UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2005

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

For the ~~quarterly~~transition period ~~ended September 30, 2004~~from to

Commission File ~~No.~~ Number 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY

Incorporated in Arizona 86-0198983 IRS Employer Identification No.


Incorporated in Arizona		86-0198983
		I.R.S. 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]~~þ No ~~[ ]~~o

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

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ~~REGISTRANT~~ISSUER’S CLASSES OF COMMON STOCK, ONAS ~~NOVEMBER~~OF 12MAY 13, ~~2004 WAS AS FOLLOWS~~2005: 3,511

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

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

AIG SUNAMERICA LIFE ASSURANCE COMPANY

INDEX

	Page
	Number(s)
Part I — Financial Information
Part I – Financial Information
Consolidated Balance Sheet (Unaudited) — September 30, 2004 and December 31, 2003		2-3
Item 1. Financial Statements
Consolidated Statement of Income and Comprehensive Income (Unaudited) — Three Months and Nine Months Ended September 30, 2004 and 2003		4-5
Consolidated Balance Sheet (Unaudited) – March 31, 2005 and December 31, 2004		2-3
Consolidated Statement of Cash Flows (Unaudited) - Nine Months Ended September 30, 2004 and 2003		6-7
Consolidated Statement of Operations and Comprehensive Income (Unaudited) – Three Months Ended March 31, 2005 and 2004		4-5
Notes to Consolidated Financial Statements (Unaudited)		8-18
Consolidated Statement of Cash Flows (Unaudited) – Three Months Ended March 31, 2005 and 2004		6-7
Management’s Discussion and Analysis of Financial Condition and Results of Operations		19-38
Notes to Consolidated Financial Statements (Unaudited)		8-11
Quantitative and Qualitative Disclosures About Market Risk		39
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12-29
Disclosure Controls and Procedures		39
Item 3. Quantitative and Qualitative Disclosures About Market Risk		29
Part II — Other Information		40
Item 4. Controls and Procedures		29
EX-31.1
Part II – Other Information
EX-31.2
Item 1. Legal Proceedings		30
EX-32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3. Defaults Upon Senior Securities		30
Item 4. Submission of Matters to a Vote of Security Holders		30
Item 5. Other Information		30
Item 6. Exhibits		30
Exhibit 31.1
Exhibit 31.2
Exhibit 32

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

	September 30,		December 31,
	2004		2003
	(in thousands)
ASSETS
Investments and cash:
Cash and short-term investments	$	261,815	$	133,105
Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: September 30, 2004, $5,115,272; December 31, 2003, $5,351,183)		5,267,874		5,505,800
Mortgage loans		675,778		716,846
Policy loans		188,150		200,232
Mutual funds		10,089		21,159
Common stocks available for sale, at fair value (cost: September 30, 2004, $4,875; December 31, 2003, $635)		4,889		727
Real estate		20,091		22,166
Securities lending collateral		1,327,722		514,145
Other invested assets		32,724		10,453
Total investments and cash		7,789,132		7,124,633
Variable annuity assets held in separate accounts		20,586,997		19,178,796
Accrued investment income		75,927		74,647
Deferred acquisition costs		1,331,563		1,264,321
Other deferred expenses		262,019		241,007
Income taxes currently receivable from Parent		—		13,856
Goodwill		14,038		14,038
Other assets		54,193		59,166
TOTAL ASSETS	$	30,113,869	$	27,970,464

CONSOLIDATED BALANCE SHEET

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


	March 31,		December 31,
	2005		2004

	(in thousands)
ASSETS

Investments and cash:
Cash and short-term investments	$	363,187	$	201,117
Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: March 31, 2005, $4,846,125; December 31, 2004, $4,987,728)		4,912,725		5,139,477
Mortgage loans		638,870		624,179
Policy loans		180,801		185,958
Mutual funds		20,694		6,131
Common stocks available for sale, at fair value (cost: March 31, 2005, $25,015; December 31, 2004, $25,015)		27,513		26,452
Securities lending collateral		825,030		883,792
Other invested assets		38,191		58,880


Total investments and cash		7,007,011		7,125,986

Variable annuity assets held in separate accounts		22,291,190		22,612,451
Accrued investment income		74,371		73,769
Deferred acquisition costs		1,378,568		1,349,089
Other deferred expenses		257,920		257,781
Income taxes currently receivable from Parent		19,404		9,945
Goodwill		14,038		14,038
Other assets		52,317		52,956


TOTAL ASSETS	$	31,094,819	$	31,496,015

See accompanying notes to consolidated financial statements.

