. The decline in 2002 results compared to 2001 primarily resulted from ~~increased~~ increased guaranteed minimum death benefits on variable annuities, increased ~~amortization~~ amortization of deferred acquisition costs, lower fee income, increased general ~~and~~ and administrative expenses and increased net realized investment losses ~~partially~~ partially offset by higher net investment income.

NET INVESTMENT SPREAD, a non-GAAP measure, which represents investment income earned on invested assets less interest credited to fixed annuity contracts, universal life insurance contracts and guaranteed investment contracts is a key measurement used by the Company in evaluating the profitability of its business. Accordingly, the Company presents an analysis of net investment spread because the Company has determined this measure to be useful and meaningful.

In evaluating its investment yield and net investment spread, the Company calculates average invested assets using the amortized cost of bonds, notes and redeemable preferred stocks. This basis does not include unrealized gains and losses, which are reflected in the carrying value (i.e., fair value) of those investment pursuant to Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. In the calculation of average invested assets, the Company excludes cash collateral received from the securities lending program, which is offset by a securities lending payable in the same amount. As discussed in Note 2 of the accompanying consolidated financial statements, the Company participates in a securities lending program with an affiliated agent, pursuant to which it lends its securities and primarily takes cash as collateral with respect to the securities lent. Participation in securities lending agreements provides additional net investment income for the Company, resulting from investment income earned on the collateral, less interest paid on the securities lending agreements and the related management fees paid to administer the program.

An analysis of net investment spread and a reconciliation to net income is presented in the following table:


	Years ended December 31,
	2003			2002			2001
	(In Thousands)
Investment income	$	398,304		$	377,556		$	358,710
Interest credited to fixed annuity contracts		(153,636	)		(142,973	)		(133,647	)
Interest credited to universal life insurance contracts		(76,415	)		(80,021	)		(81,773	)
Interest credited to guaranteed investment contracts		(7,534	)		(11,267	)		(25,079	)

Net investment spread		160,719			143,295			118,211
Net realized investment losses		(30,354	)		(65,811	)		(59,784	)
Fee income, net of reinsurance		353,681			367,574			402,396
General and administrative expenses, net of deferrals		(83,013	)		(79,287	)		(80,026	)
Amortization of DAC		(156,906	)		(187,860	)		(144,273	)
Annual commissions		(55,661	)		(58,389	)		(58,278	)
Claims on UL contracts, net of reinsurance recoveries		(17,766	)		(15,716	)		(17,566	)
Guaranteed minimum death benefits, net of reinsurance recoveries		(63,268	)		(67,492	)		(17,839	)
Income tax expense		(21,760	)		(2,063	)		(32,639	)
Cumulative effect of accounting change, net of tax		—			—			(10,342	)

Net income	$	85,672		$	34,251		$	99,860

Net investment spread totaled $160.7 million in 2003, $143.3 million in 2002 and $118.2 million in 2001. These amounts equal 2.41% on average invested assets (computed on a daily basis) of $6.66 billion in 2003, 2.35% on average invested assets of $6.09 billion in 2002 and 2.20% on average invested assets of $5.38 billion in 2001. The increase in net investment spread in 2003 from 2002 resulted from substantial growth in average invested assets and effective management of interest crediting rates to offset lower yields available on invested assets. The components of net investment spread were as follows:


	Years ended December 31,
	2003			2002			2001
	(In Thousands)
Net investment spread	$	160,719		$	143,295		$	118,211

Average invested assets		6,656,360			6,086,517			5,377,261

Average interest-bearing liabilities		(6,407,102	)		(5,962,521	)		(5,344,982	)

Yield on average invested assets		5.98	%		6.20	%		6.67	%
Rate paid on average interest bearing liabilities		3.71			3.93			4.50

Difference between yield and interest rate paid		2.27	%		2.27	%		2.17	%

Net investment spread as a percentage of average invested assets		2.41	%		2.35	%		2.20	%

The growth in average invested assets principally resulted from sales of the fixed account options of the Company’s variable annuity products (“Fixed Annuities Deposits”), and renewal deposits on its universal life product (“UL Deposits”), partially offset by net exchanges from fixed accounts into the separate accounts of variable annuity contracts. Sales of fixed annuities and universal life product totaled $1.58 billion in 2003, $1.78 billion in 2002 and $2.33 billion in 2001, and are largely deposits for the fixed accounts of variable annuities. These deposits represent 27%, 34%, and 51%, respectively, of the related reserve balances at the beginning of the respective periods. Fixed Annuity Deposits were higher by approximately $550 million in 2001 due to low margin Anchor Advisor sales allocated to one-year fixed accounts in 2001. The one-year fixed account was discontinued from the product line in September 2001.

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 $249.3 million in 2003, compared with $124.0 million in 2002 and $32.3 million in 2001. The increase in 2003 principally reflects the impact of a $200.0 million capital contribution from the Parent in the third quarter of 2002. The increase in 2002 principally reflects $120.5 million of net income tax refunds received from the Parent in the fourth quarter of 2001. The difference between the Company’s yield on average invested assets and the rate paid on average interest-bearing liabilities was 2.27% in 2003, 2.27% in 2002 and 2.17% in 2001.

Investment income (and the related yields on average invested assets) totaled $398.3 million (5.98%), compared with $377.6 million (6.20%) in 2002 and $358.7 million (6.67%) in 2001. The decrease in the investment yield in 2003 and 2002 primarily reflect a lower prevailing interest rate environment. Expenses incurred to manage the investment portfolio amounted to $2.3 million in 2003, $2.4 million in 2002 and $5.0 million in 2001. These expenses are included as a reduction of investment income in the consolidated statement of income and comprehensive income.

Interest expense totaled $237.6 million in 2003, $234.3 million in 2002 and $240.5 million in 2001. The average rate paid on all interest-bearing liabilities was 3.71% in 2003, compared with 3.93% in 2002 and 4.50% in 2001. Interest-bearing liabilities averaged $6.41 billion during 2003, $5.96 billion during 2002 and $5.34 billion during 2001. The decline in the overall rates paid in 2003 compared to 2002 and 2001 resulted primarily from the impact of a declining interest rate environment.

NET REALIZED INVESTMENT LOSSES totaled $30.4 million in 2003, $65.8 million in 2002 and $59.8 million in 2001 and include impairment writedowns of $54.1 million, $57.3 million and $68.0 million, respectively. Thus, net realized gains from sales and redemptions of investments totaled $23.7 million in 2003, compared with net realized losses of $8.5 million in 2002 and net realized gains of $8.2 million in 2001.

The Company sold or redeemed invested assets, principally bonds and notes, aggregating $2.21 billion in 2003, $1.60 billion in 2002 and $1.77 billion in 2001. 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 0.36%, 0.14% and 0.15% of average invested assets for 2003, 2002 and 2001, 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 $54.1 million, $57.3 million and $68.0 million of provisions principally applied to bonds in 2003, 2002 and 2001, respectively. Impairment writedowns represent 0.81%, 0.96% and 1.27% of average invested assets for 2003, 2002 and 2001, respectively. For the five years ended December 31, 2003, impairment writedowns as a percentage of average invested assets have ranged from 0.08% to 1.27% and have averaged 0.67%. Such writedowns are based upon estimates of the fair value of invested assets and recorded when declines in value of such assets are considered to be other than temporary. Actual realization will be dependent upon future events. The Company recorded $15.9 million ($10.3 million, net of tax) of additional impairments in 2001 pursuant to the implementation of EITF 99-20. This adjustment was recorded as a cumulative effect of accounting change in the accompanying consolidated statement of income and comprehensive income for 2001.

VARIABLE ANNUITY FEES, NET OF REINSURANCE are based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $290.1 million in 2003, $295.5 million in 2002 and $337.4 million in 2001 and are net of reinsurance premiums of $30.8 million, $22.5 million and $13.2 million, respectively. The 2003 and 2002 amounts include $60.5 million and $62.6 million attributable to the SAAMCO Agreement, respectively. In consolidation, comparable fees totaling $63.2 million in 2001 were included in the annuity operations segment. The decreased fees in 2003 as compared to 2002 reflect increased reinsurance premiums. The decreased fees in 2002 as compared to 2001 primarily reflect the unfavorable equity market conditions in 2002 and the early part of 2003, and the resulting unfavorable impact on market values of the assets in the separate accounts. Variable annuity fees represent 1.8% of average variable annuity assets in all periods presented. Variable annuity assets averaged $16.32 billion, $16.46 billion and $18.87 billion during the respective periods. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of variable annuity products, totaled $1.73 billion in 2003, $1.18 billion in 2002 and $1.41 billion in 2001. These amounts represent 12%, 6% and 7% of separate account liabilities at the beginning of the respective periods. The increase in variable annuity deposits in 2003 reflected increased demand for the variable annuity products due to the improved equity market conditions in the latter part of 2003. The decrease in variable annuity deposits in 2002 reflected lower demand for the variable account options of the Company’s variable annuity products due to the unfavorable equity market conditions discussed above. Transfers from the fixed accounts of the Company’s variable annuity products to the separate accounts are not classified as variable annuity deposits. Accordingly, changes in variable annuity deposits are not necessarily indicative of the ultimate allocation by customers among fixed and variable account options of the Company’s variable annuity products.

~~The~~ Sales ~~decline~~of invariable ~~2001~~annuity ~~from~~products ~~2000~~(which ~~primarily~~include ~~resulted~~deposits ~~from~~allocated ~~increased~~to the ~~net~~fixed accounts) (“Variable Annuity Product Sales”) amounted to $3.27 ~~realized~~billion, ~~investment~~$2.92 billion ~~losses~~and $3.69 billion in 2003, ~~lower~~2002 ~~fee~~and ~~income~~2001, ~~increased~~respectively. Such ~~amortization~~sales primarily reflect those of ~~deferred~~ ~~acquisition~~the ~~costs~~Company’s Polaris, ~~increased~~Seasons ~~guaranteed~~and ~~minimum~~WM Diversified ~~death~~Strategies ~~benefits~~family onof variable annuity products. The Company’s variable annuity products are multi-manager variable annuities, that offer investors a choice of several variable funds as well as a number of guaranteed fixed-rate funds. Investors can select from a choice of several variable funds and ~~lower~~up ~~net~~to ~~investment~~7 ~~income~~guaranteed ~~partially~~fixed-rate ~~offset~~funds depending on the product. The increase in Variable Annuity Product Sales reflect improving market conditions in 2003. Sales were higher by ~~lower~~approximately $550 million in 2001 due to low margin ~~general~~Anchor ~~and~~Advisor ~~administrative~~sales ~~expenses~~allocated to one year fixed accounts in the third quarter of 2001 before the one year fixed account was discontinued from the product line at the end of September 2001.

~~NET~~The ~~INVESTMENT~~Company ~~INCOME,~~has ~~which~~encountered isincreased ~~the~~competition ~~spread~~in ~~between~~ the ~~income~~variable ~~earned on~~annuity ~~invested~~marketplace ~~assets~~during ~~and~~recent ~~the~~years ~~interest paid on fixed annuities~~ and ~~other interest-bearing~~anticipates ~~liabilities,~~that ~~totaled~~the ~~$143.3 million~~market inwill ~~2002, $118.2 million in~~remain ~~2001~~highly ~~and~~competitive ~~$127.7 million~~for inthe ~~2000.~~foreseeable ~~These amounts equal 2~~future.~~13%~~ onAlso, ~~average~~from ~~invested assets~~time ~~(computed~~to ~~on a daily basis) of $6.72 billion in 2002~~time, ~~2.18% on average~~ ~~invested~~Federal ~~assets~~initiatives ofare ~~$5.43 billion~~proposed inthat ~~2001~~could ~~and~~affect ~~2.35%~~the ontaxation ~~average~~of ~~invested assets~~annuities of(See ~~$5.43 billion~~“Regulation” in ~~2000~~Item 1).

~~Net~~UNIVERSAL ~~investment~~LIFE ~~spreads~~INSURANCE ~~include~~POLICY ~~the~~FEES, ~~effect~~NET ofOF ~~income~~REINSURANCE ~~earned~~amounted orto ~~interest~~$35.8 ~~paid~~million onin ~~the~~2003, ~~difference~~$36.3 million ~~between~~in ~~average~~2002 ~~invested assets~~ and ~~average interest-bearing liabilities~~$36.5 million ~~Average~~in ~~invested~~2001 ~~assets~~and ~~exceeded~~are ~~average~~net of ~~interest-bearing~~reinsurance ~~liabilities~~premiums byof $~~124~~33.07 million ~~in 2002~~, ~~compared with~~ $3234.3 1 million ~~in 2001~~ and $~~169~~34.90 million, respectively. inUniversal ~~2000.~~life ~~The~~insurance ~~increase~~policy infees ~~2002~~consist ~~reflects~~of amortality ~~$200.0 million~~charges, ~~capital~~up-front ~~contribution~~fees ~~from~~earned ~~the~~on ~~Parent~~deposits inreceived ~~the~~and ~~third~~administrative ~~quarter~~fees, ofnet ~~2002~~of ~~and~~reinsurance ~~$120~~premiums.~~5 million~~ ofThe ~~net~~administrative ~~income~~fees ~~tax~~are ~~refunds~~assessed ~~received~~based ~~from~~on the ~~Parent in~~ ~~the~~number ~~fourth quarter~~ of ~~2001.~~policies ~~The decrease~~ in ~~2001~~force ~~from~~as ~~2000~~of ~~reflects~~ the ~~impact~~ end of ~~$94~~each month.~~1 million~~ inThe ~~dividends~~Company ~~paid~~acquired its touniversal ~~the~~life ~~Parent~~contracts ~~and~~as ~~realized~~part ~~investment losses~~ of ~~$59.8 million~~the ~~recorded~~acquisition inof ~~2001.~~business ~~The~~from ~~difference~~MBL Life ~~between~~Assurance ~~the~~Corporation ~~Company’s yield~~ on ~~average~~December 31, ~~invested~~1998 ~~assets~~ and ~~the~~does ~~rate~~not ~~paid~~actively onmarket such ~~average~~contracts. ~~interest-bearing liabilities~~Such ~~was~~fees represent 2.0623% ~~in 2002~~, 2.1517% ~~in 2001~~ and 2.1908% of average reserves for universal life insurance contracts in ~~2000~~the respective periods.

~~Investment~~SURRENDER ~~income~~CHARGES ~~(and~~on ~~the~~variable ~~related~~annuity ~~yields~~and onuniversal ~~average~~life ~~invested~~contracts ~~assets)~~ totaled $~~390~~27.17 million ~~(5.80%)~~ in ~~2002~~2003, ~~compared with~~ $~~359~~32.75 million ~~(6.63%)~~ in ~~2001~~ 2002 and $~~388~~24.49 million ~~(7.15%)~~ in ~~2000~~2001. Surrender ~~The~~charge ~~decrease~~periods inrange ~~the~~from ~~investment~~zero ~~yield in 2002 compared~~ to ~~2001~~nine ~~and~~years ~~2000~~from ~~primarily~~the ~~reflects~~date a ~~lower prevailing~~deposit ~~interest~~is ~~rate environment~~received. ~~Expenses~~Surrender ~~incurred~~charges togenerally ~~manage~~are ~~the~~assessed ~~investment portfolio~~on ~~amounted~~withdrawals ~~to $2.4 million in 2002, $5.0 million in 2001 and $7.1~~at ~~million~~declining inrates ~~2000.~~during ~~These~~the ~~expenses~~first ~~are~~seven ~~included~~or asnine ayears ~~reduction~~following ofreceipt ~~investment income in the consolidated statement~~ of ~~income and comprehensive income~~the deposit.

~~Interest~~GENERAL ~~expense~~AND ADMINISTRATIVE EXPENSES totaled $~~246~~83.80 million in ~~2002~~2003, $~~241~~79.~~4 million in 2001~~3 ~~and $260.7~~ million in ~~2000. The average rate paid on all interest-bearing liabilities was 3.74% in~~ 2002, ~~compared with 4.48% in 2001~~ and ~~4.96% in 2000. Interest-bearing liabilities averaged~~ $680.600 ~~billion~~million ~~during 2002, $5.39 billion during 2001 and $5.26 billion during 2000. The decline~~ in ~~the overall rates paid in 2002 compared to~~ 2001 ~~resulted primarily from the impact of a declining interest rate environment and the impact of securities lending in 2002 at short-term rates~~. AsGeneral ~~discussed in Notes 2~~ and 11administrative ~~of Notes to Consolidated~~expenses ~~Financial~~remain ~~Statements,~~closely ~~the~~controlled ~~Company~~through ~~participates in~~ a ~~securities~~company-wide ~~lending~~cost containment program ~~with~~ ~~an affiliated agent in which it lends its securities~~ and ~~primarily takes~~ ~~cash~~continue ~~as collateral with respect~~ to ~~the~~represent ~~securities~~less ~~lent.~~than ~~Income~~1% on the securities lending collateral is recorded as net investment income while it pays interest on the securities lending agreements and related management fees to administer the program. Excluding the impact of ~~the securities lending program, the~~ average ~~rate~~total ~~paid would have been 3~~assets.~~93% in 2002. The decline in~~ ~~the overall rates paid in 2001 compared to 2000 resulted primarily from the~~ ~~impact of a declining interest rate environment.~~

AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $156.9 million in 2003, compared with $187.9 million in 2002 and $144.3 million in 2001. At December 31, 2003, DAC amortization was adjusted for a DAC unlocking that resulted in a reduction of $18.0 million. The increase in amortization in 2002 was primarily related to lower estimates of future gross profits on variable annuity contracts compared to the prior years in light of the downturn in the equity markets in 2002, and additional variable annuity product sales over the last twelve months and the subsequent amortization of related deferred commissions and other direct selling costs.

~~Growth~~ANNUAL inCOMMISSIONS ~~average~~totaled ~~invested~~$55.7 million ~~assets~~in ~~resulted~~2003, ~~from~~compared ~~cash~~with ~~received from the~~$58.4 ~~securities~~million ~~lending~~in ~~program~~2002 and ~~from~~$58.3 million ~~sales~~in of2001. ~~the~~Annual ~~fixed~~commissions ~~account options of the~~represent ~~Company’s variable annuity products (“Fixed Annuity Deposits”), and~~ renewal ~~deposits~~ oncommissions ~~its~~paid ~~universal~~quarterly ~~life~~in ~~product~~arrears ~~(“UL~~to ~~Deposits”),~~maintain ~~partially~~the ~~offset~~persistency ~~by net~~of ~~exchanges~~certain ~~from~~of ~~fixed accounts into~~ the ~~separate~~Company’s ~~accounts of~~ variable annuity contracts. ~~Fixed~~Substantially ~~Annuity~~all ~~Deposits~~of ~~and~~the Company’s ULcurrently ~~Deposits~~available ~~totaled~~variable ~~$1.78 billion~~annuity ~~in 2002,~~products ~~$2.33 billion~~allow infor ~~2001~~an ~~and~~annual commission ~~$1.82 billion~~payment option in ~~2000,~~return ~~and are largely deposits~~ for ~~the~~a ~~fixed~~lower ~~accounts~~immediate ~~of variable annuities~~commission. ~~These~~The ~~deposits represent 34%,~~vast ~~51%,~~majority ~~and 35%, respectively,~~ of the ~~related~~Company’s ~~reserve~~average balances ~~at the beginning~~ of ~~the~~ ~~respective~~its ~~periods.~~variable ~~Fixed~~annuity ~~Annuity~~products ~~Deposits were higher by approximately~~are ~~$550 million~~currently insubject ~~2001 due~~ to ~~low~~such ~~margin~~annual ~~Anchor Advisor sales allocated to one-year fixed accounts in 2001~~commissions. ~~The one-year fixed account was discontinued~~ ~~from the product line in September 2001.~~

NoCLAIMS ~~GIC~~ON ~~deposits~~UNIVERSAL ~~were~~LIFE ~~received~~CONTRACTS, inNET ~~2002.~~OF ~~GIC~~REINSURANCE ~~deposits~~RECOVERIES totaled $17.8 million in 2003, compared to $4015.07 million in ~~2001~~2002 and $~~350~~17.06 million in 2001 ~~2000.~~(net ~~GIC~~of ~~surrenders~~reinsurance ~~and~~recoveries ~~maturities~~of ~~totaled~~ $~~135~~34.10 million in ~~2002~~2003, $~~191~~29.92 million in 2002 ~~2001~~ and $7831.36 million inand ~~2000~~2001). The ~~GICs~~ ~~issued~~change byin ~~the~~such ~~Company~~claims ~~are generally variable rate contracts which~~resulted ~~guarantee~~principally the payment of principal and interest for a term of three to five years. GICs purchased by asset management firms for their short-term portfolios (which represent 89% of the Company’s GIC liabilities) either prohibit withdrawals or permit withdrawals with notice ranging from 90changes toin ~~270 days. GICS that are purchased by banks for their long-term portfolios or by state and local governmental entities either prohibit withdrawals or permit scheduled book value withdrawals subject to~~ the ~~terms~~mortality ~~of the underlying indenture or agreement~~experience. ~~In pricing GICs, the Company analyzes cash flow~~ ~~information and prices accordingly so that it is compensated for possible~~ ~~withdrawals prior to maturity.~~

GUARANTEED MINIMUM DEATH BENEFITS, NET ~~REALIZED~~OF ~~INVESTMENT~~REINSURANCE ~~LOSSES~~RECOVERIES (“Net GMDB”) on variable annuity contracts totaled $6563.83 million in ~~2002~~2003, compared with $5967.85 million in ~~2001~~2002 and $1517.28 million in ~~2000~~2001 ~~and~~(net ~~include~~of ~~impairment~~reinsurance ~~writedowns~~recoveries of $578.30 million in 2003, $688.04 million in 2002 and $203.68 million, ~~respectively~~in 2001). Net GMDB consists primarily of guaranteed minimum death benefits as ~~Thus,~~well ~~net~~as ~~realized~~immaterial ~~losses~~amounts ~~from~~of ~~sales~~earnings enhancement benefits, guaranteed minimum income benefits and ~~redemptions~~guaranteed ofminimum ~~investments~~account ~~totaled~~value benefits. These $8guarantees are described in more detail in the following paragraphs.~~5 million~~ The decrease in ~~2002,~~Net ~~compared~~GMDB ~~with~~in ~~net~~2003 ~~realized~~reflects ~~gains~~the ofupturn $8in the equity markets in 2003.~~2 million~~ The increase in ~~2001~~Net GMDB related to the Company’s variable annuity separate ~~and~~account $5contracts in 2002 reflects the downturn in the equity markets in 2002.~~4 million~~ Future downturns in ~~2000~~the equity markets could increase these expenses.

~~The~~A majority of the Company’s ~~sold~~variable orannuity ~~redeemed~~products ~~invested~~are ~~assets~~issued with a death benefit feature which provides that, ~~principally~~upon ~~bonds~~the ~~and~~death ~~notes~~of a contractholder, ~~aggregating~~the ~~$1.60 billion~~contractholder’s inbeneficiary ~~2002,~~will $receive the greater of (1~~.77~~) ~~billion~~the contractholder’s inaccount ~~2001~~value, ~~and~~or ~~$1.14~~(2) ~~billion~~a ~~in 2000.~~guaranteed ~~Sales~~minimum ofdeath ~~investments~~benefit ~~result~~that varies ~~from~~by product (the ~~active~~GMDB). ~~management~~The ofCompany bears the ~~Company’s~~risk that death claims ~~investment~~following ~~portfolio.~~a ~~Because~~decline ~~redemptions~~in ofthe ~~investments~~equity ~~are~~markets ~~generally~~may exceed contractholder account ~~involuntary~~balances, and ~~sales~~that ofthe ~~investments~~fees ~~are~~collected ~~made~~under inthe ~~both~~contract ~~rising~~are ~~and~~insufficient ~~falling~~to ~~interest~~cover ~~rate~~the ~~environments,~~costs ~~net~~of ~~gains~~the ~~and~~benefit ~~losses~~to ~~from~~be ~~sales~~provided. ~~and~~At ~~redemptions~~December 31, ~~of investments~~2003, ~~fluctuate~~a ~~from~~portion of ~~period~~the toGMDB ~~period,~~risk ~~and~~on ~~represent~~approximately ~~0.13~~33%, ~~0.15%~~of ~~and~~the account value with such features 0had been reinsured.~~10%~~ ofApproximately ~~average~~half ~~invested~~of ~~assets~~this ~~for~~reinsurance ~~2002,~~will ~~2001~~cease ~~and~~at ~~2000~~March 31, ~~respectively~~2004. ~~Active portfolio~~In ~~management~~2003, ~~involves~~a ~~the~~substantial ~~ongoing~~majority ~~evaluation~~ of ~~asset~~contracts ~~sectors, individual~~sold ~~securities~~have ~~within~~reinsurance coverage. However, the ~~investment~~Company ~~portfolio~~does ~~and~~not ~~the~~currently ~~reallocation~~have ~~of investments~~reinsurance ~~from~~coverage ~~sectors~~on the ~~that~~majority ~~are~~of ~~perceived~~the contracts to be ~~relatively~~sold ~~overvalued~~after toDecember 2004. Reinsurance ~~sectors~~coverage ~~that~~is ~~are~~subject ~~perceived~~ to belimitations ~~relatively~~such ~~undervalued.~~as ~~The~~caps ~~intent~~and ofdeductibles. ~~the~~In accordance ~~Company’s~~with ~~active~~Generally ~~portfolio~~Accepted ~~management~~Accounting isPrinciples, tothe ~~maximize~~Company ~~total~~expenses ~~returns~~such benefits onin the ~~investment~~ ~~portfolio~~period incurred, ~~taking~~and ~~into~~therefore ~~account~~does ~~credit~~not provide reserves for future benefits. However, ~~option~~effective January 1, ~~liquidity~~2004, ~~and~~the Company will be ~~interest-rate~~required ~~risk~~to record a liability for GMDBs (See Note 2 of Notes to Consolidated Financial Statements).

