SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

o/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March~~June 3130, 2004

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY

Incorporated in Arizona		86-0198983
		IRS Employer
		Identification No.


Incorporated in Arizona		86-0198983 IRS Employer Identification No.

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

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~~/X/ oNo / /

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 / / o No x/X/

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT’S COMMON STOCK ON ~~MAY~~ 14AUGUST 13, 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 IH(1)(a) AND (b) OF FORM 10-KQ AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED ~~DISCLOSURE~~ DISCLOSURE FORMAT.

TABLE OF CONTENTS

		CONSOLIDATED BALANCE SHEET
		CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENT OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submissions of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit Index
EXHIBIT 10.A
EXHIBIT 10.B
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

AIG SUNAMERICA LIFE ASSURANCE COMPANY

INDEX

		~~Page~~	Page
	~~Number(s)~~		Number(s)
Part I — Financial Information
Part I - Financial Information
Consolidated Balance Sheet (Unaudited) — March 31, 2004 and December 31, 2003		3-4
	Consolidated Balance Sheet (Unaudited) - June 30, 2004 and December 31, 2003		2 - 3
Consolidated Statement of Operations and Comprehensive Income (Unaudited) — Three Months Ended March 31, 2004 and 2003		5-6
	Consolidated Statement of Income and Comprehensive Income (Unaudited) - Three Months and Six Months Ended June 30, 2004 and 2003		4 - 5
Consolidated Statement of Cash Flows (Unaudited) — Three Months Ended March 31, 2004 and 2003		7-8
	Consolidated Statement of Cash Flows (Unaudited) - Six Months Ended June 30, 2004 and 2003		6 - 7
~~Notes to Consolidated Financial Statements (Unaudited)~~	Notes to Consolidated Financial Statements (Unaudited)	~~9-15~~	8 - 17
~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~16-32~~	18 - 36
~~Quantitative and Qualitative Disclosures About Market Risk~~	Quantitative and Qualitative Disclosures About Market Risk	33	37
~~Disclosure Controls and Procedures~~	Disclosure Controls and Procedures	33	37
Part II — Other Information		34
Part II - Other Information			38
~~Exhibits and Reports on 8-K~~	Exhibits and Reports on 8-K	36	40
Exhibit 31.1
Exhibit 31.2
Exhibit 32

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~CONSOLIDATED BALANCE SHEET~~

CONSOLIDATED BALANCE SHEET

(Unaudited)

	March 31,		December 31,
	June 30,		December 31,
	2004		2003
	(in thousands)
ASSETS
Investments and cash:
Cash and short-term investments	$	142,~~186~~180	$	133,105
Bonds, notes and redeemable preferred stocks available for sale, at market value (amortized cost: March 31, 2004, $5,240,898; December 31, 2003, $5,351,183)		5,484,780		5,505,800
Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: June 30, 2004, $5,246,857; December 31, 2003, $5,351,183)		5,314,581		5,505,800
Mortgage loans		~~699~~701,~~676~~808		716,846
Policy loans		~~195~~191,~~499~~903		200,232
Mutual funds		2111,~~913~~465		21,159
Common stocks available for sale, at market value (cost: March 31, 2004, $1,625; December 31, 2003, $635)		1,632		727
Common stocks available for sale, at fair value (cost: June 30, 2004, $5,125; December 31, 2003, $635)		5,143		727
Real estate		22,166		22,166
Securities lending collateral		~~668~~1,~~717~~122,766		514,145
Other invested assets		1320,~~850~~359		10,453
Total investments and cash		7,~~250~~532,~~419~~371		7,124,633
Variable annuity assets held in separate accounts		20,~~174~~638,~~729~~516		19,178,796
Accrued investment income		7675,~~222~~947		74,647
Deferred acquisition costs		1,~~339~~316,~~331~~696		1,~~345~~264,~~332~~321
Other deferred expenses		258,634		241,007
Income taxes currently receivable from Parent		19,321		13,856
Due from affiliates		827		—
Goodwill		14,038		14,038
Other assets		~~226~~69,~~889~~856		~~219~~59,~~161~~166
TOTAL ASSETS	$	29,~~081~~926,~~628~~206	$	27,~~956~~970,~~607~~464

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY

CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)


	June 30,		December 31,
	2004		2003
	(in thousands)
LIABILITIES AND SHAREHOLDER’S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts	$	4,233,103	$	4,274,329
Reserves for universal life insurance contracts		1,565,171		1,609,233
Reserves for guaranteed investment contracts		214,032		218,032
Reserve for guaranteed benefits		73,890		12,022
Securities lending payable		1,122,766		514,145
Due to affiliates		—		19,289
Payable to brokers		3,516		1,140
Other liabilities		209,443		248,258

Total reserves, payables and accrued liabilities		7,421,921		6,896,448

Variable annuity liabilities related to separate accounts		20,638,516		19,178,796

Subordinated notes payable to affiliates		41,498		41,520

Deferred income taxes		301,497		291,152

Total liabilities		28,403,432		26,407,916

Shareholder’s equity:
Common stock		3,511		3,511
Additional paid-in capital		1,224,885		1,224,885
Retained earnings		265,949		261,542
Accumulated other comprehensive income		28,429		72,610

Total shareholder’s equity		1,522,774		1,562,548

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	29,926,206	$	27,970,464

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~CONSOLIDATED BALANCE SHEET (Continued)~~ ~~(Unaudited)~~

	March 31,		December 31,
	2004		2003
	(in thousands)
LIABILITIES AND SHAREHOLDER’S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts	$	4,170,479	$	4,274,329
Reserves for universal life insurance contracts		1,587,907		1,609,233
Reserves for guaranteed investment contracts		213,487		218,032
Reserve for guaranteed benefits		72,123		12,022
Securities lending payable		668,717		514,145
Income taxes currently payable to Parent		64,755		5,038
Modified coinsurance deposit liability		—		4,738
Due to affiliates		13,546		19,289
Payable to brokers		12,420		1,140
Other liabilities		233,054		243,470
Total reserves, payables and accrued liabilities		7,036,488		6,901,436
Variable annuity liabilities related to separate accounts		20,174,729		19,178,796
Subordinated notes payable to affiliates		41,520		41,520
Deferred income taxes		276,817		296,931
Total liabilities		27,529,554		26,418,683
Shareholder’s equity:
Common stock		3,511		3,511
Additional paid-in capital		1,215,284		1,215,284
Retained earnings		213,046		246,519
Accumulated other comprehensive income		120,233		72,610
Total shareholder’s equity		1,552,074		1,537,924
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	29,081,628	$	27,956,607

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

For the three months and six months ended June 30, 2004 and 2003

(Unaudited)


	Three months					Six months
	2004		2003			2004			2003
			(in thousands)
REVENUES
Fee income:
Variable annuity policy fees, net of reinsurance	$	90,350	$	66,945		$	178,560		$	128,979
Asset management fees		22,619		15,496			43,521			28,789
Universal life insurance policy fees, net of reinsurance		8,515		9,378			17,707			18,348
Surrender charges		6,492		6,784			13,491			14,354
Other fees		3,571		3,515			7,192			6,852

Total fee income		131,547		102,118			260,471			197,322

Investment income		97,921		102,155			185,091			199,063
Net realized investment gains (losses)		1,667		(5,358	)		(9,726	)		(8,630	)

Total revenues		231,135		198,915			435,836			387,755

BENEFITS AND EXPENSES
Interest expense:
Fixed annuity contracts		35,571		39,328			70,807			78,093
Universal life insurance contracts		18,524		18,737			37,005			37,839
Guaranteed investment contracts		1,379		2,031			2,714			4,047
Subordinated notes payable		538		660			1,098			1,502

Total interest expense		56,012		60,756			111,624			121,481

General and administrative expenses		35,409		28,345			71,633			58,332
Amortization of deferred acquisition costs and other deferred expenses		53,297		45,567			84,739			89,529
Annual commissions		15,117		15,995			30,131			30,173
Claims on universal life contracts, net of reinsurance recoveries		5,099		5,720			9,922			11,233
Guaranteed benefits, net of reinsurance		13,152		14,483			30,926			36,459

Total benefits and expenses		178,086		170,866			338,975			347,207

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		53,049		28,049			96,861			40,548

Income tax expense		15,169		7,445			27,365			9,326

INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		37,880		20,604			69,496			31,222
Cumulative effect of accounting change, net of tax		—		—			(62,589	)		—

NET INCOME	$	37,880	$	20,604		$	6,907		$	31,222

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME~~ ~~For the three months ended March 31, 2004 and 2003~~ ~~(Unaudited)~~

	2004			2003
	(in thousands)
REVENUES
Fee income:
Variable annuity fees, net of reinsurance	$	91,004		$	64,406
Asset management fees		18,108			10,921
Universal life insurance policy fees, net of reinsurance		9,192			8,970
Surrender charges		6,999			7,570
Other fees		3,621			3,337
Total fee income		128,924			95,204
Investment income		87,170			96,908
Net realized investment losses		(11,393	)		(3,272	)
Total revenues		204,701			188,840
BENEFITS AND EXPENSES
Interest expense:
Fixed annuity contracts		35,236			38,765
Universal life insurance contracts		18,481			19,102
Guaranteed investment contracts		1,335			2,016
Subordinated notes payable		560			842
Total interest expense		55,612			60,725
General and administrative expenses		36,224			29,987
Amortization of deferred acquisition costs		31,442			43,962
Annual commissions		15,014			14,178
Claims on universal life contracts, net of reinsurance recoveries		4,823			5,513
Guaranteed minimum death benefits, net of reinsurance recoveries		17,774			21,976
Total benefits and expenses		160,889			176,341
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		43,812			12,499
Income tax expense		12,196			1,881
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		31,616			10,618
Cumulative effect of accounting change, net of tax		(62,589	)		—
NET INCOME (LOSS)	$	(30,973	)	$	10,618

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (Continued)

For the three months and six months ended June 30, 2004 and 2003

(Unaudited)


	Three months						Six months
	2004			2003			2004			2003
				(in thousands)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Net unrealized gains (losses) on debt and equity securities available for sale identified in the current period less related amortization of deferred acquisition costs and other deferred expenses	$	(140,220	)	$	78,406		$	(74,368	)	$	96,926

Less reclassification adjustment for net realized (gains) losses included in net income		(1,016	)		3,400			6,398			4,755

Income tax (expense) benefit		49,432			(28,633	)		23,789			(35,589	)

OTHER COMPREHENSIVE INCOME (LOSS)		(91,804	)		53,173			(44,181	)		66,092

COMPREHENSIVE INCOME (LOSS)	$	(53,924	)	$	73,777		$	(37,274	)	$	97,314

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)~~ ~~For the three months ended March 31, 2004 and 2003 (Unaudited)~~

	2004			2003
	(in thousands)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net unrealized gains on fixed maturity and equity securities available for sale identified in the current period less related amortization of deferred acquisition costs	$	65,852		$	18,520
Less reclassification adjustment for net realized losses included in net income		7,414			1,355
Income tax expense		(25,643	)		(6,956	)
OTHER COMPREHENSIVE INCOME		47,623			12,919
COMPREHENSIVE INCOME	$	16,650		$	23,537

CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended June 30, 2004 and 2003

(Unaudited)


	2004			2003
	(in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income	$	6,907		$	31,222
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change, net of tax		62,589			—
Interest credited to:
Fixed annuity contracts		70,807			78,093
Universal life insurance contracts		37,005			37,839
Guaranteed investment contracts		2,714			4,047
Net realized investment losses		9,726			8,630
Amortization of premium on securities		2,449			2,614
Amortization of deferred acquisition costs and other deferred expenses		84,739			89,529
Depreciation of fixed assets		833			235
Acquisition costs deferred		(135,410	)		(102,204	)
Other expenses deferred		(37,521	)		(31,816	)
Provision for deferred income taxes		67,837			42,360
Change in:
Accrued investment income		(1,300	)		(9,430	)
Other assets		(11,441	)		3,382
Income taxes currently payable to Parent		(5,465	)		(7,221	)
Due to affiliates		(20,116	)		(28,884	)
Other liabilities		(28,810	)		9,469
Other, net		8,038			8,675

NET CASH PROVIDED BY OPERATING ACTIVITIES		113,581			150,982

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks		(1,028,304	)		(1,328,167	)
Mortgage loans		(9,276	)		(29,883	)
Other investments, excluding short-term investments		(16,212	)		(14,849	)
Sales of:
Bonds, notes and redeemable preferred stocks		680,095			858,085
Other investments, excluding short-term investments		11,173			67
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks		439,785			492,682
Mortgage loans		24,903			14,560
Other investments, excluding short-term investments		8,523			59,927

NET CASH PROVIDED BY INVESTING ACTIVITIES	$	110,687		$	52,422

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~CONSOLIDATED STATEMENT OF CASH FLOWS~~ ~~For the three months ended March 31, 2004 and 2003~~ ~~(Unaudited)~~

	2004			2003
	(in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)	$	(30,973	)	$	10,618
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of accounting change, net of tax		62,589			—
Interest credited to:
Fixed annuity contracts		35,236			38,765
Universal life insurance contracts		18,481			19,102
Guaranteed investment contracts		1,335			2,016
Net realized investment losses		11,393			3,272
Amortization of premium (discount) on securities		(3,735	)		4,169
Amortization of deferred acquisition costs		31,442			43,962
Acquisition costs deferred		(76,225	)		(57,874	)
Depreciation of fixed assets		427			348
Provision for deferred income taxes		(12,055	)		21,736
Change in:
Accrued investment income		(1,575	)		(8,018	)
Other assets		(13,616	)		(12,070	)
Income taxes currently payable to Parent		59,718			(9,674	)
Due to affiliates		(5,743	)		(30,478	)
Other liabilities		(6,917	)		9,609
Other, net		4,771			6,388
NET CASH PROVIDED BY OPERATING ACTIVITIES		74,553			41,871
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks		(708,678	)		(855,046	)
Mortgage loans		—			(131	)
Other investments, excluding short-term investments		(88	)		(8,171	)
Sales of:
Bonds, notes and redeemable preferred stocks		592,988			576,332
Other investments, excluding short-term investments		485			52
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks		224,361			259,602
Mortgage loans		17,469			11,213
Other investments, excluding short-term investments		4,818			54,973
Purchase of fixed assets		(45	)		(1,430	)
Sales of fixed assets		—			66
NET CASH PROVIDED BY INVESTING ACTIVITIES	$	131,310		$	37,460

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

For the six months ended June 30, 2004 and 2003

(Unaudited)


	2004			2003
	(in thousands)
CASH FLOW FROM FINANCING ACTIVITIES:
Deposits received on:
Fixed annuity contracts	$	787,396		$	803,595
Universal life insurance contracts		21,825			22,573
Net exchanges from the fixed accounts of variable annuity contracts		(654,495	)		(405,412	)
Withdrawal payments on:
Fixed annuity contracts		(200,687	)		(242,148	)
Universal life insurance contracts		(38,517	)		(33,365	)
Guaranteed investment contracts		(6,120	)		(6,240	)
Claims and annuity payments on:
Fixed annuity contracts		(55,694	)		(55,667	)
Universal life insurance contracts		(61,663	)		(62,153	)
Net payment related to a modified coinsurance transaction		(4,738	)		(11,347	)
Dividend paid to Parent		(2,500	)		(10,187	)

NET CASH USED IN FINANCING ACTIVITIES		(215,193	)		(351	)

NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS		9,075			203,053

CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD		133,105			116,882

CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD	$	142,180		$	319,935

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness	$	1,098		$	1,502

Income taxes paid to Parent	$	47,424		$	51,087

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)~~ ~~For the three months ended March 31, 2004 and 2003~~ ~~(Unaudited)~~

	2004			2003
	(in thousands)
CASH FLOW FROM FINANCING ACTIVITIES:
Deposits received on:
Fixed annuity contracts	$	372,567		$	428,057
Universal life insurance contracts		11,252			11,310
Net exchanges from the fixed accounts of variable annuity contracts		(386,957	)		(58,019	)
Withdrawal payments on:
Fixed annuity contracts		(104,031	)		(139,659	)
Universal life insurance contracts		(17,414	)		(14,100	)
Guaranteed investment contracts		(5,583	)		(4,753	)
Claims and annuity payments on:
Fixed annuity contracts		(28,281	)		(29,313	)
Universal life insurance contracts		(31,097	)		(34,172	)
Net payment related to a modified coinsurance transaction		(4,738	)		(4,862	)
Dividend paid to Parent		(2,500	)		(10,187	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(196,782	)		144,302
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS		9,081			223,633
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD		133,105			116,882
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD	$	142,186		$	340,515
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness	$	560		$	842
Income taxes paid to Parent	$	47,424		$	—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~See accompanying notes to consolidated financial statements.~~ (Unaudited)

1.		BASIS OF PRESENTATION

		AIG SunAmerica Life Assurance Company (formerly 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, 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 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.