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

	September 30,		December 31,
	March 31,		December 31,
	2004		2003
	2005		2004
	(in thousands)
LIABILITIES AND SHAREHOLDER’S EQUITY
Reserves, payables and accrued liabilities:
Reserves for fixed annuity contracts and fixed accounts of variable annuity contracts	$	4,161,363	$	4,274,329
Reserves for fixed annuity and fixed accounts of variable annuity contracts	$	3,860,908	$	3,948,158
Reserves for universal life insurance contracts		1,~~549~~517,~~073~~159		1,~~609~~535,~~233~~905
Reserves for guaranteed investment contracts		~~214~~216,~~734~~052		~~218~~215,~~032~~331
Reserves for guaranteed benefits		77,~~977~~182		1276,~~022~~949
Securities lending payable		1825,~~327,722~~030		~~514~~883,~~145~~792
Income taxes currently payable to Parent		181		—
Due to affiliates		19,621		21,655
Due to affiliates		9,095		19,289
Payable to brokers		118,922		—
Payable to brokers		31,961		1,140
Other liabilities		168,383		190,198
Other liabilities		194,201		248,258
Total reserves, payables and accrued liabilities		6,803,257		6,871,988
Total reserves, payables and accrued liabilities		7,566,307		6,896,448
Variable annuity liabilities related to separate accounts		22,291,190		22,612,451
Variable annuity liabilities related to separate accounts		20,586,997		19,178,796
Deferred income taxes		264,269		257,532
Subordinated notes payable to affiliates		41,483		41,520
Total liabilities		29,358,716		29,741,971
Deferred income taxes		312,234		291,152
Total liabilities		28,507,021		26,407,916
Shareholder’s equity:
Common stock		3,511		3,511
Additional paid-in capital		1760,~~224,885~~990		1758,~~224,885~~346
Retained earnings		~~309~~940,~~032~~241		~~261~~919,~~542~~612
Accumulated other comprehensive income		6931,~~420~~361		72,~~610~~575
Total shareholder’s equity		1,~~606~~736,~~848~~103		1,~~562~~754,~~548~~044
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	3031,~~113~~094,~~869~~819	$	2731,~~970~~496,~~464~~015

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME~~ ~~For the three months and nine months ended September 30, 2004 and 2003~~ ~~(Unaudited)~~

	Three Months						Nine Months
	2004			2003			2004			2003
	(in thousands)
REVENUES
Fee income:
Variable annuity policy fees, net of reinsurance	$	91,932		$	72,200		$	270,492		$	201,179
Asset management fees		23,000			17,625			66,521			46,414
Universal life insurance policy fees, net of reinsurance		7,481			8,192			25,188			26,540
Surrender charges		6,482			6,895			19,973			21,249
Other fees		3,857			3,578			11,049			10,430
Total fee income		132,752			108,490			393,223			305,812
Investment income		88,166			100,103			273,257			299,166
Net realized investment losses		(15,151	)		(17,940	)		(24,877	)		(26,570	)
Total revenues		205,767			190,653			641,603			578,408
BENEFITS AND EXPENSES
Interest expense:
Fixed annuity contracts and fixed accounts of variable annuity contracts		35,799			38,482			106,606			116,575
Universal life insurance contracts		18,474			19,303			55,479			57,142
Guaranteed investment contracts		1,550			2,042			4,264			6,089
Subordinated notes payable		523			542			1,621			2,044
Total interest expense		56,346			60,369			167,970			181,850
General and administrative expenses		32,649			26,275			104,282			84,607
Amortization of deferred acquisition costs and other deferred expenses		29,266			50,269			114,005			139,798
Annual commissions		15,114			11,422			45,245			41,595
Claims on universal life contracts, net of reinsurance recoveries		3,577			4,022			13,499			15,255
Guaranteed benefits, net of reinsurance recoveries		17,314			14,723			48,240			51,182
Total benefits and expenses		154,266			167,080			493,241			514,287
PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		51,501			23,573			148,362			64,121
Income tax expense		8,418			5,422			35,783			14,748
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		43,083			18,151			112,579			49,373
Cumulative effect of accounting change, net of tax		—			—			(62,589	)		—
NET INCOME	$	43,083		$	18,151		$	49,990		$	49,373

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

For the three months ended March 31, 2005 and 2004

(Unaudited)


	2005		2004

	(in thousands)
REVENUES

Fee income:
Variable annuity policy fees, net of reinsurance	$	102,605	$	87,015
Asset management fees		20,733		22,097
Universal life insurance policy fees, net of reinsurance		8,558		9,192
Surrender charges		6,555		6,999
Other fees		3,718		3,621

Total fee income		142,169		128,924

Investment income		82,433		90,954
Net realized investment gains (losses)		17,687		(15,177	)


Total revenues		242,289		204,701


BENEFITS AND EXPENSES
Interest expense:
Fixed annuity and fixed accounts of variable annuity contracts		31,831		35,236
Universal life insurance contracts		17,672		18,481
Guaranteed investment contracts		1,971		1,335
Subordinated notes payable to affiliates		—		560

Total interest expense		51,474		55,612
Amortization of bonus interest		3,209		1,938
Claims on universal life contracts, net of reinsurance recoveries		5,356		4,823
Guaranteed minimum death benefits, net of reinsurance recoveries		11,203		17,774
General and administrative expenses		33,690		36,224
Amortization of deferred acquisition costs and other deferred expenses		51,997		29,504
Annual commissions		18,353		15,014


Total benefits and expenses		175,282		160,889


PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		67,007		43,812

Income tax expense		19,275		12,196


INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		47,732		31,616

Cumulative effect of accounting change, net of tax		—		(62,589	)


NET INCOME (LOSS)	$	47,732	$	(30,973	)