~~Impairment~~EARNINGS ~~writedowns~~ENHANCEMENT ~~include~~BENEFIT ~~$57.3 million,~~(“EEB”): ~~$68.0 million~~The ~~and~~Company ~~$20.6~~issues certain variable ~~million~~annuity ofproducts ~~provisions~~that ~~principally~~offer ~~applied~~an tooptional ~~bonds~~EEB infeature. ~~2002,~~For ~~2001~~contract-holders ~~and~~who elect ~~2000~~the feature, ~~respectively.~~ ~~Impairment~~the ~~writedowns~~EEB ~~represent~~provides ~~0.85%,~~an ~~1.25%~~additional ~~and~~death ~~0.38%~~benefit ofamount equal to ~~average~~a ~~invested~~fixed ~~assets~~percentage ~~for~~of ~~2002,~~earnings ~~2001~~in ~~and~~the ~~2000~~contract, ~~respectively~~subject to certain maximums. The ~~For~~Company bears the ~~five~~risk that account values following favorable performance ~~years~~of ~~ended~~the ~~December 31,~~financial ~~2002,~~markets ~~impairment~~will ~~writedowns~~result asin agreater ~~percentage~~EEB ofdeath claims and that the fees collected under the contract are insufficient

~~average invested assets have ranged from 0.06%~~ to ~~1.25%~~cover ~~and~~the ~~have~~costs ~~averaged 0.56%. Such writedowns are based upon estimates~~ of the ~~net~~benefit ~~realizable value of invested assets and recorded when declines in value of such assets are considered~~ to be ~~other than temporary~~provided. ~~Actual~~At ~~realization will be dependent upon future events. The Company recorded $15.9~~December ~~million ($10.3 million~~31, ~~net of~~2003, ~~tax)~~approximately of8% ~~additional~~(calculated ~~impairments~~based inon ~~2001~~current ~~pursuant~~account tovalue) ~~the implementation~~ of ~~EITF 99~~in-~~20.~~force contracts ~~This~~include ~~adjustment~~EEB ~~was~~coverage, ~~recorded~~with as95% ~~a cumulative effect~~ of ~~accounting change in~~ the ~~accompanying~~EEB ~~consolidated~~risk ~~statement~~fully ~~of income and comprehensive income for 2001~~reinsured.

~~VARIABLE~~GUARANTEED ~~ANNUITY~~MINIMUM ~~FEES~~INCOME ~~are~~BENEFIT ~~based~~(“GMIB”): onThe ~~the~~Company ~~market~~issues ~~value~~certain variable ofannuity ~~assets~~products inthat ~~separate accounts~~contain ~~supporting~~or ~~variable~~offer ~~annuity~~a ~~contracts.~~GMIB ~~Such~~living ~~fees~~benefit ~~totaled $318~~feature.1 ~~million~~This infeature ~~2002,~~provides ~~$350.4 million~~a inminimum ~~2001~~annuity ~~and~~payment ~~$385.4 million~~guarantee infor ~~2000. The 2002~~those ~~amounts~~contract-holders ~~include~~who ~~$62.6 million~~choose ofto ~~fees~~receive ~~relating~~fixed tolifetime ~~the~~annuity ~~SAAMCO~~payments ~~Agreement.~~after Ina ~~consolidation~~seven, ~~comparable~~nine, ~~fees~~or ~~totaling~~ten-year ~~$63.2 million~~waiting inperiod ~~2001 and $68.7 million~~ in ~~2000~~their ~~were~~deferred ~~included in the~~ annuity ~~operations segment in those years~~contracts. ~~The~~ ~~decreased~~The ~~fees~~Company inbears ~~2002 and 2001 as compared to 2000 reflect~~ the ~~unfavorable equity~~risk ~~market~~that ~~conditions in 2002 and 2001, and~~ the ~~resulting~~performance ~~unfavorable impact on market values~~ of ~~assets in~~ the ~~separate~~financial ~~accounts.~~markets ~~Variable annuity fees~~will ~~represent~~not ~~1.9%~~be ofsufficient ~~average~~for ~~variable~~accumulated ~~annuity~~policyholder ~~assets~~account inbalances ~~2002,~~to ~~1.9%~~support ~~of average~~GMIB ~~variable~~benefits ~~annuity assets in 2001~~ and ~~1.8%~~that ofthe ~~average~~fees ~~variable~~collected ~~annuity~~under ~~assets in 2000. Variable annuity assets averaged $16.46 billion, $18.87 billion and $21.07 billion during~~ the ~~respective~~contract ~~periods.~~are ~~Variable~~insufficient ~~annuity deposits, which~~to ~~exclude~~cover ~~deposits allocated to~~ the ~~fixed~~costs ~~accounts~~ of ~~variable annuity products, totaled $1.18 billion in 2002, $1.41 billion in 2001 and $1.88 billion in 2000. These amounts represent 6%, 7% and 9% of separate account liabilities at~~ the ~~beginning~~ ofbenefit ~~the~~to ~~respective~~be ~~periods~~provided. ~~The~~Substantially ~~decrease~~all ~~in variable annuity deposits in 2002 reflected lower demand for the variable account options~~ of the Company’s ~~variable annuity~~ products ~~due~~containing to the ~~unfavorable~~GMIB ~~equity~~feature ~~market conditions~~have ~~discussed~~been ~~above.~~reinsured; furthermore, ~~Transfers~~substantially ~~from~~all of the ~~fixed~~GMIB ~~accounts~~risk ofper ~~the~~individual ~~Company’s~~reinsured ~~variable~~contract ~~annuity~~has ~~products~~been transferred to the ~~separate accounts are not classified as variable annuity deposits~~reinsurer. ~~Accordingly~~However, ~~changes in variable annuity deposits are not necessarily indicative of~~ the ~~ultimate~~Company ~~allocation~~does ~~by customers among~~not ~~fixed~~have ~~and~~reinsurance ~~variable~~coverage ~~account~~on ~~options~~contracts ofto ~~the~~be ~~Company’s~~sold ~~variable~~after ~~annuity products~~July 2004.

~~Sales~~GUARANTEED ofMINIMUM ~~variable~~ACCOUNT ~~annuity~~VALUE ~~products~~ (~~which~~“GMAV”): ~~include~~In ~~deposits~~the ~~allocated~~third toquarter of 2002, the ~~fixed~~Company ~~accounts)~~began ~~(“Variable~~issuing ~~Annuity~~certain ~~Product~~variable ~~Sales”)~~annuity ~~amounted~~products towhich ~~$2.92~~offer an ~~billion,~~optional ~~$3.69 billion~~GMAV ~~and~~living $3benefit.~~64 billion~~ inIf ~~2002,~~elected ~~2001~~by ~~and~~the ~~2000,~~policyholder ~~respectively.~~at the time of ~~Such~~contract ~~sales~~issuance, ~~primarily~~this ~~reflect~~feature ~~those~~guarantees ofthat the ~~Company’s~~account ~~Polaris~~value ~~and~~under ~~Seasons~~the ~~variable~~contract ~~annuity~~will ~~product~~equal ~~lines.~~or ~~Sales~~exceed ~~were~~the ~~higher~~amount byof ~~approximately~~the ~~$550~~initial principal invested, ~~million~~adjusted infor ~~2001~~withdrawals, ~~due~~at tothe ~~low~~end ~~margin~~of ~~Anchor~~a ~~Advisor~~ten-year ~~sales~~waiting ~~allocated~~period. toThe ~~one-year~~Company ~~fixed~~bears ~~accounts~~the inrisk ~~the~~that ~~third~~protracted ~~quarter~~under-performance of ~~2001 before~~ the ~~one-year~~financial ~~fixed~~markets ~~account~~could ~~was~~result ~~discontinued~~in ~~from~~GMAV ~~the~~benefits ~~product~~being ~~line~~higher atthan the ~~end~~underlying ofcontractholder ~~September~~account balance ~~2001.~~and ~~The Company’s~~that ~~variable~~the ~~annuity~~fees ~~products~~collected ~~are~~under ~~multi-manager~~the ~~variable~~contract ~~annuities~~are ~~that~~insufficient to ~~offer~~cover ~~investors~~the acosts ~~choice~~ of ~~several~~the ~~variable~~benefit ~~funds~~to asbe ~~well~~provided. asThe aCompany ~~number~~purchased ofput ~~guaranteed~~options ~~fixed-rate~~on ~~funds.~~the ~~Investors~~S&P ~~can~~500 ~~select~~index ~~from~~to apartially ~~choice~~offset ofthis 4risk. toChanges 41in the ~~variable~~market ~~funds~~value ~~and~~of upthe toGMAV 7benefit ~~guaranteed~~are ~~fixed-rate~~recorded ~~funds~~in ~~depending~~investment onincome in the ~~product~~accompanying consolidated statement of income and comprehensive income.

~~The~~With ~~Company~~respect ~~has~~to ~~encountered~~its ~~increased~~reinsurance ~~competition~~agreements, in the ~~variable~~Company ~~annuity~~could become ~~marketplace~~liable ~~during~~for ~~recent~~all ~~years~~obligations ~~and~~of ~~anticipates~~the ~~that~~reinsured policies if the ~~market~~reinsurers ~~will~~were ~~remain~~to ~~highly~~become ~~competitive~~unable ~~for~~to meet the ~~foreseeable~~obligations ~~future~~assumed under the respective reinsurance agreements. ~~Also,~~The ~~from~~Company ~~time~~monitors its credit exposure with respect to ~~time,~~these ~~Federal~~agreements. ~~initiatives~~Due ~~are~~to ~~proposed~~the ~~that~~high ~~could~~credit ~~affect~~ratings ~~the~~and ~~taxation~~continuous monitoring of ~~annuities~~these ~~(See~~ratings ~~“Regulation”~~of inthe ~~Item 1)~~reinsurers, such risks are considered to be minimal.

Prior to the distribution of Saamsun on January 1, 2002, the Company had asset management operations and broker-dealer operations. Operating results of these two segments for 2001 are discussed in Note 10 of the accompanying consolidated financial statements.

~~UNIVERSAL~~CAPITAL ~~LIFE~~RESOURCES ~~INSURANCE~~AND ~~FEES, NET amounted to $20.5 million, $18.9~~LIQUIDITY ~~million and $20.3 million in 2002, 2001 and 2000, respectively. Universal life~~ ~~insurance fees consist of mortality charges, up-front fees earned on deposits~~ ~~received and administrative fees, net of the excess mortality expense on these~~ contracts. The administrative fees are assessed based on the number of policies in force as of the end of each month. The Company acquired its universal life contracts as part of the Acquisition and does not actively market such contracts. Such fees represent 1.23%, 1.06% and 1.08% of average reserves for universal life insurance contracts in the respective periods.

~~SURRENDER~~SHAREHOLDER’S ~~CHARGES~~EQUITY onincreased ~~fixed~~to ~~and variable annuity contracts and universal life contracts totaled~~ $321.546 ~~million~~billion ~~in 2002, $24.9 million in 2001 and $21.0 million in 2000. Surrender charges generally are assessed on withdrawals~~ at ~~declining~~ ~~rates during the first seven years of a contract. Withdrawal payments~~December 31, ~~which~~2003 ~~exclude claims and lump-sum annuity benefits, totaled $2.37~~from ~~billion in 2002, compared with~~ $21.1032 billion inat ~~2001 and $2.22~~December ~~billion in 2000. These payments when expressed as a percentage of average related reserves represent 11.0%~~31, ~~9.0% and 8.7% for~~ 2002~~, 2001 and 2000, respectively~~. ~~Withdrawals~~ ~~include~~The ~~variable~~increase ~~annuity~~reflected ~~payments~~net ~~from~~income ~~the separate accounts totaling $1.78 billion (10.8%~~ of ~~average variable annuity liabilities),~~ $185.737 ~~billion~~million ~~(9.2%~~and ofother ~~average~~comprehensive ~~variable~~income ~~annuity~~of ~~liabilities) and~~ $156.761 ~~billion (8~~million.4% ~~of average variable annuity liabilities) in 2001, 2000, and 1999, respectively.~~ ~~The increase in withdrawal rates in 2002 reflects an increase in surrenders of~~ ~~the Company’s Anchor Advisor product allocated to one-year fixed accounts. Excluding such surrenders, the surrender rate would have been 10.2% in 2002.~~

~~GENERAL~~INVESTMENTS AND ~~ADMINISTRATIVE~~CASH ~~EXPENSES~~at December 31, 2003 totaled $~~101~~7.807 ~~million in 2002~~billion, ~~$93.0~~compared ~~million~~with ~~in 2001 and~~ $~~102~~7.819 ~~million~~billion inat ~~2000.~~December 31, ~~General and administrative expenses increased in~~ 2002. ~~due~~The toCompany’s ~~higher~~invested ~~reinsurance~~assets ~~premiums~~are managed ~~paid~~by toa ~~reinsure the~~subsidiary ~~GMDB,~~of ~~EEB~~AIG. ~~and~~The ~~GMIB~~following ~~features~~table ofsummarizes the Company’s ~~variable annuity products (see~~ ~~discussion~~Bond ~~below).~~Portfolio ~~Such premiums totaled $22.6 million in 2002, $13.2 million in 2001~~ and ~~$6.8 million~~other ininvestments ~~2000. General~~ and ~~administrative~~cash ~~expenses decreased~~at inDecember 31, ~~2001~~2003 ~~due to lower costs associated with servicing its fixed annuities~~ and ~~universal life policies. General and administrative expenses~~December ~~remain~~31, ~~closely controlled through a company-wide cost containment program and~~2002: ~~continue to represent less than 1% of average total assets.~~

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


	December 31, 2003					December 31, 2002
	Carrying		Percent of			Carrying		Percent of
	Value		Portfolio			Value		Portfolio
	(In thousands, except for percentages)
Bond Portfolio:

U.S. government securities	$	24,292		0.3	%	$	32,820		0.5	%
Mortgage-backed securities		1,191,817		16.9			1,547,568		21.5
Securities of public utilities		365,150		5.2			311,604		4.3
Corporate bonds and notes		2,697,142		38.1			2,776,021		38.6
Redeemable preferred stocks		22,175		0.3			21,575		0.3
Other debt securities		1,205,224		17.1			838,981		11.7

Total Bond Portfolio		5,505,800		77.9			5,528,569		76.9

Mortgage loans		716,846		10.1			738,601		10.3
Common stocks		727		0.0			2,609		0.0
Cash and short-term investments		85,188		1.2			65,872		0.9
Other		764,811		10.8			858,053		11.9

Total investments and cash	$	7,073,372		100.0	%	$	7,193,704		100.0	%

~~ANNUAL~~The ~~COMMISSIONS~~Company’s ~~totaled~~general ~~$58.4 million~~investment inphilosophy ~~2002,~~is ~~compared~~to ~~with~~hold ~~$58.3~~fixed-rate assets ~~million~~for inlong-term ~~2001 and $56~~investment.~~5 million~~ inThus, ~~2000.~~it ~~Annual~~does ~~commissions~~not ~~represent renewal~~have ~~commissions~~a ~~paid~~trading ~~quarterly~~portfolio. However, inthe ~~arrears~~Company tohas ~~maintain~~determined ~~the~~that ~~persistency~~all of ~~certain~~ of the ~~Company’s~~Bond ~~variable~~Portfolio ~~annuity~~is ~~contracts.~~available to ~~Substantially~~be ~~all~~sold ofin ~~the Company’s~~response ~~currently~~to ~~available~~changes ~~variable~~in ~~annuity~~market ~~products~~interest ~~allow~~rates, ~~for~~changes anin ~~annual~~relative ~~commission~~value ~~payment~~of ~~option~~asset insectors ~~return~~and ~~for~~individual asecurities, ~~lower~~changes ~~immediate~~in ~~commission.~~prepayment ~~The~~risk, ~~Company~~changes ~~estimates~~in ~~that~~the ~~approximately~~credit ~~56%~~quality ofoutlook ~~the~~for ~~average~~certain ~~balances~~securities, ofthe ~~its~~Company’s ~~variable~~need ~~annuity~~for ~~products~~liquidity isand ~~currently~~other ~~subject~~similar ~~to such annual commissions~~factors.

THE BOND PORTFOLIO, which constituted 78% of the Company’s total investment portfolio at December 31, 2003, had an aggregate fair value that was $154.6 million greater than its amortized cost at December 31, 2003, compared with an aggregate fair value that was $35.9 million greater than its amortized cost at December 31, 2002. The increase in net unrealized gains on the Bond Portfolio during 2003 principally reflected the impact of the decrease in prevailing interest rates and the corresponding effect on the fair value of the Bond Portfolio at December 31, 2003 as well as the impairment writedowns in 2003.

~~Based~~ At onDecember 31, ~~current~~2003, ~~sales~~the Bond Portfolio had an aggregate carrying value (i.e. fair value) of $5.51 billion and an aggregate amortized cost of $5.35 billion. At December 31, ~~this~~2003, ~~percentage~~the isBond ~~expected~~Portfolio (excluding $22.2 million of redeemable preferred stocks) included $5.21 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 $269.5 million of bonds rated by the Company pursuant to ~~increase~~statutory inratings ~~future~~guidelines established ~~periods~~by the NAIC. At December 31, 2003, approximately $5.14 billion of the Bond Portfolio was investment grade, including $1.22 billion of mortgage-backed securities (“MBS”) and U.S. government/agency securities.

~~GUARANTEED~~At ~~MINIMUM~~December 31, ~~DEATH BENEFITS~~2003, ~~NET~~the OFBond ~~REINSURANCE~~Portfolio ~~RECOVERIES~~included ~~(“Net GMDB”) totaled~~ $67339.51 million inof ~~2002,~~bonds that ~~compared~~were ~~with~~not ~~$17~~investment grade.~~8 million~~ inThese ~~2001~~non-investment-grade ~~and~~bonds accounted for $0approximately 1.~~6 million~~2% inof ~~2000~~the ~~(net~~Company’s oftotal ~~reinsurance~~assets ~~recoveries~~and ofapproximately ~~$8.~~4 ~~million~~.8% inof ~~2002,~~its $3invested assets.~~8 million~~ inNon-investment-grade ~~2001~~securities generally provide higher yields and ~~$0.9 million~~involve ingreater ~~2000).~~risks ~~Net~~than ~~GMDB~~investment-grade ~~consists~~securities ~~primarily~~because oftheir ~~guaranteed~~issuers ~~minimum~~typically ~~death~~are ~~benefits~~more ashighly ~~well~~leveraged asand ~~immaterial~~more ~~amounts~~vulnerable ofto ~~earnings~~adverse ~~enhancement~~economic ~~benefits,~~conditions ~~guaranteed~~than ~~minimum~~investment-grade ~~income~~issuers. ~~benefits~~In ~~and~~addition, ~~guaranteed~~the ~~minimum~~trading ~~account~~market ~~value~~for ~~benefits~~these securities is usually more limited than for investment-grade securities. ~~These~~An ~~guarantees~~economic ~~are~~downturn ~~described~~could inproduce ~~more~~higher ~~detail~~than inaverage ~~the~~issuer ~~following~~defaults ~~paragraphs.~~on ~~The~~the ~~increase~~non-investment-grade insecurities, ~~Net~~which ~~GMDB~~could ~~related~~cause the Company’s investment returns and net income to decline. At December 31, 2003, the Company’s ~~variable~~ ~~annuity~~non-investment-grade ~~separate~~portfolio ~~account~~consisted ~~contracts~~of in102 ~~2002~~issues ~~and~~with ~~2001~~no issuer ~~reflects~~representing more than 10% of the total non-investment grade portfolio. ~~downturn~~These non-investment-grade securities are comprised of bonds spanning 11 industries with 21% of these assets concentrated in ~~the~~financial ~~equity~~institutions, ~~markets~~17% of these assets concentrated in ~~2001~~utilities, 15% of these assets concentrated in telecommunications, 11% of these assets concentrated in transportation and ~~2002~~10% concentrated in noncyclical consumer products. ~~Further~~No ~~downturns~~other inindustry ~~the~~concentration ~~equity~~constituted ~~markets~~more ~~could~~than ~~increase~~10% of these ~~expenses~~assets.

~~GUARANTEED~~The ~~MINIMUM~~table ~~DEATH~~on ~~BENEFITS~~the ~~(“GMDB”):~~next Apage ~~majority~~summarizes of the Company’s ~~variable~~ ~~annuity~~rated ~~products~~bonds 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).~~rating ~~The~~classification ~~Company~~as bears the risk that death claims following a decline in the financial markets may exceed contractholder account balances, and that the fees collected under the contract are insufficient to cover the costs of ~~the benefit to be provided. At~~ December 31, ~~2002, a portion of the GMDB risk on approximately 28% (calculated based on current account value) of the contracts with such features had been reinsured~~2003. ~~Approximately half of this reinsurance~~ ~~will cease at the time the modified coinsurance deposit liability is fully paid~~ ~~down, which is presently estimated to occur in early 2004. However, a~~ substantial majority of all new contracts sold have reinsurance coverage. Reinsurance coverage is subject to limitations such as caps and deductibles. GMDB-related contractholder benefits incurred, net of related reinsurance, were $67.5 million (net of $8.4 million of reinsurance recoveries), $17.8 million (net of $3.8 million of reinsurance recoveries) and $0.6 million (net of $0.9 million of reinsurance recoveries) for 2002, 2001 and 2000, respectively. In accordance with Generally Accepted Accounting Principles, the Company expenses such benefits in the period incurred, and therefore does not provide reserves for future benefits.

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

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

~~collected~~RATED ~~under~~BONDS ~~the~~BY ~~contract~~RATING ~~are insufficient to cover the costs of the~~CLASSIFICATION ~~benefit~~(Dollars toin ~~be provided. Substantially all of the Company’s GMIB risk has been~~thousands) ~~reinsured as of December 31, 2002.~~

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


					Issues not rated by S&P/Moody’s/
Issues rated by S&P/Moody’s/Fitch					Fitch, by NAIC category						Total
															Percent
			Estimated		NAIC				Estimated				Estimated		of total
S&P/Moody’s/Fitch	Amortized		fair		category		Amortized		fair		Amortized		fair		invested
Category (1)	cost		value		(2)		cost		value		cost		value		assets
AAA+ to A-
(Aaa to A3)
[AAA to A-]	$	2,937,751	$	3,039,213		1	$	493,569	$	507,057	$	3,431,320	$	3,546,270		50.14	%
BBB+ to BBB-
(Baa1 to Baa3)
[BBB+ to BBB-]		1,235,038		1,282,317		2		304,607		315,919		1,539,645		1,598,236		22.60	%
BB+ to BB-
(Ba1 to Ba3)
[BB+ to BB-]		160,144		145,749		3		33,722		34,996		193,866		180,745		2.56	%
B+ to B-
(B1 to B3)
[B+ to B-]		109,415		101,515		4		2,354		2,113		111,769		103,628		1.47	%
CCC+ to C
(Caa to C)
[CCC]		22,386		24,295		5		11,252		10,864		33,638		35,159		0.50	%
CI to D
[DD]
{D}		6,120		5,724		6		13,310		13,863		19,430		19,587		0.28	%

TOTAL RATED ISSUES	$	4,470,854	$	4,598,813			$	858,814	$	884,812	$	5,329,668	$	5,483,625

~~With~~Footnotes ~~respect~~appear toon ~~its reinsurance agreements,~~ the ~~Company~~following ~~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~~page. ~~The Company monitors its credit exposure with respect to these~~ ~~agreements. However, due to the high credit ratings and continuous monitoring~~ ~~of these ratings of the reinsurers, such risks are considered to be minimal.~~

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

ASSET MANAGEMENT OPERATIONS

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

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

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

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

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

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

(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 range from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt’s relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody’s and Fitch ratings if rated by multiple agencies.

(2)		Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for non-defaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody’s/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $269.5 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.

~~AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $76.0 million in 2001, compared to $33.0 million in 2000.~~ The ~~increase~~valuation inof ~~amortization~~invested inassets ~~2001~~involves ~~is principally~~obtaining ~~due to~~ a ~~$34.0 million~~fair ~~writedown~~value offor ~~deferred acquisition costs~~each ~~which~~security. ~~was~~The ~~required~~source ~~following~~for the ~~2001~~fair ~~downturn~~value inis ~~the~~generally ~~equity~~from ~~markets,~~market ~~so that~~exchanges, ~~deferred~~with ~~and unamortized costs would not exceed~~ the ~~estimated~~exception ~~distribution fee and contingent deferred sales charge revenues on certain mutual fund contracts. The remaining increase in amortization was due to increased mutual fund sales and the impact~~ of anon-traded ~~full year of subsequent amortization of such related deferred commissions and other direct selling costs~~securities.

~~BROKER~~ Another ~~DEALER~~aspect ~~OPERATIONS~~of valuation pertains to impairment. As a matter of policy, the determination that a security has incurred an other-than-temporary decline in value and the amount of any loss recognition requires the judgment of the Company’s management and a continual review of its investments.

~~PRETAX~~In ~~INCOME~~general, ~~BEFORE~~a ~~CUMULATIVE~~security ~~EFFECT~~is OFconsidered ~~ACCOUNTING~~a ~~CHANGE~~candidate ~~totaled~~for ~~$17.7 million~~impairment inif ~~2001 and $29.5 million in 2000. The decline in 2001 from 2000~~it ~~primarily~~meets ~~resulted~~any ~~from~~of athe ~~decline~~following ~~in net retained commissions.~~criteria:

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

~~GENERAL~~• ~~AND~~The ~~ADMINISTRATIVE~~occurrence ~~EXPENSES~~of ~~totaled~~a ~~$29.5 million~~discrete credit event resulting in; ~~2001, compared~~(i) tothe ~~$32.1 million~~issuer indefaulting ~~2000.~~on ~~The~~a ~~decrease~~material inoutstanding ~~expenses~~obligation; inor ~~2001~~(ii) ~~as compared~~the issuer seeking protection from creditors under the bankruptcy laws or similar laws intended for the court supervised reorganization of insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to ~~2000~~which ~~reflect~~creditors are asked to exchange their claims for cash or securities having a fair value substantially lower ~~marketing-related~~than ~~expenses.~~ the par value of their claims; or

~~CAPITAL~~• ~~RESOURCES~~In ~~AND~~the ~~LIQUIDITY~~ opinion of the Company’s management, it is unlikely the Company will realize a full recovery on its investment, irrespective of the occurrence of one of the foregoing events.

~~SHAREHOLDER’S~~Once ~~EQUITY~~a ~~decreased~~security tohas ~~$1.32 billion~~been atidentified ~~December 31,~~as ~~2002~~potentially ~~from $1.59 billion at December 31~~impaired, ~~2001, due to a $552.4 million distribution to~~ the ~~Parent~~ ofamount ~~100%~~ of ~~the common stock of the Company’s wholly-owned subsidiary,~~ ~~Saamsun,~~such onimpairment ~~January 1,~~is ~~2002~~determined ~~(see~~by ~~Note~~reference ~~9 of Notes~~ to ~~Consolidated~~that ~~Financial Statements).~~security’s ~~The impact of this distribution was partially offset by a $200.0~~contemporaneous ~~million~~market ~~capital contribution from its Parent, net income of $34~~price.~~3 million and~~ ~~other comprehensive income of $45.8 million.~~

~~INVESTED~~The ~~ASSETS~~Company athas ~~December 31,~~the ~~2002~~ability ~~totaled~~to ~~$7.19 billion,~~hold ~~compared~~any ~~with $6.75 billion~~security atto ~~December 31,~~its ~~2001~~stated maturity. Therefore, ~~The majority of~~ the ~~Company’s~~decision ~~invested assets~~to ~~are~~sell ~~managed~~reflects bythe anjudgment ~~affiliate.~~of ~~The~~the Company’s ~~general investment~~ ~~philosophy~~management isthat tothe ~~hold~~security ~~fixed-rate~~sold ~~assets~~is ~~for~~unlikely ~~long-term~~to ~~investment. Thus~~provide, ~~it does~~on ~~not have~~ a ~~trading~~relative ~~portfolio. However, the Company has determined that~~value ~~all of its portfolio of bonds~~basis, ~~notes~~as ~~and~~attractive ~~redeemable~~a ~~preferred~~return ~~stocks~~in (the ~~“Bond Portfolio”)~~future isas ~~available~~alternative tosecurities beentailing comparable ~~sold~~risks. inWith ~~response~~respect to ~~changes~~distressed ~~in market interest rates~~securities, ~~changes~~the insale ~~relative value of asset sectors and individual securities,~~decision ~~changes~~reflects inmanagement’s ~~prepayment~~judgment ~~risk,~~that ~~changes in~~ the ~~credit~~risk-discounted ~~quality~~anticipated ~~outlook for certain~~ultimate ~~securities,~~recovery ~~the~~is ~~Company’s~~less ~~need~~than ~~for~~the ~~liquidity~~value ~~and~~achieved ~~other~~on ~~similar factors~~sale.