		Effective January 1, 2004, the Parent contributed to the Company 100% of the outstanding capital stock of its consolidated subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCo”) (formerly SunAmerica Asset Management Corp.) which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. (“SACS”) (formerly SunAmerica Capital Services, Inc.) and AIG SunAmerica Fund Services, Inc. (“SFS”) (formerly SunAmerica Fund Services, Inc.). Pursuant to this contribution, SAAMCo became a direct wholly owned subsidiary of the Company. This contribution increased the Company’s shareholder’s equity by $99,131,000. Included in the contribution of SAAMCo to the Company were tax benefits of $24,624,000 derived from losses incurred by SA Affordable Housing, L.L.C. through December 31, 2003, when it was no longer a subsidiary of SAAMCo. Assets, liabilities and shareholder’s equity at December 31, 2003 were restated to include $174,756,000, $75,625,000 and $99,131,000, respectively, of SAAMCo balances. Similarly, the results of operations and cash flows for the six months ended June 30, 2003 have been restated for the addition to pretax income of $2,216,000 to reflect the SAAMCo activity. Pretax income from the SAAMCo’s and its subsidiaries’ asset management operations totaled $7,686,000 for the second quarter of 2004 and $15,489,000 for the six months ended June 30, 2004.

		SAAMCo and its wholly owned distributor, SACS, and its wholly owned servicing administrator, SFS, are included in asset management segment (see Note 5). These companies 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.

		In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary, consisting of normal recurring items, to present fairly the Company’s consolidated financial position as of June 30, 2004 and December 31, 2003, the results of its consolidated operations for the three months and six months ended June 30, 2004 and 2003 and its consolidated cash flows for the six months ended June 30, 2004 and 2003. The results of operations for the three months and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003, contained in the Company’s 2003 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

2.		RECENTLY ISSUED ACCOUNTING STANDARDS

		In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). This statement was effective as of January 1, 2004, and requires the Company to recognize a liability for guaranteed minimum death benefits and other living benefits related to its variable annuities

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

1.		BASIS OF PRESENTATION
2.		RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
		AIG SunAmerica Life Assurance Company (formerly 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, 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”).
		and modifies certain disclosures and financial statement presentations for these products. In addition, SOP 03-1 addresses the presentation and reporting of separate accounts and the capitalization and amortization of sales inducements. The Company reported for the first quarter of 2004 a one-time cumulative accounting charge upon adoption of $62,589,000 ($96,291,000 pre-tax) to reflect the liability and the related impact of deferred acquisition costs (“DAC”) and reinsurance as of January 1, 2004.
		The Company 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.
		The Company issues variable annuities for which the investment risk is generally borne by the contract holder, except with respect to amounts invested in the fixed-rate account options. For many of the Company’s variable annuities, the Company offers contractual guarantees in the event of death, at specified dates during the accumulation period, upon certain withdrawals or at annuitization. Such benefits are referred to as guaranteed minimum death benefits (“GMDB”), guaranteed minimum account value benefits (“GMAV”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income benefits (“GMIB”), respectively. The Company also issues certain variable annuity products that offer an optional earnings enhancement benefit (“EEB”) feature.
		Effective January 1, 2004, the Parent contributed to the Company 100% of the outstanding capital stock of its consolidated subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCo”) (formerly SunAmerica Asset Management Corp.) which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. (“SACS”) (formerly SunAmerica Capital Services, Inc.) and AIG SunAmerica Fund Services, Inc. (“SFS”) (formerly SunAmerica Fund Services, Inc.). Pursuant to this contribution, SAAMCo became a direct wholly owned subsidiary of the Company. This contribution increased the Company’s shareholder’s equity by $74,507,000. Pretax income from the asset management operation totaled $5,307,000 for the three months ended March 31, 2004. Assets, liabilities and shareholder’s equity at December 31, 2003 were restated to include $174,756,000, $100,249,000 and $74,507,000, respectively, of SAAMCo balances. Similarly, the results of operations and cash flows for the three months ended March 31, 2003 have been restated for the addition to pretax income of $120,000 to reflect the SAAMCo activity.
		The assets supporting the variable portion of variable annuities are carried at fair value and reported as summary total “variable annuity assets held in separate accounts” with an equivalent summary total reported for liabilities. Amounts assessed against the contract holders for mortality, administrative, other services and certain features are included in variable annuity policy fees, net of reinsurance, in the consolidated statement of income and comprehensive income. Changes in liabilities for minimum guarantees are included in guaranteed benefits, net of reinsurance, in the consolidated statement of income and comprehensive income. Separate account net investment income, net investment gains and losses and the related liability charges are offset within the same line item in the consolidated statement of income and comprehensive income.
		SAAMCo comprises the Company’s asset management segment (see Note 6) along with its wholly owned distributors, SACS and SFS. These companies 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 Company offers GMDB options that guarantee for virtually all contract holders, upon the death, the contract holder’s beneficiary will receive the greater of (1) the contract holder’s account value, or (2) a guaranteed minimum death benefit that varies by product and election by policy owner. The EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums. The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of June 30, 2004, approximately 30% of in-force contracts with GMDB (calculated based on account value) have been reinsured.
		In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary, consisting of normal recurring items, to present fairly the Company’s consolidated financial position as of March 31, 2004 and December 31, 2003 and the results of its consolidated operations and its consolidated cash flows for the three months ended March 31, 2004 and 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003, contained in the Company’s 2003 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period’s presentation.
		If elected by the contract holder at the time of contract issuance, GMAV guarantees that the account value under the contract will at least equal the amount of initial principal invested during the first 90 days, adjusted for withdrawals, at the end of a ten-year waiting period. The Company purchases put options on the S&P 500 index to partially offset this risk. GMAVs are considered to be derivatives under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and are recognized at fair value in the consolidated balance sheet through investment income in the consolidated statement of income and comprehensive income.
2.		RECENTLY ISSUED ACCOUNTING STANDARDS
		The GMWB option provides a guaranteed annual withdrawal stream, regardless of market performance, equal to premiums invested during the first ninety days after issue adjusted for subsequent withdrawals (“Eligible Premium”). These annual withdrawals are available after either a three-year waiting period or a five-year waiting period and limited to 10% of Eligible Premiums annually without reducing the amount guaranteed. Additional incentives are earned by the contract holder if no withdrawals are taken prior to the end of the waiting period. The GMWB is considered to be a derivative under FAS 133 and is recognized
		In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). This statement was effective as of January 1, 2004, and requires the Company to recognize a liability for guaranteed minimum death benefits and other living benefits related to its variable annuities and modifies certain disclosures and financial statement presentations for these products. In addition, SOP 03-1 addresses the presentation and reporting of separate accounts and the capitalization and amortization of sales inducements. The Company reported for the first quarter of 2004 a one-time cumulative accounting charge upon

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

2.		RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
		adoption of $62,589,000 ($96,291,000 pre-tax) to reflect the liability and the related impact of deferred acquisition costs (“DAC”) and reinsurance as of January 1, 2004.
		at fair value in the consolidated balance sheet through investment income in the consolidated statement of income and comprehensive income. In June 2004, variable annuity deposits with the GMWB option were immaterial.
		The Company issues variable annuities for which and the investment risk is generally borne by, the contract holder in all but the fixed-rate account options. For many of the Company’s variable annuities, the Company contractually guarantees to the contract holder either (a) total deposits made to the contract less any partial withdrawals plus a minimum return (and in minor instances, no minimum returns), or (b) the highest contract value on a specified anniversary date minus any withdrawals following the contract anniversary. These guarantees include benefits that are payable in the event of death, annuitization or at specified dates during the accumulation period. Such benefits are referred to as guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), and guaranteed minimum account value benefits (“GMAV”), respectively. The Company also issues certain variable annuity products that offer an optional earnings enhancement benefit (“EEB”) feature. The EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums.
		If elected by the contract holder, GMIB provides a minimum fixed annuity payment guarantee after a seven, nine or ten-year waiting period. As there is a waiting period to annuitize using the GMIB, as of June 30, 2004, there are no policies eligible to receive this benefit. The GMIB liability is determined each period end by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of June 30, 2004, virtually all of the Company’s GMIB exposure was effectively transferred to several large insurance companies via reinsurance agreements. However, the Company does not have reinsurance coverage on contracts to be sold after July 2004.
		The assets supporting the variable portion of variable annuities are carried at fair value and reported as summary total “variable annuity assets held in separate accounts” with an equivalent summary total reported for liabilities. Amounts assessed against the contract holders for mortality, administrative, and other services are included in variable annuity fees and changes in liabilities for minimum guarantees are included in guaranteed minimum death benefits, net of reinsurance in the consolidated statement of operations and comprehensive income. Separate account net investment income, net investment gains and losses, and the related liability changes are offset within the same line item in the consolidated statement of operations and comprehensive income.
		Details concerning the Company’s guaranteed benefit exposures as of June 30, 2004 are as follows:
		The GMDB liability is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of March 31, 2004, a portion of the GMDB risk on approximately 18% of the account value with GMDB features had been reinsured.
		In addition to GMDB, the Company currently offers to a lesser extent GMIB. The GMIB liability is determined each period end by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of March 31, 2004, virtually all of the Company’s GMIB exposure was effectively transferred to several large insurance companies via reinsurance agreements.
		The Company currently offers GMAV on its variable annuity products. The Company purchased put options on the S&P 500 index to partially offset this risk. GMAVs are considered to be derivatives under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and are recognized at fair value in the consolidated balance sheet through investment income in the consolidated statement of operations and comprehensive income.
		Details concerning the Company’s guaranteed benefits exposures as of March 31, 2004 are as follows:


				Highest Specified
	Return of Net			Anniversary Account
	Deposits			Value Minus
	Plus a			Withdrawals Post
	Minimum Return			Anniversary
	(dollars in thousands)
In the event of death (GMDB and EEB):
Account value	$	12,343,952		$	11,715,093
Net amount at risk (a)		1,118,520			1,412,543
Average attained age of contract holders		65			64
Range of guaranteed minimum return rates		0%-5	%		0	%

At annuitization (GMIB):
Account value	$	6,342,023
Net amount at risk (a)		3,997
Weighted average period remaining until expected annuitization	4.1 Years
Range of guaranteed minimum return rates		0%-6.5	%

Accumulation at specified date (GMAV):
Account value	$	1,165,910
Net amount at risk (a)		703
Weighted average period remaining until expected payout	9.2 Years
Range of guaranteed minimum return rates		0	%

(a)

Net amount at risk represents the guaranteed benefit exposure in excess of the current account value, net of reinsurance, if all contract holders died, in the case of GMDB, annuitized, in the case of GMIB, or reached the specified date, in the case of GMAV, at the same balance sheet date.

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

2.NOTES ~~RECENTLY~~TO ~~ISSUED~~CONSOLIDATED ~~ACCOUNTING~~FINANCIAL ~~STANDARDS~~STATEMENTS (Continued)

				Highest Specified
	Return of Net			Anniversary Account
	Deposits			Value Minus
	Plus a			Withdrawals Post
	Minimum Return			Anniversary
	(in thousands)
In the event of death (GMDB and EEB):
Account value	$	12,090,330		$	11,441,042
Net amount at risk (a)		1,169,208			1,504,131
Average attained age of contract holders		65			64
Range of guaranteed minimum return rates		0%-5	%		0	%
At annuitization (GMIB):
Account value	$	6,123,529
Net amount at risk (a)		704,002
Weighted average period remaining until expected annuitization	4.1 Years
Range of guaranteed minimum return rates		0%-6.5	%
Accumulation at specified date (GMAV):
Account value	$	938,147
Net amount at risk (a)		604
Range of guaranteed minimum return rates		0	%

(Unaudited)

~~(a)~~2. ~~Net~~RECENTLY ~~amount~~ISSUED atACCOUNTING ~~risk~~STANDARDS ~~represents~~(Continued) ~~the~~The ~~guaranteed~~following ~~benefit~~summarizes ~~exposure, in excess of~~ the ~~current~~reserve ~~account~~for ~~value,~~guaranteed ~~if all contract holders died~~benefits, innet ~~the case~~ of ~~GMDB~~reinsurance, ~~annuitized,~~on invariable ~~the~~contracts ~~case~~reflected ~~of GMIB, or reached the specified date,~~ in the ~~case~~general ~~of GMAV, at the same balance sheet date.~~account:

The following summarizes the liability for guaranteed benefits on variable contracts reflected in the general account:


	(in thousands)

Balance at January 1, 2004 (b)	$	65,423
Guaranteed benefits incurred, net of reinsurance		30,926
Guaranteed benefits paid, net of reinsurance		(22,459	)

Balance at June 30, 2004	$	73,890

	(in thousands)
Balance at January 1, 2004 (b)	$	65,423
Guaranteed benefits incurred		17,774
Guaranteed benefits paid		(11,074	)
Balance at March 31, 2004	$	72,123

(b)Includes amounts from the one-time cumulative accounting change resulting from the adoption of SOP 03-1.

~~(b)~~The ~~Includes~~following ~~amounts~~assumptions ~~from~~and ~~the~~methodology ~~one-time~~were ~~cumulative~~used ~~accounting~~to ~~change~~determine ~~resulting~~the ~~from~~reserve ~~the~~for ~~adoption~~guaranteed ofbenefits ~~SOP~~at ~~03-1.~~June 30, 2004:

	•		Data used was 5,000 stochastically generated investment performance scenarios.
	•		Mean investment performance assumption was 10%.
	•		Volatility assumption was 16%.
	•		Mortality was assumed to be 64 percent of the 75-80 ALB table.
	•		Lapse rates vary by contract type and duration and range from 1% to 30%.
	•		The discount rate was approximately 8%.

		The Company currently offers enhanced crediting rates or bonus payments to contract holders on certain of its products. These sales inducements are deferred and amortized over the life of the policy using the same methodology and assumptions used to amortize DAC. The Company previously deferred these sales inducements as part of DAC and reported the amortization of such amounts as part of DAC amortization. Upon implementation of SOP 03-1, the Company reclassified sales inducements of $160.0 million from DAC to other deferred expenses, which is reported on the consolidated balance sheet. For the six months ended June 30, 2004, sales inducements of $20.7 million was deferred. Amortization of the deferred sales inducements is reported as part of amortization of deferred acquisition costs and other deferred expenses on the consolidated statement of income and comprehensive income. For the six months ended June 30, 2004, amortization of sales inducements was $4.5 million. Prior period consolidated balance sheet and consolidated statement of income and comprehensive income presentation has been reclassified to conform to the new presentation.

3.		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. In addition, the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at June 30, 2004 is $480,490,000. In August 2004, these commitments decreased by $287,890,000 due to early redemption. The remaining commitments have contractual maturity dates as follows: $21,930,000 in the remainder of 2004 and $170,670,000 in 2005. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $61,521,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The Internal Revenue Service has completed its examinations into the transactions

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

2. RECENTLY ISSUED ACCOUNTING STANDARDS (Continued) The following assumptions and methodology were used to determine the GMDB liability at March 31, 2004:

3.		CONTINGENT LIABILITIES (Continued)

		underlying these commitments, including the Company’s role in the transactions. The examination did not result in a material loss to the Company.