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY CONSOLIDATED STATEMENT OF ~~INCOME~~OPERATIONS AND COMPREHENSIVE INCOME (Continued) For the three months ~~and nine months~~ ended ~~September~~March 3031, ~~2004~~2005 and ~~2003~~2004 (Unaudited)

	Three Months						Nine Months
	2005			2004
	2004			2003			2004			2003
	(in thousands)
	(in thousands)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
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	$	(56,489	)	$	65,852
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	$	50,076		$	(17,432	)	$	(24,292	)	$	79,494
Less reclassification adjustment for net realized (gains) losses included in net income		(6,602	)		7,414
Less reclassification adjustment for net realized losses included in net income		12,988			11,645			19,386			16,400
Net unrealized losses on foreign currency		(316	)		—
Income tax (expense) benefit		(22,~~073~~193	)		2(25,~~025~~643	)		~~1,716~~			~~(33,564~~	)
OTHER COMPREHENSIVE INCOME (LOSS)		40(41,~~991~~214	)		(347,~~762~~623	)		~~(3,190~~	)		~~62,330~~
COMPREHENSIVE INCOME	$	846,~~074~~518		$	1416,~~389~~650		$	~~46,800~~		$	~~111,703~~

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~CONSOLIDATED STATEMENT OF CASH FLOWS~~ ~~For the nine months ended September 30, 2004 and 2003~~ ~~(Unaudited)~~

	2004			2003
	(in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income	$	49,990		$	49,373
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 and fixed accounts of variable annuity contracts		106,606			116,575
Universal life insurance contracts		55,479			57,142
Guaranteed investment contracts		4,264			6,089
Net realized investment losses		24,877			26,570
Amoritization of premium on securities		723			48
(Gain) loss on other invested assets		(5,869	)		5,507
Amortization of deferred acquisition costs and other deferred expenses		114,005			139,798
Depreciation of fixed assets		1,227			898
Acquisition costs deferred		(190,437	)		(158,851	)
Other expenses deferred		(51,312	)		(51,166	)
Provision (benefit) for deferred income taxes		56,501			(48,611	)
Change in:
Accrued investment income		(1,280	)		(7,438	)
Other assets		3,746			(7,656	)
Income taxes currently receivable from/payable to Parent		14,037			52,446
Due to affiliates		(10,194	)		(14,733	)
Other liabilities		11,593			(4,683	)
Other, net		12,536			11,617
NET CASH PROVIDED BY OPERATING ACTIVITIES		259,081			172,925
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks		(1,153,904	)		(1,431,013	)
Mortgage loans		(25,760	)		(42,859	)
Other investments, excluding short-term investments		(20,671	)		(14,970	)
Sales of:
Bonds, notes and redeemable preferred stocks		755,843			803,180
Other investments, excluding short-term investments		14,589			269
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks		633,620			767,055
Mortgage loans		67,747			35,215
Other investments, excluding short-term investments		12,308			70,107
NET CASH PROVIDED BY INVESTING ACTIVITIES	$	283,772		$	186,984

CONSOLIDATED STATEMENT OF CASH FLOWS

For the three months ended March 31, 2005 and 2004

(Unaudited)


	2005			2004

	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	47,732		$	(30,973	)
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 and fixed accounts of variable annuity contracts		31,831			35,236
Universal life insurance contracts		17,672			18,481
Guaranteed investment contracts		1,971			1,335
Net realized investment (gains) losses		(17,687	)		15,177
Amortization of net premium/accretion of net discount on investments		2,574			(235	)
Amortization of deferred acquisition costs and other expenses		55,206			31,442
Acquisition costs deferred		(54,503	)		(65,611	)
Other expenses deferred		(8,821	)		(10,614	)
Provision for deferred income taxes		28,930			(12,055	)
Change in:
Accrued investment income		(602	)		(1,575	)
Other assets		478			(13,189	)
Income taxes currently payable to/receivable from Parent		(9,459	)		59,718
Due from/to affiliates		(2,034	)		(5,743	)
Other liabilities		(11,184	)		(14,619	)
Other, net		(1,369	)		4,725


NET CASH PROVIDED BY OPERATING ACTIVITIES		80,735			74,089


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks		(214,823	)		(708,678	)
Mortgage loans		(32,575	)		—
Other investments, excluding short-term investments		(25,448	)		(88	)
Sales of:
Bonds, notes and redeemable preferred stocks		266,714			592,988
Other investments, excluding short-term investments		36,577			485
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks		207,365			224,361
Mortgage loans		18,120			17,469
Other investments, excluding short-term investments		5,243			5,237


NET CASH PROVIDED BY INVESTING ACTIVITIES	$	261,173		$	131,774

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) For the ~~nine~~three months ended ~~September~~March 3031, ~~2004~~2005 and ~~2003~~2004 (Unaudited)