~~THE~~As ~~BOND~~a ~~PORTFOLIO,~~result ~~which~~of ~~constituted~~these ~~77%~~policies, of the Company’s ~~total investment~~recorded ~~portfolio~~pretax atimpairment writedowns ~~December 31,~~of ~~2002, had an aggregate fair value that was~~ $3554.91 million ~~greater~~in ~~than~~the ~~its amortized cost at December 31~~2003, ~~2002, compared with an amortized cost that was~~ $6257.83 million ~~greater than its aggregate fair value at December 31, 2001. The decrease~~ in ~~net~~2002 ~~unrealized losses~~ and ~~increase~~$68.0 inmillion ~~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~~2001.

AtOne ~~December 31,~~individual ~~2002,~~impairment ~~the~~loss ~~Bond~~accounted ~~Portfolio~~for ~~(excluding~~14% ~~$21.6 million~~ of ~~redeemable~~ ~~preferred~~the ~~stocks) included $5.31 billion of bonds rated by Standard & Poor~~Company’s ~~(“S&P”), Moody’s Investors Service (“Moody’s”), Fitch (“Fitch”) or the~~pre-tax ~~Securities~~income ~~Valuation~~in ~~Office~~2003 ofand ~~the~~no ~~National~~other ~~Association~~individual ofimpairment ~~Insurance Commissioners~~loss ~~(“NAIC”),~~exceeded ~~and~~10% ~~$196.6 million~~ of ~~bonds rated by~~ the ~~Company~~ ~~pursuant~~Company’s topre-tax ~~statutory~~income ~~ratings~~for ~~guidelines established by~~ the ~~NAIC.~~year Atended December 31, ~~2002, approximately $5~~2003.~~18 billion of the Bond Portfolio was investment~~ ~~grade, including $1.58 billion of mortgage-backed securities (“MBS”) and U.S.~~ ~~government/agency securities.~~

AtExcluding ~~December 31,~~the ~~2002~~impairments noted above, the ~~Bond~~changes ~~Portfolio~~in ~~included~~fair ~~$331.8 million~~value offor ~~bonds~~the ~~that~~Company’s ~~were~~Bond ~~not~~Portfolio, ~~investment~~which ~~grade.~~constitutes ~~These~~the ~~non-investment-grade~~vast ~~bonds~~majority ~~accounted for approximately 1.4%~~ of the Company’s ~~total assets and approximately 4.6% of its~~ invested assets. Non-investment-grade securities generally provide higher yields and involve greater risks than investment-grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment-grade issuers. In additioninvestments, ~~the~~were ~~trading market~~recorded ~~for~~as ~~these~~a ~~securities~~component ~~is usually more limited than for investment-grade securities. These non-investment-grade securities are comprised~~ of ~~bonds spanning~~other 30comprehensive ~~industries~~income ~~with 23% of these assets concentrated~~ in ~~financial~~ ~~institutions~~shareholder’s ~~and~~equity ~~14%~~as ~~concentrated~~unrealized ingains ~~telecommunications.~~or ~~No other industry concentration constituted more than 10% of these assets~~losses.

~~The~~At ~~table~~December 31, on2003, the ~~next page summarizes the~~ Company’s ~~rated~~Bond ~~bonds~~Portfolio byhad ~~rating~~gross unrealized ~~classification~~gains asof $214.7 million and gross unrealized losses of ~~December~~$60.1 ~~31,~~million. ~~2002~~One issuer accounted for 16% of unrealized losses. No other single issuer accounted for more than 10% of unrealized losses.

At December 31, 2003, the fair value of the Company’s Bond Portfolio aggregated $5.51 billion. Of this aggregate fair value, approximately 1.1% represented securities trading at or below 75% of amortized cost. The impact of unrealized losses on net income will be further mitigated upon realization, because realization will result in current decreases in the amortization of certain deferred acquisition costs and decreases in income taxes.

At December 31, 2003, approximately $971.9 million, at amortized cost, of the Company’s Bond Portfolio had a fair value of $911.8 million resulting in an aggregate unrealized loss of $60.1 million. The gross unrealized losses in the Bond Portfolio included the following concentrations:


	Gross
	Unrealized
Concentration	Losses
	(In thousands)
Investment Grade:
Finance companies	$	15,497
Transportation		4,929
Non-corporate		4,399
Consumer products		2,280

Not Rated and Below Investment Grade:
Finance companies		13,621
Transportation		8,074
Non-corporate		5,027
Consumer products		2,818

~~RATED~~ The ~~BONDS~~amortized BYcost ~~RATING~~of ~~CLASSIFICATION (Dollars~~the Bond Portfolio in ~~thousands)~~an unrealized loss position at December 31, 2003, by contractual maturity, is shown below.

					Issues not rated by S&P/Moody's/
	Amortized
Issues rated by S&P/Moody's/Fitch					Fitch, by NAIC category						Total
	Cost
															Percent
	(In thousands)
			Estimated		NAIC				Estimated				Estimated		of total
Due in one year or less	$	6,467
S&P/Moody's/Fitch	Amortized		fair		category		Amortized		fair		Amortized		fair		invested
Due after one year through five years		259,519
Category (1)	cost		value		(2)		cost		value		cost		value		assets
Due after five years through ten years		393,902
AAA+ to A- (Aaa to A3) [AAA to A-]	$	3,187,888	$	3,269,229		1	$	493,556	$	513,847	$	3,681,444	$	3,783,076		52.59	%
Due after ten years		312,002
BBB+ to BBB- (Baa1 to Baa3) [BBB+ to BBB-]		1,112,451		1,115,445		2		275,308		276,630		1,387,759		1,392,075		19.35	%
Total	$	971,890
BB+ to BB- (Ba1 to Ba3) [BB+ to BB-]		187,096		164,737		3		15,077		12,364		202,173		177,101		2.46	%
B+ to B- (B1 to B3) [B+ to B-]		68,031		55,056		4		5,705		5,815		73,736		60,871		0.85	%
CCC+ to C (Caa to C) [CCC]		64,589		34,159		5		61,377		59,394		125,966		93,553		1.30	%
CI to D [DD] {D}		—		—		6		83		319		83		319		0.00	%
TOTAL RATED ISSUES	$	4,620,055	$	4,638,626			$	851,106	$	868,369	$	5,471,161	$	5,506,995

~~Footnotes~~ The ~~appear~~aging onof the ~~following~~Bond ~~page.~~Portfolio in an unrealized loss position at December 31, 2003 is shown below:


	Less than or Equal to 20%							Greater than 20% to 50%							Greater than 50%
	of Amortized Cost							of Amortized Cost							of Amortized Cost							Total
(dollars in thousands)	Amortized		Unrealized					Amortized		Unrealized					Amortized		Unrealized					Amortized		Unrealized
Months	Cost		Loss			Items		Cost		Loss			Items		Cost		Loss			Items		Cost		Loss			Items
Investment Grade Bonds
0-6	$	635,215	$	(12,119	)		112	$	34,692	$	(11,503	)		6	$	—	$	—			—	$	669,907	$	(23,622	)		118
7-12		9,072		(55	)		4		—		—			—		—		—			—		9,072		(55	)		4
>12		89,140		(4,864	)		15		—		—			—		—		—			—		89,140		(4,864	)		15

Total	$	733,427	$	(17,038	)		131	$	34,692	$	(11,503	)		6	$	—	$	—			—	$	768,119	$	(28,541	)		137

Below Investment Grade Bonds
0-6	$	137,716	$	(7,817	)		26	$	64,683	$	(23,235	)		14	$	45	$	(36	)		2	$	202,444	$	(31,088	)		42
7-12		—		—			—		—		—			—		599		(469	)		1		599		(469	)		1
>12		728		(18	)		1		—		—			—		—		—			—		728		(18	)		1

Total	$	138,444	$	(7,835	)		27	$	64,683	$	(23,235	)		14	$	644	$	(505	)		3	$	203,771	$	(31,575	)		44

Total Bonds
0-6	$	772,931	$	(19,936	)		138	$	99,375	$	(34,738	)		20	$	45	$	(36	)		2	$	872,351	$	(54,710	)		160
7-12		9,072		(55	)		4		—		—			—		599		(469	)		1		9,671		(524	)		5
>12		89,868		(4,882	)		16		—		—			—		—		—			—		89,868		(4,882	)		16

Total	$	871,871	$	(24,873	)		158	$	99,375	$	(34,738	)		20	$	644	$	(505	)		3	$	971,890	$	(60,116	)		181

In 2003, the pretax realized losses incurred with respect to the sale of fixed securities in the Bond Portfolio were $9.6 million. The aggregate fair value of securities sold was $280.6 million, which was approximately 96% of amortized cost. The average period of time that securities sold at a loss during 2003 were trading continuously at a price below amortized cost was approximately 11 months.

As stated previously, the valuation for the Company’s Bond Portfolio comes from market exchanges or dealer quotations, with the exception of non-traded securities. The Company considers non-traded securities to mean certain fixed income investments, certain structured securities and limited partnerships. The aggregate carrying value of these securities at December 31, 2003 was approximately $1.57 billion.

~~Footnotes~~ The methodology used to ~~the~~estimate ~~table~~fair value of ~~Rated~~non-traded ~~Bonds~~fixed income investments is by ~~Rating~~reference ~~Classification~~to traded securities with similar attributes and using a matrix pricing methodology. This technique takes into account such factors as the industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer and other relevant factors. The change in fair value is recognized as a component of other comprehensive income.

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

For certain structured securities, the carrying value is based on an estimate of the security’s future cash flows pursuant to the requirements of Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” The change in carrying value is recognized in income.

Each of these investment categories is regularly tested to determine if impairment in value exists. Various valuation techniques are used with respect to each category in this determination.

Senior secured loans (“Secured Loans”) are included in the Bond Portfolio and aggregated $252.7 million at December 31, 2003. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At December 31, 2003, Secured Loans consisted of $194.4 million of privately traded securities and $58.3 million of publicly traded securities. These Secured Loans are composed of loans to 54 borrowers spanning 25 industries, with 13% of these assets concentrated in foods, 12% concentrated in consumer services, 11% concentrated in non-cable media, 10% concentrated in electric and 10% concentrated in transportation. No other industry constituted more than 10% of these assets.

While the trading market for the Company’s privately traded Secured Loans is more limited than for publicly traded issues, 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 $716.8 million at December 31, 2003 and consisted of 108 commercial first mortgage loans with an average loan balance of approximately $6.6 million, collateralized by properties located in 31 states. Approximately 35% of this portfolio was office, 18% was multifamily residential, 15% was manufactured housing, 11% was industrial, 11% was hotels, 5% was retail, and 5% was other types. At December 31, 2003, approximately 27%, 11% and 11% of this portfolio were secured by properties located in California, Michigan and New York, respectively, and no more than 10% of this portfolio was secured by properties located in any other single state. At December 31, 2003, 16 mortgage loans have an outstanding balance of $10 million or more, which collectively aggregated approximately 50% of this portfolio. At December 31, 2003, approximately 18% of the mortgage loan portfolio consisted of loans with balloon payments due before January 1, 2007. During 2003, 2002 and 2001, loans delinquent by more than 90 days, foreclosed loans and restructured loans have not been significant in relation to the total mortgage loan portfolio.

AtSubstantially ~~December 31,~~all ~~2002,~~of ~~approximately~~the ~~$1.10 billion~~mortgage ofloan portfolio has been originated by the Company’s ~~Bond~~under its underwriting standards. Commercial mortgage loans on ~~Portfolio~~properties ~~had~~such anas ~~aggregate~~offices, ~~unrealized~~hotels ~~loss~~and shopping centers generally represent a higher level of ~~$169~~risk than do mortgage loans secured by multifamily residences.~~1 million.~~ This ~~The~~greater ~~gross~~risk is due to several factors, including the larger size of such ~~unrealized~~loans ~~losses~~and inthe more immediate effects of general economic conditions on these commercial property types. However, due to the ~~Bond~~Company’s ~~Portfolio~~underwriting standards, ~~included~~the Company believes that it has prudently managed the ~~following~~risk attributable ~~concentrations:~~to its mortgage loan portfolio while maintaining attractive yields.

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

POLICY LOANS totaled $200.2 million at December 31, 2003, compared to $215.8 million at December 31, 2002, and primarily represent loans taken against universal life insurance policies.

~~The~~SEPARATE ~~amortized~~ACCOUNT ~~cost~~SEED ofMONEY ~~the~~totaled ~~Bond~~$17.8 million ~~Portfolio~~at inDecember 31, an2003, compared ~~unrealized~~to ~~loss~~$25.4 million ~~position~~ at December 31, 2002, byand ~~contractual~~consists ~~maturity,~~principally of seed money for mutual funds used as investment vehicles for the Company’s variable annuity separate accounts. The decrease in 2003 is ~~shown~~due ~~below~~primarily to redemptions.

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

SECURITIES LENDING COLLATERAL totaled $514.1 million at December 31, 2003, compared to $585.8 million at December 31, 2002, and consisted of cash collateral invested in highly rated short-term securities received in connection with the Company’s securities lending program. Although the cash collateral is currently invested in highly rated short-term securities, the applicable collateral agreements permit the cash collateral to be invested in highly liquid short and long-term investment portfolios. At least 75% of the portfolio’s short-term investments must have external issue ratings of A-1/P-1, one of the highest ratings for short-term credit quality. Long-term investments include corporate notes with maturities of five years or less and a credit rating by at least two nationally recognized statistical rating organizations (NRSRO), with no less than a S&P rating of A or equivalent by any other NRSRO.

~~Senior~~ASSET-LIABILITY ~~secured~~MATCHING ~~loans~~is ~~(“Secured~~utilized ~~Loans”)~~by ~~are~~the ~~included~~Company in ~~the~~an ~~Bond~~effort ~~Portfolio~~to minimize the risks of interest rate fluctuations and ~~aggregated~~disintermediation ~~$235~~(i.~~3 million~~e. the atrisk ~~December 31,~~of ~~2002.~~being ~~Secured~~forced ~~Loans~~to ~~are~~sell ~~senior~~investments during unfavorable market toconditions). ~~subordinated~~The ~~debt~~Company ~~and~~believes ~~equity~~that ~~and~~its ~~are~~fixed-rate ~~secured~~liabilities should be backed by ~~assets~~a ofportfolio ~~the~~principally ~~issuer.~~composed ~~At December 31,~~of ~~2002,~~fixed-rate ~~Secured~~investments ~~Loans~~that generate ~~consisted~~predictable rates of ~~$42~~return.~~4 million~~ ofThe ~~publicly~~Company ~~traded~~does not have a specific ~~securities~~target ~~and~~rate ~~$192~~of return.~~9 million~~ Instead, its rates of ~~privately~~return ~~traded~~vary ~~securities.~~over ~~These~~time ~~Secured~~depending ~~Loans~~on ~~are~~the ~~composed~~current interest rate environment, the slope of ~~loans~~the toyield 51curve, ~~borrowers~~the spread ~~spanning~~at 19which ~~industries~~fixed-rate investments are priced over the yield curve, ~~with~~default rates ~~13%~~and ofgeneral economic conditions. Its portfolio strategy is constructed ~~these~~with ~~assets~~a ~~concentrated~~view into ~~airlines~~achieve ~~and~~adequate ~~13%~~risk-adjusted ~~concentrated~~returns inconsistent ~~energy,~~with ~~12%~~its ~~concentrated~~investment inobjectives ~~non~~of effective asset-~~cable~~liability ~~media~~matching, ~~11%~~liquidity ~~concentrated~~and safety. inThe ~~financial~~Company’s ~~institutions~~fixed-rate ~~and~~products incorporate surrender charges or ~~11%~~other ~~concentrated~~restrictions in ~~transportation~~order to encourage persistency. NoApproximately ~~other~~79% ~~industry~~of ~~constituted~~the Company’s ~~more~~fixed ~~than~~annuity, universal life and GIC reserves had surrender ~~10%~~penalties ofor ~~these~~other ~~assets~~restrictions at December 31, 2003.

~~While~~As ~~the~~part ~~trading~~of ~~market~~its ~~for~~asset-liability matching discipline, the Company’s ~~privately traded Secured Loans~~conducts isdetailed ~~more~~computer ~~limited~~simulations ~~than~~that ~~for~~model ~~publicly~~its ~~traded~~fixed-rate ~~issues,~~assets ~~management~~and ~~believes that~~liabilities ~~participation~~under incommonly ~~these~~used ~~transactions~~interest ~~has~~rate ~~enabled the Company to improve its investment yield~~scenarios. AsWith athe ~~result~~results of ~~restrictive financial covenants,~~ these ~~Secured~~computer ~~Loans~~simulations, ~~involve~~the ~~greater~~Company ~~risk~~can ofmeasure ~~technical~~the ~~default~~potential ~~than~~gain door ~~publicly~~loss ~~traded~~in ~~investment-grade~~fair ~~securities.~~value ~~However, management believes that the risk~~ of ~~loss~~ ~~upon~~its ~~default~~interest-rate ~~for~~sensitive ~~these~~instruments ~~Secured~~and ~~Loans~~seek ~~is mitigated by such~~to

~~financial~~protect ~~covenants~~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 ~~collateral~~duration ~~values~~and ~~underlying~~cash flows of the ~~Secured~~fixed-rate assets to that of ~~Loans~~its fixed-rate liabilities. The fixed-rate assets in the Company’s asset-liability ~~Secured~~modeling ~~Loans~~include: ~~are~~cash ~~rated~~and byshort-term ~~S&P~~investments; bonds, ~~Moody~~notes and redeemable preferred stocks; mortgage loans; policy loans; and investments in limited partnerships that invest primarily in fixed-rate securities. At December 31, 2003, these assets had an aggregate fair value of $6.56 billion with an option-adjusted duration of 3.3 years. The Company’s fixed-rate liabilities include fixed options of variable annuities, ~~Fitch~~as well as universal life, ~~the~~fixed ~~NAIC~~annuity and GIC contracts. At December 31, 2003, these liabilities orhad an aggregate fair value (determined by ~~the~~discounting future contractual cash flows by related market rates of interest) of $6.25 billion with an option-adjusted duration of 3.4 years. The Company,’s ~~pursuant~~potential exposure due to a ~~comparable~~relative ~~statutory~~10% ~~ratings~~decrease ~~guidelines~~in prevailing interest rates from its December 31, 2003 ~~established~~levels is a loss of approximately $0.1 million, representing an 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 ~~NAIC~~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.

~~MORTGAGE~~Option-adjusted ~~LOANS~~duration ~~aggregated~~is ~~$738.6 million~~a atcommon ~~December 31,~~measure ~~2002~~for ~~and consisted~~the ofprice ~~117~~sensitivity ~~commercial first mortgage loans with an average loan balance~~ of ~~approximately $6.3 million, collateralized by properties located in 28~~ ~~states.~~a ~~Approximately~~fixed-maturity ~~34% of this~~ portfolio ~~was~~to ~~office,~~changes ~~19%~~in ~~was~~interest ~~multifamily residential,~~rates. ~~16%~~For ~~was manufactured housing~~example, ~~10% was industrial, 9% was hotels,~~if 5%interest ~~was~~rates ~~retail,~~increase ~~and 7~~1% ~~was other types. At December 31~~, ~~2002,~~the ~~approximately~~fair ~~28% and~~value ~~11%~~ of ~~this~~an ~~portfolio~~asset ~~were~~with ~~secured~~a byduration ~~properties~~of ~~located in California and~~5.0 ~~New~~is ~~York,~~expected ~~respectively,~~to ~~and~~decrease noin ~~more~~value ~~than 10% of this portfolio was secured~~ by ~~properties~~ ~~located~~approximately ~~in any other single state~~5%. AtThe ~~December 31,~~Company ~~2002, 16~~estimates ~~mortgage~~the ~~loans~~option-adjusted ~~have~~duration ~~an outstanding balances~~ of ~~$10 million~~its orassets ~~more,~~and ~~which collectively~~liabilities ~~aggregated~~using ~~approximately~~a ~~49%~~number of different ~~this~~interest ~~portfolio.~~rate ~~At December 31~~scenarios, ~~2002,~~ ~~approximately~~assuming ~~21%~~continuation of ~~the~~existing ~~mortgage loan portfolio consisted of loans with~~investment ~~balloon~~and ~~payments~~interest ~~due~~crediting ~~before January 1~~strategies, ~~2006.~~including ~~During~~maintaining ~~2002,~~an ~~2001~~appropriate ~~and 2000, loans~~level ~~delinquent~~of byliquidity. ~~more~~Actual ~~than~~company ~~90 days,~~and ~~foreclosed~~contract ~~loans~~owner ~~and~~behaviors ~~restructured~~may ~~loans~~be ~~have~~different ~~not~~than ~~been~~was ~~significant~~assumed in ~~relation~~the toestimate ~~the~~of ~~total~~option-adjusted ~~mortgage~~duration ~~loan~~and ~~portfolio~~these differences may be material.

~~Substantially~~The ~~all~~overall ofinterest-credited ~~the~~rate ~~mortgage~~environment ~~loan portfolio~~ has ~~been~~continued ~~originated~~to bydecline in ~~the~~2003. ~~Company~~A ~~under~~significant ~~strict~~portion ~~underwriting~~of ~~standards.~~the ~~Commercial~~Company’s ~~mortgage~~fixed ~~loans~~annuity oncontracts ~~properties~~(including ~~such~~the asfixed ~~offices,~~option ~~hotels~~of ~~and~~variable ~~shopping~~contracts) ~~centers~~has ~~generally~~reached ~~represent~~or ~~a higher~~is ~~level~~near ofthe minimum ~~risk~~contractual ~~than~~guaranteed dorate ~~mortgage~~(generally ~~loans~~3%). ~~secured~~Continual bydeclines ~~multifamily residences.~~in ~~This~~interest ~~greater~~rates ~~risk~~could iscause ~~due to several factors, including~~ the ~~larger~~spread ~~size~~between ~~of such loans and~~ the ~~more~~yield ~~immediate effects of general economic conditions~~ on ~~these commercial property types. However, due to~~ the ~~Company’s~~portfolio ~~strict underwriting~~and ~~standards,~~ the ~~Company~~interest ~~believes~~rate ~~that~~credited itto ~~has~~policyholders ~~prudently managed the risk attributable~~ to ~~its mortgage loan portfolio while maintaining attractive yields~~deteriorate.

~~POLICY~~The ~~LOANS~~Company ~~totaled~~has ~~$215.8 million~~had atthe ~~December 31~~ability, ~~2002~~limited by minimum interest rate guarantees, ~~compared~~to respond to the generally declining interest rate environment in ~~$227~~the last five years by lowering crediting rates in response to lower investment returns.~~0 million~~ atThe trends experienced during the three years ended December 31, ~~2001,~~2003 in the Company’s yield on average invested assets and ~~primarily~~rate ~~represent~~of ~~loans~~interest ~~taken~~credited ~~against~~on ~~universal~~average ~~life~~interest-bearing ~~insurance~~liabilities, ~~policies~~compared to the market trend in long-term interest rates as illustrated by the average ten-year U.S. Treasury bond rate, are presented in the following table:

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

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

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


	2003			2002			2001
10-year U.S. Treasury bond rate:		4.01	%		4.61	%		5.02	%
AIG SunAmerica Life Assurance Company:
Average yield on Bond Portfolio		5.75			6.23			6.82
Rate paid on average interest bearing liabilities		3.71			3.93			4.58

~~OTHER~~As ~~INVESTED ASSETS principally include collateral held under~~ a ~~securities~~ ~~lending~~component ~~agreement~~of ~~with~~its anasset-liability ~~affiliated~~management ~~agent.~~strategy, ~~The~~the Company ~~has entered~~may ~~into~~utilize ainterest ~~securities~~rate ~~lending~~swap ~~agreement~~agreements ~~with~~(“Swap anAgreements”) ~~affiliated~~to ~~lending~~match ~~agent,~~assets ~~which~~more ~~authorizes~~closely ~~the agent~~ to ~~lend~~liabilities. ~~securities~~Swap ~~held~~Agreements inare ~~the~~agreements ~~Company’s~~to ~~portfolio~~exchange towith a ~~list~~counterparty ofinterest ~~authorized~~rate ~~borrowers.~~payments ~~The Company receives primarily cash collateral in an amount in excess~~ of ~~the~~differing ~~market~~character ~~value~~(for ~~of the securities loaned. The~~example, ~~affiliated~~variable-rate ~~lending~~payments ~~agent~~exchanged ~~monitors~~for ~~the~~fixed-rate ~~daily~~payments) ~~market~~based ~~value~~on ~~of securities loaned~~an ~~with~~underlying ~~respect~~principal tobalance ~~the~~(notional ~~collateral~~principal) ~~value and obtains additional collateral when necessary~~ to ~~ensure~~hedge ~~that~~against ~~collateral is maintained at a minimum of 102% of the~~interest ~~value~~rate ~~of the loaned securities~~changes. ~~Such collateral is not available for the~~ ~~general use of the Company.~~

~~ASSET-LIABILITY~~The ~~MATCHING is utilized by the~~ Company seeks to ~~minimize~~enhance ~~the~~its ~~risks of~~spread ~~interest~~income ~~rate~~with ~~fluctuations~~dollar ~~and~~roll ~~disintermediation~~repurchase agreements (~~i.e.~~“Dollar ~~the~~Roll ~~risk~~Repos”). ofDollar ~~being forced~~Roll toRepos ~~sell~~involve ~~investments~~a ~~during~~sale ~~unfavorable~~of ~~market~~MBS ~~conditions).~~by the ~~The~~ Company ~~believes~~ ~~that~~and ~~its~~an ~~fixed-rate~~agreement ~~liabilities~~to ~~should~~repurchase besubstantially ~~backed~~similar byMBS at a ~~portfolio~~later ~~principally~~date ~~composed~~at ofan ~~fixed-rate~~agreed ~~investments~~upon ~~that generate predictable rates of return~~price. The Company ~~does~~also ~~not~~seeks ~~have~~to aprovide ~~specific~~liquidity ~~target~~by investing ~~rate~~in ~~of return~~MBSs. ~~Instead,~~ ~~its~~MBSs ~~rates~~are ofgenerally ~~return~~investment-grade ~~vary over time depending on the current interest~~securities ~~rate~~collateralized ~~environment,~~by ~~the~~large ~~slope~~pools of ~~the~~mortgage ~~yield~~loans. ~~curve,~~MBSs ~~the~~generally ~~spread~~pay ~~at which fixed-rate~~principal ~~investments are priced over the yield curve, default rates~~ and ~~general~~interest ~~economic conditions~~monthly. ~~Its~~The ~~portfolio~~amount ~~strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives~~ of ~~effective~~ ~~asset-liability~~principal ~~matching, liquidity~~ and ~~safety.~~interest ~~The~~payments ~~Company’s~~may ~~fixed-rate~~fluctuate ~~products~~as ~~incorporate~~a ~~surrender~~result ~~charges~~of orprepayments ~~other restrictions in order to encourage persistency. Approximately 82%~~ of the ~~Company’s~~underlying ~~fixed annuity,~~mortgage ~~universal life and GIC reserves had surrender penalties or other restrictions at December 31, 2002~~loans.