		At June 30, 2004, the Company has commitments to purchase a total of approximately $28,000,000 of asset backed securities in the ordinary course of business. The expiration dates of these commitments are as follows: $19,000,000 in 2004 and $9,000,000 in 2006.

		Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and regulatory and other matters are not considered material in relation to the financial position, results of operations or cash flows of the Company.

		On April 5, 2004, a purported class action captioned Nitika Mehta, as Trustee of the N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The lawsuit alleges certain improprieties in conjunction with alleged market timing activities. The probability of any particular outcome cannot be reasonably estimated at this time.

4.		RELATED-PARTY MATTERS

		Subordinated notes (including accrued interest of $538,000) payable to affiliates totaled $41,498,000 at interest rates ranging from 4.00% to 9.5% at June 30, 2004, and require principal payments of $3,000,000 in 2004, $7,560,000 in 2005 and $30,400,000 in 2008.

		On October 31, 2003, the Company entered into an existing credit agreement under which the Company agreed to make loans to AIG in an aggregate amount of $60,000,000. This commitment expires on October 30, 2004. There was no outstanding balance under this agreement at June 30, 2004.

		On February 1, 2004, SAAMCo entered into an administrative services agreement with its affiliate, First SunAmerica Life Insurance Company (“FSA”), whereby SAAMCo will pay to FSA a fee based on a percentage of all assets invested through FSA’s variable annuity products in exchange for services performed. SAAMCo is the investment advisor for certain trusts that serve as investment options for FSA’s variable annuity products. Amounts paid or accrued to FSA under this agreement totaled $0.9 million in 2004 and are included in asset management fees in the statement of income and comprehensive income. A fee of $0.8 million was paid under a different agreement in 2003.

		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. This guarantee is unconditional and irrevocable, and the Company’s policyholders have the right to enforce the guarantee directly against American Home.

		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

• Data used was 5,000 stochastically generated investment performance scenarios. • Mean investment performance assumption was 10%. • Volatility assumption was 16%. • Mortality was assumed to be 64 percent of the 75-80 ALB table. • Lapse rates vary by contract type and duration and range from 1% to 30%. • The discount rate was approximately 8%.

		The Company currently offers enhanced crediting rates or bonus payments to contract-holders on certain of its products. These sales inducements are deferred and amortized over the life of the policy using the same methodology and assumptions used to amortize DAC. The Company previously deferred these sales inducements as part of DAC and reported the amortization of such amounts as part of DAC amortization. Upon implementation of SOP 03-1, the Company reclassified sales inducements of $165.1 million from DAC to deferred sales inducements, which are reported in other assets on the consolidated balance sheet. For the three months ended March 31, 2004, sales inducements of $10.6 million were deferred. Amortization of the deferred sales inducements is reported as part of amortization of deferred acquisition costs on the consolidated statement of operations and comprehensive income. For the three months ended March 31, 2004, amortization of sales inducements was $5.5 million. Prior period consolidated balance sheet and consolidated statement of operations and comprehensive income presentation has been reclassified to conform to the new presentation.
3.		SUBORDINATED NOTES PAYABLE TO AFFILIATES
		Subordinated notes (including accrued interest of $560,000) payable to affiliates totaled $41,520,000 at interest rates ranging from 4.25% to 9.5% at March 31, 2004, and require principal payments of $3,000,000 in 2004 and $37,960,000 in 2005.
4.		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 March 31, 2004 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 the remainder of 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 March 31, 2004, the Company has a commitment to purchase approximately $25,000,000 of asset backed securities in the ordinary course of business. The expiration dates of these commitments are as follows: $16,000,000 in 2004 and $9,000,000 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.

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

4. CONTINGENT LIABILITIES (Continued) On April 5, 2004, a purported class action captioned NIKITA Mehta, as Trustee of the N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The lawsuit alleges certain improprieties in conjunction with alleged market timing activities. The probability of any particular outcome cannot be reasonably estimated at this time. 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. This guarantee is unconditional and irrevocable, and the Company’s policyholders have the right to enforce the guarantee directly against American Home. 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. 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. 5. RELATED-PARTY MATTERS On October 31, 2003, the Company entered into an existing credit agreement under which the Company agreed to make loans to AIG in an aggregate amount of $60,000,000. This commitment expires on October 30, 2004. There was no outstanding balance under this agreement at March 31, 2004. 6. SEGMENT INFORMATION As of January 1, 2004, the Company conducted its business through two business segments, annuity operations and asset management operations. Prior to January 1, 2004, the Company conducted its business through one segment: annuity operations. Annuity operations consists of the sale and administration of deposit-type insurance contracts, including fixed and variable annuities, universal life insurance contracts and GICs. Asset management operations, which includes the distribution and management of mutual funds, is conducted by SAAMCo and its subsidiary and distributor, SACS. Following is selected information pertaining to the Company’s business segments.

4.		RELATED-PARTY MATTERS (Continued)

		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 prepared on the basis of U.S. generally accepted accounting principles, 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 files annual reports on Form 10-K and quarterly reports on Form 10-Q, which are available from the Securities and Exchange Commission.

5.		SEGMENT INFORMATION

		As of January 1, 2004, the Company began conducting its business through two business segments, annuity operations and asset management operations. Prior to January 1, 2004, the Company conducted its business through one segment: annuity operations. Annuity operations consists of the sale and administration of deposit-type insurance contracts, including fixed and variable annuities, universal life insurance contracts and GICs. Asset management operations, which includes the distribution and management of mutual funds, is conducted by SAAMCo and its subsidiary and distributor, SACS, and its subsidiary and servicing administrator, SFS. Following is selected information pertaining to the Company’s business segments.

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

65. SEGMENT INFORMATION (Continued)

				Asset
	Annuity			Management
				Management
	Operations			Operations		Total
	Annuity Operations			Operations		Total
	(in thousands)
THREE MONTHS ENDED JUNE 30, 2004				(in thousands)
THREE MONTHS ENDED MARCH 31, 2004:
REVENUES:
REVENUES:
Fee income:
Fee income:
Variable annuity policy fees, net of reinsurance	$	90,350		$	—	$	90,350
Variable annuity fees, net of reinsurance	$	88,210		$	2,794	$	91,004
Asset management fees		—			22,619		22,619
Asset management fees		—			18,108		18,108
Universal life insurance fees, net of reinsurance		8,515			—		8,515
Universal life insurance fees, net of reinsurance		9,192			—		9,192
Surrender charges		6,492			—		6,492
Surrender charges		6,999			—		6,999
Other fees		—			3,571		3,571
Other fees		—			3,621		3,621
Total fee income		105,357			26,190		131,547
Total fee income		104,401			24,523		128,924
Investment income		97,783			138		97,921
Investment income		86,993			177		87,170
Net realized investment gains		1,667			—		1,667
Net realized investment losses		(11,393	)		—		(11,393	)
Total revenues		204,807			26,328		231,135
Total revenues		180,001			24,700		204,701
BENEFITS AND EXPENSES:
BENEFITS AND EXPENSES:
Interest expense		55,474			538		56,012
Interest expense		55,052			560		55,612
General and administrative expenses		25,273			10,136		35,409
General and administrative expenses		27,328			8,896		36,224
Amortization of deferred acquisition costs and other deferred expenses		45,329			7,968		53,297
Amortization of deferred acquisition costs		24,001			7,441		31,442
Annual commissions		15,117			—		15,117
Annual commissions		15,014			—		15,014
Claims on universal life contracts, net of reinsurance recoveries		5,099			—		5,099
Claims on universal life contracts, net of reinsurance recoveries		4,823			—		4,823
Guaranteed benefits, net of reinsurance		13,152			—		13,152
Guaranteed minimum death benefits, net of reinsurance recoveries		17,774			—		17,774
Total benefits and expenses		159,444			18,642		178,086
Total benefits and expenses		143,992			16,897		160,889
Pretax income before cumulative effect of accounting change	$	45,363		$	7,686	$	53,049
Pretax income before cumulative effect of accounting change	$	36,009		$	7,803	$	43,812
Total assets	$	29,740,719		$	185,487	$	29,926,206
Total assets	$	28,902,900		$	178,728	$	29,081,628
Expenditures for long-lived assets	$	—		$	37	$	—
Expenditures for long-lived assets	$	—		$	45	$	45

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

65. SEGMENT INFORMATION (Continued)

Asset

Annuity

Management

Operations

Total

Annuity Operations

Operations

Total

(in thousands)

THREE MONTHS ENDED JUNE 30, 2003

(in thousands)

THREE MONTHS ENDED MARCH 31, 2003:

REVENUES:

Fee income:

Variable annuity fees, net of reinsurance

62,034

2,372

64,406

Variable annuity policy fees, net of reinsurance

66,945

—

66,945

Asset management fees

—

1015,~~921~~496

Universal life insurance fees, net of reinsurance

89,~~970~~378

—

89,~~970~~378

Surrender charges

76,~~570~~784

—

76,~~570~~784

Other fees

—

3,~~337~~515

Total fee income

7883,~~574~~107

1619,~~630~~011

95102,~~204~~118

Investment income

96100,~~785~~040

~~123~~2,115

96102,~~908~~155

Net realized investment losses

(35,~~272~~358

)

—

(35,~~272~~358

)

Total revenues

~~172~~177,~~087~~789

1621,~~753~~126

~~188~~198,~~840~~915

BENEFITS AND EXPENSES:

Interest expense

5960,~~883~~096

~~842~~660

60,~~725~~756

General and administrative expenses

2119,~~259~~030

89,~~728~~315

2928,~~987~~345

Amortization of deferred acquisition costs

38,821

5,141

43,962

Amortization of deferred acquisition costs and other deferred expenses

40,256

5,311

45,567

Annual commissions

1415,~~178~~995

—

1415,~~178~~995

Claims on universal life contracts, net of reinsurance recoveries

5,~~513~~720

—

5,~~513~~720

Guaranteed minimum death benefits, net of reinsurance recoveries

21,976

—

21,976

Guaranteed benefits, net of reinsurance

14,483

—

14,483

Total benefits and expenses

~~161~~155,~~630~~580

1415,~~711~~286

~~176~~170,~~341~~866

Pretax income before cumulative effect of accounting change

1022,~~457~~209

25,~~042~~840

1228,~~499~~049

Total assets

2325,~~738~~456,~~608~~775

~~173~~222,~~640~~207

2325,~~912~~678,~~248~~982

Expenditures for long-lived assets

—

~~2,128~~565

~~2,128~~—

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~MANAGEMENT’S~~NOTES ~~DISCUSSION~~TO ~~AND~~CONSOLIDATED ~~ANALYSIS OF~~ FINANCIAL ~~CONDITION~~STATEMENTS ~~AND RESULTS OF OPERATIONS~~(Continued) (Unaudited)

~~Management’s~~5. ~~discussion~~SEGMENT ~~and~~INFORMATION ~~analysis of financial condition and results of operations of AIG SunAmerica Life Assurance Company~~ (~~formerly Anchor National Life Insurance Company~~Continued) (the “Company”) for the three months ended March 31, 2004 (“2004”) and March 31, 2003 (“2003”) follows. Certain prior period amounts have been reclassified to conform to the current period’s presentation.


				Asset
				Management
	Annuity Operations			Operations		Total
SIX MONTHS ENDED JUNE 30, 2004				(in thousands)

REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	178,560		$	—	$	178,560
Asset management fees		—			43,521		43,521
Universal life insurance fees, net of reinsurance		17,707			—		17,707
Surrender charges		13,491			—		13,491
Other fees		—			7,192		7,192

Total fee income		209,758			50,713		260,471

Investment income		184,776			315		185,091
Net realized investment losses		(9,726	)		—		(9,726	)

Total revenues		384,808			51,028		435,836

BENEFITS AND EXPENSES:
Interest expense		110,526			1,098		111,624
General and administrative expenses		52,601			19,032		71,633
Amortization of deferred acquisition costs and other deferred expenses		69,330			15,409		84,739
Annual commissions		30,131			—		30,131
Claims on universal life contracts, net of reinsurance recoveries		9,922			—		9,922
Guaranteed benefits, net of reinsurance		30,926			—		30,926

Total benefits and expenses		303,436			35,539		338,975

Pretax income before cumulative effect of accounting change	$	81,372		$	15,489	$	96,861

Total assets	$	29,740,719		$	185,487	$	29,926,206

Expenditures for long-lived assets	$	—		$	83	$	—

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

SEGMENT INFORMATION (Continued)


				Asset
				Management
	Annuity Operations			Operations		Total
SIX MONTHS ENDED JUNE 30, 2003				(in thousands)

REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	128,979		$	—	$	128,979
Asset management fees		—			28,789		28,789
Universal life insurance fees, net of reinsurance		18,348			—		18,348
Surrender charges		14,354			—		14,354
Other fees		—			6,852		6,852

Total fee income		161,681			35,641		197,322

Investment income		196,825			2,238		199,063
Net realized investment losses		(8,630	)		—		(8,630	)

Total revenues		349,876			37,879		387,755

BENEFITS AND EXPENSES:
Interest expense		119,979			1,502		121,481
General and administrative expenses		40,289			18,043		58,332
Amortization of deferred acquisition costs and other deferred expenses		79,077			10,452		89,529
Annual commissions		30,173			—		30,173
Claims on universal life contracts, net of reinsurance recoveries		11,233			—		11,233
Guaranteed benefits, net of reinsurance		36,459			—		36,459

Total benefits and expenses		317,210			29,997		347,207

Pretax income before cumulative effect of accounting change	$	32,666		$	7,882	$	40,548

Total assets	$	25,456,775		$	222,207	$	25,678,982

Expenditures for long-lived assets	$	—		$	2,693	$	—

AIG SUNAMERICA LIFE ASSURANCE COMPANY

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 (formerly Anchor National Life Insurance Company) (the “Company”) for the three months and six months ended June 30, 2004 and June 30, 2003 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, amortization of deferred acquisition costs and other deferred expenses and valuation of ~~reserves~~the reserve for guaranteed benefits. 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~~ how management exercises that judgment follows.

VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on debt and equity securities available for sale amounted to $3067.98 million at June ~~March 31~~30, 2004. In determining if and when a decline in fair value below ~~amortized~~ amortized cost is other than temporary, the Company evaluates at each reporting ~~period~~ period the market conditions, offering prices, trends of earnings, price multiples, and other key measures for 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 the Company’s portfolio with a carrying value of approximately $1972.163 ~~billion~~million at ~~March~~June 3130, 2004 do not have readily determinable market prices. For these securities, the Company estimates the fair value with internally prepared valuations (including those based on estimates of future profitability). Otherwise, the Company uses 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. The Company’s ability to liquidate its positions in these securities will be impacted to a significant degree by the lack of an actively traded market, and the Company may not be able ~~to dispose of~~

1618

to dispose of these investments in a timely manner. Although the Company believes its estimates reasonably reflect the fair value of those securities, the key assumptions about the risk-free interest rates, risk premiums, performance of underlying collateral, if any, and other factors may not reflect those of an active market.

AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES: Approximately ~~The~~82% of the amortization of deferred acquisition costs (“DAC”) and other deferred expenses was attributed to policy acquisition costs deferred by the annuity operations and 18% was attributed to the distribution costs deferred by the asset management operations. For the annuity operations, the Company amortizes deferred acquisition costs (“DAC”) based on a percentage of expected gross profits (“EGPs”) over the life of the underlying policies, ~~and for mutual funds,~~ over the estimated lives of the fund deposits on a straight -line basis. EGPs are computed based on assumptions related to the underlying policies written, including their anticipated duration, the growth rate of the separate ~~account~~ account assets (with respect to variable annuities) or general account assets (with respect to fixed annuities, fixed options of variable annuities and ~~universal~~ 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 amortization of DAC ~~amortization~~and other deferred expenses (a “DAC unlocking”) when estimates of current or future gross profits to be realized from its annuity policies are revised. Approximately 95% of the ~~Company’s~~ DAC balance attributed to annuity operations at ~~March 31~~June 30, 2004 related to variable annuity products and 5% related to fixed annuity and universal life products.