	2004			2003
	2005			2004
	(in thousands)
CASH FLOW FROM FINANCING ACTIVITIES:
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits received on:
Fixed annuity contracts and fixed accounts of variable annuity contracts	$	1,082,777		$	1,181,329
Fixed annuity and fixed accounts of variable annuity contracts	$	296,835		$	372,567
Universal life insurance contracts		3210,~~532~~814			3411,~~176~~252
Net exchanges from the fixed accounts of variable annuity contracts		(~~962~~260,~~641~~709	)		(~~732~~386,~~102~~957	)
Withdrawal payments on:
Fixed annuity contracts and fixed accounts of variable annuity contracts		(330,033	)		(349,241	)
Fixed annuity and fixed accounts of variable annuity contracts		(134,730	)		(104,031	)
Universal life insurance contracts		(5417,~~943~~233	)		(4517,~~307~~414	)
Guaranteed investment contracts		(61,~~673~~250	)		(75,~~647~~583	)
Claims and annuity payments on:
Claims and annuity payments, net of reinsurance, on:
Fixed annuity contracts and fixed accounts of variable annuity contracts		(83,045	)		(82,191	)
Fixed annuity and fixed accounts of variable annuity contracts		(26,124	)		(28,281	)
Universal life insurance contracts		(8422,~~879~~441	)		(9031,~~912~~097	)
Net payment related to a modified coinsurance transaction		~~(4,738~~—	)		(184,~~959~~738	)
Dividend paid to Parent		(225,~~500~~000	)		(102,~~187~~500	)
NET CASH USED IN FINANCING ACTIVITIES		(~~414~~179,~~143~~838	)		(~~121~~196,~~041~~782	)
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS		~~128~~162,~~710~~070			~~238~~9,~~868~~081
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD		~~133~~201,~~105~~117			~~116~~133,~~882~~105
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD AT END OF PERIOD AT END OF PERIOD	$	261,815		$	355,750
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD	$	363,187		$	142,186
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on indebtedness	$	~~1,621~~—		$	~~2,044~~560
Income taxes paid to Parent	$	47,424		$	51,087
Income taxes (received from) paid to Parent	$	(196	)	$	47,424

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY ~~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, at which time 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 nine months ended September 30, 2003 have been restated for the addition to pretax income of $10,034,000 to reflect the SAAMCo activity.
		SAAMCo and its wholly owned distributor, SACS, and its wholly owned servicing administrator, SFS, are included in the Company’s asset management segment (see Note 5). These companies earn fee income by managing, distributing and administering a diversified family of mutual funds, managing certain subaccounts offered 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 September 30, 2004 and December 31, 2003, the results of its consolidated operations for the three months and nine months ended September 30, 2004 and 2003 and its consolidated cash flows for the nine months ended September 30, 2004 and 2003. The results of operations for the three months and nine months ended September 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	BASIS OF PRESENTATION

	These statements are unaudited. In the opinion of management, all adjustments consisting only of normal recurring accruals have been made for a fair statement of the results presented herein. Certain amounts have been reclassified in the 2004 financial statements to conform to their 2005 presentation. For further information, refer to the Annual Report on Form 10-K of AIG SunAmerica Life Assurance Company (the “Company”) for the year ended December 31, 2004.

2.	COMMITMENTS AND CONTINGENT LIABILITIES

	The Company has six agreements outstanding 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 31, 2005 is $195,442,000. The expiration dates of these commitments are as follows: $81,012,000 in the remainder of 2005 and $114,430,000 in 2006. Related to each of these agreements are participation agreements with SunAmerica Life Insurance Company, the Company’s immediate parent, (the “Parent”) under which the Parent will share in $62,590,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements.

	At March 31, 2005, the Company has a commitment to purchase a total of approximately $4,000,000 of asset-backed securities in the ordinary course of business. This commitment has a contractual maturity date in 2006.

	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 on April 5, 2004 in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The action has been transferred to and is currently pending in the United States District Court for the District of Maryland, Case No. 04-md-15863, as part of a Multi-District Litigation proceeding. 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.

	Various federal, state and other regulatory agencies are reviewing certain transactions and practices of the Company and its subsidiaries in connection with industry-wide and other inquiries. In the opinion of the Company’s management, based on the current status of these inquiries, it is not likely that any of these inquiries will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows of the Company.

	Various lawsuits against the Company and its subsidiaries 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 consolidated financial position, results of operations or cash flows of the Company.

3.	RELATED PARTY TRANSACTION

	On May 1, 2005, American International Group, Inc. (“AIG”), the Company’s ultimate parent, publicly expressed its intent to include in its restated financial statements for 2000 through 2003 and its financial statements for 2004 to be included in AIG’s Annual Report on Form 10-K for the year ended December 31, 2004 when filed, adjustments attributable to compensation expense related to the SICO Deferred Compensation Profit Participation Plan (the “SICO Plan”). As a result of AIG’s expressed intent to record such compensation expense, the Company has determined that, as a subsidiary of AIG, it is appropriate to record the compensation expense related to its employees’ participation in the SICO Plan.

	As total SICO compensation expense for each prior year would not have been material to any such prior year, in the first quarter of 2005, the Company has recorded the total amount of compensation expense related to the SICO Plan that would have been recorded in all prior periods through December 31, 2004 as a reduction of retained earnings on the consolidated balance sheet of $2,103,000, with a corresponding increase to additional paid-in capital, and with no effect on total shareholder’s equity or cash flows. Compensation expense related to the SICO Plan for the first quarter of 2005 was $541,000 and included in general and administrative expenses in the consolidated statement of operations and comprehensive income. The Company will record compensation expense related to the SICO Plan for all future periods.