AsThere ~~part~~are ofrisks ~~its~~associated ~~asset-liability~~with ~~matching~~some ~~discipline,~~of the techniques the Company ~~conducts~~uses to ~~detailed~~provide ~~computer~~liquidity, ~~simulations~~enhance ~~that~~its ~~model~~spread ~~its~~income ~~fixed-rate~~and match its assets and ~~liabilities~~ ~~under~~liabilities. ~~commonly~~The ~~used~~primary ~~stress-test~~risk ~~interest~~associated ~~rate~~with ~~scenarios.~~the ~~With~~Company’s ~~the~~Dollar ~~results~~Roll ofRepos ~~these~~and ~~computer~~Swap ~~simulations,~~Agreements ~~the~~is ~~Company~~counterparty ~~can~~risk. ~~measure~~The ~~the~~Company ~~potential~~believes, ~~gain~~however, ~~or loss~~that inthe ~~fair~~counterparties ~~value~~to of its ~~interest-rate~~Dollar ~~sensitive~~Roll ~~instruments~~Repos and ~~seek~~Swap toAgreements ~~protect~~are financially ~~its~~responsible ~~economic value~~ and ~~achieve~~that athe ~~predictable~~counterparty ~~spread~~risk ~~between~~associated ~~what~~with itthose ~~earns on~~transactions ~~its~~is ~~invested~~minimal. ~~assets~~It ~~and~~is ~~what~~the itCompany’s ~~pays~~policy onthat ~~its~~these ~~liabilities~~agreements byare ~~designing~~entered ~~its~~into ~~fixed-rate~~with ~~products~~counterparties ~~and~~who ~~conducting~~have ~~its~~a ~~investment~~debt ~~operations~~rating ~~to closely match the duration~~ of ~~the~~A/A2 ~~fixed-rate~~or ~~assets~~better tofrom ~~that~~both ofS&P ~~its fixed-rate liabilities.~~and Moody’s. The Company’s ~~fixed-rate~~continually ~~assets~~monitors ~~include:~~its ~~cash~~credit ~~and~~exposure ~~short-term~~with ~~investments;~~respect to ~~bonds,~~these ~~notes~~agreements. ~~and~~In ~~redeemable~~addition ~~preferred~~to ~~stocks;~~counterparty ~~mortgage~~risk, ~~loans;~~Swap ~~policy~~Agreements ~~loans;~~also ~~and~~have ~~investments~~interest ~~in limited partnerships that invest primarily in fixed-~~rate ~~securities~~ risk. ~~At December 31~~However, ~~2002,~~the ~~these~~Company’s ~~assets~~Swap ~~had~~Agreements anare ~~aggregate~~intended ~~fair value of~~to ~~$7.19 billion~~hedge ~~with~~variable-rate aassets ~~duration~~or ~~of 3~~liabilities.8. The ~~Company’s~~primary ~~fixed-rate~~risk ~~liabilities~~associated with ~~include~~MBSs ~~fixed~~is ~~annuity,~~that ~~universal~~a ~~life~~changing ~~and~~interest ~~GIC~~rate ~~reserves.~~environment Atmight ~~December 31,~~cause ~~2002, these~~prepayment ~~liabilities~~of ~~had~~the underlying anobligations ~~aggregate~~at ~~fair~~speeds ~~value~~slower ~~(determined~~or byfaster ~~discounting~~than ~~future contractual~~anticipated ~~cash~~at ~~flows~~the ~~by related market rates~~ time of ~~interest)~~their ~~of $6~~purchase.~~47 billion with~~ aAs ~~duration~~part of ~~3.8.~~its ~~The~~decision ~~Company’s~~to ~~potential~~purchase ~~exposure~~such ~~due to~~ a ~~10%~~security, ~~decrease~~the inCompany ~~prevailing~~assesses ~~interest~~the ~~rates~~risk ~~from~~of ~~their~~prepayment ~~December 31,~~by ~~2002~~analyzing ~~levels~~the issecurity’s ~~a loss of~~projected ~~approximately~~performance ~~$6.2 million,~~over ~~representing~~ an ~~increase~~array ~~in fair value~~ of ~~its fixed~~interest-rate ~~liabilities~~scenarios. ~~that~~Once issuch ~~not offset by~~ a ~~increase~~security ~~in fair value of its~~is ~~fixed-rate~~purchased, ~~assets. Because~~ the Company ~~actively~~monitors ~~manages~~ its ~~assets~~actual ~~and~~prepayment experience monthly to ~~liabilities~~reassess ~~and~~the ~~has~~relative ~~strategies~~attractiveness inof ~~place~~the tosecurity ~~minimize~~with ~~its~~the ~~exposure~~intent to maximize ~~loss~~total asreturn. ~~interest rate~~

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 conducting these reviews for bonds, management principally considers the adequacy of any collateral, compliance with contractual

~~changes~~covenants, ~~occur~~the borrower’s recent financial performance, itnews ~~expects~~reports ~~that~~and ~~actual~~other externally ~~losses~~generated ~~would~~information beconcerning ~~less~~the ~~than~~creditor’s affairs. In the ~~estimated~~case ~~potential~~of ~~loss~~publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners.

~~Duration~~The iscarrying avalues ~~common~~of ~~option-adjusted~~investments ~~measure~~that ~~for~~are ~~the~~determined ~~price~~to ~~sensitivity~~have ofdeclines in avalue ~~fixed-maturity~~that ~~portfolio~~are toother ~~changes~~than intemporary ~~interest~~are ~~rates.~~reduced Itto ~~measures~~net ~~the approximate~~realizable ~~percentage~~value ~~change~~and, in the ~~market~~case ~~value~~ of abonds, ~~portfolio~~no iffurther accruals of interest are made. The provisions ~~rates~~for ~~change~~impairment byon ~~100~~mortgage ~~basis~~loans ~~points~~are ~~(i.e.~~based ~~1%),~~on ~~recognizing~~losses ~~the~~expected ~~changes~~by inmanagement ~~cash~~to ~~flows~~be ~~resulting~~realized ~~from~~on ~~embedded~~transfers ~~options~~of ~~such~~mortgage asloans ~~policy~~to ~~surrenders~~real estate, ~~investment prepayments~~on the disposition and ~~bond~~settlement ~~calls.~~of Itmortgage ~~also~~loans ~~incorporates~~and ~~the~~on ~~assumption~~mortgage loans that ~~the~~management believes ~~Company~~may ~~will~~not ~~continue~~be tocollectible ~~utilize~~in ~~its~~full. ~~existing~~Accrual ~~strategies~~ of ~~pricing~~interest ~~its~~is ~~fixed annuity,~~suspended ~~universal~~when ~~life~~ principal and ~~GIC~~interest ~~products,~~payments ~~allocating~~on ~~its~~mortgage ~~available~~loans ~~cash~~are ~~flow amongst~~past ~~its~~due ~~various~~more ~~investment~~than ~~portfolio~~90 days. Impairment ~~sectors~~losses ~~and~~on ~~maintaining~~securitized ~~sufficient levels~~assets ofare ~~liquidity.~~recognized ~~Because~~if the ~~calculation~~fair value of ~~duration~~the security ~~involves~~is ~~estimation and~~less ~~incorporates~~than ~~assumptions~~its book value, ~~potential~~and ~~changes~~the innet ~~portfolio~~present value ~~indicated~~of byexpected ~~the~~future ~~portfolio’s~~cash ~~duration~~flows ~~will~~is ~~likely~~less bethan ~~different from~~ the ~~actual~~net ~~changes experienced~~present ~~under~~value ~~given~~of ~~interest~~expected ~~rate~~future ~~scenarios,~~cash flows ~~and~~at the ~~differences~~most ~~may~~recent ~~be material~~(prior) estimation date.

AsDEFAULTED ~~a component of its asset and liability management strategy~~INVESTMENTS, ~~the~~comprising ~~Company utilizes~~all ~~interest~~investments ~~rate~~that ~~swap~~are ~~agreements~~in ~~(“Swap~~default ~~Agreements”) to match assets more~~as ~~closely~~ to ~~liabilities.~~the ~~Swap~~payment ~~Agreements~~of ~~are~~principal ~~agreements~~or ~~to exchange with a counterparty~~ interest, ~~rate~~totaled ~~payments~~$49.6 million of ~~differing~~bonds ~~character~~at December 31, ~~(for example~~2003, ~~variable-rate~~ ~~payments~~which ~~exchanged~~constituted ~~for~~approximately ~~fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes~~0.7% ~~The~~of ~~Company~~total ~~typically utilizes Swap Agreements to create a hedge~~invested ~~that effectively converts floating-rate~~ assets ~~and liabilities into fixed-rate instruments~~. At December 31, 2002, ~~the~~defaulted ~~Company~~investments ~~had~~totaled ~~one outstanding Swap~~$15.6 million ~~Agreement~~($8.9 million ~~with~~of abonds ~~notional~~and ~~principal of~~ $336.47 million. ~~This~~of ~~agreement~~mortgage ~~matures~~loans), which constituted inapproximately ~~December~~0.2% ~~2024~~of total invested assets.

~~The~~SOURCES ~~Company~~OF ~~seeks~~LIQUIDITY toare ~~enhance~~readily ~~its~~available ~~spread~~to ~~income~~the ~~with~~Company ~~reverse~~in ~~repurchase~~the form of ~~agreements~~the ~~(“Reverse~~Company’s ~~Repos”).~~existing ~~Reverse~~portfolio ~~Repos~~of ~~involve~~cash aand ~~sale~~short-term ofinvestments, ~~securities~~Dollar Roll Repo capacity on invested assets and an, ~~agreement~~if torequired, ~~repurchase~~proceeds ~~the~~from ~~same~~invested asset ~~securities~~sales. atThe aCompany’s ~~later~~liquidity ~~date~~is atprimarily anderived ~~agreed~~from operating cash ~~upon~~flows. ~~price~~At ~~and~~December 31, ~~are~~2003, ~~generally~~approximately ~~over-collateralized~~$4.59 billion ~~The~~of the Company’s ~~also~~Bond Portfolio ~~seeks~~had ~~to provide~~an ~~liquidity~~aggregate byunrealized ~~investing~~gain inof ~~MBSs~~$214.7 million, ~~MBSs~~while approximately ~~are~~$911.8 million ~~generally~~of ~~investment-grade securities~~the ~~collateralized~~Bond byPortfolio ~~large~~had ~~pools~~an aggregate unrealized loss of ~~mortgage~~$60.1 million. ~~loans~~In addition, the Company’s investment portfolio currently provides approximately $51.2 million ~~MBSs~~of ~~generally~~monthly ~~pay~~cash flow from scheduled principal and interest ~~monthly~~payments. ~~The~~Historically, ~~amount~~cash flows from operations and from the sale of ~~principal~~the Company’s annuity and ~~interest~~GIC ~~payments~~products have ~~may~~been ~~fluctuate~~more asthan asufficient ~~result~~in ofamount ~~prepayments~~to ofsatisfy the ~~underlying~~Company’s ~~mortgage~~liquidity ~~loans~~needs.

~~There~~Management ~~are~~is ~~risks~~aware ~~associated~~that ~~with~~prevailing ~~some~~market ofinterest ~~the~~rates ~~techniques~~may ~~the~~shift significantly ~~Company~~and ~~uses~~has ~~to provide~~strategies ~~liquidity,~~in ~~enhance~~place ~~its~~to ~~spread~~manage ~~income~~either ~~and~~an ~~match~~increase ~~its~~or decrease ~~assets~~in ~~and liabilities~~prevailing rates. ~~The~~In ~~primary~~a ~~risk~~rising ~~associated~~interest ~~with~~rate ~~the~~environment, the Company’s ~~Reverse~~average ~~Repos~~cost ~~and Swap~~of ~~Agreements~~funds iswould ~~counterparty~~increase ~~risk.~~over ~~The~~time ~~Company~~as ~~believes,~~it ~~however,~~prices ~~that the counterparties to~~ its ~~Reverse Repos and Swap Agreements are financially~~new ~~responsible~~ and ~~that~~renewing ~~the~~annuities ~~counterparty~~to ~~risk~~maintain ~~associated~~a ~~with~~generally ~~those~~competitive ~~transactions is~~market ~~minimal~~rate. Management Itwould isseek ~~the~~to ~~Company’s~~place ~~policy~~new ~~that~~funds ~~these~~in ~~agreements~~investments ~~are~~that ~~entered~~were ~~into~~matched in ~~with~~duration ~~counterparties~~to, ~~who~~and ~~have~~higher ayielding ~~debt~~than, ~~rating~~the ofliabilities ~~A/A2 or better from both S&P and Moody’s~~assumed. The Company ~~continually monitors its credit exposure with respect to~~ ~~these~~believes ~~agreements.~~that Inliquidity ~~addition~~ to ~~counterparty~~fund ~~risk,~~withdrawals ~~Swap~~would ~~Agreements~~be ~~also~~available ~~have~~through incoming ~~interest~~cash ~~rate risk. However~~flow, the ~~Company’s~~sale ~~Swap~~of ~~Agreements~~short-term ~~typically~~or ~~hedge variable~~floating-rate ~~assets~~instruments or ~~liabilities,~~Dollar ~~and interest rate fluctuations that~~Roll ~~adversely~~Repos ~~affect~~on the ~~net~~Company’s ~~cash~~substantial ~~received~~MBS orsegment ~~paid~~of ~~under~~ the ~~terms~~Bond ofPortfolio, ~~a Swap~~thereby ~~Agreement~~avoiding ~~would~~the besale ~~offset~~of ~~by increased interest income earned on the variable~~fixed-rate assets orin ~~reduced~~an ~~interest~~unfavorable ~~expense~~bond ~~paid on the variable-rate liabilities~~market. ~~The primary risk associated with MBSs is that a changing interest~~ ~~rate environment might cause prepayment of the underlying~~

~~obligations~~ In ata ~~speeds~~declining ~~slower~~rate orenvironment, ~~faster than anticipated at~~ the ~~time~~Company’s ofcost ~~their purchase. As part~~ of ~~its~~funds ~~decision~~would decrease toover ~~purchase an MBS~~time, ~~the~~reflecting ~~Company~~lower ~~assesses~~interest ~~the risk~~crediting ofrates ~~prepayment~~on byits ~~analyzing the security’s projected performance over an~~fixed ~~array~~annuities. ofShould ~~interest-rate~~increased ~~scenarios.~~liquidity ~~Once~~be anrequired ~~MBS~~for ~~is purchased~~withdrawals, the Company ~~monitors~~believes ~~its~~that ~~actual~~a ~~prepayment~~significant ~~experience~~portion ~~monthly~~of toits ~~reassess~~investments ~~the~~could ~~relative~~be sold without ~~attractiveness~~adverse consequences in light of the ~~security~~general ~~with~~strengthening ~~the~~that ~~intent~~would tobe expected ~~maximize~~in ~~total~~the ~~return~~bond market.

~~INVESTED~~If ~~ASSETS~~a ~~EVALUATION~~substantial isportion ~~routinely~~of ~~conducted by~~ the Company~~. Management~~’s ~~identifies~~Bond ~~monthly~~Portfolio ~~those investments that require additional~~diminished ~~monitoring~~significantly ~~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~~and/or ~~may be other than temporary. In making these reviews for bonds~~defaulted, ~~management principally considers~~ the ~~adequacy~~Company ofwould ~~any~~need ~~collateral,~~to ~~compliance with contractual covenants, the~~liquidate ~~borrower’s recent financial performance, news reports and~~ other ~~externally generated~~portions ~~information concerning the creditor’s affairs. In the case~~ of ~~publicly~~ ~~traded~~its ~~bonds,~~investment ~~management~~portfolio ~~also~~and/or ~~considers~~arrange ~~market value quotations, if available~~financing. ~~For mortgage loans, management generally considers information~~Such ~~concerning~~events ~~the~~that ~~mortgaged~~may ~~property~~cause ~~and,~~such ~~among~~a ~~other~~liquidity ~~things,~~strain ~~factors~~could ~~impacting the~~be ~~current and expected payment status of~~ the ~~loan~~result ~~and, if available, the current fair value~~ of ~~the underlying collateral. For investments in~~economic ~~partnerships,~~collapse ~~management~~or ~~reviews~~terrorist ~~the financial statements and other information provided by the general partners~~acts.

~~The~~Management ~~carrying~~believes ~~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~~Company’s ofliquid ~~bonds,~~assets 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~~cash ~~future~~provided ~~cash~~by ~~flows~~operations iswill ~~less~~enable ~~than~~ the ~~net~~Company ~~present~~to ~~value~~meet ofany ~~expected~~foreseeable ~~future~~ cash ~~flows~~requirements for at least the ~~most~~next ~~recent~~twelve ~~(prior) estimation date~~months.

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

~~SOURCES~~The OFCompany ~~LIQUIDITY~~has ~~are~~entered ~~readily~~into ~~available~~seven toagreements ~~the~~in ~~Company~~which init ~~the~~has ~~form~~provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the ~~Company’s~~event there ~~existing~~is ~~portfolio~~no ofother ~~cash~~buyer ~~and~~in the short-term ~~investments,~~marketplace. ~~Reverse Repo~~In ~~capacity~~return onthe ~~invested~~Company receives ~~assets~~a ~~and,~~fee. ifIn ~~required~~addition, ~~proceeds~~the ~~from~~Company ~~invested~~guarantees ~~asset sales.~~the ~~The~~payment ~~Company’s~~of ~~liquidity~~these securities isupon ~~primarily~~redemption. ~~derived~~The ~~from~~maximum ~~operating~~liability ~~cash~~under ~~flows. At~~these guarantees at December 31, ~~2002,~~2003 ~~approximately~~is $4557.438 ~~billion~~million. Related to each of these agreements are participation agreements with the Company’s ~~Bond Portfolio~~Parent, ~~had~~under anwhich ~~aggregate~~the ~~unrealized~~Parent ~~gain~~will share ofin $~~205~~222.05 million, ~~while approximately~~of ~~$1.10 billion~~these liabilities in exchange for a proportionate percentage of the ~~Bond~~fees ~~Portfolio~~received ~~had~~under anthese ~~aggregate~~agreements. ~~unrealized loss~~The expiration dates of these commitments are as follows: $~~169~~21.19 million. Inin ~~addition~~2004, ~~the~~$385.9 million ~~Company’s investment portfolio~~in ~~currently~~2005 ~~provides~~and ~~approximately~~ $51150.40 million ofin ~~monthly~~2006. ~~cash~~The ~~flow~~Internal ~~from~~Revenue Service has initiated ~~scheduled~~examinations ~~principal~~into ~~and~~the ~~interest~~transactions ~~payments.~~underlying ~~Historically~~these commitments, ~~cash~~including ~~flows from~~the ~~operations~~Company’s ~~and~~role ~~from~~in the ~~sale~~transactions. ofThe Company is fully cooperating with the IRS. ~~Company’s~~Management does not anticipate any material losses with respect to these commitments.

At December 31, 2003, the Company has future obligations to purchase approximately $18 million of asset backed securities in the ordinary course of business. The expiration dates of these commitments are as follows: $11 million in 2004 and $7 million in 2006.

At December 31, 2003, the Company held reserves for GICs with maturity dates as follows: $80.2 million in 2004, $105.2 million in 2005 and $32.6 million in years subsequent to 2006.

RECENTLY ISSUED ACCOUNTING STANDARDS: On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). This statement requires the Company to recognize all derivatives in the balance sheet and measure these derivatives at fair value. The recognition of the change in the fair value of a derivative depends on a number of factors, including the intended use of the derivative and the extent to which it is effective as part of a hedge transaction. The adoption of SFAS 133 on January 1, 2001 resulted in an increase of $1.4 million, net of tax, in other comprehensive income.

~~annuity~~ In ~~and~~January 2001, ~~GIC~~the ~~products~~Emerging ~~have~~Issues ~~been~~Task ~~more~~Force ~~than~~(“EITF”) ~~sufficient~~issued EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in ~~amount~~Securitized toFinancial Assets (“EITF 99-20”). EITF ~~satisfy~~99-20 provides guidance on the calculation of interest income and the recognition of impairments related to beneficial interests held in an investment portfolio. The Company’s ~~liquidity~~beneficial ~~needs~~interests are investments that represent rights to receive specified cash flows from a pool of underlying assets (i.e. collateralized debt obligations). The Company recorded $15.9 million of additional impairments ($10.3 million net of tax) pursuant to the implementation of EITF 99-20. This adjustment was recorded as a cumulative effect of accounting change in the consolidated statement of income and comprehensive income for 2001.

~~Management~~In isJune 2001, ~~aware~~Financial ~~that~~Accounting ~~prevailing~~Standards ~~market~~Board ~~interest~~(“FASB”) ~~rates~~issued Statement ~~may~~of ~~shift significantly~~Financial Accounting Standard No. 142, “Goodwill and ~~has~~Other Intangible ~~strategies~~Assets” in(“SFAS ~~place~~142”). toSFAS ~~manage~~142 ~~either~~requires anthe ~~increase~~Company orto discontinue ~~decrease~~the inamortization ~~prevailing~~of ~~rates.~~goodwill Inon aits ~~rising~~consolidated ~~interest~~statement ~~rate~~of ~~environment,~~income ~~the~~and ~~Company’s~~comprehensive ~~average~~income ~~cost~~and is effective as of ~~funds~~January 1, ~~would~~2002. ~~increase~~SFAS ~~over~~142 ~~time~~requires goodwill asto itbe ~~prices~~subject ~~its~~to ~~new and~~an ~~renewing~~assessment ~~annuities~~of ~~and~~impairment ~~GICs~~on toan ~~maintain~~annual basis, or more frequently if circumstances indicate that a ~~generally~~possible ~~competitive~~impairment ~~market~~has ~~rate~~occurred. ~~Management~~The ~~would~~assessment ~~seek~~of toimpairment ~~place~~involves ~~new~~a ~~funds~~two-step process prescribed in ~~investments~~SFAS ~~that~~142, ~~were matched~~whereby inan ~~duration~~initial ~~to,~~assessment ~~and~~for ~~higher~~potential ~~yielding~~impairment ~~than~~is performed, followed by a measurement of the ~~liabilities~~amount ~~assumed~~of impairment, if any. ~~The~~SFAS ~~Company~~142 ~~believes~~also ~~that~~requires ~~liquidity~~the tocompletion ~~fund~~of ~~withdrawals~~a ~~would~~transitional beimpairment ~~available~~test ~~through incoming~~in ~~cash~~the ~~flow~~year of adoption, ~~the~~with ~~sale~~any ofidentified ~~short-term~~impairments orrecognized ~~floating-rate~~as ~~instruments~~a orcumulative effect ~~Reverse~~of ~~Repos~~an onaccounting ~~the~~change. The Company’s ~~substantial~~has ~~MBS~~evaluated ~~segment~~the impact of the impairment ~~Bond~~provisions ~~Portfolio~~of SFAS 142 as of December 31, 2003, and has determined ~~thereby~~that ~~avoiding~~no ~~the~~impairment ~~sale~~is ofrequired ~~fixed-rate~~to ~~assets~~be inrecorded anto ~~unfavorable~~the ~~bond~~carrying ~~market~~value of the Company’s goodwill balance.

In aNovember 2002, ~~declining~~FASB ~~rate~~issued ~~environment~~Interpretation No. 45, ~~the Company~~“Guarantor’s Accounting ~~cost~~and ofDisclosure ~~funds~~Requirements ~~would~~for Guarantees, Including Indirect ~~decrease~~Guarantees ~~over~~of ~~time,~~Indebtedness ~~reflecting~~of ~~lower~~Others” ~~interest~~(“FIN ~~crediting~~45”), ~~rates~~which onrequires ~~its~~that, ~~fixed~~for ~~annuities~~guarantees ~~and~~within ~~GICs.~~the ~~Should~~scope ~~increased~~of ~~liquidity~~FIN be45 ~~required~~issued ~~for~~or ~~withdrawals,~~ amended by the Company ~~believes~~after December 31, ~~that~~2002, a ~~significant~~liability ~~portion~~for the fair value of ~~its~~the ~~investments~~obligation ~~could~~undertaken in issuing the guarantee be ~~sold~~ ~~without~~recognized. ~~adverse~~FIN ~~consequences~~45 also requires additional disclosures in ~~light~~financial ofstatements ~~the~~starting ~~general~~with ~~strengthening~~the ~~that~~Company’s 2002 year-end ~~would~~financial bestatements. ~~expected~~The inadoption of FIN 45 did not have a significant impact on the ~~bond~~Company’s ~~market~~results of operations or financial condition.