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

The assumption 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.

For the asset management operations, the Company defers distribution costs that are directly related to the sale of mutual funds which have a 12b-1 distribution plan and/or a contingent deferred sales charge feature, (collectively, “Distribution Fee Revenue”). These costs are amortized on a straight-line basis, adjusted for redemptions, over a period ranging from one year to eight years depending on share class. The carrying value of the deferred asset is subject to continuous review based on projected Distribution Fee Revenue. Amortization of deferred distribution costs is increased if at any reporting period the value of the deferred amount exceeds the projected Distribution Fee Revenue. The projected Distribution Fee Revenue is sensitive to estimated future withdrawal rates and the rates of market return. Management uses historical activity to estimate future withdrawal rates and average annual performance of the equity markets to estimate the rates of market return.

RESERVE FOR GUARANTEED BENEFITS: Pursuant to the adoption of Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”) on January 1, 2004, the Company is required to recognize a liability for guaranteed minimum death benefits (“GMDB”) and other guaranteed benefits. In calculating the projected liability, five thousand stochastically generated investment performance scenarios were developed with a mean investment performance of 10%. Additional assumptions are made for mortality, lapse rates of return and the volatility of equity markets.

~~BUSINESS SEGMENTS~~19

Effective January 1, 2004, SunAmerica Life Insurance Company (the “Parent”) contributed to the Company 100% of the outstanding capital stock of its then wholly owned subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCo”), which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. (“SACS”) and AIG SunAmerica Fund Services, Inc. (“SFS”). This capital contribution increased the Company’s shareholder’s equity by approximately $74.5 million (see Note 1 of Notes to Consolidated Financial Statements). Effective January 1, 2004, the Company’s earnings includes the asset management operations of SAAMCo, SACS and SFS. Prior year results have been restated to account for this contribution.

The Company has two business segments: annuity operations and asset management operations. The annuity operations consists of the sale and administration of deposit-type insurance contracts, such as variable and fixed annuities and universal life insurance contracts. The Company focuses primarily on the marketing of variable annuity products. The variable annuity products offer investors a broad spectrum of fund alternatives, with a choice

of investment managers, as well as guaranteed fixed-rate account options. The Company earns fee income on investments in the variable account options and net investment spread on the fixed-rate account options.

The asset management operations are conducted by the Company’s registered investment advisor subsidiary, SAAMCo, and its wholly owned distributors, SACS and SFS. These companies 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. Premiums from variable annuities sold by the Company are held in trusts that are owned by the Company, with the assets directly supporting policyholder obligations. SAAMCo is the investment advisor for all of the trusts as well as trusts owned by an affiliate, First SunAmerica Life Insurance Company.

RESULTS OF OPERATIONS

NET ~~LOSS~~INCOME totaled $3137.09 million in the second quarter of 2004, compared with to$20.6 million in the second quarter of 2003. For the six months ended June 30, 2004, net income ofamounted to $~~10.~~6 .9 million, compared to $31.2 million in 2003.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption of SOP 03-1 on January 1, 2004. The Company recorded a loss of $62.6 million, net of tax, which is recognized in the consolidated statement of ~~operations~~income and comprehensive income as a cumulative effect of accounting change for the six ~~quarter~~months ended ~~March~~June 3130, 2004.

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $4353.80 million in the second quarter of 2004, compared with $1228.50 million in the second quarter of 2003. ~~The~~For ~~increase~~the six months, pretax income before cumulative effect of accounting change totaled $96.9 million in 2004 , compared to $40.5 million in 2003. The increase in both the second quarter and the six months of 2004 was primarily due to higher variable annuity and asset management fee income ~~and~~partially ~~lower~~offset ~~amortization~~by ofhigher ~~deferred~~general ~~acquisition~~and ~~costs~~administrative expenses.

INCOME TAX EXPENSE totaled $1215.2 million in the second quarter of 2004, $7.4 million ~~compared~~in tothe ~~income~~second quarter of 2003, $27.4 million of tax ~~benefit~~expense in the six months of 2004 and $1.9.3 million in the six months of 2003, representing effective tax rates of 2829%, ~~and 15~~27%, in28% ~~2004~~ and ~~2003~~ 2.3%, respectively. The increase in 2004 is due primarily to higher pretax income in 2004 without corresponding increase in permanent tax differences.

AsBUSINESS ~~discussed above and in Note 1 of Notes of Consolidated Financial~~SEGMENTS ~~Statements, effective January 1, 2004, the Company has two business segments,~~ ~~annuity operations and asset management operations.~~

Effective January 1, 2004, SunAmerica Life Insurance Company (the “Parent”) contributed to the Company 100% of the outstanding capital stock of its then wholly owned subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCo”), which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. (“SACS”) and AIG SunAmerica Fund Services, Inc. (“SFS”). This contribution increased the Company’s shareholder’s equity by approximately $99.1 million (see Note 1 of Notes to Consolidated Financial Statements). Effective January 1, 2004, the Company’s earnings include the asset management operations of SAAMCo, SACS and SFS. Prior year results have been restated to account for this contribution as if it had occurred at the beginning of the earliest period presented.

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

The asset management operations are conducted by the Company’s registered investment advisor subsidiary, SAAMCo, and its wholly owned distributor, SACS, and its wholly owned servicing administrator, SFS. These companies 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. SAAMCo is the investment advisor for certain trusts that serve as investment options for the Company’s variable annuity products.

ANNUITY OPERATIONS

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $3645.04 million in the second quarter of 2004, compared with $1022.52 million in the second quarter of 2003. ~~The~~For ~~increase~~the insix ~~2004~~months, pretax income before cumulative ~~compared~~effect toof ~~2003~~accounting ~~was~~change ~~primarily~~totaled ~~due~~$81.4 million in 2004, compared to ~~higher~~$32.7 million ~~variable~~in ~~fee~~2003. ~~income~~The ~~and~~increase ~~lower amortization~~in of2004 ~~deferred~~compared ~~acquisition~~to ~~costs~~2003 ~~partially~~was ~~offset~~primarily bydue to higher ~~net realized~~variable ~~investment~~annuity ~~losses~~policy fee 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 investments 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. 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 an affiliate to administer the program.

18 An analysis of net investment spread and a reconciliation to pretax income before cumulative effect of accounting change is presented in the following table:


	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
				(in thousands)

Investment income	$	97,783		$	100,040		$	184,776		$	196,825
Interest credited to fixed annuity contracts		(35,571	)		(39,328	)		(70,807	)		(78,093	)
Interest credited to universal life insurance contracts		(18,524	)		(18,737	)		(37,005	)		(37,839	)
Interest credited to guaranteed investment contracts		(1,379	)		(2,031	)		(2,714	)		(4,047	)

Net investment spread		42,309			39,944			74,250			76,846

Net realized investment gain (losses)		1,667			(5,358	)		(9,726	)		(8,630	)
Fee income, net of reinsurance		105,357			83,107			209,758			161,681
General and administrative expenses		(25,273	)		(19,030	)		(52,601	)		(40,289	)
Amortization of deferred acquisition costs and other deferred expenses		(45,329	)		(40,256	)		(69,330	)		(79,077	)
Annual commissions		(15,117	)		(15,995	)		(30,131	)		(30,173	)
Claims on UL contracts, net of reinsurance recoveries		(5,099	)		(5,720	)		(9,922	)		(11,233	)
Guaranteed benefits, net of reinsurance		(13,152	)		(14,483	)		(30,926	)		(36,459	)

Pretax income before cumulative effect of accounting change	$	45,363		$	22,209		$	81,372		$	32,666

AnNet ~~analysis~~investment spread totaled $42.3 million in the second quarter of 2004, compared to $39.9 million in the second quarter of 2003. These amounts equal 2.70% on average invested assets (computed on a daily basis) of $6.26 billion in the second quarter of 2004 and 2.37% on average invested assets of $6.75 billion in the second quarter of 2003. For the six months, net investment spread totaled $74.3 million in 2004 and a$76.8 million ~~reconciliation~~in to2003, ~~pretax~~representing 2.37% ~~income~~of isaverage invested assets of $6.27 billion in 2004 and 2.28% of average ~~presented~~invested assets of $6.74 billion in ~~the~~2003 ~~following~~on ~~table:~~an annualized basis.

	Three months ended March 31,
	2004			2003
	(in thousands)
Investment income	$	86,993		$	96,785
Interest credited to fixed annuity contracts		(35,236	)		(38,765	)
Interest credited to universal life insurance contracts		(18,481	)		(19,102	)
Interest credited to guaranteed investment contracts		(1,335	)		(2,016	)
Net investment spread		31,941			36,902
Net realized investment losses		(11,393	)		(3,272	)
Fee income, net of reinsurance		104,401			78,574
General and administrative expenses, net of deferrals		(27,328	)		(21,259	)
Amortization of DAC		(24,001	)		(38,821	)
Annual commissions		(15,014	)		(14,178	)
Claims on UL contracts, net of reinsurance recoveries		(4,823	)		(5,513	)
Guaranteed minimum death benefits, net of reinsurance recoveries		(17,774	)		(21,976	)
Pretax income	$	36,009		$	10,457

Net investment spread totaled $31.9 million in 2004 and $36.9 million in 2003. These amounts equal 2.03% on average invested assets (computed on a daily basis) of $6.28 billion in 2004 and 2.20% on average invested assets of $6.72 billion in 2003. The decrease in net investment spread in 2004 from 2003 resulted from a lower prevailing interest rate environment.

The components of net investment spread were as follows:

	Three months ended March 31,
	Three months ended						Six months ended
	2004			2003
	June 30,						June 30,
	(in thousands)
	2004			2003			2004			2003
Net investment spread	$	31,941		$	36,902
				(in thousands)
Average invested assets		6,279,002			6,724,297
Net investment spread	$	42,309		$	39,944		$	74,250		$	76,846
Average interest-bearing liabilities		(6,006,388	)		(6,455,839	)
Average invested assets		6,259,041			6,745,831			6,269,022			6,735,124
Yield on average invested assets		5.54	%		5.76	%
Average interest-bearing liabilities		5,987,837			6,500,720			5,997,113			6,478,404
Rate paid on average interest bearing liabilities		3.67			3.71
Yield on average invested assets		6.25	%		5.93	%		5.89	%		5.84	%
Difference between yield and interest rate paid		1.87	%		2.05	%
Rate paid on average interest-bearing liabilities		3.71			3.70			3.69			3.70
Net investment spread as a percentage of average invested assets		2.03	%		2.20	%
Difference between yield and interest rate paid		2.54	%		2.23	%		2.20	%		2.14	%
Net investment spread as a percentage of average invested assets		2.70	%		2.37	%		2.37	%		2.28	%

The decline in average invested assets ~~principally~~ resulted primarily from net exchanges from fixed accounts into the separate accounts of variable annuity contracts, partially offset by sales of the fixed account options of the Company’s variable annuity products (“Fixed Annuity Deposits”). ~~Sales~~Fixed ~~of fixed~~Annuity ~~annuities~~Deposits and renewal deposits on its universal life product totaled $~~383~~425.84 million in the second quarter of 2004, $386.7 million in the second quarter of 2003, $809.2 million in the six months of 2004 and $~~439~~826.4 2 million in the six months of 2003, and are largely deposits for the fixed accounts of variable annuities. On an annualized basis, these deposits represent 2630%, ~~and 31~~29%, 28% and 28%, respectively, of the related reserve balances at the beginning of the respective periods.

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 $~~272~~271.62 million in the second quarter of 2004, compared with $~~268~~245.51 million in the second quarter of 2003. For the six months, average invested assets exceeded average interest-bearing liabilities by $271.9 million in 2004, compared with $256.7 million in 2003. The difference between the Company’s yield on average invested assets and the rate paid on average interest-bearing liabilities was 2.54% in the second quarter of 12004, 2.8723% in the second quarter of 2003, 2.20% in the six months of 2004 and 2.0514% in the six months of 2003.

19 Investment income (and the related yields on average invested assets) totaled $97.8 million (6.25%) in the second quarter of 2004, $100.0 million (5.93%) in the second quarter of 2003, $184.8 million (5.89%) in the six months of 2004 and $196.8 million (5.84%) in the six months of 2003. The increase in the investment yield primarily reflects $3.0 million in income from the mark to market of the GMAV put options and embedded derivatives in the second quarter of 2004, compared to a $2.8 million loss in the second quarter of 2003. Excluding the impact of the put options, investment income would have been $94.7 (6.06%) and $102.8 (6.10%) in the second quarters of 2004 and 2003, respectively. For the six months, the increase in the investment yield primarily reflects $1.2 million loss from the mark to market of the GMAV put options and embedded derivatives in 2004, compared to $4.5 million in 2003. Excluding the impact of the put options, investment income would have been $185.9 (5.93%) and $201.3 (5.98%) in the six months of 2004 and 2003, respectively. Expenses incurred to manage the investment portfolio amounted to $0.6 million in the second quarter of 2004, $0.6 million in the second quarter of 2003, $1.2 million in the six months of 2004 and $1.1 million in the six months of 2003. These expenses are included as a reduction of investment income in the consolidated statement of income and comprehensive income.

~~Investment~~Interest ~~income~~expense ~~(and~~totaled ~~the~~$55.5 million ~~related~~in ~~yields~~the onsecond ~~average~~quarter ~~invested~~of ~~assets) totaled~~2004 and $8760.01 million ~~(5.54%)~~in ~~and~~the ~~$96.8 million~~second ~~(5.76%)~~quarter inof 2003. ~~The~~For ~~decrease in~~ the ~~investment~~six ~~yield~~months, ~~primarily reflects an overall lower prevailing~~ interest ~~rate~~expense ~~environment~~aggregated as$110.5 million ~~well~~in as2004, compared with $4120.20 million ~~loss~~in 2003. ~~from~~The ~~the~~average ~~mark~~rate topaid ~~market~~on ofall ~~the GMAV~~interest-bearing ~~put~~liabilities ~~options~~was ~~and~~3.71% ~~embedded~~in the ~~derivatives~~second inquarter of 2004, compared towith $13.~~7 million~~70% in the second quarter of 2003. For ~~Expenses~~the ~~incurred~~six tomonths, ~~manage~~ the ~~investment~~average ~~portfolio~~rate ~~amounted~~paid toon ~~$0.7~~all interest-bearing liabilities ~~million~~was 3.69% in 2004 and $03.~~6 million~~70% in 2003. ~~These~~Interest-bearing ~~expenses~~liabilities ~~are~~averaged $5.99 billion ~~included~~during asthe asecond quarter of 2004, $6.50 billion during the ~~reduction~~second quarter of ~~investment~~2003, ~~income~~$6.00 billion induring the ~~consolidated~~six ~~statement~~months of ~~operations~~2004 and $6.48 ~~comprehensive~~billion ~~income~~during the six months of 2003.

~~Interest~~NET ~~expense~~REALIZED INVESTMENT GAINS (LOSSES) totaled $~~55.~~1.7 million of gains in the second quarter of 2004, ~~and~~compared with net realized investment losses of $595.94 million in the second quarter of 2003. and include impairment writedowns of ~~The~~$1.5 million ~~average~~and ~~rate~~$10.4 million, ~~paid~~respectively. onFor ~~all~~the ~~interest-bearing~~six ~~liabilities~~months, ~~was~~net 3realized investment losses totaled $9.~~67%~~7 million in 2004, compared with 3$8.~~71%~~6 million in 2003. ~~Interest-bearing~~and ~~liabilities~~include ~~averaged~~impairment writedowns of $2.6 million and $15.015 million, ~~billion~~respectively. ~~during~~Thus, net realized gains from sales and redemptions of investments totaled $3.2 million in the second quarter of 2004 and $65.460 ~~billion~~million in ~~during~~the second quarter of 2003. ~~Despite~~For athe ~~lower~~six ~~interest rate environment~~months, ~~interest~~net ~~rates~~realized ~~did~~losses ~~not~~from sales ~~decline~~and ~~significantly~~redemptions ~~because~~of ~~many contracts~~investments ~~were~~totaled ~~already~~$7.1 million atin or2004, ~~near~~compared ~~their~~to net ~~contractual~~realized ~~minimum~~gains ~~rates~~of $6.9 million in 2003.