	In making this determination, the Company has evaluated the impact that expense recognition would have had on all prior years to which SICO Plan compensation would have applied. In addition, these amounts have been calculated as variable stock awards, which consider the fair market value of AIG common stock at each measurement date, and would include any distributions made under the SICO Plan.

	In 1975, the voting shareholders and Board of Directors of Starr International Company (“SICO”), a private holding company whose principal asset consists of approximately 12% of AIG’s outstanding common stock as of January 31, 2005, decided that a portion of the capital value of SICO (AIG shares of their cash equivalent) should be used to provide an incentive plan for the current and succeeding managements of all AIG companies, including the Company. None of the costs of the various benefits provided under the SICO Plan were paid by the Company.

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

2.		RECENTLY ISSUED ACCOUNTING STANDARDS
4.	SUBSEQUENT EVENT
		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 certain other expenses. 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.
	AIG has announced that it has delayed filing its Annual Report on form 10-K for the year ended December 31, 2004 to allow AIG’s Board of Directors and new management adequate time to complete an extensive review of AIG’s books and records. The review includes issues arising from pending investigations into non-traditional insurance products and certain assumed reinsurance transactions by the Office of the Attorney General for the State of New York and the Securities and Exchange Commission and from AIG’s decision to review the accounting treatment of certain additional items. AIG has announced that the findings of that review have resulted in AIG’s decision to restate its financial statements for the years ended December 31, 2003, 2002, 2001 and 2000, the quarters ended March 31, June 30 and September 30, 2004 and 2003 and the quarter ended December 31, 2003. Circumstances affecting AIG can have an impact on the Company. For example, beginning in March 2005, the major rating agencies downgraded the ratings of AIG in a series of actions which resulted in downgrades and ratings actions being taken with respect to the Company’s financial strength ratings. Accordingly, management can give no assurance that any further changes in circumstances for AIG will not impact the Company.
		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 that provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums.
5.	SEGMENT INFORMATION
		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.
	The Company conducts its business through two business segments, annuity operations and asset management operations. Annuity operations consists of the sale and administration of deposit-type insurance contracts, including fixed and variable annuity contracts, universal life insurance contracts and guaranteed investment contracts. Asset management operations, which includes the managing, distributing and administering a diversified family of mutual funds, managing certain subaccounts offered within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios, is conducted by AIG SunAmerica Asset Management Corp. and its subsidiary and distributor, AIG SunAmerica Capital Services, Inc., and its subsidiary and servicing administrator, AIG SunAmerica Fund Services, Inc.. Following is selected information pertaining to the Company’s business segments.
		The Company offers GMDB options that guarantee for virtually all contract holders, that upon 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 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 guaranteed benefits, net of reinsurance recoveries, if actual experience or other evidence suggests that earlier assumptions should be revised. As of September 30, 2004, approximately 30% of in-force contracts with GMDB (calculated based on account value) have been reinsured.
		GMAV is a feature offered on certain variable annuity products. If available and 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 deposits invested during the first ninety days, adjusted for any subsequent 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 and through investment income in the consolidated statement of income and comprehensive income.
		GMWB is a feature offered on certain variable annuity products. If available and elected by the contract holder at the time of contract issuance, this feature provides a guaranteed annual withdrawal stream, regardless of market performance, equal to deposits invested during the first ninety days adjusted for any subsequent withdrawals (“Eligible Premium”). These guaranteed annual withdrawals of up to 10% of Eligible Premiums, are available after either a three-year or a five-year

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

2.		RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
		waiting period as elected by the contract holder at time of contract issuance, without reducing the future amounts guaranteed. If no withdrawals have been made during the waiting period of 3 or 5 years, the contract holder will realize an additional 10% or 20%, respectively, of Eligible Premium after all other amounts guaranteed under this benefit have been paid. GMWBs are considered to be derivatives under FAS 133 and are recognized at fair value in the consolidated balance sheet and through investment income in the consolidated statement of income and comprehensive income.
		If available and 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, there are virtually no policies eligible to receive this benefit at September 30, 2004. 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 guaranteed benefits, net of reinsurance recoveries, 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 sold after July 2004.