IfIn aJuly 2003, ~~substantial~~the ~~portion~~American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts (“SOP-03-1”). FASB did not object to the issuance of SOP 03-1. This statement is effective for the Company’s ~~Bond~~as ~~Portfolio~~of ~~diminished~~January 1, 2004. ~~significantly~~Under SOP 03-1, variable annuity assets held in separate accounts will continue to be measured at fair value and~~/or~~ ~~defaulted~~reported in summary total on the Company’s financial statements, with an equivalent summary total reported for related liabilities, if the separate account arrangement meets certain specified conditions. Assets underlying the Company’s ~~would~~interest ~~need~~in a separate account (separate account seed money) do not qualify for separate account accounting and reporting. The Company will be required to ~~liquidate~~“look through” the separate ~~other~~account ~~portions~~for purposes of accounting for its ~~investment~~interest ~~portfolio~~therein, and~~/or~~ ~~arrange~~account ~~financing. Such~~for ~~events~~and ~~that~~classify ~~may~~separate ~~cause~~account ~~such~~seed amoney ~~liquidity~~based ~~strain~~on ~~could~~its benature ~~the~~as ~~result~~if the assets of ~~economic~~the separate account underlying the Company’s interest were held directly by ~~collapse~~the orgeneral ~~terrorist~~account ~~acts.~~rather than through the separate account

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

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

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

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

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

~~deposit~~structure. ~~liability~~The adoption of ~~$31.4 million~~SOP is03-1 ~~expected~~on toJanuary 1, be2004 ~~fully~~will ~~paid~~not ~~down~~have a ~~during~~material ~~2004~~impact ~~(see~~on ~~Note~~the 7Company’s ofseparate ~~Notes~~accounts toor ~~Consolidated~~separate ~~Financial~~account ~~Statements)~~seed money.

~~RECENTLY~~In ~~ISSUED~~addition, ~~ACCOUNTING~~SOP ~~STANDARDS~~03-1 ~~are~~will ~~discussed~~require the Company to recognize a liability for guaranteed minimum death benefits, guaranteed minimum income benefits and enhanced earnings benefits and modify certain disclosures and financial statement presentations for these products. The Company’s estimate of the liability, including the impact of DAC, will result in ~~Note~~a 2one-time cumulative accounting charge upon adoption of ~~Notes~~approximately to$52 million ($79 million ~~Consolidated~~pre-tax) ~~Financial~~to ~~Statements~~be recorded in the first quarter of 2004.

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 2728 to 2830 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 DATA

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

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

None.

36ITEM 9A. DISCLOSURE CONTROLS & PROCEDURES

The Company’s disclosure and procedures are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures provide reasonable assurance of effectiveness as of the end of the period covered by this report. In addition, there has been no change in the Company’s internal control over financial reporting that occurred during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

Information called for by Items 10 through 13 of this part is omitted pursuant to General Instruction I. of Form 10-K.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

As an indirect wholly-owned subsidiary of AIG, oversight functions regarding our independent accountants, PricewaterhouseCoopers LLP, are included in the duties of AIG’s Audit Committee. The Company does not have its own Audit Committee. AIG’s Audit Committee has adopted pre-approval policies and procedures regarding audit and non-audit services provided by PricewaterhouseCoopers LLP for AIG and its consolidated subsidiaries, including the Company.

In accordance with the SEC’s definitions and rules, audit fees of $1,048,000 and $784,000 were paid to PricewaterhouseCoopers LLP (“PWC”) for professional services for the audits of our consolidated financial statements included in Form 10-K, review of financial statements included in Forms 10-Q, and for services that are normally provided in connection with statutory and regulatory filings or engagements for 2003 and 2002, respectively.

PART IV

ITEM 1415. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

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

EXHIBITS

Exhibit No.		Description
2(a)		Purchase and Sale Agreement, dated as of July 15, 1998, by and among the Company, ~~SunAmerica Inc. (“SAI”)~~AIGRS, First SunAmerica Life Insurance Company and MBL Life Assurance Corporation, is incorporated herein by reference to Exhibit 2(e) to ~~SAI~~AIGRS’s 1998 Annual Report on Form 10-K, filed December 21, 1998.
3(a)		Articles of Amendment to the Amended and Restated Articles of Incorporation, dated September 30, 2002, filed with the Arizona Department of Insurance and the Arizona Corporation Commission on October 20, 2002, is incorporated herein by reference to Exhibit 3(1) to the Company’s 2002 Annual Report on Form 10-K, filed March 28, 2003.
3(b)		Amended and Restated Articles of Incorporation, dated December 19, 2001, filed with the Arizona Department of Insurance and Arizona Corporation Commission on January 23, 2002 and January 24, 2002, respectively, is incorporated herein as Exhibit 3(a) to the Company’s 2001 Annual Report on Form 10-K, filed March 29, 2002.
3(c)		Amended and Restated Articles of Incorporation and Articles of Redomestication, filed with the Arizona Department of Insurance on December 22, 1995, is incorporated herein by reference to Exhibit 3(a) to the Company’s quarterly report on Form 10-Q for the quarter ended December 31, 1995, filed February 14, 1996.
3(d)		Amended and Restated Bylaws, as adopted January 1, 1996, is incorporated herein by reference to Exhibit 3(b) to the Company’s quarterly report on Form 10-Q for the quarter ended December 31, 1995, filed February 14, 1996.
3(e)		Amended and Restated Bylaws, as amended January 2, 2001, is incorporated herein as Exhibit 3(d) to the Company’s 2001 Annual Report on Form 10-K, filed March 29, 2002.
3(f)		Amended and Restated Bylaws, dated as of December 19, 2001, is incorporated herein as Exhibit 3(e) to the Company’s 2001 Annual Report on Form 10-K, filed March 29, 2002.
4(a)		Articles of Amendment to the Amended and Restated Articles of Incorporation. See Exhibit 3(a).
4(b)		Amended and Restated Articles of Incorporation, dated December 19, 2001. See Exhibit 3(b).
4(c)		Amended and Restated Bylaws, dated December 19, 2001. See Exhibit 3(f).
10(a)		Subordinated Loan Agreement for Equity Capital, dated August 4, 1999, between the Company’s subsidiary, Royal Alliance Associates, Inc., and SAI, defining SAI’s rights with respect to the 8.0% notes due September 23, 2002, is incorporated herein by reference to Exhibit 10(a) to the Company’s 2001 Annual report on Form 10-K, filed March 29, 2002.

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued)


Exhibit No.		Description
3(d)		Amended and Restated Bylaws, as adopted January 1, 1996, is incorporated herein by reference to Exhibit 3(b) to the Company’s quarterly report on Form 10-Q for the quarter ended December 31, 1995, filed February 14, 1996.

3(e)		Amended and Restated Bylaws, as amended January 2, 2001, is incorporated herein as Exhibit 3(d) to the Company’s 2001 Annual Report on Form 10-K, filed March 29, 2002.

3(f)		Amended and Restated Bylaws, dated as of December 19, 2001, is incorporated herein as Exhibit 3(e) to the Company’s 2001 Annual Report on Form 10-K, filed March 29, 2002.

4(a)		Articles of Amendment to the Amended and Restated Articles of Incorporation. See Exhibit 3(a).

4(b)		Amended and Restated Articles of Incorporation, dated December 19, 2001. See Exhibit 3(b).

4(c)		Amended and Restated Bylaws, dated December 19, 2001. See Exhibit 3(f).

10(a)		Amendment to Subordinated Loan Agreement for Equity Capital, dated as of February 7, 2002, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to April 30, 2004 and adjusting the interest rate to 4.75% per annum for the unpaid principal under the Subordinated Loan Agreement for Equity Capital, dated as of March 17, 2000, defining AIGRS’ rights with respect to the 8.75% due April 30, 2003.

10(b)		Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of February 27, 2003, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to April 30, 2005 and adjusting the interest rate to 4.25% per annum for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity Capital, dated as of February 7, 2002, defining AIGRS’ rights with respect to the 4.75% notes due April 30, 2004.

10(c)		Amendment to Subordinated Loan Agreement for Equity Capital, dated as of January 15, 2002, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to March 31, 2004 and adjusting the interest rate to 4.75% per annum for the unpaid principal under the Subordinated Loan Agreement for Equity Capital, dated February 21, 2000, defining AIGRS’ rights with respect to the 8.5% notes due March 31, 2003.

10(d)		Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of January 27, 2003, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to March 31, 2005 and adjusting the interest rate to 4.25% per annum for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity Capital, dated as of January 15, 2002, defining AIGRS’ rights with respect to the 4.75% notes due March 31, 2004.

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued)


Exhibit No.		Description
10(e)		Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of March 8, 2002, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to April 30, 2004 and adjusting the interest rate to 4.75% per annum for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity Capital, dated as of March 20, 2001, defining AIGRS’ rights with respect to the 8% notes due April 30, 2003.

10(f)		Third Amendment to Subordinated Loan Agreement for Equity Capital, dated as of February 27, 2003, between the Company’s affiliate, SACS, and AIGRS extending the maturity date to April 30, 2005 and adjusting the interest rate to 4.25% per annum for the unpaid principal under the Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of March 8, 2002, defining AIGRS’ rights with respect to the 4.75% notes due April 30, 2004.

10(g)		Third Amendment to Subordinated Loan Agreement for Equity Capital, dated as of April 15, 2002, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to June 30, 2004 and adjusting the interest rate to 4.75% per annum for the unpaid principal under the Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of April 30, 2001, defining AIGRS’ rights with respect to the 7.5% note due June 30, 2003.

10(h)		Fourth Amendment to Subordinated Loan Agreement for Equity Capital, dated as of May 7, 2003, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to June 30, 2005 and adjusting the interest rate to 4.25% per annum for the unpaid principal under the Third Amendment to Subordinated Loan Agreement for Equity Capital, dated as of April 15, 2002, defining AIGRS’ rights with respect to the 4.75% notes due June 30, 2004.

10(i)		Third Amendment to Subordinated Loan Agreement for Equity Capital, dated as of May 28, 2002, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to July 30, 2004 and adjusting the interest rate to 4.75% per annum for the unpaid principal under the Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of June 5, 2001, defining AIGRS’ rights with respect to the 7.5% notes due July 30, 2003.

10(j)		Fourth Amendment to Subordinated Loan Agreement for Equity Capital, dated as of June 13, 2003, between the Company’s affiliate, SACS, and AIGRS extending the maturity date to July 30, 2005 and adjusting the interest rate to 4.25% per annum for the unpaid principal under the Third Amendment to Subordinated Loan Agreement for Equity Capital, dated as of May 28, 2002, defining AIGRS rights with respect to the 4.75% notes due July 30, 2004.

ITEM 1415. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued)

Exhibit No.		Description
10(b)		Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of September 13, 1999, between the Company’s subsidiary, AIG SunAmerica Asset Management Corp., and SAI, extending the maturity date to September 13, 2002 and adjusting the interest rate to 8% for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity Capital, dated September 3, 1996, with a maturity date of September 13, 1999, is incorporated herein by reference to Exhibit 10(b) to the Company’s 2001 Annual report on Form 10-K, filed March 29, 2002.
10(k)		Amendment to Subordinated Loan Agreement for Equity Capital, dated as of September 30, 2000, between the Company’s subsidiary, SACS, and SAI, extending the maturity date to October 31, 2004 and changing the interest rate to 9.5% of a Subordinated Loan Agreement for Equity Capital, dated as of August 25, 1998, defining SAI’s rights with respect to the 8.5% notes due October 30, 2001, is incorporated herein by reference to Exhibit 10(c) to the Company’s 2001 Annual report on Form 10-K, filed March 29, 2002.
10(c)		Amendment to Subordinated Loan Agreement for Equity Capital, dated as of September 30, 2000, between the Company’s subsidiary, SACS, and SAI, extending the maturity date to October 31, 2004 and changing the interest rate to 9.5% of a Subordinated Loan Agreement for Equity Capital, dated as of August 25, 1998, defining SAI’s rights with respect to the 8.5% notes due October 30, 2001, is incorporated herein by reference to Exhibit 10(c) to the Company’s 2001 Annual report on Form 10-K, filed March 29, 2002.
10(l)		Amendment to Subordinated Loan Agreement for Equity Capital, dated as of July 23, 2001, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to September 30, 2005 and adjusting the interest rate from 8% to 6.75% for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity Capital, dated as of August 31, 1999, defining AIGRS’ rights with respect to 8% notes due September 30, 2002, is incorporated herein by reference to Exhibit 10(a) to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2001, filed November 13, 2001.
10(d)		Subordinated Loan Agreement for Equity Capital, dated as of March 17, 2000, between the Company’s subsidiary, SACS, and SAI, defining SAI’s rights with respect to the 8.75% notes due April 30, 2003, is incorporated herein by reference to Exhibit 10(a) to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2000, filed May 12, 2000.
10(m)		Asset Lease Agreement, dated June 26, 1998, between the Company and Aurora National Life Assurance Company (“Aurora”), relating to a lease from Aurora of certain information relating to single premium deferred annuities, is incorporated herein by reference by Exhibit 10(h) to the Company’s Form 10-K, filed December 23, 1998.
10(e)		Subordinated Loan Agreement for Equity Capital, dated February 21, 2000, between the Company’s subsidiary, SACS, and SAI, defining SAI’s rights with respect to the 8.5% notes due March 31, 2003, is incorporated herein by reference to Exhibit 10(b) to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2000, filed May 12, 2000.
31.1		Rule 13a-14(a)/15d-14(a) Certifications
10(f)		Amendment to Subordinated Loan Agreement for Equity Capital, dated as of March 20, 2001, between the Company’s subsidiary, SACS, and SAI, extending the maturity date to April 30, 2003 and adjusting the interest rate to 8% of a Subordinated Loan Agreement for Equity Capital, dated as of March 19, 1999, defining SAI’s rights with respect to the 8.5% notes due April 30, 2002, is incorporated herein by reference to Exhibit 10(a) to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2001, filed May 14, 2001.
31.2		Rule 13a-14(a)/15d-14(a) Certifications
10(g)		Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of April 30, 2001, between the Company’s subsidiary, SACS, and SAI, extending the maturity date to June 30, 2003 and adjusting the interest rate from 9.5% to 7.5% per annum for the unpaid principal under the Amendment to Subordinated Loan Agreement for Equity Capital, dated as of May 22, 2000, with a maturity date of June 30, 2002 is incorporated herein by reference to Exhibit 10(a) to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2001, filed August 13, 2001.
32		Section 1350 Certifications

REPORTS ON FORM 8-K

There were no reports on Form 8-K filed during the three months ended December 31, 2003.

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

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

REPORTS ON FORM 8-K

A current report on Form 8-K dated August 14, 2002 was furnished under Item 9 of Form 8-K pursuant to Regulation FD with respect to certifications made by the Principal Executive Officer and the Principal Financial Officer of the Company to accompany the quarterly report on Form 10-Q for the quarter ended June 30, 2002.

SIGNATURES

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

AIG SUNAMERICA LIFE ASSURANCE COMPANY BYBy /S/ N. SCOTT ~~GILLISN~~GILLIS N. Scott Gillis Senior Vice President, Chief Financial Officer and Director

March 2829, ~~2003~~2004

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~~Title	Date
/s/ N. SCOTT GILLIS N. Scott Gillis	Senior Vice President and Director (Principal Financial Officer)	March 28, 2003
/s/	JAY S. WINTROB	Chief Executive Officer and Director (Principal Executive Officer)	March 29, 2004
/s/ MAURICE S. HEBERT Maurice S. Hebert	Vice President & Controller (Principal Accounting Officer)	March 28, 2003
	Jay S. Wintrob
/s/ JAY S. WINTROB Jay S. Wintrob	Chief Executive Officer and Director (Principal Executive Officer)	March 28, 2003
/s/	N. SCOTT GILLIS	Senior Vice President, Chief Financial Officer & Director (Principal Financial Officer)	March 29, 2004
/s/ JANA W. GREER Jana W. Greer	President and Director	March 28, 2003
	N. Scott Gillis
/s/ JAMES R. BELARDI James R. Belardi	Senior Vice President and Director	March 28, 2003
/s/	Stewart Polakov	Senior Vice President & Controller (Principal Accounting Officer)	March 29, 2004
/s/ MARC H. GAMSIN Marc H. Gamsin	Senior Vice President and Director	March 28, 2003
	Stewart Polakov
/s/ EDWIN R. RAQUEL Edwin R. Raquel	Senior Vice President and Chief Actuary	March 28, 2003
/s/	JANA W. GREER	President and Director	March 29, 2004
	Jana W. Greer
/s/	JAMES R. BELARDI	Senior Vice President and Director	March 29, 2004
	James R. Belardi
/s/	MARC H. GAMSIN	Senior Vice President and Director	March 29, 2004
	Marc H. Gamsin
/s/	EDWIN R. RAQUEL	Senior Vice President and Chief Actuary	March 29, 2004
	Edwin R. Raquel

4039

AIG SUNAMERICA LIFE ASSURANCE COMPANY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
	Number(s)
Report of Independent Accountants		F-2
Report of Independent Auditors		F-2
Consolidated Balance Sheet — December 31, 2002 and December 31, 2001	F-3 to F-4
Consolidated Balance Sheet – December 31, 2003 and December 31, 2002	F-3 to F-4
Consolidated Statement of Income and Comprehensive Income — Years Ended December 31, 2002, 2001 and 2000	F-5 to F-6
Consolidated Statement of Income and Comprehensive Income – Years Ended December 31, 2003, 2002 and 2001	F-5 to F-6
Consolidated Statement of Cash Flows — Years Ended December 31, 2002, 2001 and 2000	F-7 to F-8
Consolidated Statement of Cash Flows – Years Ended December 31, 2003, 2002 and 2001	F-7 to F-8
Notes to Consolidated Financial Statements	F-9 to F-3936

F - 1

Report of Independent ~~Accountants~~Auditors

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

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income and comprehensive income and of cash flows present fairly, in all material respects, the financial position of AIG SunAmerica Life Assurance Company and its subsidiaries (formerly, Anchor National Life Insurance Company), an indirect wholly owned subsidiary of American International Group, Inc., at December 31, ~~2002~~2003 and ~~2001~~2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2002~~2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

PricewaterhouseCoopers LLP Los Angeles, California ~~February~~March 1129, ~~2003~~2004

F - 2

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET

		December 31,	~~December 31,~~		December 31,	~~December 31,~~
			2002			2001
		2003			2002
		(in thousands)	~~(in thousands)~~
ASSETS
Investments and cash:
Cash and short-term investments	~~Cash and short-term investments~~	$	$85,188	~~65,872~~	$	$65,872	~~200,064~~
	Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: December 31, 2002, $5,492,677; December 31, 2001, $4,607,901)			5,528,569			4,545,075
Bonds, notes and redeemable preferred stocks available for sale, at market value (amortized cost: December 31, 2003, $5,351,183; December 31, 2002, $5,492,677)			5,505,800			5,528,569
Mortgage loans	~~Mortgage loans~~		716,846	~~738,601~~		738,601	~~692,392~~
Policy loans	~~Policy loans~~		200,232	~~215,846~~		215,846	~~226,961~~
Separate account seed money	~~Separate account seed money~~		17,815	~~25,366~~		25,366	~~50,560~~
	Common stocks available for sale, at fair value (cost: December 31, 2002, $4,111; December 31, 2001, $1,288)			2,609			861
Common stocks available for sale, at market value (cost: December 31, 2003, $635; December 31, 2002, $4,111)			727			2,609
	Partnerships			8,766			451,583
Real estate			22,166			22,315
	Real estate			22,315			20,091
Securities lending collateral			514,145			585,760
Other invested assets	~~Other invested assets~~		10,453	~~585,760~~		8,766	~~563,739~~
Total investments and cash	~~Total investments and cash~~		7,073,372	~~7,193,704~~		7,193,704	~~6,751,326~~
Variable annuity assets held in separate accounts			19,178,796	~~14,758,642~~		14,758,642	~~18,526,413~~
Accrued investment income			74,647	~~75,326~~		75,326	~~65,272~~
Deferred acquisition costs			1,424,317	~~1,364,748~~		1,364,748	~~1,419,498~~
Income taxes currently receivable from Parent			—	~~100,123~~		100,123	~~61,435~~
Due from affiliates			—	~~26,304~~		26,304	~~3,999~~
Goodwill			4,603	~~4,603~~		4,603	~~20,150~~
Other assets			26,116	~~15,382~~		15,382	~~92,012~~
TOTAL ASSETS		$	$27,781,851	~~23,538,832~~	$	$23,538,832	~~26,940,105~~

See accompanying notes to consolidated financial statements

F - 3

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)

		December 31,	~~December 31,~~		December 31,	~~December 31,~~
			2002			2001
		2003			2002
		(in thousands)	~~(in thousands)~~
LIABILITIES AND SHAREHOLDER’S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts	~~Reserves for fixed annuity contracts~~	$	$4,274,329	~~4,285,098~~	$	$4,285,098	~~3,498,917~~
Reserves for universal life insurance contracts	~~Reserves for universal life insurance contracts~~		1,609,233	~~1,676,073~~		1,676,073	~~1,738,493~~
Reserves for guaranteed investment contracts	~~Reserves for guaranteed investment contracts~~		218,032	~~359,561~~		359,561	~~483,861~~
	Securities loaned under collateral agreements			585,760			541,899
Securities lending payable			514,145			585,760
	Modified coinsurance deposit liability			31,393			61,675
Income taxes currently payable to Parent			394			—
	Payable to brokers			8,529			4,479
Modified coinsurance deposit liability			4,738			31,393
	Other liabilities			160,265			220,588
Due to affiliates			11,448			—
Total reserves, payables and accrued liabilities				7,106,679			6,549,912
Payable to brokers			1,140			8,529
Variable annuity liabilities related to separate accounts				14,758,642			18,526,413
Other liabilities			224,780			160,265
Subordinated notes payable to affiliates				—			58,814
Total reserves, payables and accrued liabilities			6,858,239			7,106,679
Deferred income taxes				351,872			210,970
Variable annuity liabilities related to separate accounts			19,178,796			14,758,642
Shareholder’s equity:
Deferred income taxes			281,399			351,872
	Common stock			3,511			3,511
Total liabilities			26,318,434			22,217,193
	Additional paid-in capital			1,125,753			925,753
Shareholder’s equity:
	Retained earnings			175,871			694,004
Common stock			3,511			3,511
	Accumulated other comprehensive income (loss)			16,504			(29,272	)
Additional paid-in capital			1,125,753			1,125,753
	Total shareholder’s equity			1,321,639			1,593,996
Retained earnings			261,543			175,871
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY			$	23,538,832		$	26,940,105
Accumulated other comprehensive income			72,610			16,504
Total shareholder’s equity			1,463,417			1,321,639
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY		$	27,781,851		$	23,538,832

See accompanying notes to consolidated financial statements

F - 4

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

		Years Ended December 31,	~~Years Ended December 31,~~
			2002				2001				2000
		2003				2002				2001
		(in thousands)	~~(in thousands)~~
Investment income			$	390,086			$	375,213			$	399,355
REVENUES:
Interest expense on:
Fee income:
	Fixed annuity contracts			(142,973	)			(133,647	)			(140,322	)
Variable annuity policy fees, net of reinsurance		$	290,132			$	295,509			$	348,883
	Universal life insurance contracts			(80,021	)			(81,773	)			(86,263	)
Net retained commissions			—				—				47,572
	Guaranteed investment contracts			(11,267	)			(25,079	)			(34,124	)
Asset management fees			—				—				63,529
	Securities lending agreements			(12,530	)			(945	)			—
Universal life insurance fees, net of reinsurance			35,816				36,253				36,475
	Subordinated notes payable to affiliates			—				(4,475	)			(4,144	)
Surrender charges			27,733				32,507				24,911
	Total interest expense			(246,791	)			(245,919	)			(264,853	)
Other fees, net			—				3,305				14,551
NET INVESTMENT INCOME				143,295				129,294				134,502
Total fee income			353,681				367,574				535,921
NET REALIZED INVESTMENT LOSSES				(65,811	)			(92,711	)			(15,177	)
Investment income			398,304				377,556				374,268
Fee income:
Net realized investment losses			(30,354	)			(65,811	)			(92,711	)
	Variable annuity fees			318,061				361,877				400,495
Total revenues			721,631				679,319				817,478
	Net retained commissions			—				47,572				62,202
BENEFITS AND EXPENSES:
	Asset management fees			—				63,529				73,922
Interest expense:
	Universal life insurance fees, net			20,537				18,909				20,258
Fixed annuity contracts			153,636				142,973				133,647
	Surrender charges			32,507				24,911				20,963
Universal life insurance contracts			76,415				80,021				81,773
	Other fees			3,305				14,551				12,959
Guaranteed investment contracts			7,534				11,267				25,079
TOTAL FEE INCOME				374,410				531,349				590,799
Sub notes payable to affiliates			—				—				4,475
GENERAL AND ADMINISTRATIVE EXPENSES				(101,839	)			(149,936	)			(171,013	)
Total interest expense			237,585				234,261				244,974
AMORTIZATION OF DEFERRED ACQUISITION COSTS				(187,860	)			(220,316	)			(158,007	)
General and administrative expenses			83,013				79,287				136,942
ANNUAL COMMISSIONS				(58,389	)			(58,278	)			(56,473	)
Amortization of deferred acquisition costs			156,906				187,860				220,316
GUARANTEED MINIMUM DEATH BENEFITS, NET OF REINSURANCE RECOVERIES				(67,492	)			(17,839	)			(614	)
Annual commissions			55,661				58,389				58,278
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE				36,314				121,563				324,017
Claims on universal life contracts, net of reinsurance recoveries			17,766				15,716				17,566
Income tax expense				(2,063	)			(20,852	)			(108,445	)
Guaranteed minimum death benefits, net of reinsurance recoveries			63,268				67,492				17,839
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE				34,251				100,711				215,572
Total benefits and expenses			614,199				643,005				695,915
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX				—				(10,342	)			—
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE			107,432				36,314				121,563
NET INCOME			$	34,251			$	90,369			$	215,572
Income tax expense			21,760				2,063				20,852
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE			85,672				34,251				100,711
Cumulative effect of accounting change, net of tax			—				—				(10,342	)
NET INCOME		$	85,672			$	34,251			$	90,369

See accompanying notes to consolidated financial statements

F - 5

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

		Years Ended December 31,	~~Years Ended December 31,~~
			2002				2001				2000
		2003				2002				2001
		(in thousands)	~~(in thousands)~~
OTHER COMPREHENSIVE INCOME, NET OF TAX:
	Net unrealized gains (losses) on debt and equity securities available for sale identified in the current period (net of income tax expense of $7,125, income tax benefit of $3,646 and income tax expense of $20,444 for 2002, 2001 and 2000, respectively)		$	13,233			$	(6,772	)		$	37,968
Net unrealized gains (losses) on fixed maturity and equity securities available for sale identified in the current period less related amortization of deferred acquisition costs		$	67,125			$	20,358			$	(10,418	)
	Less reclassification adjustment for net realized losses included in net income (net of income tax benefit of $18,300, $22,422 and $4,848 for 2002, 2001 and 2000, respectively)			33,985				41,640				9,003
Less reclassification adjustment for net realized losses included in net income			19,194				52,285				64,062
	CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX			—				1,389				—
Cumulative effect of accounting change, net of tax			—				—				1,389
	Net change related to cash flow hedges (net of income tax benefit of $776 for 2002 and income tax expense of $28 for 2001)			(1,442	)			53				—
Change related to cash flow hedges			—				(2,218	)			81
OTHER COMPREHENSIVE INCOME				45,776				36,310				46,971
Income tax expense			(30,213	)			(24,649	)			(18,804	)
COMPREHENSIVE INCOME			$	80,027			$	126,679			$	262,543
OTHER COMPREHENSIVE INCOME			56,106				45,776				36,310
COMPREHENSIVE INCOME		$	141,778			$	80,027			$	126,679