~~NET~~The ~~REALIZED~~Company ~~INVESTMENT~~sold ~~LOSSES~~or ~~totaled~~redeemed invested assets, principally bonds and notes, aggregating $11335.43 million in ~~2004~~the ~~and~~second quarter of 2004, $3517.3 6 million in the second quarter of 2003, ~~and~~$1.18 billion ~~include~~in ~~impairment~~the ~~writedowns~~six months of 2004 and $1.~~1 million~~35 billion ~~and~~in $5the six months of 2003.2 Sales of investments result from the active ~~million,~~management ~~respectively~~of the Company’s investment portfolio. ~~Thus~~Because redemptions of investments are generally involuntary and sales of investments are made in both rising and falling interest rate environments, net ~~realized~~gains and losses from sales and redemptions of investments ~~totaled~~fluctuate ~~$10~~from period to period, and represent 0.~~3 million~~20%, 0.30%, 0.23% and 0.21% of average invested assets in the second quarter of 2004, ~~and~~the ~~net~~second ~~realized~~quarter ~~gains~~of ~~from~~2003, ~~sales~~the six months of 2004 and the six months ~~redemptions~~of 2003, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments ~~totaled~~from $1sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued.~~9 million~~ inThe ~~2003~~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.

~~The~~Impairment ~~Company~~writedowns ~~sold~~include ~~or redeemed invested assets~~$1.5 million, ~~principally bonds and notes, aggregating~~ $~~840~~10.4 million, ~~in 2004~~ $2.6 million and $~~837~~15.35 million ~~in 2003. Sales~~ of ~~investments~~ ~~result~~provisions ~~from~~principally ~~the~~applied ~~active~~to ~~management~~bonds ofin the ~~Company’s investment~~second ~~portfolio.~~quarter ~~Because redemptions~~ of ~~investments~~2004, ~~are~~the ~~generally~~second ~~involuntary~~quarter ~~and sales~~ of ~~investments~~2003, ~~are~~the ~~made~~six inmonths ~~both~~of ~~rising~~2004 and ~~falling~~the ~~interest rate~~six ~~environments,~~months ~~net~~of ~~gains~~2003, ~~and~~respectively. ~~losses~~On ~~from~~an ~~sales~~annualized ~~and~~basis, ~~redemptions~~impairment ~~of investments~~writedowns ~~fluctuate~~represent ~~from~~0.09%, ~~period to period~~0.62%, ~~and represent~~ 0.6608% and 0.1046% of average invested assets ~~for~~in ~~2004~~the respective ~~and 2003, respectively~~periods. ~~Active~~For ~~portfolio management involves~~ the ~~ongoing~~twenty ~~evaluation~~quarters ofended ~~asset~~June 30, ~~sectors~~2004, ~~individual securities within~~impairment ~~the~~writedowns ~~investment~~as ~~portfolio~~an ~~and~~annualized ~~the~~percentage ~~reallocation~~ of ~~investments~~average ~~from~~invested ~~sectors~~assets ~~that~~have ranged ~~are~~from ~~perceived~~0.07% to be1.95% ~~relatively~~and ~~overvalued~~have toaveraged ~~sectors~~0.67%. ~~that~~Such writedowns are ~~perceived~~based ~~to be~~upon ~~relatively~~estimates ~~undervalued.~~of ~~The~~the ~~intent~~fair value of ~~the~~invested ~~Company’s~~assets ~~active~~and ~~portfolio~~recorded when declines in ~~management~~the isvalue toof ~~maximize~~such ~~total~~assets ~~returns~~are onconsidered ~~the~~to ~~investment~~be ~~portfolio,~~other ~~taking into~~than ~~account~~temporary. ~~credit,~~Actual realization ~~option,~~will ~~liquidity~~be ~~and~~dependent ~~interest-rate~~upon ~~risk~~future events.

~~Impairment~~VARIABLE ~~writedowns~~ANNUITY ~~include~~POLICY FEES, NET OF REINSURANCE are based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $190.14 million in the second quarter of 2004 and $566.29 million in the second quarter of ~~provisions~~2003 and are net of reinsurance premiums of $6.4 ~~principally~~million ~~applied~~and to$7.7 million, ~~bonds~~respectively. For the six months, variable annuity policy fees totaled $178.6 million in 2004 and $129.0 million in 2003 and are net of reinsurance premiums of $14.9 million and $14.1 million, respectively. The Onincreased fees in 2004 as compared to 2003 primarily reflect the improving equity market conditions since the first quarter of 2003, and the resulting favorable impact on market values of the assets in the separate accounts. On an annualized basis, ~~impairment~~variable ~~writedowns~~annuity policy fees represent 01.078%, 1.7%, 1.8% and 01.317% of average ~~invested~~ variable annuity assets ~~for~~in the second quarters and six months of 2004 and 2003, respectively. ~~For~~Variable ~~the~~annuity ~~twenty~~assets ~~quarters~~averaged ~~ended March~~$20.13 31billion, ~~2004~~$15.67 billion, ~~impairment~~$19.98 billion ~~writedowns~~and as$15.08 billion anduring ~~annualized~~the respective ~~percentage~~periods. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of ~~average~~variable ~~invested~~annuity products, totaled $757.6 ~~assets~~million ~~have~~in ~~ranged~~the ~~from~~second 0quarter of 2004 and $394.~~07%~~3 million toin the second quarter of 2003. For the six months, variable annuity deposits totaled $1.~~95%~~50 billion in ~~and~~2004, ~~have~~compared ~~averaged~~with 0$722.~~66%~~7 million in 2003. ~~Such~~On an annualized basis, these ~~writedowns~~amounts ~~are~~represent ~~based~~15%, ~~upon~~11%, ~~estimates~~16% and 10% of ~~the~~variable ~~fair~~annuity ~~value~~reserves at the beginning of ~~invested~~the ~~assets~~respective ~~and~~periods. The increase in variable annuity deposits ~~recorded~~in ~~when~~2004 ~~declines~~reflected increased demand for variable annuity products due to the improved equity market conditions in ~~value~~2004 and the latter part of ~~such~~2003. Transfers ~~assets~~from ~~are~~the ~~considered~~fixed toaccounts beof ~~other~~the ~~than~~Company’s variable annuity products to ~~temporary.~~the ~~Actual~~separate ~~realization~~accounts ~~will~~are benot ~~dependent~~classified ~~upon~~as ~~future~~variable ~~events~~annuity deposits.

~~VARIABLE ANNUITY FEES, NET OF REINSURANCE are primarily based on the~~23 market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $88.2 million in 2004 and $62.0 million in 2003 and are net of reinsurance premiums of $8.5 million and $6.4 million, respectively. The increased fees in 2004 compared to 2003 reflect the favorable equity market conditions in 2004 and the latter part of 2003, and the resulting favorable impact on market values of the assets in the separate accounts. On an annualized basis, variable annuity fees represent 1.8% and 1.7% of average variable annuity assets in 2004 and 2003, respectively. Variable annuity assets averaged $19.82 billion during 2004 and $14.48 billion during 2003. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of variable annuity products, totaled $742.3 million in 2004 and $328.4 million in 2003. On an annualized basis, these amounts represent 15% and 9% of separate account liabilities at the beginning of the respective periods. The increase in variable annuity deposits in 2004 reflected increased demand for variable annuity products due to the improved equity market conditions in 2004 and the latter part of 2003. 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.

Sales of variable annuity products (which include deposits allocated to the fixed accounts) (“Variable Annuity Product Sales”) amounted to $1.11 billion and $754.8 million in 2004 and 2003, respectively. Such sales primarily reflect those of the Company’s Polaris and Seasons families of variable annuity products. The Company’s

Accordingly, changes in variable annuity ~~products~~deposits are ~~primarily~~not ~~multi-manager variable annuities~~necessarily ~~that~~indicative ~~offer investors a choice~~ of ~~several~~the ~~variable~~ultimate ~~funds~~allocation asby ~~well~~customers asamong ~~a number of guaranteed~~ fixed~~-rate~~ ~~funds. Investors can select from a choice of several variable funds~~ and ~~up to 7 guaranteed fixed-rate funds depending on the~~variable ~~product.~~account ~~The~~options ~~increase~~of ~~in Variable Annuity Product Sales reflects improving market conditions since~~ the ~~first~~Company’s ~~quarter~~variable ofannuity ~~2003~~products.

~~The~~Sales ~~Company~~of ~~has~~variable ~~encountered~~annuity ~~increased~~products ~~competition~~(which include deposits allocated to the fixed accounts) (“Variable Annuity Product Sales”) amounted to $1.17 billion, $769.6 million, $2.29 billion and $1.52 billion in the second quarters and the six months of 2004 and 2003, respectively. Such sales primarily reflect those of the Company’s Polaris and Seasons families of variable annuity ~~marketplace~~products. ~~during~~The ~~recent~~Company’s ~~years~~variable ~~and~~annuity ~~anticipates~~products are primarily multi-manager variable annuities that ~~the~~offer ~~market~~investors ~~will~~a ~~remain~~choice of several variable funds as ~~highly~~well ~~competitive~~as ~~for~~a ~~the~~number ~~foreseeable~~of ~~future~~guaranteed fixed-rate funds. ~~Also,~~Investors can select from ~~time~~a choice of several variable funds and up to ~~time~~7 guaranteed fixed-rate funds, ~~Federal~~depending ~~initiatives~~on ~~are~~the ~~proposed~~product. ~~that~~The ~~could~~increase ~~affect~~in Variable Annuity Product Sales for the ~~taxation~~six ofmonths ~~annuities~~reflects the improving equity market conditions since the first ~~(See~~quarter ~~“Regulation”)~~of 2003.

~~UNIVERSAL~~The ~~LIFE~~Company ~~INSURANCE~~has ~~POLICY~~encountered ~~FEES,~~increased ~~NET~~competition ~~OF REINSURANCE amounted to $9.2 million~~ in ~~2004~~the ~~and~~variable ~~$9.0 million in 2003 and are net of reinsurance premium of~~annuity ~~$8.1 million~~marketplace ~~and~~during ~~$8.4 million,~~recent ~~respectively.~~years ~~Universal life insurance policy fees consist of mortality charges, up-front fees earned on deposits received~~ and ~~administrative~~anticipates ~~fees,~~that ~~net~~the ofmarket ~~reinsurance~~will ~~premiums. The administrative fees~~remain ~~are~~highly ~~assessed~~competitive ~~based~~for on the ~~number~~foreseeable ~~of policies in force as of the end of each month~~future. ~~The~~Also, ~~Company acquired its universal life contracts as part of the acquisition of business~~ from ~~MBL~~time ~~Life~~to ~~Assurance Corporation on December 31~~time, ~~1998~~Federal ~~and~~initiatives ~~does~~are ~~not~~proposed ~~actively~~that ~~market~~could ~~such~~affect ~~contracts.~~the ~~Such~~taxation ~~fees annualized represent 2.3% and 2.2%~~ of ~~average reserves for universal life insurance~~annuities ~~contracts~~(see ~~in the respective periods~~“Regulation”).

~~SURRENDER~~UNIVERSAL ~~CHARGES~~LIFE onINSURANCE ~~variable~~POLICY ~~annuity~~FEES, NET OF REINSURANCE amounted to $8.5 million in the second quarter of 2004 and $9.4 million in the second quarter of 2003 and are net of reinsurance premiums of $8.4 million and $7.8 million, respectively. For the six months, universal life ~~contracts~~insurance policy fees totaled $717.07 million in 2004 and $718.63 million in 2003 and are net of reinsurance premiums of $16.5 million ~~Surrender~~and ~~charge~~$16.3 million, ~~periods~~respectively. ~~range~~Universal life ~~from~~insurance ~~zero~~policy tofees ~~nine~~consist ~~years~~of ~~from~~mortality ~~the~~charges, ~~date~~up-front afees ~~deposit~~earned ison deposits received. ~~Surrender~~and ~~charges~~administrative fees, net of reinsurance premiums. The ~~generally~~administrative fees are assessed based on ~~withdrawals~~the atnumber ~~declining~~of ~~rates~~policies ~~during~~in force as of the ~~first~~end ~~seven~~of each month. The Company acquired its universal life contracts as orpart ~~nine~~of ~~years~~the ~~following~~acquisition ~~receipt~~of business from MBL Life Assurance Corporation on December 31, 1998 and does not actively market such contracts. Such fees annualized represent 2.2%, 2.3%, 2.3% and 2.3% of average reserves for universal life insurance contracts in the ~~deposit~~respective periods.

~~GENERAL~~SURRENDER ~~AND~~CHARGES ~~ADMINISTRATIVE~~on ~~EXPENSES~~variable ~~totaled~~annuity and universal life contracts totaled $276.35 million in the second quarter of 2004 and $216.38 million in the second quarter of 2003. ~~The~~For ~~increase~~the insix ~~2004~~months, ~~results~~such ~~from~~surrender ~~higher~~charges ~~information~~totaled $13.5 ~~technology~~million ~~costs~~in 2004 and ~~payroll~~$14.4 million ~~related~~in ~~expenses~~2003. ~~General~~Surrender ~~and~~charge ~~administrative~~periods range from ~~expenses~~zero ~~remain~~to ~~closely~~nine ~~controlled~~years ~~through~~from the date a ~~company-wide~~deposit ~~cost~~is ~~containment~~received. Surrender charges ~~program~~generally ~~and~~are ~~continue~~assessed toon ~~represent~~withdrawals ~~less~~at ~~than~~declining 1%rates ofduring ~~average~~the ~~total~~first ~~assets~~seven or nine years following receipt of the deposit.

~~AMORTIZATION~~GENERAL OFAND ~~DEFERRED~~ADMINISTRATIVE ~~ACQUISITION~~EXPENSES ~~COSTS~~ totaled $2425.03 million in ~~2004,~~the second ~~compared~~quarter ~~with~~of 2004 and $3819.80 million in the second quarter of 2003. ~~Prior~~For ~~year~~the ~~included~~six months, ~~accelerated~~general and administrative expenses totaled $52.6 million in 2004 and ~~amortization~~$40.3 million ~~due~~in to2003. The increase in 2004 results from higher ~~than~~information technology ~~anticipated~~costs ~~surrenders~~and onpayroll ~~certain~~related ~~products~~expenses. ~~with~~General and administrative ~~features~~expenses ~~which~~remain ~~have~~closely ~~been~~controlled ~~discontinued~~through a company-wide cost containment program and continue to represent less than 1% of average total assets.

~~ANNUAL~~AMORTIZATION ~~COMMISSIONS~~OF ~~totaled~~DEFERRED ~~$15.0 million~~ACQUISITION inCOSTS ~~2004,~~AND ~~compared~~OTHER ~~with~~DEFERRED EXPENSES totaled $1445.2 3 million in ~~2003.~~the ~~Annual~~second ~~commissions~~quarter ~~represent~~of ~~renewal~~2004, ~~commissions~~compared ~~paid quarterly~~to $40.3 million in ~~arrears to maintain~~ the ~~persistency~~second ofquarter ~~certain~~ of ~~the Company’s variable annuity contracts~~2003. ~~Substantially~~For ~~all of~~ the ~~Company’s~~six ~~currently available~~months, ~~variable~~such ~~annuity~~amortization ~~products allow for an annual commission payment~~totaled ~~option~~$69.3 million in ~~return~~2004 ~~for~~and a$79.1 million ~~lower~~in ~~immediate commission~~2003. ~~The~~Prior ~~vast~~year ~~majority~~included accelerated ofamortization ~~the Company’s~~due ~~average~~to ~~balances~~higher ofthan ~~its~~anticipated ~~variable~~surrenders ~~annuity~~on certain products ~~are~~with ~~currently subject~~features towhich ~~such~~have ~~annual~~been ~~commissions~~discontinued.