5.	SEGMENT INFORMATION (Continued)


			Asset
	Annuity		Management
	Operations		Operations			Total

	(in thousands)
THREE MONTHS ENDED MARCH 31, 2005:

REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	102,605	$	—		$	102,605
Asset management fees		—		20,733			20,733
Universal life insurance policy fees, net of reinsurance		8,558		—			8,558
Surrender charges		6,555		—			6,555
Other fees		—		3,718			3,718

Total fee income		117,718		24,451			142,169

Investment income		81,897		536			82,433
Net realized investment gains (losses)		17,841		(154	)		17,687


Total revenues		217,456		24,833			242,289

BENEFITS AND EXPENSES:
Interest expense		51,474		—			51,474
Amortization of bonus interest		3,209		—			3,209
Claims on universal life contracts, net of reinsurance recoveries		5,356		—			5,356
Guaranteed benefits, net of reinsurance recoveries		11,203		—			11,203
General and administrative expenses		24,296		9,394			33,690
Amortization of deferred acquisition costs and other deferred expenses		44,291		7,706			51,997
Annual commissions		18,353		—			18,353


Total benefits and expenses		158,182		17,100			175,282


Pretax income before cumulative effect of accounting change	$	59,274	$	7,733		$	67,007


Total assets	$	30,886,653	$	208,166		$	31,094,819


Expenditures for long-lived assets	$	—	$	16		$	16

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

25. ~~RECENTLY~~BUSINESS ~~ISSUED~~SEGMENTS ~~ACCOUNTING STANDARDS~~ (Continued) ~~Details concerning the Company’s guaranteed benefit exposures as of September 30, 2004 are as follows:~~

				Highest Specified
				Asset
				Anniversary Account
	Annuity			Management
	Return of Net			Value Minus
	Operations			Operations			Total
	Deposits Plus a			Withdrawals Post
	(in thousands)
	Minimum Return			Anniversary
THREE MONTHS ENDED MARCH 31, 2004:
	(dollars in thousands)
REVENUES:
In the event of death (GMDB and EEB):
Fee income:
Account value	$	12,161,430		$	11,795,514
Variable annuity policy fees, net of reinsurance	$	87,015		$	—		$	87,015
Net amount at risk (a)		1,221,718			1,488,877
Asset management fees		—			22,097			22,097
Average attained age of contract holders		65			64
Universal life insurance policy fees, net of reinsurance		9,192			—			9,192
Range of guaranteed minimum return rates		0%-5	%		0	%
Surrender charges		6,999			—			6,999
At annuitization (GMIB):
Other fees		—			3,621			3,621
Account value	$	6,375,984
Total fee income		103,206			25,718			128,924
Net amount at risk (a)		4,841
Investment income		90,777			177			90,954
Weighted average period remaining until earliest annuitization	3.9 Years
Net realized investment losses		(15,177	)		—			(15,177	)
Range of guaranteed minimum return rates		0%-6.5	%
Total revenues		178,806			25,895			204,701
Accumulation at specified date (GMAV):
BENEFITS AND EXPENSES:
Account value	$	1,313,412
Interest expense		55,052			560			55,612
Net amount at risk (a)		3,462
Amortization of bonus interest		1,938						1,938
Weighted average period remaining until guaranteed payment	9.1 Years
Claims on universal life contracts, net of reinsurance recoveries		4,823			—			4,823
Annual withdrawals at specified date (GMWB):
Guaranteed benefits, net of reinsurance recoveries		17,774			—			17,774
Account value	$	135,316
General and administrative expenses		27,328			8,896			36,224
Net amount at risk (b)		162
Amortization of deferred acquisition costs and other deferred expenses		22,063			7,441			29,504
Weighted average period remaining until expected payout	14.1 Years
Annual commissions		15,014			—			15,014
Total benefits and expenses		143,992			16,897			160,889
Pretax income before cumulative effect of accounting change	$	34,814		$	8,998		$	43,812
Total assets	$	28,902,900		$	178,728		$	29,081,628
Expenditures for long-lived assets	$	—		$	45		$	45

(a)		Net amount at risk represents the guaranteed benefit exposure in excess of the current account value, net of applicable 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.
(b)		Net amount at risk represents the guaranteed benefit exposure in excess of the current account value if all contract holders exercise the maximum withdrawal benefits at the same balance sheet date. If no withdrawals have been made during the waiting period of 3 or 5 years, the contract holder will realize an additional 10% or 20% of Eligible Premium, respectively, after all other amounts guaranteed under this benefit have been paid. The additional 10% or 20% enhancement increases the net amount at risk by $17,814,000 payable no sooner than 13 or 15 years from contract issuance for the 3 or 5 year waiting periods, respectively.

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

2.MANAGEMENT’S ~~RECENTLY~~DISCUSSION ~~ISSUED~~AND ~~ACCOUNTING STANDARDS (Continued) The following summarizes the reserve for guaranteed benefits, net of reinsurance, on variable contracts reflected in the general account:~~ANALYSIS

	(in thousands)
Balance at January 1, 2004 (c)	$	65,423
Guaranteed benefits incurred, net of reinsurance recoveries		48,240
Guaranteed benefits paid, net of reinsurance recoveries		(35,686	)
Balance at September 30, 2004	$	77,977

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 (cthe “Company”) ~~Includes~~for ~~amounts~~the ~~from~~three ~~the~~months ~~one-time~~ended ~~cumulative~~March 31, ~~accounting~~2005 (“2005”), ~~change~~and ~~resulting~~March 31, ~~from~~2004 ~~the~~(“2004”) ~~adoption~~follows. ofCertain ~~SOP~~prior ~~03-1~~period amounts have been reclassified to conform to the current period’s presentation.