See accompanying notes to consolidated financial statements

F - 6

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS

		Years Ended December 31,		~~Years Ended December 31,~~
				2002				2001				2000
		2003				2002				2001
		(in thousands)		~~(in thousands)~~
CASH FLOW FROM OPERATING ACTIVITIES:
Net income		$	85,672	$	~~34,251~~	$	34,251	$	~~90,369~~	$	90,369	$	~~215,572~~
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change, net of tax	~~Cumulative effect of accounting change, net of tax~~		—		—		—		~~10,342~~		10,342		—
Interest credited to:	~~Interest credited to:~~
Fixed annuity contracts		~~Fixed annuity contracts~~	153,636		~~142,973~~		142,973		~~133,647~~		133,647		~~140,322~~
Universal life insurance contracts		~~Universal life insurance contracts~~	76,415		~~80,021~~		80,021		~~81,773~~		81,773		~~86,263~~
Guaranteed investment contracts		~~Guaranteed investment contracts~~	7,534		~~11,267~~		11,267		~~25,079~~		25,079		~~34,124~~
Net realized investment losses	~~Net realized investment losses~~		30,354		~~65,811~~		65,811		~~92,711~~		92,711		~~15,177~~
	(Accretion) amortization of net (discounts) premiums on investments				(1,295	)			4,554				(2,198	)
Amortization of premium (discount) on securities			590				(2,721	)			(6,284	)
	Universal life insurance fees, net				(20,537	)			(18,909	)			(20,258	)
Amortization of goodwill			—				—				1,452
	Amortization of goodwill				—				1,452				1,455
Amortization of deferred acquisition costs			156,906				187,860				220,316
	Amortization of deferred acquisition costs				187,860				220,316				158,007
Acquisition costs deferred			(250,475	)			(256,538	)			(359,158	)
	Acquisition costs deferred				(256,538	)			(359,158	)			(362,084	)
Provision for deferred income taxes			(100,685	)			128,748				126,010
	Provision for deferred income taxes				128,748				126,010				114,127
Change in:
	Change in:
Accrued investment income			679				(10,099	)			(7,717	)
		Accrued investment income			(10,099	)			(7,717	)			3,029
Separate account seed money			(7,375	)			3,932				10,838
Other assets		~~Other assets~~	(10,734	)	~~2,433~~		2,433		~~15,042~~		15,042		~~(16,628~~	)
		Income taxes currently receivable from/ payable to Parent			(50,471	)			106				(84,482	)
Income taxes currently payable to/ receivable from Parent			100,517				(50,471	)			106
Due from/to affiliates		~~Due from/to affiliates~~	(26,248	)	~~16,153~~		16,153		~~(68,844~~	)	(68,844	)	~~27,763~~
Other liabilities		~~Other liabilities~~	46,987		~~5,167~~		5,167		~~9,697~~		9,697		~~(40,283~~	)
Other, net	~~Other, net~~		17,124		~~40,518~~		17,475		~~40,125~~		21,216		~~43,376~~
NET CASH PROVIDED BY OPERATING ACTIVITIES			280,897		~~376,262~~		376,262		~~396,595~~		396,595		~~313,282~~
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks	~~Bonds, notes and redeemable preferred stocks~~		(2,078,310	)	~~(2,403,362~~	)	(2,403,362	)	~~(2,178,830~~	)	(2,178,830	)	~~(881,647~~	)
Mortgage loans	~~Mortgage loans~~		(44,247	)	~~(128,764~~	)	(128,764	)	~~(70,295~~	)	(70,295	)	~~(144,303~~	)
Other investments, excluding short-term investments	~~Other investments, excluding short-term investments~~		(20,266	)	~~(65,184~~	)	(65,184	)	~~(27,413~~	)	(27,413	)	~~(66,722~~	)
Sales of:
Bonds, notes and redeemable preferred stocks	~~Bonds, notes and redeemable preferred stocks~~		1,190,299		~~849,022~~		849,022		~~1,087,090~~		1,087,090		~~468,221~~
	Other investments, excluding short-term investments				825				3,527				60,538
Common stock			3,920				195				164
Redemptions and maturities of:
Other investments, excluding short-term investments			8,915				630				3,363
	Bonds, notes and redeemable preferred stocks				615,798				549,638				429,347
Redemptions and maturities of:
	Mortgage loans				82,825				63,960				136,277
Bonds, notes and redeemable preferred stocks			994,014				615,798				549,638
	Other investments, excluding short-term investments				114,347				78,555				122,195
Mortgage loans			67,506				82,825				63,960
Net cash and short-term investments transferred to affiliates in assumption reinsurance transaction relating to MBL Life Assurance Corporation					—				—				(3,314	)
Other investments, excluding short-term investments			72,970				114,347				78,555
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES				$	(934,493	)		$	(493,768	)		$	120,592
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		$	194,801			$	(934,493	)		$	(493,768	)

See accompanying notes to consolidated financial statements

F - 7

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

		Years Ended December 31,	~~Years Ended December 31,~~
			2002				2001				2000
		2003				2002				2001
		(in thousands)	~~(in thousands)~~
CASH FLOW FROM FINANCING ACTIVITIES:
Deposit received on:
Deposits received on:
Fixed annuity contracts	~~Fixed annuity contracts~~	$	$1,553,030	~~1,731,597~~		$	$1,731,597	~~2,280,498~~		$	$2,280,498	~~1,764,600~~
Universal life insurance contracts	~~Universal life insurance contracts~~		45,657	~~49,402~~			49,402	~~52,469~~			52,469	~~58,738~~
Guaranteed investment contracts	~~Guaranteed investment contracts~~		—	—			—	~~40,000~~			40,000	~~350,000~~
Net exchanges from the fixed accounts of variable annuity contracts			(1,148,030	~~(503,221~~)	)		(503,221	~~(1,368,527~~)	)		(1,368,527	~~(1,994,710~~)	)
Withdrawal payments on:
Fixed annuity contracts	~~Fixed annuity contracts~~		(464,332	~~(529,466~~)	)		(529,466	~~(315,794~~)	)		(315,794	~~(320,778~~)	)
Universal life insurance contracts	~~Universal life insurance contracts~~		(61,039	~~(68,444~~)	)		(68,444	~~(55,361~~)	)		(55,361	~~(145,067~~)	)
Guaranteed investment contracts	~~Guaranteed investment contracts~~		(148,719	~~(135,084~~)	)		(135,084	~~(191,919~~)	)		(191,919	~~(78,312~~)	)
Claims and annuity payments on:
Fixed annuity contracts	~~Fixed annuity contracts~~		(109,412	~~(98,570~~)	)		(98,570	~~(52,685~~)	)		(52,685	~~(114,761~~)	)
Universal life insurance contracts	~~Universal life insurance contracts~~		(111,380	~~(100,995~~)	)		(100,995	~~(146,998~~)	)		(146,998	~~(118,302~~)	)
Net receipts from (repayments of) other short-term financings			14,498	~~(8,025~~	)		(8,025	~~15,920~~)			15,920	~~(33,689~~	)
Net payment related to a modified coinsurance transaction			(26,655	~~(30,282~~)	)		(30,282	~~(35,972~~)	)		(35,972	~~(43,110~~)	)
Net receipts from issuances of subordinated notes payable to affiliate				—				—				17,303
Capital contribution received from Parent			—				200,000				—
Capital contribution received from Parent				200,000				—				—
Dividends paid to Parent			—				—				(94,095	)
Dividends paid to Parent				—				(94,095	)			(69,000	)
Net cash and short-term investments transferred to the Parent in distribution of Saamsun Holdings Corp.			—				(82,873	)			—
Net cash and short-term investments transferred to the Parent in distribution of Saamsun Holdings Corp.				(82,873	)			—				—
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES			(456,382	)			424,039				127,536
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES				424,039				127,536				(727,088	)
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS			19,316				(134,192	)			30,363
NET (DECREASE) INCREASE IN CASH AND SHORT-TERM INVESTMENTS				(134,192	)			30,363				(293,214	)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD			65,872				200,064				169,701
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD				200,064				169,701				462,915
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD		$	85,188			$	65,872			$	200,064
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD			$	65,872			$	200,064			$	169,701
SUPPLEMENTAL CASH FLOW INFORMATION:
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness		$	—			$	—			$	780
Interest paid on indebtedness			$	12,530			$	1,725			$	1,841
Net income taxes paid to (refunded by) Parent		$	21,928			$	(76,214	)		$	(120,504	)
Net income taxes refunded by (paid to) Parent			$	76,214			$	120,504			$	(78,796	)

See accompanying notes to consolidated financial statements

F - 8

AIG SUNAMERICA LIFE ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.		NATURE OF OPERATIONS
		AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance Company), (the “Company”) is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the “Parent”), which is a wholly owned subsidiary of AIG SunAmerica Inc. (“SAI”), a wholly owned subsidiary American International Group, Inc. (“AIG”). AIG is a holding company which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services and retirement savings and asset management. The Company is an Arizona-domiciled life insurance company principally engaged in the business of writing variable annuities directed to the market for tax-deferred, long-term savings products. It also administers closed blocks of fixed annuities, universal life policies and guaranteed investment contracts (“GICs”) directed to the institutional marketplace.
		AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance Company), (the “Company”) is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the “Parent”), which is a wholly owned subsidiary of AIG Retirement Services, Inc. (“AIGRS”)(formerly AIG SunAmerica Inc.), 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 services and asset management. The Company is an Arizona-domiciled life insurance company principally engaged in the business of writing variable annuities directed to the market for tax-deferred, long-term savings products. It also administers closed blocks of fixed annuities, universal life policies and guaranteed investment contracts (“GICs”).
		The Company changed its name to SunAmerica National Life Insurance Company on October 5, 2001 and further changed its name to AIG SunAmerica Life Assurance Company on January 24, 2002. The Company continued to do business as Anchor National Life Insurance Company until February 28, 2003, at which time it began doing business under its new name.
		On January 1, 2002, the Company declared a distribution to the Parent of 100% of the outstanding capital stock of its consolidated subsidiary, Saamsun Holdings Corp. (“Saamsun”). Pursuant to this distribution, Saamsun became a direct wholly owned subsidiary of the Parent. Prior to January 1, 2002, Saamsun held the Company’s asset management and broker-dealer segments (see Note 12). This distribution had a material effect on the Company’s shareholder’s equity, reducing it by $552,384,000. This distribution had the effect of reducing cash and short-term investments by $82,873,000, partnerships by $443,369,000, deferred acquisition costs by $98,428,000, other assets by $108,163,000, other liabilities by $121,635,000 and subordinated notes payable to affiliates by $58,814,000. Pretax income in future periods will be reduced by the earnings of the Company’s asset management and broker-dealer operations, substantially offset by a profit sharing agreement on fees earned on variable annuity subaccounts through the asset management business. Pretax loss from these operations, on a combined basis, totaled $21,278,000 for the year ended December 31, 2001, compared to pretax income of $66,017,000 for the year ended December 30, 2000.
		On January 1, 2002, the Company declared a distribution to the Parent of 100% of the outstanding capital stock of its consolidated subsidiary, Saamsun Holdings Corp. (“Saamsun”). Pursuant to this distribution, Saamsun became a direct wholly owned subsidiary of the Parent. Prior to January 1, 2002, Saamsun held the Company’s asset management and broker-dealer segments (see Note 10). This distribution had a material effect on the Company’s shareholder’s equity, reducing it by $552,384,000. This distribution had the effect of reducing cash and short-term investments by $82,873,000, partnerships by $443,369,000, deferred acquisition costs by $98,428,000, other assets by $108,163,000, other liabilities by $121,635,000 and subordinated notes payable to affiliates by $58,814,000. Pretax income in future periods will be reduced by the earnings of the Company’s asset management and broker-dealer operations, substantially offset by a profit sharing agreement on fees earned on variable annuity subaccounts through the asset management business. Pretax loss from these operations, on a combined basis, totaled $21,278,000 for the year ended December 31, 2001.
		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
		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

F - 9

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

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

F - 10

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

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
		list of authorized borrowers. The Company receives primarily cash collateral in an amount in excess of the market value of the securities loaned. The affiliated lending agent monitors the daily market value of securities loaned with respect to the collateral value and obtains additional collateral when necessary to ensure that collateral is maintained at a minimum of 102% of the value of the loaned securities. Such collateral is not available for the general use of the Company. Income earned on the collateral is recorded as net investment income while interest paid on the securities lending agreements and the related management fees paid to administer the program are recorded as interest expense in the statement of income and comprehensive income.
		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, net of interest paid on the securities lending agreements and the related management fees paid to administer the program, is recorded as investment income in the consolidated statement of income and comprehensive income.
		Other invested assets consist principally of investments in limited partnerships and put options on the S&P 500 index purchased to partially offset the risk of Guaranteed Minimum Account Value (“GMAV”) benefits. Limited partnerships are carried at equity or cost depending on the equity ownership position. The put options do not qualify for hedge accounting and accordingly are marked to market and changes in market value are recorded through investment income.
		Realized gains and losses on the sale of investments are recognized in operations at the date of sale and are determined by using the specific cost identification method. Premiums and discounts on investments are amortized to investment income by using the interest method over the contractual lives of the investments.
		INTEREST RATE SWAP AGREEMENTS: As a component of its asset and liability management strategy, the Company utilizes interest rate swap agreements (“Swap Agreements”) to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company typically utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities into fixed-rate instruments. At December 31, 2002, the Company has one outstanding Swap Agreement with a notional principal of $33,400,000. This agreement matures in December 2024.
		The Company regularly reviews its investments for possible impairment based on criteria including economic conditions, market prices, past experience and other issuer-specific developments among other factors. If there is a decline in a security’s net realizable value, a determination is made as to whether that decline is temporary or “other than temporary”. If it is believed that a decline in the value of a particular investment is temporary, the decline is recorded as an unrealized loss in accumulated other comprehensive income. If it is believed that the decline is “other than temporary”, the Company writes down the carrying value of the investment and records a realized loss in the consolidated statement of income and comprehensive income.
		DEFERRED ACQUISITION COSTS (“DAC”): Policy acquisition costs are deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over the estimated lives of the annuity contracts. Estimated gross profits are composed of net investment income, net realized investment gains and losses, variable annuity fees, universal life insurance fees, guarantee costs, surrender charges and direct administrative expenses. DAC consists of commissions and other costs that vary with, and are primarily related to, the production or acquisition of new business. The Company capitalized DAC of $256,538,000, $359,158,000, and $362,084,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
		DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments primarily used by the Company include interest rate swap agreements and put options on the S&P 500 index entered into to partially offset the risk of certain guarantees of annuity policy values. At December 31, 2003, the notional amount was $226.4 million. The Company is neither a dealer nor a trader in derivative financial instruments.
		As debt and equity securities available for sale are carried at aggregate fair value, an adjustment is made to DAC equal to the change in amortization that would have been recorded if such securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. The change in this adjustment, net of tax, is included with the change in net unrealized gains or losses on debt and equity securities available for sale which is a component of accumulated other comprehensive income (loss) and is credited or charged directly to shareholder’s equity. DAC has been decreased by $9,000,000 at December 31, 2002 and increased $16,000,000 and at December 31, 2001, for this adjustment.
		The Company recognizes all derivatives in the consolidated balance sheet at fair value. Hedge accounting requires a high correlation between changes in fair values or cash flows of the derivative financial instrument and the specific item being hedged, both at inception and throughout the life of the hedge. For fair value hedges, gains and losses in the fair value of both the derivative and the hedged item attributable to the risk being hedged are recognized in earnings. For cash flow hedges, to the extent the hedge is effective, gains and losses in the fair value of both the derivative and the hedged item attributable to the risk being hedged are recognized as a component of accumulated other comprehensive income in shareholders’ equity.

F - 11

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

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
		AMORTIZATION OF DEFERRED ACQUISITION COSTS: DAC is amortized based on a percentage of expected gross profits (“EGPs”) over the life of the underlying policies. EGPs are computed based on assumptions related to the underlying policies written, including their anticipated duration, the growth rate of the separate account assets (with respect to variable annuities) or general account assets (with respect to fixed annuities) supporting the annuity obligations, costs of providing for policy guarantees and the level of expenses necessary to maintain the policies. The Company adjusts DAC amortization (a “DAC unlocking”) when estimates of current or future gross profits to be realized from its annuity policies are revised.
		Any ineffective portion of cash flow hedges is reported in investment income. On the date a derivative contract is entered into, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet.
		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.
		Interest rate swap agreements convert specific investment securities from a floating-rate to a fixed-rate basis, or vice versa, and hedge against the risk of declining rates on anticipated security purchases. Interest rate swaps in which the Company agrees to pay a fixed rate and receive a floating rate are accounted for as fair value hedges. Interest rate swaps in which the Company agrees to pay a floating rate and receive a fixed rate are accounted for as cash flow hedges. The difference between amounts paid and received on swap agreements is recorded as an adjustment to investment income or interest expense, as appropriate, on an accrual basis over the periods covered by the agreements. The related amount payable to or receivable from counterparties is included in other liabilities or other assets.
		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.
		The Company issues certain variable annuity products which offer an optional Guaranteed Minimum Account Value (“GMAV”) living benefit. If elected by the policyholder at the time of contract issuance, this feature guarantees that the account value under the contract will equal or exceed the amount of the initial principal invested, adjusted for withdrawals, at the end of a ten-year waiting period. There is a separate charge to the contractholder for this feature. The Company bears the risk that protracted under-performance of the financial markets could result in GMAV benefits being higher than the underlying contractholder account balance and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. As of December 31, 2003, the premiums in force subject to guarantee totaled approximately $652,647,000.
		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.
		Under SFAS 133, the GMAV benefit is considered an embedded derivative that should be bifurcated and marked to market. Changes in the market value of the estimated GMAV benefit are recorded through investment income.
		GOODWILL: Goodwill amounted to $4,603,000 (net of accumulated amortization of $7,847,000) and $20,150,000 (net of accumulated amortization of $19,852,000) at December 31, 2002 and 2001, respectively. Pursuant to the distribution of Saamsun to the Parent on January 1, 2002, the Company transferred $15,547,000 of goodwill belonging to the asset management operations and broker-dealer operations to the Parent.
		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 $250,475,000, $256,538,000 and $359,158,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
		In accordance with Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company assesses goodwill for impairment on an annual basis, or more frequently if
		As fixed maturity and equity securities available for sale are carried at aggregate fair value, an adjustment is made to DAC equal to the change in

F - 12

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

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
		circumstances indicate that a possible impairment has occurred. The assessment of impairment involves a two-step process whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of the impairment, if any. The Company has evaluated goodwill for impairment as of December 31, 2002, and has determined that no impairment provision is necessary. See “Recently Issued Accounting Standards” below for further discussion of SFAS 142.
		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 fixed maturity 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 $43,000,000 at December 31, 2003 and $9,000,000 at December 31, 2002, for this adjustment.
		RESERVES FOR FIXED ANNUITIES, UNIVERSAL LIFE INSURANCE AND GUARANTEED INVESTMENT CONTRACTS (“GICs”): Reserves for fixed annuity, universal life insurance and GIC contracts are accounted for in accordance with Statement of Financial Accounting Standards No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments,” and are recorded at accumulated value (deposits received, plus accrued interest, less withdrawals and assessed fees).
		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, fixed options of variable annuities and universal life contracts) supporting the annuity obligations, costs of providing for policy guarantees and the level of expenses necessary to maintain the policies. The Company adjusts DAC amortization (a “DAC unlocking”) when estimates of current or future gross profits to be realized from its annuity policies are revised. At December 31, 2003, DAC amortization was adjusted for a DAC unlocking that resulted in a reduction of $18.0 million.
		MODIFIED COINSURANCE DEPOSIT LIABILITY: Cash received as part of the modified coinsurance transaction described in Note 7 is recorded as a deposit liability. Deposits from the reinsured business are allocated to pay down the liability pursuant to a repayment schedule.
		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.
		SECURITIES LOANED UNDER COLLATERAL AGREEMENTS: The Company has entered into a securities lending agreement with an affiliated lending agent, which authorizes the agent to lend securities held in the Company’s portfolio to a list of authorized borrowers. The Company receives primarily cash collateral in an amount in excess of the market value of the securities loaned. The affiliated lending agent monitors the daily market value of securities loaned with respect to the collateral value and obtains additional collateral when necessary to ensure that collateral is maintained at a minimum of 102% of the value of the loaned securities. Such collateral is not available for the general use of the Company.
		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.
		FEE INCOME: Variable annuity fees, asset management fees, universal life insurance fees and surrender charges are recorded as income when earned. Net retained commissions are recognized as income on a trade date basis.
		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
		INCOME TAXES: The Company files as a “life insurance company” under the provisions of the Internal Revenue Code of 1986. Its federal income tax return is consolidated with those of the Parent and its affiliate, First SunAmerica Life Insurance Company (“FSA”). Income taxes have been calculated as if the Company filed a separate return. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax basis of assets and liabilities using enacted income tax rates and laws.
		RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). This statement requires the Company to recognize all derivatives in the balance sheet and measure these derivatives at fair value. The recognition of the change in the fair value of a derivative depends on a

F - 13

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

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
		number of factors, including the intended use of the derivative and the extent to which it is effective as part of a hedge transaction. SFAS 133 was postponed by SFAS 137, Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of SFAS No. 133, and became effective for the Company on January 1, 2001. The adoption of SFAS 133 on January 1, 2001 resulted in an increase of $1,389,000, net of tax, in other comprehensive income.
		Annuity Fees in the consolidated statement of income and comprehensive income.
		In January 2001, the Emerging Issues Task Force of the FASB (“EITF”) issued EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (“EITF 99-20”). EITF 99-20 provides guidance on the calculation of interest income and the recognition of impairments related to beneficial interests held in an investment portfolio. Beneficial interests are investments that represent rights to receive specified cash flows from a pool of underlying assets (i.e. collateralized debt obligations). The Company recorded $15,910,000 of additional impairments ($10,342,000 net of tax) pursuant to the implementation of EITF 99-20. This adjustment was recorded as a cumulative effect of accounting change in the consolidated statement of income and comprehensive income for 2001.
		GOODWILL: Goodwill amounted to $4,603,000 (net of accumulated amortization of $7,847,000) at both December 31, 2003 and 2002. Pursuant to the distribution of Saamsun to the Parent on January 1, 2002, the Company transferred $15,547,000 of goodwill belonging to the asset management operations and broker-dealer operations to the Parent.
		In June 2001, FASB issued Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires the Company to discontinue the amortization of goodwill on its statement of income and is effective as of January 1, 2002. SFAS 142 requires goodwill to be subject to an assessment of impairment on an annual basis, or more frequently if circumstances indicate that a possible impairment has occurred. The assessment of impairment involves a two-step process prescribed in SFAS 142, whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of impairment, if any. SFAS 142 also requires the completion of a transitional impairment test in the year of adoption, with any identified impairments recognized as a cumulative effect of a change in accounting principle. The Company has evaluated the impact of the impairment provisions of SFAS 142 as of December 31, 2002, and has determined that no impairment is required to be recorded to the carrying value of the Company’s goodwill balance.
		In accordance with Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company assesses goodwill for impairment on an annual basis, or more frequently if circumstances indicate that a possible impairment has occurred. The assessment of impairment involves a two-step process whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of the impairment, if any. The Company has evaluated goodwill for impairment as of December 31, 2003, and has determined that no impairment provision is necessary. See “Recently Issued Accounting Standards” below for further discussion of SFAS 142.
		In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which requires that, for guarantees within the scope of FIN 45 issued or amended by the Company after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be recognized. FIN 45 also requires additional disclosures in financial statements starting with the Company’s 2002 year-end financial statements. The Company believes that the impact of FIN 45 on its results from operations and financial condition will not be significant.
		RESERVES FOR FIXED ANNUITIES, UNIVERSAL LIFE INSURANCE AND GUARANTEED INVESTMENT CONTRACTS (“GICs”): Reserves for fixed annuity, universal life insurance and GIC contracts are accounted for in accordance with Statement of Financial Accounting Standards No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments,” and are recorded at accumulated value (deposits received, plus accrued interest, less withdrawals and assessed fees).
		The Company has entered into eight agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. The maximum liability under these guarantees at December 31, 2002 is $813,000,000. These agreements are more fully described in Note 8.
		MODIFIED COINSURANCE DEPOSIT LIABILITY: Cash received as part of the modified coinsurance transaction described in Note 5 is recorded as a deposit liability. Deposits from the reinsured business are allocated to pay down the liability pursuant to a repayment schedule.
		FEE INCOME: Variable annuity fees, asset management fees, universal life insurance fees and surrender charges are recorded as income when earned. Net retained commissions are recognized as income on a trade date basis.
		INCOME TAXES: The Company files as a “life insurance company” under the provisions of the Internal Revenue Code of 1986. Its federal income tax return is consolidated with those of the Parent and its affiliate, First SunAmerica Life Insurance Company (“FSA”). Income taxes have been calculated as if the Company filed a separate return. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax basis of assets and liabilities using enacted income tax rates and laws.
		RECENTLY ISSUED ACCOUNTING STANDARDS: On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). This statement requires the Company to recognize all derivatives in the balance sheet and measure these derivatives at fair value. The recognition of the change in

F - 14

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

3.		ACQUISITION
2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
		On December 31, 1998, the Company acquired the individual life business and the individual and group annuity business of MBL Life Assurance Corporation (“MBL Life”) (the “Acquisition”), via a 100% coinsurance transaction, for a cash purchase price of $128,420,000. The $128,420,000 purchase price was allocated between the Company and FSA based on the estimated future gross profits of the two blocks of business. The portion allocated to FSA was $10,000,000.
		the fair value of a derivative depends on a number of factors, including the intended use of the derivative and the extent to which it is effective as part of a hedge transaction. The adoption of SFAS 133 on January 1, 2001 resulted in an increase of $1,389,000, net of tax, in other comprehensive income.
		As part of the Acquisition, the Company received $242,473,000 from MBL Life to pay policy enhancements guaranteed by the MBL Life rehabilitation agreement to policyholders meeting certain requirements. Of this amount, the Company was required to transfer $20,055,000 to the Parent for enhancements on policies in which customers elected to convert to fixed annuity policies of the Parent. Included in the Company’s reserves transferred to FSA in 1999 were $34,657,000 of such policy enhancement reserves. Based upon final actuarial calculations performed in the first quarter of 2000, $16,741,000 of such reserves were returned to the Company by FSA. A primary requirement was that annuity policyholders must have converted their MBL Life policy to a policy type currently offered by the Company or one of its affiliates by December 31, 1999. Pursuant to the agreement, the enhancements were scheduled to be credited in four installments on January 1, 2000, June 30, 2001, June 30, 2002 and June 30, 2003 to eligible policies still active on each of those dates. The Company’s portion of the payment due amounted to $58,329,000 on January 1, 2000, $52,093,000 on June 30, 2001 and $48,939,000 on June 30, 2002, and was either credited to the accounts of the policyholders or paid as benefits through withdrawals or accelerated death benefits. On December 31, 2002, the remaining enhancement reserve for such payments totaled $48,595,000.
		In January 2001, the Emerging Issues Task Force (“EITF”) issued EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (“EITF 99-20”). EITF 99-20 provides guidance on the calculation of interest income and the recognition of impairments related to beneficial interests held in an investment portfolio. Beneficial interests are investments that represent rights to receive specified cash flows from a pool of underlying assets (i.e. collateralized debt obligations). The Company recorded $15,910,000 of additional impairments($10,342,000 net of tax) pursuant to the implementation of EITF 99-20. This adjustment was recorded as a cumulative effect of accounting change in the consolidated statement of income and comprehensive income for 2001.
		In June 2001, Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires the Company to discontinue the amortization of goodwill on its consolidated statement of income and comprehensive income and is effective as of January 1, 2002. SFAS 142 requires goodwill to be subject to an assessment of impairment on an annual basis, or more frequently if circumstances indicate that a possible impairment has occurred. The assessment of impairment involves a two-step process prescribed in SFAS 142, whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of impairment, if any. SFAS 142 also requires the completion of a transitional impairment test in the year of adoption, with any identified impairments recognized as a cumulative effect of an accounting change. The Company has evaluated the impact of the impairment provisions of SFAS 142 as of December 31, 2003, and has determined that no impairment is required to be recorded to the carrying value of the Company’s goodwill balance.
		In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which requires that, for guarantees within the scope of FIN 45 issued or amended by the Company after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be recognized. FIN 45 also requires additional disclosures in financial statements starting with the Company’s 2002 year-end financial statements. The adoption of FIN 45 did not have a significant impact on the Company’s results of operations or financial condition.
		In July 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts” (“SOP-03-1”). FASB did not object to the issuance of SOP 03-1. This statement is effective for the Company as of January 1, 2004.