~~CLAIMS~~ANNUAL ONCOMMISSIONS ~~UNIVERSAL LIFE CONTRACTS, NET OF REINSURANCE RECOVERIES~~ totaled $415.81 million in the second quarter of 2004, compared towith $516.50 million in ~~2003~~the ~~(net~~second quarter of ~~reinsurance~~2003. For the six months, ~~recoveries~~annual ofcommissions totaled $930.31 million in 2004 and $1030.82 million ~~and~~in 2003). Annual ~~The~~commissions ~~change~~represent renewal commissions paid quarterly in arrears to ~~such~~maintain ~~claims~~the ~~resulted~~persistency ~~principally~~of ~~from~~certain ~~changes~~of the Company’s variable annuity contracts. Substantially all of the Company’s currently available variable annuity products allow for an annual commission payment option in return for a lower immediate commission. The vast majority of the ~~mortality~~Company’s ~~experience~~average balances of its variable annuity products are currently subject to such annual commissions.

~~GUARANTEED~~CLAIMS ~~MINIMUM~~ON ~~DEATH~~UNIVERSAL ~~BENEFITS~~LIFE CONTRACTS, NET OF REINSURANCE RECOVERIES ~~(“Net GMDB”) on variable annuity contracts~~ totaled $175.81 million in the second quarter of 2004, compared ~~with~~ to $225.07 million in the second quarter of 2003 (net of reinsurance recoveries of $213.14 million in the second quarter of 2004 and $37.0 million in ~~2003).~~the ~~Net~~second ~~GMDB~~quarter ~~consists primarily~~ of ~~guaranteed minimum death benefits as well as immaterial amounts of earnings enhancement benefits and guaranteed minimum income benefits~~2003). ~~These guarantees are~~For ~~described in more detail in~~ the ~~following paragraphs. The decrease in Net GMDB~~ ~~in 2004 reflects the upturn in the equity markets in 2004 and 2003. Downturns in the~~ ~~equity markets could increase these expenses.~~

~~A majority of the Company’s variable annuity products are issued with a~~24 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 Company bears the risk that death claims following a decline in the equity 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.~~six ~~At March 31~~months, ~~2004, a portion of the GMDB risk on approximately 18% of the account value with~~ such ~~features~~claims ~~had~~totaled ~~been reinsured~~$9.9 million Inin 2004, ~~a substantial~~and ~~majority of contracts sold have reinsurance coverage~~$11.2 million ~~However, the~~in ~~Company~~2003 ~~does~~(net ~~not~~of ~~currently have~~ reinsurance ~~coverage~~recoveries ~~on the majority~~ of ~~the contracts~~$22.6 million toin ~~be sold after December~~ 2004. ~~Reinsurance coverage is subject to limitations such as caps~~ and ~~deductibles~~$17. ~~On January~~8 ~~1, 2004, the Company~~million ~~recorded~~in a2003). ~~liability~~The ~~for~~change ~~GMDBs~~in ~~(See~~such ~~Note~~claims 2resulted ofprincipally ~~Notes~~from tochanges ~~Consolidated~~in ~~Financial~~the ~~Statements)~~mortality ~~pursuant to adoption of a new accounting standard, SOP 03-1~~experience.

~~EARNINGS~~GUARANTEED ~~ENHANCEMENT~~BENEFITS, ~~BENEFIT~~NET OF REINSURANCE RECOVERIES (“~~EEB~~Net GMDB”): ~~The Company issues certain variable~~on variable annuity ~~products~~contracts ~~that~~totaled ~~offer~~$13.2 million anin ~~optional~~the ~~EEB~~second ~~feature.~~quarter ~~For~~of ~~contract-holders who~~2004, ~~elect~~compared ~~the~~with ~~feature,~~$14.5 million in the ~~EEB~~second ~~provides~~quarter anof ~~additional~~2003 ~~death~~(net ~~benefit~~of ~~amount~~reinsurance recoveries ~~equal~~of ~~to a~~$0.2 million ~~fixed~~in ~~percentage~~2004 ofand ~~earnings~~$2.8 million in 2003). For the ~~contract~~six months, ~~subject~~Net GMDB amounted to ~~certain~~$30.9 million ~~maximums~~in 2004 and $36.5 million in 2003 ~~The~~(net ~~Company~~of ~~bears~~reinsurance ~~the~~recoveries ~~risk~~of ~~that~~$2.4 million ~~account~~in ~~values~~2004 ~~following~~and ~~favorable~~$5.7 million ~~performance~~in 2003). Net GMDB consists primarily of ~~the~~guaranteed ~~financial~~minimum ~~markets~~death ~~will~~benefits ~~result~~as well inas ~~greater~~immaterial ~~EEB~~amounts ~~death~~of ~~claims~~earnings ~~and~~enhancement ~~that~~benefits ~~the~~and guaranteed ~~fees~~minimum ~~collected~~income ~~under~~benefits. ~~the~~These ~~contract~~guarantees are ~~insufficient~~described toin ~~cover~~more ~~the~~detail ~~costs~~in of the ~~benefit~~following toparagraphs. beThe ~~provided.~~decrease Atin ~~March 31,~~Net GMDB in 2004, ~~approximately~~reflects 8%the ~~(calculated~~upturn ~~based~~in onthe ~~current~~equity ~~account~~markets ~~value) of~~ in~~-force~~ ~~contracts~~2004 ~~include~~and ~~EEB~~2003. ~~coverage,~~Downturns ~~with~~in ~~91% of~~ the ~~EEB~~equity ~~risk~~markets ~~fully~~could increase ~~reinsured~~these expenses.

~~GUARANTEED~~A ~~MINIMUM~~majority ~~INCOME~~of ~~BENEFIT~~the ~~(“GMIB”): The~~ Company’s ~~issues certain~~ variable annuity products ~~that~~are ~~contain~~issued orwith ~~offer~~ a death ~~GMIB~~benefit feature. ~~This~~which ~~feature~~ provides athat, ~~minimum~~upon ~~annuity~~the ~~payment~~death ~~guarantee~~of ~~for~~a ~~those~~ contract~~-holders~~ ~~who~~holder, ~~choose~~the tocontract holder’s beneficiary will receive ~~fixed~~the ~~lifetime~~greater ~~annuity~~of ~~payments~~(1) the ~~after~~contract holder’s aaccount ~~seven~~value, ~~nine,~~ or ~~ten-year~~ ~~waiting~~(2) a ~~period~~guaranteed inminimum ~~their~~death ~~deferred~~benefit ~~annuity~~that ~~contracts~~varies by product and election by policyholder. The Company bears the risk that ~~the~~death ~~performance~~claims offollowing a decline in the ~~financial~~equity markets ~~will~~may ~~not~~exceed becontract ~~sufficient for~~holder ~~accumulated policyholder~~ account balances, ~~to support GMIB benefits~~ and that ~~the~~ the fees collected under the contract are insufficient to cover the costs of ~~the~~ the benefit to be provided. ~~Substantially~~At ~~all~~June 30, of2004, ~~the~~approximately ~~Company’s~~30% ~~products~~of in-force ~~containing~~contracts ~~the~~with ~~GMIB~~GMDB ~~feature~~(calculated based on account value) have been reinsured. In 2004, 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 ~~July~~December 2004. Reinsurance coverage is subject to limitations such as caps and deductibles. On January 1, 2004, the Company recorded a reserve for GMDB (see Note 2 of Notes to Consolidated Financial Statements) pursuant to adoption of a new accounting standard, SOP 03-1.

~~GUARANTEED~~EARNINGS ~~MINIMUM~~ENHANCEMENT ~~ACCOUNT~~BENEFIT ~~VALUE~~ (“~~GMAV~~EEB”): InThe ~~the third quarter of 2002, the~~ Company ~~began~~issues ~~issuing~~ certain variable annuity products that offer an optional ~~GMAV~~EEB feature. IfFor ~~elected~~contract byholders ~~the~~who elect ~~policyholder at~~ the ~~time of contract issuance~~feature, ~~this~~the ~~feature~~EEB ~~guarantees~~provides ~~that~~an ~~the~~additional ~~account~~death ~~value~~benefit ~~under~~amount ~~the~~equal ~~contract~~to ~~will~~a atfixed ~~least~~percentage ~~equal~~of ~~the~~earnings ~~amount~~in of the ~~initial principal invested~~contract, ~~adjusted~~subject ~~for withdrawals,~~to atcertain ~~the end of a ten-year waiting period~~maximums. The Company bears the risk that ~~protracted~~account ~~under-performance~~values following favorable performance of the financial markets ~~could~~will result in ~~GMAV~~ ~~benefits~~greater ~~being~~EEB ~~higher~~death ~~than~~claims ~~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. ~~The~~At ~~Company~~June 30, ~~purchased~~2004, ~~put~~approximately ~~options~~8% on(calculated ~~the~~based ~~S&P~~on ~~500~~current ~~index~~account tovalue) ~~partially~~of ~~offset~~in-force ~~this~~contracts ~~risk.~~include ~~Changes~~EEB incoverage, ~~the~~and ~~market value of~~88% ~~both~~of the ~~GMAV~~contracts ~~benefit~~with ~~and~~EEB ~~the put options~~ are ~~recorded in investment income in the accompanying consolidated statement of operations and comprehensive income~~reinsured.

GUARANTEED MINIMUM INCOME BENEFIT (“GMIB”): The Company issues certain variable annuity products that contain or offer a GMIB feature. This feature provides a minimum annuity payment guarantee for those contract holders 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. However, the Company does not have reinsurance coverage on contracts to be sold after July 2004. As there is a waiting period to annuitize using the GMIB, as of June 30, 2004, there are no policies eligible to receive this benefit.

GUARANTEED MINIMUM ACCOUNT VALUE (“GMAV”): In the third quarter of 2002, the Company began issuing certain variable annuity products that offer an optional GMAV. If elected by the policyholder at the time of contract issuance during the first 90 days, this feature guarantees that the account value under the contract will at least equal 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 contract holder account balance and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. The Company purchased put options on the S&P 500 index to partially offset this risk. Changes in the market value of both the GMAV benefit and the put options are recorded in investment income in the accompanying consolidated statement of income and comprehensive income.

GUARANTEED MINIMUM WITHDRAWAL BENEFIT (“GMWB”): In May of 2004, the Company began issuing certain variable annuity products that offer an optional GMWB. This feature provides a guaranteed annual withdrawal stream, regardless of market performance, equal to premiums invested during the first ninety days after issue

adjusted for subsequent withdrawals (“Eligible Premium”). These annual withdrawals are available after either a three-year waiting period or a five-year waiting period and limited to 10% of Eligible Premium before the amount guaranteed is reduced. Additional incentives are earned by the contract holder if no withdrawals are taken prior to the end of the waiting period. In 2004, variable annuity deposits with GMWB were immaterial.

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. Due to the high credit ratings and periodic monitoring of these ratings of the reinsurers, such risks are considered to be minimal.

ASSET MANAGEMENT OPERATIONS

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $7.87 million in the second quarter of 2004 compared to a ~~loss~~$5.8 million in the second quarter of 2003. For the six months, pretax income before cumulative effect of accounting change amounted to $215.05 million in ~~2003~~2004 and $7.9 million ~~The~~in ~~increase~~2003. The increases in the quarter and six months of 2004 from 2003 resulted from increased asset management fees, partially offset by ~~decreased~~increased amortization of DAC ~~amortization~~and other deferred expenses.

~~VARIABLE~~ASSET ~~ANNUITY~~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 $222.6 million on average assets managed of $9.64 billion in the second quarter of 2004 and $15.5 million on average assets managed of $7.84 billion in the second quarter of 2003. For the six months, asset management fees amounted to $43.5 million on average assets managed of $9.62 billion in 2004 and $28.8 million on average assets managed of $7.61 billion in 2003. Asset management fees are not necessarily proportionate to average assets managed, principally due to changes in product mix. Mutual fund sales, excluding sales of money market accounts and private accounts, totaled $538.1 million in the second quarter of 2004, compared to $2561.41 million in the second quarter of 2003. For the six months, mutual fund sales amounted to $1.24 billion in 2004 and $1.00 billion in 2003. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $379.1 million in the second quarter of 2004, $350.3 million in the second quarter of 2003, $742.1 million ~~The~~in ~~increase~~the six months of 2004 and $773.2 million in ~~variable~~the ~~annuity~~six ~~fees~~months of 2003, which, annualized, represent 19%, 23%, 19% and 27%, respectively, of average related mutual fund assets. The increase in sales in 2004 principally reflects ~~the~~increasing ~~improved~~demand for equity products, due to the improving stock market conditions ~~since~~over ~~2003~~the past year.

~~ASSET~~GENERAL ~~MANAGEMENT~~AND ~~FEES,~~ADMINISTRATIVE ~~which~~EXPENSES ~~include~~totaled ~~investment advisory fees and 12b-~~$10.1 ~~distribution~~ million ~~fees,~~in ~~are based on~~ the ~~market~~second quarter ~~value~~ of ~~assets~~2004, ~~managed~~$9.3 million in ~~mutual funds~~the bysecond ~~SAAMCo.~~quarter ~~Such~~of ~~fees~~2003, ~~totaled~~ $1819.10 million onin the ~~average~~six ~~assets~~months ~~managed~~ of ~~$9.64 billion~~ in 2004 and $1018.90 million onin ~~average~~the ~~assets~~six ~~managed~~months of ~~$7.38 billion in~~ 2003. ~~Asset management fees are not necessarily proportionate to~~The ~~average~~increase ~~assets managed, principally due to changes~~ in ~~product~~expenses ~~mix. Mutual fund sales, excluding sales of money market accounts and private accounts, totaled $698.4 million~~ in 2004, ~~compared~~is attributable to ~~$440.2 million~~higher inmarketing ~~2003.~~and ~~Redemptions~~advertising ofcosts. ~~mutual funds, excluding redemptions~~

22 AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES totaled $8.0 million in the second quarter of 2004, compared with $5.3 million in the second quarter of 2003. For the six months, such amortization totaled $15.4 million in 2004 and $10.5 million in 2003. The increase in amortization was primarily due to additional mutual fund sales since the second quarter of 2003 and amortization of the deferred commissions thereon.

of money market accounts, amounted to $362.9 million in 2004 and $422.9 million in 2003, which, annualized, represent 18.6% and 30.8%, respectively, of average related mutual fund assets. The increase in sales in 2004 principally reflects increasing demand for equity products, due to the improving stock market conditions over the past year.

GENERAL, ADMINISTRATIVE AND OTHER EXPENSES totaled $8.9 million in 2004 and $8.7 million in 2003. General and administrative expenses remain closely controlled through a company-wide cost containment program and continue to represent less than 1% of average total assets.

AMORTIZATION OF DEFERRED ACQUISITION COSTS totaled $7.4 million in 2004, compared with $5.1 million in 2003. The increase in amortization was primarily due to additional mutual fund sales since the first quarter of 2003.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDER’S EQUITY ~~increased~~decreased to $1.5552 billion at ~~March~~June 3130, 2004 from $1.5456 billion at December 31, 2003. The ~~increase~~decrease reflected ~~other~~a ~~comprehensive~~$44.2 million ~~income~~decrease in unrealized gains, net of the effect of taxes and DAC, and a $472.6 5 million ~~and~~dividend ato ~~net~~the ~~loss~~Parent ofpartially offset by $316.09 million, ~~respectively~~of net income.