~~The~~ In ~~following~~connection ~~assumptions~~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 ~~methodology~~in ~~were~~any ~~used~~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 ~~determine~~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 ~~reserve~~foregoing, ~~for~~forward-looking ~~guaranteed~~statements ~~benefits~~include atstatements ~~September~~which 30represent the Company’s beliefs concerning future levels of sales and redemptions of the Company’s products, investment ~~2004:~~spreads and yields, or the earnings and profitability of the Company’s activities.

• Forward-looking ~~Data~~statements ~~used~~are ~~was~~necessarily 5based on estimates and assumptions that are inherently subject to significant business,~~000~~ ~~stochastically~~economic ~~generated~~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 ~~performance~~portfolio. ~~scenarios~~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.

~~• Mean investment performance assumption was 10%.~~OVERVIEW

• The ~~Volatility~~Company’s ~~assumption~~primary ~~was~~activities ~~16%~~are retirement services, herein discussed as 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 annuity contracts, universal life insurance contracts and guaranteed investment contracts (“GICs”). The asset management operations are conducted by the Company’s registered investment advisor subsidiary, AIG SunAmerica Asset Management Corp (“SAAMCo”), and its wholly owned distributor, AIG SunAmerica Capital Services, Inc. (“SACS”), and its wholly owned servicing administrator, AIG SunAmerica Fund Services, Inc. (“SFS”).

• The ~~Mortality~~Company ~~was~~ranks ~~assumed~~among the largest U.S. issuers of variable annuity contracts. The Company distributes its products and services through an extensive network of independent broker-dealers, full-service securities firms and financial institutions. In prior years, GICs were marketed directly to bebanks, ~~64%~~municipalities, asset management firms and direct plan sponsors and through intermediaries, such as managers or consultants servicing these groups. In addition to distributing its variable annuity products through its nine affiliated broker-dealers, the Company distributes its products through a vast network of independent broker-dealers, full-service securities firms and financial institutions. In total, more than 84,000 independent sales representatives are appointed to sell the 75Company’s annuity products. The Company’s nine affiliated broker-80dealers ~~ALB~~are among ~~table~~the largest networks of registered representatives in the nation.

• The ~~Lapse~~Company ~~rates~~believes ~~vary~~that bydemographic ~~contract~~trends ~~type~~have produced strong consumer demand for long-term, investment-oriented products. According to U.S. Census Bureau projections, the number of individuals between the ages of 45 to 64 grew from 51 million to 69 million from 1994 to 2003, making this age group the fastest-growing segment of the U.S. population. Between 1994 and ~~duration~~2003, annual industry premiums from fixed and ~~range~~variable annuities increased from 1%$155 billion to ~~30%~~$267 billion.

• Benefiting ~~The~~from ~~discount~~continued ~~rate~~strong ~~was~~growth ~~approximately~~of 8%the retirement savings market, industry sales of tax-deferred savings products have represented, for a number of years, a significantly larger source of new premiums for the U.S. life insurance industry than have traditional life insurance products. Recognizing the growth potential of this market, the Company focuses its life operations on the sale of variable annuity contracts. In recent years, the Company has enhanced its marketing efforts and expanded its offerings of fee-based variable annuity contracts. Variable accounts within the Company’s variable annuity business entail no portfolio credit risk and requires significantly less capital support than the fixed accounts of variable annuity contracts (“Fixed Options”), which generate net investment income.

		The Company currently offers enhanced crediting rates or bonus payments to contract holders on certain of its products. Such amounts 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 expenses 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 $160.0 million of these expenses from DAC to other deferred expenses, which is reported on the consolidated balance sheet. For the nine months ended September 30, 2004, $29.1 million of these expenses were deferred. For the nine months ended September 30, 2004, amortization of these deferred expenses was $6.7 million. Amortization of other deferred expenses is reported as part of amortization of deferred acquisition costs and other deferred expenses on the consolidated statement of income and comprehensive income. 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 six agreements outstanding 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 September 30, 2004 is $195,439,000. These commitments have contractual maturity dates as follows: $20,500,000 in the remainder of 2004 and $174,939,000 in 2005. Related to each of these agreements are participation agreements with the Parent under which the Parent will share in $62,599,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The Internal Revenue Service has completed

RECENT DEVELOPMENTS

The Company’s ultimate parent, American International Group, Inc. (“AIG”), has announced that it has delayed filing its Annual Report on Form 10-K for the year ended December 31, 2004 to allow AIG’s Board of Directors and new management adequate time to complete an extensive review of AIG’s books and records. The review includes issues arising from pending investigations into non-traditional insurance products and certain assumed reinsurance transactions by the Office of the Attorney General for the State of New York and the Securities and Exchange Commission and from AIG’s decision to review the accounting treatment of certain additional items. AIG has announced that the findings of that review have resulted in AIG’s decision to restate its financial statements for the years ended December 31, 2003, 2002, 2001 and 2000, the quarters ended March 31, June 30 and September 30, 2004 and 2003 and the quarter ended December 31, 2003. Circumstances affecting AIG can have an impact on the Company. For example, beginning in March 2005, the major rating agencies downgraded the ratings of AIG in a series of actions which resulted in downgrades and ratings actions being taken with respect to the Company’s financial strength ratings. Accordingly, management can give no assurance that any further changes in circumstances for AIG will not impact the Company.