F - 15

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

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

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

		Under SOP 03-1, variable annuity assets held in separate accounts will continue to be measured at fair value and reported in summary total on the Company’s financial statements, with an equivalent summary total reported for related liabilities, if the separate account arrangement meets certain specified conditions. Assets underlying the Company’s interest in a separate account (separate account seed money) do not qualify for separate account accounting and reporting. The Company will be required to “look through” the separate account for purposes of accounting for its interest therein, and account for and classify separate account seed money based on its nature as if the assets of the separate account underlying the Company’s interest were held directly by the general account rather than through the separate account structure. The adoption of SOP 03-1 will not have a material impact on the Company’s separate accounts or separate account seed money.

		In addition, SOP 03-1 will require the Company to recognize a liability for guaranteed minimum death benefits, guaranteed minimum income benefits and enhanced earnings benefits and modify certain disclosures and financial statement presentations for these products. The Company’s estimate of this liability, including the impact on DAC, will result in a one-time cumulative accounting charge upon adoption of approximately $52 million ($79 million pre-tax) to be recorded in the first quarter of 2004.

3.		INVESTMENTS

		The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks by major category follow:

						Estimated
		Amortized			Estimated
			Amortized			Fair
		Cost			Fair Value
			Cost			Value
		(In thousands)
			(In thousands)
AT DECEMBER 31, 2003:
AT DECEMBER 31, 2002:
Securities of the United States Government		$	22,393		$	24,292
Securities of the United States Government			$	32,531		$	32,820
Mortgage-backed securities			1,148,452			1,191,817
Mortgage-backed securities				1,476,100			1,547,568
Securities of public utilities			352,998			365,150
Securities of public utilities				311,951			311,604
Corporate bonds and notes			2,590,254			2,697,142
Corporate bonds and notes				2,757,880			2,776,021
Redeemable preferred stocks			21,515			22,175
Redeemable preferred stocks				21,515			21,575
Other debt securities			1,215,571			1,205,224
Other debt securities				892,700			838,981
Total		$	5,351,183		$	5,505,800
	Total		$	5,492,677		$	5,528,569
AT DECEMBER 31, 2001:
Securities of the United States Government			$	24,279		$	24,069
Mortgage-backed securities				1,532,155			1,543,175
Securities of public utilities				223,006			222,815
Corporate bonds and notes				2,059,160			2,002,981
Redeemable preferred stocks				21,515			21,515
Other debt securities				747,786			730,520
	Total		$	4,607,901		$	4,545,075

~~The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks by contractual maturity, as of December 31, 2002, follow:~~F-16

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

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

INVESTMENTS (Continued)


	Amortized		Estimated
	Cost		Fair Value
	(In thousands)
AT DECEMBER 31, 2002:

Securities of the United States Government	$	32,531	$	32,820
Mortgage-backed securities		1,476,100		1,547,568
Securities of public utilities		311,951		311,604
Corporate bonds and notes		2,757,880		2,776,021
Redeemable preferred stocks		21,515		21,575
Other debt securities		892,700		838,981

Total	$	5,492,677	$	5,528,569

The amortized cost and estimated fair value of bonds, notes and redeemable preferred stocks by contractual maturity, as of December 31, 2003, follow:


	Amortized		Estimated
	Cost		Fair Value
	(In thousands)
Due in one year or less	$	164,842	$	167,073
Due after one year through five years		2,050,327		2,119,273
Due after five years through ten years		1,485,944		1,522,642
Due after ten years		501,618		504,995
Mortgage-backed securities		1,148,452		1,191,817

Total	$	5,351,183	$	5,505,800

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

FGross -unrealized 16 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, 2003:

Securities of the United States Government	$	1,898	$	—
Mortgage-backed securities		46,346		(2,980	)
Securities of public utilities		13,467		(1,315	)
Corporate bonds and notes		127,996		(21,108	)
Redeemable preferred stocks		660		—
Other debt securities		24,366		(34,713	)

Total	$	214,733	$	(60,116	)

F-17

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

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

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

Gross unrealized gains on equity securities aggregated $76112,000 at December 31, ~~2002~~2003 and $1276,000 at December 31, ~~2001~~2002. Gross unrealized losses on equity securities aggregated $120,~~578,~~000 at December 31, ~~2002~~2003 and $~~439~~1,578,000 at December 31, ~~2001~~2002.

FThe -following 17 table summarizes the Company’s gross unrealized losses and estimated fair values on investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2003.


	Less than 12 Months						12 Months or More						Total
(In thousands)	Market		Unrealized				Market		Unrealized				Market		Unrealized
December 31, 2003	Value		Losses		Items		Value		Losses		Items		Value		Losses		Items
Mortgage-backed securities	$	180,559	$	2,882		49	$	13,080	$	98		6	$	193,639	$	2,980		55
Securities of public utilities		67,626		1,315		8		—		—				67,626		1,315		8
Corporate bonds & notes		276,373		17,086		54		30,383		4,022		5		306,756		21,108		59
Other debt securities		302,230		33,951		54		41,523		762		5		343,753		34,713		59

Total — Debt securities		826,788		55,234		165		84,986		4,882		16		911,774		60,116		181
Equity securities		366		20		1		250		—		1		616		20		2

Total	$	827,154	$	55,254		166	$	85,236	$	4,882		17	$	912,390	$	60,136		183

F-18

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

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

		Years ended December 31,	~~Years ended December 31,~~
			2002				2001				2000
		2003				2002				2001
		(In thousands)	~~(In thousands)~~
BONDS, NOTES AND REDEEMABLE PREFERRED STOCKS:
BONDS, NOTES AND REDEEMABLE
	Realized gains		$	26,555			$	34,026			$	9,608
PREFERRED STOCKS:
	Realized losses			(33,600	)			(25,258	)			(5,573	)
Realized gains		$	28,691			$	24,681			$	34,026
MORTGAGE LOANS:
Realized losses			(9,612	)			(32,532	)			(25,258	)
	Realized losses			—				—				(276	)
COMMON STOCKS:
COMMON STOCKS:
Realized gains			561				—				164
Realized gains				—				164				610
Realized losses			(117	)			(169	)			—
Realized losses				(169	)			—				—
OTHER INVESTMENTS:
OTHER INVESTMENTS:
Realized gains			—				—				—
Realized gains				—				—				1,091
Realized losses			—				—				(685	)
Realized losses				(1,324	)			(685	)			—
IMPAIRMENT WRITEDOWNS				(57,273	)			(100,958	)			(20,637	)
Total net realized investment losses			$	(65,811	)		$	(92,711	)		$	(15,177	)

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

Years ended December 31,

2002

2001

2000

2003

2002

2001

(In thousands)

Short-term investments

~~3,879~~794

83,~~422~~879

218,~~683~~422

Bonds, notes and redeemable preferred stocks

~~305~~321,~~480~~493

~~285~~305,~~668~~480

~~290~~285,~~157~~668

Mortgage loans

5553,~~417~~951

5855,~~262~~417

6058,~~608~~262

Partnerships

1(3,~~281~~890

)

131,~~905~~281

713,~~031~~905

Policy loans

1815,~~796~~925

18,~~218~~796

2018,~~200~~218

Common stocks

—

2—

—2

Real estate

(~~276~~331

)

(~~272~~276

)

~~121~~(272

)

Other invested assets

712,~~866~~670

(4,~~030~~664

)

6(4,~~668~~975

)

Less: investment expenses

(2,~~357~~308

)

(42,~~962~~357

)

(74,~~113~~962

)

Total investment income

~~390~~398,~~086~~304

~~375~~377,~~213~~556

~~399~~374,~~355~~268

F - 1819

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

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

3.		INVESTMENTS (Continued)

		Investment income was attributable to the following products:

F - 19


	Years Ended December 31,
	2003		2002		2001
	(In thousands)
Fixed annuities	$	37,762	$	41,856	$	51,208
Variable annuities		239,863		201,766		164,422
Guaranteed investment contracts		20,660		28,056		36,073
Universal life insurance contracts		100,019		105,878		122,565

Total	$	398,304	$	377,556	$	374,268

		At December 31, 2003, no investments in any one entity or its affiliates exceeded 10% of the Company’s shareholder’s equity.

		At December 31, 2003, bonds, notes and redeemable preferred stocks included $339,119,000 of bonds that were not rated investment grade. These non-investment-grade securities are comprised of bonds spanning 11 industries with 21% of these assets concentrated in financial institutions, 17% of these assets concentrated in utilities, 15% of these assets concentrated in telecommunications, 11% of these assets concentrated in transportation and 10% of these assets concentrated in noncyclical consumer products. No other industry concentration constituted more than 10% of these assets.

		At December 31, 2003, mortgage loans were collateralized by properties located in 31 states, with loans totaling approximately 27%, 11% and 11% of the aggregate carrying value of the portfolio secured by properties located in California, Michigan and New York. No more than 10% of the portfolio was secured by properties in any other single state.

		At December 31, 2003, the carrying value, which approximates market value, of all investments in default as to the payment of principal or interest totaled $49,607,000 of bonds.

		As a component of its asset and liability management strategy, the Company utilizes Swap Agreements to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company typically utilizes Swap Agreements to create a hedge that effectively converts floating-rate assets and liabilities to fixed-rate instruments.

		At December 31, 2003, $10,245,000 of bonds, at amortized cost, was on deposit with regulatory authorities in accordance with statutory requirements.

F-20

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

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

F - 2021

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

5.		FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
4.		FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
		PARTNERSHIPS: Fair value of partnerships that invest in debt and equity securities is based upon the fair value of the net assets of the partnerships as determined by the general partners.
		VARIABLE ANNUITY ASSETS HELD IN SEPARATE ACCOUNTS: Variable annuity assets are carried at the market value of the underlying securities.
		RESERVES FOR FIXED ANNUITY CONTRACTS: Deferred annuity contracts are assigned a fair value equal to current net surrender value. Annuitized contracts are valued based on the present value of future cash flows at current pricing rates.
		RESERVES FOR GUARANTEED INVESTMENT CONTRACTS: Fair value is based on the present value of future cash flows at current pricing rates.
		SECURITIES HELD/LOANED UNDER COLLATERAL AGREEMENTS: Carrying value is considered to be a reasonable estimate of fair value.
		VARIABLE ANNUITY LIABILITIES RELATED TO SEPARATE ACCOUNTS: Variable annuity liabilities are carried at the market value of the underlying securities of the variable annuity assets held in separate accounts.
		SUBORDINATED NOTES PAYABLE TO AFFILIATES: Fair value is estimated based on the quoted market prices for similar issues.
		The estimated fair values of the Company’s financial instruments at December 31, 2003 and 2002 compared with their respective carrying values, are as follows:

F - 21


	Carrying		Fair
	Value		Value
	(In thousands)
DECEMBER 31, 2003:

ASSETS:
Cash and short-term investments	$	85,188	$	85,188
Bonds, notes and redeemable preferred stocks		5,505,800		5,505,800
Mortgage loans		716,846		774,758
Policy loans		200,232		200,232
Separate account seed money		17,815		17,815
Common stocks		727		727
Partnerships		1,312		1,685
Securities lending collateral		514,145		514,145
Variable annuity assets held in separate accounts		19,178,796		19,178,796

LIABILITIES:
Reserves for fixed annuity contracts	$	4,274,329	$	4,225,329
Reserves for guaranteed investment contracts		218,032		223,553
Securities lending payable		514,145		514,145
Variable annuity liabilities related to separate accounts		19,178,796		19,178,796

F-22

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

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

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

F5. -REINSURANCE 22 GUARANTEED MINIMUM DEATH BENEFIT (“GMDB”): A majority of the Company’s variable annuity products are issued with a death benefit feature which provides that, upon the death of a contractholder, the contractholder’s beneficiary will receive the greater of (1) the contractholder’s account value, or (2) a guaranteed minimum death benefit that varies by product (the GMDB). Depending on the product, the GMDB may equal the principal invested, adjusted for withdrawals; the principal invested, adjusted for withdrawals, accumulated at up to 5% per annum (subject to certain caps); or an amount equal to the highest account value in effect on any anniversary date under the contract. These benefits have issue age and other restrictions to reduce mortality risk exposure. The Company bears the risk that death claims following a decline in the financial markets may exceed contractholder account balances, and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. At December 31, 2003, a portion of the GMDB risk on approximately 33% (calculated based on current account value) of the contracts with such features had been reinsured. Approximately half of this reinsurance will cease on March 31, 2004. In 2003, a substantial majority of contracts sold have reinsurance coverage. However, the Company does not currently have reinsurance coverage on the majority of the contracts to be sold after 2003. Reinsurance coverage is subject to limitations such as caps and deductibles. GMDB reinsurance premiums of $20,691,000, $15,544,000 and $8,200,000 were netted against variable annuity policy fees in 2003, 2002 and 2001, respectively. GMDB-

F-23

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

5. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

5.		REINSURANCE (Continued)

		related contractholder benefits incurred, net of related reinsurance, were $63,268,000 (net of $8,042,000 of reinsurance recoveries), $67,492,000 (net of $8,362,000 of reinsurance recoveries) and $17,839,000 (net of $3,767,000 of reinsurance recoveries) for 2003, 2002 and 2001, respectively. In accordance with Generally Accepted Accounting Principles, the Company expenses such benefits in the period incurred, and therefore does not provide reserves for future benefits. However, effective January 1, 2004, the company will be required to record a liability for GMDBs (see Note 2).

		EARNINGS ENHANCEMENT BENEFIT (“EEB”): The Company issues certain variable annuity products that offer an optional Earnings Enhancement Benefit (EEB) feature. This optional feature provides an additional death benefit, for which the Company assesses a separate charge to contractholders who elect the feature. The EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums. The percentages vary by issue age and policy duration. The Company bears the risk that account values following favorable performance of the financial markets will result in greater EEB death claims and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. At December 31, 2003, approximately 8% (calculated based on current account value) of in-force contracts include EEB coverage, with 95% of the EEB risk fully reinsured. EEB reinsurance premiums of $4,045,000 and $2,106,000 were netted against variable annuity policy fees in 2003 and 2002, respectively. There were no EEB reinsurance premium in 2001.

		GUARANTEED MINIMUM INCOME BENEFIT (“GMIB”): The Company issues certain variable annuity products that contain or offer a Guaranteed Minimum Income Benefit (“GMIB”) living benefit feature. This feature provides a minimum annuity payment guarantee for those contractholders who choose to receive fixed lifetime annuity payments after a seven, nine or ten-year waiting period in their deferred annuity contracts. The Company bears the risk that the performance of the financial markets will not be sufficient for accumulated policyholder account balances to support GMIB benefits and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. Substantially all of the Company’s products containing the GMIB feature have been reinsured; furthermore, substantially all of the GMIB risk per individual reinsured contract has been transferred to the reinsurer. However, the Company does not currently have reinsurance coverage on contracts to be sold after the middle of 2004. GMIB reinsurance premiums of $6,059,000, $4,902,000 and $5,047,000 were netted against variable annuity policy fees in 2003, 2002 and 2001, respectively.

		The universal life insurance contracts are subject to reinsurance ceded agreements. In order to limit the exposure to loss on any single insured, the Company entered into a reinsurance treaty effective January 1, 1999 under which the Company retains no more than $100,000 of risk on any one insured life. Reinsurance premiums of $33,710,000, $34,098,000 and $34,011,000 were netted against universal life insurance fees in 2003, 2002 and 2001, respectively. Reinsurance recoveries were $34,036,000, $29,171,000 and $31,591,000 in 2003, 2002 and 2001, respectively. Total reserve credits of $3,705,000 and $3,641,000 were taken against the life insurance reserves at December 31, 2003 and 2002, respectively.

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

F-24

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

F - 23

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

7.		REINSURANCE
5.		REINSURANCE (Continued)
		GUARANTEED MINIMUM DEATH BENEFIT (“GMDB”): A majority of the Company’s variable annuity products are issued with a death benefit feature which provides that, upon the death of a contractholder, the contractholder’s beneficiary will receive the greater of (1) the contractholder’s account value, or (2) a guaranteed minimum death benefit that varies by product (the GMDB). Depending on the product, the GMDB may equal the principal invested, adjusted for withdrawals; the principal invested, adjusted for withdrawals, accumulated at up to 5% per annum (subject to certain caps); or an amount equal to the highest account value in effect on any anniversary date under the contract. These benefits have issue age and other restrictions to reduce mortality risk exposure. The Company bears the risk that death claims following a decline in the financial markets may exceed contractholder account balances, and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. At December 31, 2002, a portion of the GMDB risk on approximately 28% (calculated based on current account value) of the contracts with such features had been reinsured. Approximately half of this reinsurance will cease at the time the modified coinsurance deposit liability is fully paid down, which is presently estimated to occur in early 2004. However, a substantial majority of all new contracts sold have reinsurance coverage. Reinsurance coverage is subject to limitations such as caps and deductibles. GMDB-related contractholder benefits incurred, net of related reinsurance, were $67,492,000 (net of $8,362,000 of reinsurance recoveries), $17,839,000 (net of $3,767,000 of reinsurance recoveries) and $614,000 (net of $937,000 of reinsurance recoveries) for 2002, 2001 and 2000, respectively. In accordance with Generally Accepted Accounting Principles, the Company expenses such benefits in the period incurred, and therefore does not provide reserves for future benefits. GMDB reinsurance premiums were $17,290,000, $8,200,000 and $3,689,000 for 2002, 2001, and 2000, respectively, and are included in general and administrative expenses in the consolidated statement of income and comprehensive income.
		On August 1, 1999, the Company entered into a modified coinsurance transaction, approved by the Arizona Department of Insurance, which involved the ceding of approximately $6,000,000,000 of variable annuities to ANLIC Insurance Company (Hawaii), a non-affiliated stock life insurer. As part of the transaction, the Company received cash in the amount of $150,000,000 and recorded a corresponding deposit liability. As payments are made to the reinsurer, the deposit liability is relieved. For the year ended December 31, 2003, the Company recorded income of $7,591,000 from this program, as compared to an income of $6,418,000 for the year ended December 31, 2002 and a cost of $6,909,000 for the year ended December 31, 2001. These amounts are reported as a component of general and administrative expenses in the consolidated statement of income and comprehensive income.
		EARNINGS ENHANCEMENT BENEFIT (“EEB”): The Company issues certain variable annuity products that offer an optional Earnings Enhancement Benefit (EEB) feature. This optional feature provides an additional death benefit, for which the Company assesses a separate charge to contractholders who elect the feature. The EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums. The percentages vary by issue age and policy duration. The Company bears the risk that account values following favorable performance of the financial markets will result in greater EEB death claims and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. At December 31, 2002, approximately 7% of inforce contracts include EEB coverage, with 96% of the EEB risk fully reinsured. EEB reinsurance premiums were $360,000 for 2002 and are included in general and administrative expenses in the consolidated statement of income and comprehensive income. There were no EEB reinsurance premiums in 2001 or 2000.
		With respect to its reinsurance agreements, the Company could become liable for all obligations of the reinsured policies if the reinsurers were to become unable to meet the obligations assumed under the respective reinsurance agreements. The Company monitors its credit exposure with respect to these agreements. However, due to the high credit ratings of the reinsurers, such risks are considered to be minimal.
6.		COMMITMENTS AND CONTINGENT LIABILITIES
		The Company has entered into seven agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. The maximum liability under these guarantees at December 31, 2003 is $557,775,000. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $222,524,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates of these commitments are as follows: $21,930,000 in 2004, $385,845,000 in 2005 and $150,000,000 in 2006. The Internal Revenue Service has initiated examinations into the transactions underlying these commitments, including the Company’s role in the transactions. The Company is fully cooperating with the IRS. Management does not anticipate any material losses with respect to these commitments.
		At December 31, 2003, the Company was obligated to purchase approximately $18,000,000 of asset backed securities in the ordinary course of business. The expiration dates of these commitments are as follows: $11,000,000 in 2004 and $7,000,000 in 2006.
		Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company.

F - 2425

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

7.		REINSURANCE (Continued)
6.		COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
		GUARANTEED MINIMUM INCOME BENEFIT (“GMIB”): The Company issues certain variable annuity products that contain or offer a Guaranteed Minimum Income Benefit (“GMIB”) living benefit feature. This feature provides a minimum annuity payment guarantee for those contractholders who choose to receive fixed lifetime annuity payments after a seven or ten-year waiting period in their deferred annuity contracts. Over 90% of the contracts (calculated based on account values) with the GMIB feature guaranteed fixed lifetime annuity payments based on principal, adjusted for withdrawals, invested in the contract. The remaining contracts also offer a GMIB based on principal accumulated at 3% to 6.5% per annum. The charges for this feature vary by contract and in certain instances there is no charge for the benefit. The Company bears the risk that the performance of the financial markets will not be sufficient for accumulated policyholder account balances to support GMIB benefits and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. Substantially all of the Company’s GMIB risk has been reinsured as of December 31, 2002. GMIB reinsurance premiums were $4,902,000, $5,047,000 and $3,109,000 for 2002, 2001, and 2000, respectively, and are included in general and administrative expenses in the consolidated statement of income and comprehensive income.
		The Company’s insurance policy obligations are guaranteed 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. This guarantee is unconditional and irrevocable, and the Company’s policyholders have the right to enforce the guarantee directly against American Home.
		The business which was assumed from MBL Life as part of the Acquisition is subject to existing reinsurance ceded agreements. At December 31, 1998, the maximum retention on any single life was $2,000,000, and a total credit of $5,057,000 was taken against the life insurance reserves, representing predominantly yearly renewable term reinsurance. In order to limit even further the exposure to loss on any single insured and to recover an additional portion of the benefits paid over such limits, the Company entered into a reinsurance treaty effective January 1, 1999 under which the Company retains no more than $100,000 of risk on any one insured life. At December 31, 2002, a total reserve credit of $3,641,000 was taken against the life insurance reserves.
		The Company has a support agreement in effect between the Company and AIG (the “Support Agreement”), pursuant to which AIG has agreed that AIG will cause the Company to maintain a policyholder’s surplus of not less than $1,000,000 or such greater amount as shall be sufficient to enable the Company to perform its obligations under any policy issued by it. The Support Agreement also provides that if the Company needs funds not otherwise available to it to make timely payment of its obligations under policies issued by it, AIG will provide such funds at the request of the Company. The Support Agreement is not a direct or indirect guarantee by AIG to any person of any obligations of the Company. AIG may terminate the Support Agreement with respect to outstanding obligations of the Company only under circumstances where the Company attains, without the benefit of the Support Agreement, a financial strength rating equivalent to that held by the Company with the benefit of the Support Agreement. Policyholders have the right to cause the Company to enforce its rights against AIG and, if the Company fails or refuses to take timely action to enforce the Support Agreement or if the Company defaults in any claim or payment owed to such policyholder when due, have the right to enforce the Support Agreement directly against AIG.
		On August 1, 1999, the Company entered into a modified coinsurance transaction, approved by the Arizona Department of Insurance, which involved the ceding of approximately $6,000,000,000 of variable annuities to ANLIC Insurance Company (Hawaii), a non-affiliated stock life insurer. The transaction is accounted for as reinsurance for statutory reporting purposes. As part of the transaction, the Company received cash in the amount of $150,000,000 and recorded a corresponding deposit liability. As payments are made to the reinsurer, the deposit liability is relieved. For the year ended December 31, 2002, the Company recorded income of $6,418,000 from this program, as compared to a cost of $6,909,000 for the year ended December 31, 2001 and a cost of $12,026,000 for the year ended December 31, 2000. These amounts are reported as a component of general and administrative expenses in the Consolidated Statement of Income and Comprehensive Income.
		American Home does not publish financial statements, although it files statutory annual and quarterly reports with the New York State Insurance Department, where such reports are available to the public. AIG is a reporting company under the Securities Exchange Act of 1934, and publishes annual reports on Form 10-K and quarterly reports on Form 10-Q, which are available from the Securities and Exchange Commission.
		With respect to its reinsurance agreements, the Company could become liable for all obligations of the reinsured policies if the reinsurers were to become unable to meet the obligations assumed under the respective reinsurance agreements. The Company monitors its credit exposure with respect to these agreements. However, due to the high credit ratings of the reinsurers, such risks are considered to be minimal.