INVESTMENTS AND CASH at ~~March~~June 3130, 2004 totaled $7.2553 billion, compared ~~with~~ with $7.12 billion at December 31, 2003. The Company’s invested assets are ~~managed~~ managed by aan ~~subsidiary~~affiliate of AIG. The following table summarizes the Company’s portfolio of bonds, notes and redeemable preferred stocks (the “Bond Portfolio”) and other investments and cash at ~~March~~June 3130, 2004 and December 31, 2003:

	March 31, 2004					December 31, 2003
	June 30, 2004					December 31, 2003
	Fair		Percent of			Fair		Percent of
	Value		Portfolio			Value		Portfolio
	(in thousands, except for percentages)
Bond Portfolio:			(in thousands, except for percentages)
Bond Portfolio:
U.S. government securities	$	29,933		0.4	%	$	24,292		0.3	%
U.S. government securities	$	127,326		1.8	%	$	24,292		0.3	%
Mortgage-backed securities		1,054,405		14.0			1,191,817		16.7
Mortgage-backed securities		1,055,273		14.5			1,191,817		16.7
Securities of public utilities		320,498		4.3			365,150		5.1
Securities of public utilities		148,743		2.1			365,150		5.1
Corporate bonds and notes		2,855,942		37.9			2,697,142		37.9
Corporate bonds and notes		2,867,553		39.5			2,697,142		37.9
Redeemable preferred stocks		21,400		0.3			22,175		0.3
Other debt securities		1,~~264~~032,~~485~~403		1713.47			1,205,224		16.9
Total Bond Portfolio		5,~~484~~314,~~780~~581		7570.6			5,505,800		77.2
Mortgage loans		~~699~~701,~~676~~808		9.73			716,846		10.1
Common stocks		15,~~632~~143		0.01			727		0.0
Cash and short-term investments		142,~~186~~180		21.09			133,105		1.9
Securities lending collateral		~~668~~1,~~717~~122,766		914.29			514,145		7.2
Other		~~253~~245,~~428~~893		3.52			254,010		3.6
Total investments and cash	$	7,~~250~~532,~~419~~371		100.0	%	$	7,124,633		100.0	%

The Company’s general investment philosophy is to hold fixed-rate assets for long-term investment. Thus, it does not have a trading portfolio. However, the Company has determined that all of the Bond Portfolio is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities, changes in prepayment risk, changes in the credit quality outlook for certain securities, the Company’s need for liquidity and other similar factors.

THE BOND PORTFOLIO, which constituted 7671% of the Company’s total investment portfolio at ~~March~~June 3130, 2004, had an aggregate fair value that was $~~243~~67.97 million greater than its amortized cost at ~~March~~June 30, 2004, compared with $154.6 million at December 31, 2003. The decrease in net unrealized gains on the Bond Portfolio during 2004 principally reflects the rise in prevailing interest rates during the second quarter of 2004 and the corresponding effect on the fair value of the Bond Portfolio at June 30, 2004.

23 At June 30, 2004, the Bond Portfolio had an aggregate fair value of $5.31 billion and an aggregate amortized cost of $5.25 billion. At June 30, 2004, the Bond Portfolio (excluding $21.4 million of redeemable preferred stocks) included $5.19 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 $107.4 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At June 30, 2004, approximately $4.93 billion of the Bond Portfolio was investment grade, including $1.08 billion of mortgage-backed securities (“MBS”) and U.S. government/agency securities.

~~compared~~ At ~~with~~June 30, 2004, the Bond Portfolio included $~~154~~367.60 million atof ~~December 31,~~bonds ~~2003~~that were not investment grade. ~~The~~These ~~increase~~non-investment-grade inbonds ~~net~~accounted for ~~unrealized~~approximately ~~gains~~1.2% onof the ~~Bond~~Company’s ~~Portfolio~~total ~~during~~assets ~~2004~~and ~~principally~~approximately ~~reflected~~4.9% ~~the~~of its ~~impact~~invested ofassets. ~~the~~Non-investment-grade ~~decrease~~securities ingenerally ~~prevailing~~provide ~~interest~~higher yields ~~rates~~and involve greater risks than investment-grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment-grade issuers. In addition, the ~~corresponding~~trading ~~effect~~market for these securities is usually more limited than for investment-grade securities. An economic downturn could produce higher than average issuer defaults on the ~~fair~~non-investment-grade ~~value~~securities, ofwhich could cause the Company’s ~~Bond~~investment ~~Portfolio~~returns atand ~~March~~net income to decline. At June 3130, 2004, the Company’s non-investment-grade bond portfolio consisted of 167 issues with no single issuer representing more than 10% of the total non-investment grade portfolio. These non-investment-grade securities are comprised of bonds spanning 11 industries with 21% of these assets concentrated in financial institutions, 19% concentrated in utilities and 16% concentrated in telecommunications. No other industry concentration constituted more than 10% of these assets.

AtThe ~~March 31,~~table ~~2004,~~on the ~~Bond~~following ~~Portfolio~~page ~~had~~summarizes ~~an aggregate fair value of $5.48 billion and an aggregate amortized cost of $5.24 billion. At March 31, 2004,~~ the ~~Bond Portfolio (excluding $21.4 million of redeemable preferred stocks) included $5.26 billion of bonds rated by Standard & Poor~~Company’s ~~(“S&P”),~~rated ~~Moody’s Investors Service (“Moody’s”), Fitch (“Fitch”) or the National Association of Insurance Commissioners (“NAIC”), and $205.3 million of~~ bonds ~~rated~~ by ~~the~~ ~~Company~~rating ~~pursuant~~classification toas ~~statutory~~of ~~ratings guidelines established by the NAIC. At March~~June 3130, 2004~~, approximately $5~~.~~10 billion of the Bond Portfolio was~~ ~~investment grade, including $1.18 billion of mortgage-backed securities (“MBS”)~~ ~~and U.S. government/agency securities.~~

~~At March 31, 2004, the Bond Portfolio included $363.6 million of bonds~~28 that were not investment grade. These non-investment-grade bonds accounted for approximately 1.2% of the Company’s total assets and approximately 5.0% of its invested assets. Non-investment-grade securities generally provide higher yields and involve greater risks than investment-grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment-grade issuers. In addition, the trading market for these securities is usually more limited than for investment-grade securities. An economic downturn could produce higher than average issuer defaults on the non-investment-grade securities, which could cause the Company’s investment returns and net income to decline. At March 31, 2004, the Company’s non-investment-grade portfolio consisted of 96 issues with no issuer representing more than 10% of the total non-investment grade portfolio. These non-investment-grade securities are comprised of bonds spanning 11 industries with 18% of these assets concentrated in financial institutions, 17% concentrated in utilities, 14% concentrated in telecommunications, 12% concentrated in noncyclical consumer products and 10% concentrated in noncyclical consumer products. No other industry concentration constituted more than 10% of these assets.

The table on the next page summarizes the Company’s rated bonds by rating classification as of March 31, 2004.

RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)

Issues rated by S&P/Moody’s/Fitch					Issues not rated by S&P/Moody’s/Fitch, by NAIC category						Total
					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
Category (1)	cost		value		(2)		cost		value		cost		value		assets
AAA+ to A- (Aaa to A3) [AAA to A-]	$	2,~~904~~949,~~370~~718	$	32,~~048~~992,~~820~~884		1	$	~~445~~407,~~057~~658	$	~~459~~412,~~585~~618	$	3,~~349~~357,~~427~~376	$	3,~~508,~~405,502		4847.7431	%
BBB+ to BBB- (Baa1 to Baa3) [BBB+ to BBB-]		1,~~255~~227,~~405~~247		1,~~318~~248,~~128~~445		2		~~260~~270,~~258~~729		~~273~~272,~~292~~230		1,~~515~~497,~~663~~976		1,~~591~~520,~~420~~675		2821.1112	%
BB+ to BB- (Ba1 to Ba3) [BB+ to BB-]		~~116~~133,~~845~~404		~~120~~133,~~695~~210		3		3128,~~826~~450		3529,~~603~~423		~~148~~161,~~671~~854		~~156~~162,~~298~~633		2.1726	%
B+ to B- (B1 to B3) [B+ to B-]		~~124~~151,~~192~~136		~~118~~140,~~692~~414		4		116,~~832~~967		119,~~636~~996		~~126~~168,~~024~~103		~~120~~160,~~328~~410		12.6723	%
CCC+ to C (Caa to C) [CCC]		19,719		24,451		5		8,076		7,909		27,795		32,360		0.45	%
CCC+ to CCC- (Caa1 to Caa3) [CCC+ to CCC-]		17,918		19,562		5		6,238		5,638		24,156		25,200		0.35	%
C1 to D [DD] {D}		—		—		6		53,177		54,571		53,177		54,571		0.76	%
CC to D (Ca to C) [CC to D]		2,933		4,659		6		14,318		14,102		17,251		18,761		0.26	%
TOTAL RATED ISSUES	$	4,~~420~~482,~~531~~356	$	4,~~630~~539,~~786~~174			$	~~800~~744,~~226~~360	$	~~832~~754,~~596~~007	$	5,~~220~~226,~~757~~716	$	5,~~463~~293,~~382~~181

Footnotes to the table of Rated Bonds by Rating Classification

(1)		S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt’s relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody’s rates debt securities in rating categories ~~range~~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 $~~205~~107.34 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.

2529

The valuation of invested assets involves obtaining a fair value for each security. The source for the fair value is generally from market exchanges, with the exception of non-traded securities.

Another aspect 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. In general, a security is considered a candidate for impairment if it meets any of the following criteria:

• Trading at a significant discount to par, amortized cost (if lower) or cost for an extended period of time; • The occurrence of a discrete credit event resulting in: (i) the issuer defaulting on a material outstanding obligation; (ii) 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 which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than the par value of their claims; or • In the 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.

• The occurrence of a discrete credit event resulting in: (i) the issuer defaulting on a material outstanding obligation; (ii) 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 which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than the par value of their claims; or

• In the 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.

Once a security has been identified as potentially impaired, the amount of such impairment is determined by reference to that security’s contemporaneous market price.

The Company has the ability to hold any security to its stated maturity. Therefore, the decision to sell reflects the judgment of the Company’s management that the security sold is unlikely to provide, on a relative value basis, as attractive a return in the future as alternative securities entailing comparable risks. With respect to distressed securities, the sale decision reflects management’s judgment that the risk-discounted anticipated ultimate recovery is less than the value achieved on sale.

As a result of these policies, the Company recorded pretax impairment writedowns of $12.16 million and $15.5 million in the six months of 2004 and 2003, $5respectively.~~2 million~~ inOne ~~2003~~impairment loss amounted to 20% of net income for the six months ended June 30, 2004. No other individual impairment loss exceeded 10% of the Company’s net ~~loss~~income for the ~~three~~six months ended ~~March~~June 3130, 2004.

Excluding the impairments noted above, the changes in fair value for the Company’s Bond Portfolio, which constitutes the vast majority of the Company’s investments, were recorded as a component of other comprehensive income in shareholder’s equity as unrealized gains or losses.

At ~~March~~June 3130, 2004, the fair value of the Company’s Bond Portfolio ~~had gross unrealized gains~~ ofaggregated $~~274~~5.831 ~~million~~billion. ~~and~~Of ~~gross~~this ~~unrealized~~aggregate ~~losses~~fair ofvalue, ~~$30.9 million.~~approximately ~~At December~~0.6% ~~31,~~represented ~~2003,~~securities ~~the~~trading ~~Company’s~~at ~~Bond~~or ~~Portfolio~~below ~~had~~75% ~~gross~~of ~~unrealized~~amortized ~~gains~~cost. ofThe ~~$214.7~~impact ~~million~~of ~~and gross~~ unrealized losses ofon ~~$60.1 million.~~net ~~One~~income ~~issuer~~will ~~accounted~~be ~~for 16%~~further ofmitigated ~~unrealized~~upon ~~losses.~~realization, because Norealization ~~other~~will ~~single~~result ~~issuer~~in ~~accounted~~current ~~for~~decreases ~~more~~in ~~than~~the ~~10%~~ amortization of certain ~~unrealized~~deferred ~~losses~~acquisition costs and decreases in income taxes.

At ~~March~~June 3130, 2004, approximately $3.48 billion, at amortized cost, of the Bond Portfolio had a fair value of ~~the~~$3.61 billion ~~Company’s~~resulting ~~Bond~~in ~~Portfolio~~an aggregate ~~aggregated~~unrealized gain of $135.5 million.48 At June ~~billion~~30, 2004, approximately $1.77 billion, Ofat ~~this~~amortized ~~aggregate~~cost, of the Bond Portfolio had a fair value, ~~approximately~~of 0$1.3%70 ~~represented~~billion ~~securities~~resulting ~~trading~~in atan oraggregate ~~below~~unrealized ~~75%~~loss of ~~amortized cost~~$67.8 million. ~~The~~One ~~impact~~issuer accounted for 15% of unrealized losses. onNo ~~net~~other ~~income~~single ~~will~~issuer beaccounted ~~further~~for more ~~mitigated~~than ~~upon~~10% ~~realization~~of unrealized losses. Approximately 29%, ~~because~~ ~~realization~~29% ~~will~~and ~~result~~11% inof unrealized ~~current~~losses ~~decreases~~were infrom the ~~amortization~~transportation, offinancial and ~~certain~~noncyclical ~~deferred~~consumer ~~acquisition~~industries, ~~costs~~respectively. ~~and~~No ~~decreases~~other inindustry ~~income~~accounted ~~taxes~~for more than 10% of unrealized losses.

~~At March 31, 2004, approximately $656.4 million, at amortized cost, of the Bond Portfolio had a fair value of $625.5 million resulting in an aggregate unrealized loss of $~~30~~.9 million. Unrealized losses for the Bond Portfolio and~~ ~~equity securities did not reflect any significant industry concentrations.~~

The amortized cost of the Bond Portfolio in an unrealized loss position at ~~March~~June 3130, 2004, by contractual maturity, is shown below.

	Amortized
	Cost
	(in thousands)
Due in one year or less	$	2625,~~586~~663
Due after one year through five years		~~218~~545,~~033~~701
Due after five years through ten years		~~232~~648,~~879~~597
Due after ten years		~~178~~550,~~903~~103
Total	$	~~656~~1,~~401~~770,064

The aging of the Bond Portfolio in an unrealized loss position at ~~March 31~~June 30, 2004 is shown below:

(dollars in	Less than or Equal to 20%							Greater than 20% to 50%							Greater than 50%
	Less than or Equal to 20%							Greater than 20% to 50%							Greater than 50%
thousands)	of Amortized Cost							of Amortized Cost							of Amortized Cost							Total
(dollars in thousands)	of Amortized Cost							of Amortized Cost							of Amortized Cost							Total
	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	$	~~220~~1,~~327~~079,373	$	(322,~~625~~096	)		28150	$	—	$	—			—	$	—	$	—			—	$	~~220~~1,~~327~~079,373	$	(322,~~625~~096	)		28150
7-12		93444,~~963~~065		(~~736~~15,006	)		1390		—22,715		—(5,900	)		—3		—		—			—		93466,~~963~~780		(~~736~~20,906	)		1393
>12		~~209~~33,~~648~~640		(~~6,485~~782	)		4911		2219,~~704~~465		(64,~~136~~359	)		31		—		—			—		~~232~~53,~~352~~105		(125,~~621~~141	)		5212
Total	$	~~523~~1,~~938~~557,078	$	(1037,~~846~~884	)		90251	$	2242,~~704~~180	$	(610,~~136~~259	)		34	$	—	$	—			—	$	~~546~~1,~~642~~599,258	$	(1648,~~982~~143	)		93255
Below Investment Grade Bonds
0-6	$	680,~~478~~035	$	(872,079	)		453	$	~~987~~—	$	~~(306~~—	)		1—	$	~~599~~—	$	~~(469~~—	)		1—	$	880,~~064~~035	$	(~~862~~2,079	)		653
7-12		848,~~651~~611		(~~230~~2,911	)		29		~~378~~39,890		(~~116~~14,127	)		16		—		—			—		988,~~029~~501		(~~346~~17,038	)		315
>12		791,~~720~~671		(~~8,642~~108	)		142		~~12,946~~—		~~(4,085~~—	)		3—		—599		—(469	)		—1		922,~~666~~270		(~~12,727~~577	)		173
Total	$	94130,~~849~~317	$	(85,~~959~~098	)		2064	$	1439,~~311~~890	$	(414,~~507~~127	)		56	$	599	$	(469	)		1	$	~~109~~170,~~759~~806	$	(1319,~~935~~694	)		2671
Total Bonds
0-6	$	~~226~~1,~~805~~159,408	$	(324,~~712~~175	)		32203	$	~~987~~—	$	~~(306~~—	)		1—	$	~~599~~—	$	~~(469~~—	)		1—	$	~~228~~1,~~391~~159,408	$	(424,~~487~~175	)		34203
7-12		~~102~~492,~~614~~676		(~~966~~17,917	)		1599		~~378~~62,605		(~~116~~20,027	)		19		—		—			—		~~102~~555,~~992~~281		(137,~~082~~944	)		16108
>12		~~289~~35,~~368~~311		(~~15,127~~890	)		6313		3519,~~650~~465		(104,~~221~~359	)		61		—599		—(469	)		—1		~~325~~55,~~018~~375		(255,~~348~~718	)		6915
Total	$	~~618~~1,~~787~~687,395	$	(1942,~~805~~982	)		~~110~~315	$	3782,~~015~~070	$	(1024,~~643~~386	)		810	$	599	$	(469	)		1	$	~~656~~1,~~401~~770,064	$	(3067,~~917~~837	)		~~119~~326

In 2004, the pretax realized losses incurred with respect to the sale of fixed securities in the Bond Portfolio were $107.92 million. The aggregate fair value of securities sold was $74100.79 million, which was approximately 8789.25% of amortized cost. The average period of time that securities sold at a loss during 2004 were trading continuously at a price below amortized cost was approximately 2016 months.

AsThe ~~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, and certain structured securities ~~and limited partnerships~~. The aggregate fair value of these securities at ~~March~~ June 3130, 2004 was approximately $1972.163 ~~billion~~million.

The methodology used to estimate fair value of non-traded fixed income investments is by reference 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.

2731

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 $~~314~~289.73 million at ~~March~~June 3130, 2004. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At ~~March~~June 3130, 2004, Secured Loans consisted of $~~210~~191.05 million of privately traded securities and $~~104~~97.78 million of publicly traded securities. These Secured Loans are composed of loans to 59 borrowers spanning 10 industries, with 2523% of these assets concentrated in utilities, 17% concentrated in ~~transportation~~communications, 1615% concentrated in ~~communications~~transportation, 11% concentrated in cyclical consumer products and 10% concentrated in noncyclical consumer products. 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 $~~699~~701.78 million at ~~March~~June 3130, 2004 and consisted of 103 ~~105~~ commercial first mortgage loans with an average loan balance of approximately $6.78 million, collateralized by properties located in 31 states. Approximately 34% of this portfolio was office, 18% was multifamily residential, 1615% was manufactured housing, 1112% was industrial, 11% was hotels, ~~5% was retail,~~ and 510% was other types. At ~~March~~June 3130, 2004, approximately 26%, 11%, 10% and 10% of this portfolio were secured by properties located in California, New York, Massachusetts and ~~Massachusetts~~Michigan, respectively. No more than 10% of this portfolio was secured by properties located in any other single state. At ~~March~~June 3130, 2004, 16 mortgage loans have an outstanding balance of $10 million or more, which collectively aggregated approximately 5251% of this portfolio. At ~~March 31~~June 30, 2004, approximately 2636% of the mortgage loan portfolio consisted of loans with balloon payments due before ~~April~~July 1, 2007. During 2004 and 2003, loans delinquent by more than 90 days, foreclosed loans and structured loans have not been significant in relation to the total mortgage loan portfolio.

Substantially all of the mortgage loan portfolio has been originated by the Company under its underwriting standards. Commercial mortgage loans on properties such as offices, hotels and shopping centers generally represent a higher level of risk than do mortgage loans secured by multifamily residences. This greater risk is due to several factors, including the larger size of such loans and the more immediate effects of general economic conditions on these commercial property types. However, due to the Company’s underwriting standards, the Company believes that it has prudently managed the risk attributable to its mortgage loan portfolio while maintaining attractive yields.

SECURITIES LENDING COLLATERAL totaled $~~668~~1.712 ~~million~~billion at ~~March~~June 3130, 2004, compared to $514.1 million at December 31, 2003, 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~~ any other NRSRO.

2832

ASSET-LIABILITY MATCHING is utilized by the Company in an effort to minimize the risks of interest rate fluctuations and disintermediation (i.e. the risk of being forced to sell investments during unfavorable market conditions). The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, default rates and general economic conditions. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. The Company’s fixed-rate products incorporate surrender charges or other restrictions in order to encourage persistency. Approximately 6278% of the Company’s fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at ~~March~~June 3130, 2004.

As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-rate assets and liabilities under commonly used 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 and cash flows of the fixed-rate assets to that of its fixed-rate liabilities. The fixed-rate assets in the Company’s asset-liability modeling include: cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; policy loans; and investments in limited partnerships that invest primarily in fixed-rate securities. At ~~March~~June 3130, 2004, these assets had an aggregate fair value of $6.5839 billion with an option-adjusted duration of 3.3 years. The Company’s fixed-rate liabilities include fixed options of variable annuities, as well as universal life, fixed annuity and GIC contracts. At ~~March~~June 3130, 2004, these liabilities had an aggregate fair value (determined by by discounting future contractual cash flows by related market rates of interest) of $65.1398 billion with an option-adjusted duration of 3.45 years. The Company’s potential exposure due to a relative 10% increase in prevailing interest rates from its ~~March~~June 3130, 2004 levels is a loss of approximately $20.2 8 million, representing aan ~~decrease~~increase in fair value of its fixed-rate ~~assets~~liabilities that is not offset by aan ~~decrease~~increase in fair value of its fixed-rate ~~liabilities~~assets. Because ~~the~~ the Company actively manages its assets and liabilities and has strategies in ~~place~~ place to minimize its exposure to loss as interest rate changes occur, it ~~expects~~ expects that actual losses would be less than the estimated potential loss.

Option-adjusted duration is a common measure for the price sensitivity of a fixed-maturity portfolio to changes in interest rates. For example, if interest rates increase 1%, the fair value of an asset with a duration of 5.0 years is expected to decrease in value by approximately 5%. The Company ~~estimates~~ estimates the option-adjusted duration of its assets and liabilities using a number of different interest rate scenarios, assuming continuation of existing ~~investment~~ investment and interest crediting strategies, including maintaining an appropriate level of liquidity. Actual company and contract owner behaviors may be different than was assumed in the estimate of option-adjusted duration and these differences may be material.

~~The overall interest-credited rate environment has continued to decline in 2004.~~ A significant portion of the Company’s fixed annuity contracts (including the fixed option of variable contracts) ~~has~~have reached or isare near the ~~minimum~~ minimum contractual guaranteed rate (generally 3% or 4%). Continual declines in in interest rates could cause the spread between the yield on the portfolio and the interest rate credited to policyholders to deteriorate.

The Company has had the ability, limited by minimum interest rate guarantees, to respond to the generally declining interest rate environment in the last five years by lowering crediting rates in response to lower investment returns. See the earlier discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on the calculation of investment yield and net investment spread used by the Company’s management as a key component in evaluating the profitability of its annuity business. The trends experienced during the ~~three~~six months ended ~~March~~June 3130, 2004 and the three years ended December 31, 2003 in the Company’s yield on average invested assets and rate of interest credited on average interest-bearing liabilities, 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:

2933

	Three months
	Six months ended
	ended March 31,			Years ended December, 31
	June 30,						Years ended December, 31
	2004			2003			2002			2001
10-year U.S. Treasury bond rate:		4.00	%		4.01	%		4.61	%		5.02	%
Average 10-year U.S. Treasury bond rate:		4.29	%		4.01	%		4.61	%		5.02	%
AIG SunAmerica Life Assurance Company:
Average yield on Bond Portfolio		5.7479			5.75			6.23			6.82
Rate paid on average interest-bearingliabilities		3.68			3.73			3.95			4.49
Rate paid on average interest-bearing liabilities		3.69			3.71			3.93			4.58

As a component of its asset-liability management strategy, the Company may utilize 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 seeks to enhance its spread income with dollar roll repurchase agreements (“Dollar Roll Repos”). Dollar Roll Repos involve a sale of MBS by the Company and an agreement to repurchase substantially similar MBS at a later date at an agreed upon price. The Company also seeks to provide liquidity by investing in ~~MBSs~~MBS. ~~MBSs~~MBS are generally investment-grade securities ~~collateralized~~ collateralized by large pools of mortgage loans. ~~MBSs~~MBS generally pay principal and interest monthly. The amount of principal and interest payments may fluctuate as a result of prepayments of the underlying mortgage loans.

There are risks associated with some of the techniques the Company uses to provide liquidity, enhance its spread income and match its assets and liabilities. The primary risk associated with the Company’s Dollar Roll Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its Dollar Roll Repos and Swap Agreements are financially responsible and that the counterparty risk associated with those transactions is minimal. It is the Company’s policy that these agreements are entered into with counterparties who have a debt rating of A/A2 or better from both S&P and Moody’s. The Company continually monitors its credit exposure with respect to these agreements. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the Company’s Swap Agreements are intended to hedge variable-rate assets or liabilities. The primary risk associated with ~~MBSs~~MBS is that a changing interest rate environment might cause prepayment of the underlying obligations at speeds slower or faster than anticipated at the ~~time~~ time of their purchase. As part of its decision to purchase such a security, ~~the~~ the Company assesses the risk of prepayment by analyzing the security’s ~~projected~~ projected performance over an array of interest-rate scenarios. Once such a security is purchased, the Company monitors its actual prepayment experience monthly to reassess the relative attractiveness of the security with the intent to to maximize total return.

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

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

3034

if the fair value of the security is less than its book value, and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date.

DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $4238.40 million of bonds at June ~~March 31~~30, 2004, which constituted approximately 0.65% of total invested assets. At At December 31, 2003, defaulted investments totaled $49.6 million, which constituted approximately 0.7% of total invested assets.

SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company’s existing portfolio of cash and short-term investments, repo capacity on invested assets and, if required, proceeds from invested asset sales. The Company’s liquidity is primarily derived from operating cash flows. from annuity operations. At ~~March~~June 3130, 2004, approximately $43.8661 billion of the ~~Company’s~~ Bond Portfolio had an aggregate unrealized gain of $~~274~~135.85 million, while approximately $~~625~~1.~~5 million~~70 billion of the Bond Portfolio had an aggregate unrealized loss of $3067.9 8 million. In addition, the Company’s investment portfolio currently provides approximately $4846.06 million of monthly cash flow from scheduled principal and interest payments. Historically, cash flows from operations and from the sale of the Company’s annuity products have been more than sufficient in amount to satisfy the Company’s liquidity needs.

Management is aware that prevailing market interest rates may shift significantly and has strategies in place to manage either an increase or decrease in prevailing rates. In a rising interest rate environment, the Company’s average cost of funds would increase over time as it prices its new and renewing annuities to maintain a generally competitive market rate. Management would seek to place new funds in investments that were matched in duration to, and higher yielding than, the liabilities assumed. The Company believes that liquidity to fund withdrawals would be available through incoming cash flow, the sale of short-term or floating-rate instruments or repos on the Company’s substantial MBS segment of the Bond Portfolio, thereby avoiding the sale of fixed-rate assets in an unfavorable bond market.

In a declining rate environment, the Company’s cost of funds would decrease over time, reflecting lower interest crediting rates on its fixed annuities. Should increased liquidity be required for withdrawals, the Company believes that a significant portion of its investments could be sold without adverse consequences in light of the general strengthening that would be expected in the bond market.

If a substantial portion of the Company’s Bond Portfolio diminished significantly in value and/or defaulted, the Company would need to liquidate other portions of its investment portfolio and/or arrange financing. Such events that may cause such a liquidity strain could be the result of economic collapse or terrorist acts.

Management believes that the Company’s liquid assets and its net cash provided by operations will enable the Company to meet any foreseeable cash requirements for at least the next twelve months.

GUARANTEES AND OTHER COMMITMENTS

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. In addition, the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at ~~March~~June 3130, 2004 is $~~557~~480.85 million. In August 2004, these commitments decreased by $287.9 due to early redemption. The remaining commitments have contractual maturity dates as follows: $21.9 million in the remainder of 2004 and $170.7 million in 2005. Related to each of these agreements are ~~participation~~ participation agreements with the ~~Company’s~~ Parent, under which the Parent will share in $~~222~~61.5 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: $21.9 million in 2004, $385.9 million in 2005 and $150.0 million in 2006. The~~ Internal Revenue Service has ~~initiated~~completed examinations into the transactions underlying these commitments, including the Company’s role in the transactions. The ~~Company~~examination isdid ~~fully cooperating with the IRS. Management does~~ not ~~anticipate~~result ~~any~~in a material ~~losses~~loss ~~with respect~~ to ~~these commitments~~the Company.

At ~~March~~June 3130, 2004, the Company held reserves for GICs with maturity dates as follows: $185.36 million in 2005 and $28.24 million in 2006 and thereafter.

3135

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). (For further discussion see Note 2 of Notes to Consolidated Financial Statements.)

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 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 ~~March~~June 3130, 2004.

The federal government does not directly regulate the business of insurance, however, the Company and its products are governed by federal agencies, including the SEC, the Internal Revenue Service, and the self-regulatory organization, the National Association of Securities Dealers, Inc. (“NASD”). 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.

Recently there 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, among other items, 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, the NASD and on a federal level, which, if passed, could have an impact on the business of the Company and/or its subsidiaries.

3236

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 2933 to 3034 herein.

DISCLOSURE CONTROLS & PROCEDURES

The Company’s disclosure controls 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 fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

3337

PART II —- OTHER INFORMATION

Item 1. Legal Proceedings

Various lawsuits against the Company have arisen in the ordinary course of business. Contingent liabilities arising from litigation, income taxes and regulatory and other matters are not considered material in relation to the ~~financial~~ financial position, results of operations or cash flows of the Company.

On April 5, 2004, a purported class action captioned ~~NIKITA~~Nitika Mehta, as Trustee of the N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The lawsuit alleges certain improprieties in conjunction with alleged market timing activities. The probability of any particular outcome cannot be reasonably estimated at this time.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submissions of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

EXHIBITS

None.

REPORTS FOR FORM 8-K

There were no current reports on Form 8-K filed during the three months ended ~~March~~June 3130, 2004.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AIG SUNAMERICA LIFE ASSURANCE COMPANY Registrant
Date: May 14, 2004	/s/ N. SCOTT GILLIS
Date: August 13, 2004	/s/ N. SCOTT GILLIS
	N. Scott Gillis
	Senior Vice President, Chief Financial Officer and Director

Date: May 14, 2004	/s/ STEWART POLAKOV
Date: August 13, 2004	/s/ STEWART POLAKOV
	Stewart Polakov
	Senior Vice President and Controller (Principal Accounting Officer)

3539

Exhibit Index

Exhibit
10(a)		Third Amendment to Subordinated Loan Agreement for Equity Capital, dated as of March 12, 2004, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to April 30, 2008 and adjusting the interest rate to 4% per annum for the unpaid principal under the Second Amendment to Subordinated Loan Agreement for Equity Capital, dated as of February 27, 2003, defining AIGRS’ rights with respect to the 4.25% notes due April 30, 2005.
10(b)		Fourth Amendment to Subordinated Loan Agreement for Equity Capital, dated as of March 12, 2004, between the Company’s affiliate, SACS, and AIGRS, extending the maturity date to April 30, 2008 and adjusting the interest rate to 4% per annum for the unpaid principal under the Third Amendment to Subordinated Loan Agreement for Equity Capital, dated February 27, 2003, defining AIGRS’ rights with respect to 4.25% notes due April 30, 2005.
31.1		Rule 13a-14(a)/15d-14(a) Certifications
31.2		Rule 13a-14(a)/15d-14(a) Certifications
32		Section 1350 Certifications

Exhibit

31.1		Rule 13a-14(a)/15d-14(a) Certifications

31.2		Rule 13a-14(a)/15d-14(a) Certifications

32		Section 1350 Certifications

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