F - 2526

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

8.		COMMITMENTS AND CONTINGENT LIABILITIES
7.		SHAREHOLDER’S EQUITY
		The Company has entered into eight agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. The maximum liability under these guarantees at December 31, 2002 is $813,000,000. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $350,450,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates of these commitments are as follows: $250,000,000 in 2004, $405,000,000 in 2005 and $158,000,000 in 2006. Management does not anticipate any material losses with respect to these commitments.
		The Company is authorized to issue 4,000 shares of its $1,000 par value Common Stock. At December 31, 2003 and 2002, 3,511 shares were outstanding.
		In the ordinary course of business, the Company is obligated to purchase approximately $42,000,000 of asset backed securities as of December 31, 2002. The expiration dates of these commitments are as follows: $21,000,000 in 2003, $14,000,000 in 2004 and $7,000,000 in 2006.
		Changes in shareholder’s equity are as follows:
		The Company has entered into an agreement whereby it is committed to purchase the remaining principal amount, $36,437,000 as of December 31, 2002, of various mortgage-backed securities at par value in March 2006. As of December 31, 2002, the estimated fair value exceeded the principal amount of the securities. At the present time, management does not anticipate any material losses with respect to this agreement.
		In the third quarter of 2002, the Company began issuing certain variable annuity products which offer an optional Guaranteed Minimum Account Value (“GMAV”) living benefit. If elected by the policyholder at the time of contract issuance, this feature guarantees that the account value under the contract will equal or exceed the amount of the initial principal invested, adjusted for withdrawals, at the end of a ten-year waiting period. There is a separate charge to the contractholder for this feature. The Company bears the risk that protracted under-performance of the financial markets could result in GMAV benefits being higher than the underlying contractholder account balance and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. As of December 31, 2002, the premiums subject to guarantee totaled approximately $100 million, and the estimated fair values of the GMAV were not material.
		Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company. The Company previously reported on a matter, McMurdie et al. v. SunAmerica et al., Case No. BC 194082, filed on July 10, 1998 in the Superior Court for the County of Los Angeles. The lawsuit was settled in September 2002.
		The Company’s current financial strength and counterparty credit ratings from Standard & Poor’s are based in part on a guarantee (the “Guarantee”) of the Company’s insurance policy obligations by American Home Assurance Company (“American Home”), a subsidiary of AIG, and a member of an AIG intercompany pool, and the belief that the Company is viewed as a strategically important

F - 26


	Years ended December 31,
	2003			2002			2001
				(In thousands)
ADDITIONAL PAID-IN CAPITAL:
Beginning balances	$	1,125,753		$	925,753		$	493,010
Capital contributions by Parent		—			200,000			—
Contribution of subsidiary by Parent		—			—			432,743

Ending balances	$	1,125,753		$	1,125,753		$	925,753

RETAINED EARNINGS:
Beginning balances	$	175,871		$	694,004		$	697,730
Net income		85,672			34,251			90,369
Dividends paid to Parent		—			—			(94,095	)
Distribution of subsidiary to Parent		—			(552,384	)		—

Ending balances	$	261,543		$	175,871		$	694,004

ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS):
Beginning balances	$	16,504		$	(29,272	)	$	(65,582	)
Change in net unrealized gains (losses) on debt securities available for sale		118,725			98,718			59,844
Change in net unrealized gains (losses) on equity securities available for sale		1,594			(1,075	)		(400	)
Change in adjustment to deferred acquisition costs		(34,000	)		(25,000	)		(5,800	)
Cumulative effect of accounting change, net of tax		—			—			1,389
Net change related to cash flow hedges		—			(2,218	)		81
Tax effects of net changes		(30,213	)		(24,649	)		(18,804	)

Ending balances	$	72,610		$	16,504		$	(29,272	)

F-27

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

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

7.		SHAREHOLDER’S EQUITY (Continued)

		Gross unrealized gains (losses) on fixed maturity and equity securities included in accumulated other comprehensive income are as follows:

F - 27


	December 31,			December 31,
	2003			2002
	(In thousands)
Gross unrealized gains	$	214,845		$	205,052
Gross unrealized losses		(60,136	)		(170,662	)
Adjustment to DAC		(43,000	)		(9,000	)
Deferred income taxes		(39,099	)		(8,886	)

Accumulated other comprehensive income	$	72,610		$	16,504

		On October 30, 2002, the Company received a capital contribution of $200,000,000 in cash from the Parent.

		On January 1, 2002, the Company declared a distribution to its Parent of 100% of the outstanding capital stock of its then consolidated subsidiary, Saamsun. Pursuant to this distribution, Saamsun became a direct wholly owned subsidiary of the Parent. Saamsun held the Company’s asset management and broker-dealer segments. This distribution reduced the Company’s shareholder’s equity by $552,384,000, cash and short term investments by $82,873,000, partnerships by $443,369,000, deferred acquisition costs by $98,428,000, other assets by $108,163,000, other liabilities by $121,635,000 and subordinated notes payable to affiliates by $58,814,000. Pretax income in future periods will be reduced by the earnings of the Company’s asset management and broker-dealer operations, substantially offset by a profit sharing agreement on fees earned on variable annuity subaccounts (see Note 9). Net loss from these operations, on a combined basis, totaled $9,491,000 for the year ended December 31, 2001.

		On January 1, 2001, the Parent contributed all of its ownership interests in SA Affordable Housing, LLC (“SAAH LLC”), a wholly owned subsidiary, to the Company. The Company subsequently contributed all of its ownership interests in SAAH LLC to Saamsun. All of SAAH LLC’s ownership interests were ultimately contributed to SAAMCO. SAAH LLC has investments in limited partnership interests whose primary purpose is the generation of rehabilitation tax credits, low income housing credits and passive losses. Realized tax credits are realized by its direct Parent, SAAMCO. At the time of the contribution, SAAH LLC had partnership assets of $432,120,000, other assets of $623,000 and shareholder’s equity of $432,743,000. SAAH LLC’s results of operations are included within the asset management operations. As a result of this transfer, additional paid-in capital was increased by $432,743,000. This contribution was approved by the Arizona Department of Insurance.

F-28

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

9.		SHAREHOLDER’S EQUITY
7.		SHAREHOLDER’S EQUITY (Continued)
		The Company is authorized to issue 4,000 shares of its $1,000 par value. Common Stock. At December 31, 2002 and 2001, 3,511 shares were outstanding.
		Dividends that the Company may pay to its shareholder in any year without prior approval of the Arizona Department of Insurance are limited by statute. The maximum amount of dividends which can be paid to shareholders of insurance companies domiciled in the state of Arizona without obtaining the prior approval of the Insurance Commissioner is limited to the lesser of either 10% of the preceding year’s statutory surplus or the preceding year’s statutory net gain from operations if, after paying the dividend, the Company’s capital and surplus would be adequate in the opinion of the Arizona Department of Insurance. Accordingly, the maximum amount of dividends that can be paid to stockholders in the year 2004 without obtaining prior approval is $59,884,000. No dividends were paid in the years ended December 31, 2003 and 2002. Dividends of $94,095,000 were paid on April 2, 2001.
		Changes in shareholder’s equity are as follows:
		Under statutory accounting principles utilized in filings with insurance regulatory authorities, the Company’s net income totaled $89,071,000 for the year ended December 31, 2003 and net losses of $180,737,000 and $122,322,000 for the years ended December 31, 2002 and 2001, respectively. The Company’s statutory capital and surplus totaled $602,348,000 at December 31, 2003 and $463,905,000 at December 31, 2002.
8.		INCOME TAXES
		The components of the provisions for federal income taxes on pretax income consist of the following:

		Years ended December 31,	~~Years ended December 31,~~
			2002				2001				2000
		2003				2002				2001
		(In thousands)	~~(In thousands)~~
ADDITIONAL PAID-IN CAPITAL:
Current		$	122,445			$	(126,685	)		$	(105,158	)
	Beginning balances		$	925,753			$	493,010			$	493,010
Deferred			(100,685	)			128,748				126,010
	Capital contributions by Parent			200,000				—				—
Total income tax expense		$	21,760			$	2,063			$	20,852
	Contribution of subsidiary by Parent			—				432,743				—
	Ending balances		$	1,125,753			$	925,753			$	493,010
RETAINED EARNINGS:
	Beginning balances		$	694,004			$	697,730			$	551,158
	Net income			34,251				90,369				215,572
	Dividends paid to Parent			—				(94,095	)			(69,000	)
	Distribution of subsidiary to Parent			(552,384	)			—				—
	Ending balances		$	175,871			$	694,004			$	697,730
ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS):
	Beginning balances		$	(29,272	)		$	(65,582	)		$	(112,553	)
	Change in net unrealized gains (losses) on debt securities available for sale			98,718				59,842				79,891
	Change in net unrealized gains (losses) on equity securities available for sale			(1,075	)			(400	)			(27	)
	Change in adjustment to deferred acquisition costs			(25,000	)			(5,800	)			(7,600	)
	Tax effects of net changes			(25,425	)			(18,774	)			(25,293	)
	Cumulative effect of accounting change, net of tax			—				1,389				—
	Net change related to cash flow hedges			(1,442	)			53				—
	Ending balances		$	16,504			$	(29,272	)		$	(65,582	)

F - 2829

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

98. ~~SHAREHOLDER’S~~INCOME ~~EQUITY~~TAXES (Continued) ~~Gross~~Income ~~unrealized~~taxes ~~gains~~computed ~~(losses)~~at onthe ~~fixed~~United ~~maturity~~States ~~and~~federal ~~equity~~income ~~securities~~tax ~~included~~rate inof ~~accumulated~~35% ~~other~~and ~~comprehensive~~ income ~~(loss)~~taxes ~~are~~provided differ as follows:

	December 31,			December 31,
	Years ended December 31,
	2002			2001
	2003			2002			2001
	(In thousands)
Gross unrealized gains	$	205,052		$	46,341
Amount computed at statutory rate	$	37,601		$	12,710		$	42,547
Gross unrealized losses		(170,662	)		(109,594	)
Increases (decreases) resulting from:
Adjustment to DAC		(9,000	)		16,000
Amortization of differences between book and tax bases of net assets acquired		—			—			613
Cash flow hedge		—			2,218
State income taxes, net of federal tax benefit		—			—			4,072
Deferred income taxes		(8,886	)		15,763
Dividends received deduction		(15,920	)		(10,117	)		(13,406	)
Accumulated other comprehensive income (loss)	$	16,504		$	(29,272	)
Tax credits		—			—			(16,758	)
Other, net		79			(530	)		3,784
Total income tax expense	$	21,760		$	2,063		$	20,852

OnFor ~~October~~United ~~30,~~States ~~2002,~~federal ~~the~~income ~~Company~~tax ~~received a capital contribution of $200~~purposes,~~000,000~~ incertain ~~cash~~amounts from ~~the~~life ~~Parent.~~insurance Onoperations ~~January~~are 1,accumulated ~~2002,~~in ~~the Company declared~~ a distribution to its Parent of 100% of the outstanding capital stock of its then consolidated subsidiary, Saamsun Holdings Corp. (“Saamsun”). Pursuant to this distribution, Saamsun became a direct wholly owned subsidiary of the Parent. Saamsun held the Companypolicyholders’s ~~asset~~surplus ~~management~~account and ~~broker-dealer~~are ~~segments.~~taxed ~~This~~only ~~distribution~~when ~~reduced~~distributed ~~the~~to ~~Company’s~~shareholders ~~shareholder’s~~or ~~equity~~when bysuch ~~$552,384,000,~~account ~~cash~~exceeds ~~and~~prescribed short term investments by $82,873,000, partnerships by $443,369,000, deferred acquisition costs by $98,428,000, other assets by $108,163,000, other liabilities by $121,635,000 and subordinated notes payable to affiliates by $58,814,000limits. ~~Pretax~~The ~~income~~accumulated ~~in future periods will be reduced by the earnings of the Company~~policyholders’s ~~asset~~surplus ~~management~~was and broker-dealer operations, substantially offset by a profit sharing agreement on fees earned on variable annuity subaccounts (see Note 11). Net loss from these operations, on a combined basis, totaled $914,~~491~~304,000 ~~for~~at ~~the year ended~~ December 31, ~~2001~~2003. Net income from these operations, on a combined basis, totaled $39,619,000 for the year ended December 31, 2000. On January 1, 2001, the Parent contributed all of its ownership interests in SA Affordable Housing, LLC (“SAAH LLC”), a wholly owned subsidiary, to the Company. The Company ~~subsequently~~does ~~contributed~~not ~~all~~anticipate ofany ~~its~~transactions ~~ownership~~which ~~interests~~would ~~SAAH~~cause ~~LLC~~any topart ~~Saamsun. All~~ of ~~SAAH~~this ~~LLC’s~~surplus ~~ownership interests were ultimately contributed~~ to ~~SAAMCO~~be taxable. ~~SAAH~~Deferred ~~LLC~~income ~~has~~taxes ~~investments~~reflect ~~in limited partnership interests whose primary purpose is~~ the ~~generation~~net ~~of rehabilitation~~ tax ~~credits,~~effects ~~low~~of ~~income~~temporary ~~housing~~differences ~~credits~~between ~~and passive losses. Realized tax credits are passed on to its direct Parent, SAAMCO. At~~ the ~~time~~carrying ofamounts ~~the contribution, SAAH LLC had partnership assets~~ of ~~$432,120,000, other~~ assets ~~of $623,000~~ and ~~shareholder’s~~liabilities ~~equity~~for offinancial ~~$432,743,000.~~reporting ~~SAAH~~purposes ~~LLC’s~~and ~~results of operations are included within~~ the ~~asset~~amounts ~~management~~used ~~operations.~~for Asincome atax ~~result~~reporting ~~of this transfer, additional paid-in capital was increased by $432,743,000~~purposes. ~~This contribution was approved by the Arizona Department of Insurance.~~

F - 2930

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

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

8.		INCOME TAXES (Continued)

		The significant components of the liability for Deferred Income Taxes are as follows:

F - 30


	December 31,			December 31,
	2003			2002
	(In thousands)
DEFERRED TAX LIABILITIES:

Deferred acquisition costs	$	455,151		$	423,823
Other liabilities		—			42,289
Net unrealized gains on debt and equity securities available for sale		39,098			8,885

Total deferred tax liabilities		494,249			474,997

DEFERRED TAX ASSETS:

Investments		(24,436	)		(13,591	)
Contractholder reserves		(158,112	)		(84,943	)
Guaranty fund assessments		(3,408	)		(3,774	)
Deferred income		(21,881	)		(16,416	)
Other assets		(5,013	)		(4,401	)

Total deferred tax assets		(212,850	)		(123,125	)

Deferred income taxes	$	281,399		$	351,872

		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.

9.		RELATED-PARTY MATTERS

		As discussed in Notes 1 and 7, the Company declared a distribution to the Parent, effective January 1, 2002, of 100% of the outstanding common stock of its consolidated subsidiary, Saamsun.

		For the years ended December 31, 2003 and December 31, 2002, the Company paid commissions totaling $51,716,000 and $59,058,000 to nine affiliated broker-dealers: Royal Alliance Associates, Inc.; SunAmerica Securities, Inc.; Advantage Capital Corporation; FSC Services Corporation; Sentra Securities Corporation; Spelman & Co., Inc.; VALIC Financial Advisors; American General Financial Advisors and Franklin Financial Services Corporation, respectively. Royal Alliance Associates, Inc. was a wholly owned subsidiary of the Company prior to January 1, 2002. For the year ended December 31, 2001, the Company paid commissions totaling $40,567,000 to six affiliated broker-dealers: SunAmerica Securities, Inc.; Advantage Capital Corporation; FSC Services Corporation; Sentra Securities Corporation; Spelman & Co., Inc. and VALIC Financial Advisors. These affiliated broker-dealers, distribute a significant portion of the Company’s variable annuity products, amounting to approximately 24.0%, 31.2% and 26.0% of deposits for each of the respective periods. Of the Company’s mutual fund sales, 26.3% was distributed by these affiliated broker-dealers for the year ended December 31, 2001.

F-31

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

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

9.		RELATED-PARTY MATTERS (Continued)

		Pursuant to a cost allocation agreement, the Company purchases administrative, investment management, accounting, marketing and data processing services from its Parent, AIGRS and AIG. The allocation of such costs for investment management services is based on the level of assets under management. The allocation of costs for other services is based on estimated levels of usage, transactions or time incurred in providing the respective services. Amounts paid for such services totaled $126,531,000 for the year ended December 31, 2003, $119,981,000 for the year ended December 31, 2002 and $130,178,000 for the year ended December 31, 2001. The component of such costs that relate to the production or acquisition of new business during these periods amounted to $48,733,000, $49,004,000 and $68,757,000, respectively, and is deferred and amortized as part of deferred acquisition costs. The other components of such costs are included in general and administrative expenses in the consolidated statement of income and comprehensive income.

		The Company paid $500,000, $790,000 and $219,000 of management fees to an affiliate of the Company to administer its securities lending program for the years ended December 31, 2003, 2002 and 2001, respectively (see Note 2).

		The majority of the Company’s invested assets are managed by an affiliate of the Company. The investment management fees incurred were $2.3 million, $2.4 million and $5.0 million for the years ended December 31, 2003, 2002 and 2001, respectively.

		In December 2003, the Company purchased an affiliated bond with a carrying value of $37,129,000.

		On June 10, 2002, the Company entered into a profit sharing agreement with AIG SunAmerica Asset Management Corp. (“SAAMCO”), a former subsidiary of the Company and registered investment advisor, whereby SAAMCO will contribute to the Company on a quarterly basis its profits earned in connection with its role as investment advisor and/or business manager to several open-end investment management companies registered under the Investment Company Act of 1940, as amended, that fund the variable investment options available to investors through the Company’s variable annuity contracts (the “SAAMCO Agreement”). The SAAMCO Agreement is retroactive to January 1, 2002. Variable annuity fees of $60,458,000 and $62,562,000 were included in the consolidated statement of income and comprehensive income relating to the SAAMCO Agreement for the years ended December 31, 2003 and 2002. Of this amount $54,753,000 and $57,745,000 has been paid to the Company in 2003 and 2002 and $5,705,000 and $4,817,000 remained receivables from SAAMCO at December 31, 2003 and 2002, respectively.

		On September 26, 2001, the Company entered into a short-term financing arrangement with AIGRS, whereby the Company has the right to borrow up to $500,000,000 from AIGRS. Any advances made by AIGRS under this agreement must be repaid within 30 days. No borrowings were outstanding under this agreement at December 31, 2003 or December 31, 2002.

		On December 19, 2001, the Company entered into a short-term financing arrangement with AIGRS, whereby AIGRS has the right to borrow up to

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

F-32

F - 31

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

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

9.		RELATED-PARTY MATTERS (Continued)

		$500,000,000 from the Company. Any advances made by the Company under this agreement must be repaid within 30 days. No borrowings were outstanding under this agreement at December 31, 2003. At December 31, 2002, $50,000,000 was due to the Company under this agreement. This receivable was collected in January 2003 and was included in due from affiliates on the balance sheet at December 31, 2002.

		On September 26, 2001, the Company entered into a short-term financing arrangement with an affiliate, SunAmerica Investments, Inc., whereby the Company has the right to borrow up to $500,000,000 from SunAmerica Investments, Inc. Any advances made by SunAmerica Investments, Inc. under this agreement must be repaid within 30 days. At December 31, 2003, the Company owed $14,000,000 under this agreement. This payable was paid in January 2004 and was included in due to affiliates on the balance sheet at December 31, 2003. No borrowings were outstanding under this agreement at December 31, 2002.

		On December 19, 2001, the Company entered into a short-term financing arrangement with an affiliate, SunAmerica Investments, Inc., whereby SunAmerica Investments, Inc. has the right to borrow up to $500,000,000 from the Company. Any advances made by the Company under this agreement must be repaid within 30 days. No borrowings were outstanding under this agreement at December 31, 2003 or December 31, 2002.

10.		BUSINESS SEGMENTS

		As a result of the distribution of Saamsun to the Parent on January 1, 2002, the Company had one business segment in 2003 and 2002, annuity operations (see Note 7). Prior to January 1, 2002, the Company had three business segments: annuity operations, asset management operations and broker-dealer operations. The accounting policies of the segments are the same as those described in Note 2. The Company evaluates performance based on profit or loss from operations before income taxes. There were no intersegment revenues for the year ended December 31, 2001. Substantially all of the Company’s revenues are derived from the United States. The Parent makes expenditures for long-lived assets for the Company and allocates depreciation of such assets to the Company.

		Products for the annuity operations and asset management operations are marketed through affiliated and independent broker-dealers, full-service securities firms and financial institutions. One independent selling organization in the annuity operations represented 14.6% of sales in the year ended December 31, 2003, 11.9% of sales in the year ended December 31, 2002 and 12.2% of sales in the year ended December 31, 2001. No other independent selling organization was responsible for 10% or more of sales for any such period. For the year ended December 31, 2001, there was no single independent selling organization that accounted for 10% or more of sales in the asset management operations. Registered representatives sell products offered by the broker-dealer operations. Revenue from any single registered representative or group of registered representatives does not compose a material percentage of total revenues in the broker-dealer operations for the year ended December 31, 2001.

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

F-33

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

F - 32

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

10. ~~INCOME~~BUSINESS ~~TAXES~~SEGMENTS (Continued) ~~Deferred~~Summarized ~~income~~data ~~taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities~~ for ~~financial reporting purposes and~~ the ~~amounts~~Company’s ~~used~~business ~~for~~segments ~~income tax reporting purposes. The significant components of the liability for Deferred Income Taxes are as follows~~follow:

	December 31,			December 31,
				Asset			Broker-
	2002			2001
	Annuity			Management			Dealer
	(In thousands)
	Operations			Operations			Operations		Total
DEFERRED TAX LIABILITIES:
	(In thousands)
Deferred acquisition costs	$	423,823		$	425,208
YEAR ENDED DECEMBER 31, 2003:
State income taxes		—			5,978
REVENUES:
Other liabilities		42,289			24,247
Fee income:
Net unrealized gains on debt and equity securities available for sale		8,885			—
Variable annuity fees	$	290,132		$	—		$	—	$	290,132
Total deferred tax liabilities		474,997			455,433
Universal life insurance fees		35,816			—			—		35,816
DEFERRED TAX ASSETS:
Surrender charges		27,733			—			—		27,733
Investments		(13,591	)		(23,194	)
Other fees		—			—			—		—
Contractholder reserves		(84,943	)		(184,890	)
Total fee income		353,681			—			—		353,681
Guaranty fund assessments		(3,774	)		(3,629	)
Investment income		398,304			—			—		398,304
Deferred income		(16,416	)		(16,211	)
Net realized investment losses		(30,354	)		—			—		(30,354	)
Other assets		(4,401	)		—
Total revenues		721,631			—			—		721,631
Net unrealized losses on debt and equity securities available for sale		—			(16,539	)
BENEFITS AND EXPENSES:
Total deferred tax assets		(123,125	)		(244,463	)
Interest expense		237,585			—			—		237,585
Deferred income taxes	$	351,872		$	210,970
General and administrative expenses		83,013			—			—		83,013
Amortization of deferred acquisition costs		156,906			—			—		156,906
Annual commissions		55,661			—			—		55,661
Claims on universal life contracts, net of reinsurance		17,766			—			—		17,766
Guaranteed minimum death benefits, net of reinsurance recoveries		63,268			—			—		63,268
Total benefits and expenses		614,199			—			—		614,199
Pretax income before cumulative effect of accounting change	$	107,432		$	—		$	—	$	107,432
Total assets	$	27,781,851		$	—		$	—	$	27,781,851
Expenditures for long-lived assets	$	—		$	—		$	—	$	—

F - 3334

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

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

10.

BUSINESS SEGMENTS (Continued)

F - 34


				Asset		Broker-
	Annuity			Management		Dealer
	Operations			Operations		Operations		Total
				(In thousands)
YEAR ENDED DECEMBER 31, 2002:

REVENUES:
Fee income:
Variable annuity fees	$	295,509		$	—	$	—	$	295,509
Universal life insurance fees		36,253			—		—		36,253
Surrender charges		32,507			—		—		32,507
Other fees		3,305			—		—		3,305

Total fee income		367,574			—		—		367,574

Investment income		377,556			—		—		377,556
Net realized investment losses		(65,811	)		—		—		(65,811	)

Total revenues		679,319			—		—		679,319

BENEFITS AND EXPENSES:
Interest expense		234,261			—		—		234,261
General and administrative expenses		79,287			—		—		79,287
Amortization of deferred acquisition costs		187,860			—		—		187,860
Annual commissions		58,389			—		—		58,389
Claims on universal life contracts, net of reinsurance		15,716			—		—		15,716
Guaranteed minimum death benefits, net of reinsurance recoveries		67,492			—		—		67,492

Total benefits and expenses		643,005			—		—		643,005

Pretax income before cumulative effect of accounting change	$	36,314		$	—	$	—	$	36,314

Total assets	$	23,538,832		$	—	$	—	$	23,538,832

Expenditures for long-lived assets	$	—		$	—	$	—	$	—

F-35

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

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

10.

BUSINESS SEGMENTS (Continued)

F - 35


				Asset			Broker-
	Annuity			Management			Dealer
	Operations			Operations			Operations		Total
				(In thousands)
YEAR ENDED DECEMBER 31, 2001:

REVENUES:
Fee income:
Variable annuity fees	$	337,384		$	11,499		$	—	$	348,883
Net retained commissions		—			2,210			45,362		47,572
Asset management fees		—			63,529			—		63,529
Universal life insurance fees		36,475			—			—		36,475
Surrender charges		24,911			—			—		24,911
Other fees		3,626			9,350			1,575		14,551

Total fee income		402,396			86,588			46,937		535,921

Investment income		358,710			14,988			570		374,268
Net realized investment losses		(59,784	)		(32,927	)		—		(92,711	)

Total revenues		701,322			68,649			47,507		817,478

BENEFITS AND EXPENSES:
Interest expense		240,499			4,115			360		244,974
General and administrative expenses		80,026			27,430			29,486		136,942
Amortization of deferred acquisition costs		144,273			76,043			—		220,316
Annual commissions		58,278			—			—		58,278
Claims on universal life contracts, net of reinsurance		17,566			—			—		17,566
Guaranteed minimum death benefits, net of reinsurance recoveries		17,839			—			—		17,839

Total benefits and Expenses		558,481			107,588			29,846		695,915

Pretax income before cumulative effect of accounting change	$	142,841		$	(38,939	)	$	17,661	$	121,563

Total assets	$	26,207,279		$	659,876		$	72,950	$	26,940,105

Expenditures for long-lived assets	$	—		$	614		$	608	$	1,222

~~Table of Contents~~F-36

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

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

F - 36

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

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

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

F - 37

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

12. BUSINESS SEGMENTS (Continued)

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

F - 38

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

13. BUSINESS SEGMENTS (Continued)

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

F - 39

CERTIFICATIONS

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

1. I have reviewed this annual report on Form 10-K of AIG SunAmerica Life Assurance Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition and results of operations of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within the entity, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days of the date of this annual report (the “Evaluation Date"]; and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

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

6. The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 28, 2003 /s/ JAY S. WINTROB Jay S. Wintrob Chief Executive Officer

CERTIFICATIONS

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

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

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