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

3.		CONTINGENT LIABILITIES (Continued)
		its examinations into the transactions underlying these commitments, including the Companys’s role in the transactions. The examination did not result in a material loss to the Company.
		At September 30, 2004, the Company has commitments to purchase a total of approximately $24,000,000 of asset-backed securities in the ordinary course of business. The expiration dates of these commitments are as follows: $15,000,000 in 2004 and $9,000,000 in 2006.
		Various federal, state and other regulatory agencies are reviewing certain transactions and practices of the Company and its subsidiaries in connection with industry-wide and other inquiries. In the opinion of the Company’s management and based on the current status of these inquiries, it is not likely that any of these inquiries will have a material adverse effect on the Company’s consolidated financial condition or operation.
		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 $523,000) payable to affiliates totaled $41,483,000 at interest rates ranging from 4.00% to 9.5% at September 30, 2004, and require principal payments of $3,000,000 in 2004 and $37,960,000 in 2008.
		On October 31, 2003, the Company became a party to an existing credit agreement under which the Company agreed to make loans to AIG in an aggregate amount of up to $60,000,000. This commitment expires on October 28, 2005. There was no outstanding balance under this agreement at September 30, 2004.
		At September 30, 2004, a receivable of $5,000,000 was included in due to affiliates on the consolidated balance sheet. This balance is due from AIGRS under the short-term financing arrangement that is discussed in the Related-Party Matters footnote of the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
		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 earned by FSA under this agreement totaled $1.3 million in 2004 and are included in asset management fees in the statement of income and comprehensive income. A fee of $1.2 million was paid to FSA under a different agreement in 2003.
		On October 1, 2001, SAAMCo entered into two administrative services agreements with business trusts established by its affiliate, The Variable Annuity Life Insurance Company (“VALIC”), whereby the trust pays to SAAMCo a fee based on a percentage of average daily net assets invested through VALIC’s annuity products in exchange for services performed. Amounts earned by SAAMCo under this agreement totaled $6.7 million in 2004 and $5.4 million in 2003 and are included in other fees in the consolidated statement of income and comprehensive income.
		SAAMCo and VALIC have an agreement pursuant to which SAAMCo pays a fee based on a percentage of each funds’ average daily net assets invested through VALIC’s annuity products for certain administrative costs incurred by VALIC. Amounts paid by SAAMCo totaled $1.9 million in 2004 and $1.6 million in 2003 and are included in other fees in the consolidated statement of income and comprehensive income.

The Company considers its most critical accounting estimates those used with respect to valuation of certain financial instruments, amortization of deferred acquisition costs (“DAC”) and other deferred expenses and valuation of 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 management exercises that judgment follows.

VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on debt and equity securities available for sale amounted to $43.7 million at March 31, 2005. In determining if and when a decline in fair value below amortized cost is other than temporary, the Company evaluates at each reporting period the market conditions, offering prices, trends of earnings, price multiples, and other key measures for investments in debt and 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 $729.4 million at March 31, 2005 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 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: Policy acquisition costs include commissions and other costs that vary with, and are primarily related to, the production or acquisition of new business. Such costs are deferred and amortized over the estimated lives of the annuity contracts. Approximately 85% of the amortization of DAC and other deferred expenses was attributed to policy acquisition costs deferred by the annuity operations and 15% was attributed to the distribution costs deferred by the asset management operations. For the annuity operations, the Company amortizes DAC and other deferred expenses based on a percentage of expected gross profits (“EGPs”) over the life of the underlying policies. EGPs are computed based on assumptions related to the underlying policies written, including their anticipated duration, the growth rate of the separate account assets (with respect to variable options of the variable annuity contracts) or general account assets (with respect to fixed annuity contracts, Fixed Options and universal life insurance contracts) supporting these obligations, costs of providing contract guarantees and the level of expenses necessary to administer the policies. The Company adjusts amortization of DAC and other deferred expenses (a “DAC unlocking”) when current or estimates of future gross profits to be realized from its annuity contracts are revised as more fully described below. Substantially all of the DAC balance attributed to annuity operations at March 31, 2005 related to variable annuity contracts.

DAC amortization on annuities is impacted by 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 Options, the growth rate depends on the yield on the general account assets supporting those annuity contracts. With respect to the variable options of the variable annuity contracts, 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 rate of the separate account assets in the determination of DAC amortization with respect to its variable annuity contracts 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 that 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 impacted by 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”) which was adopted on January 1, 2004, the Company is required to recognize a liability for guaranteed minimum death benefits and other guaranteed benefits. In calculating the projected liability, five thousand stochastically generated investment performance scenarios were developed using the Company’s best estimates. These assumptions included, among others, mean equity return and volatility, mortality rates and lapse

~~AIG~~rates. ~~SUNAMERICA~~The ~~LIFE~~estimation ~~ASSURANCE~~of ~~COMPANY~~cash flow and the determination of the assumptions used require ~~NOTES~~judgment, TOwhich ~~CONSOLIDATED~~can, ~~FINANCIAL~~at ~~STATEMENTS~~times, ~~(Continued)~~be subjective. ~~(Unaudited)~~

4.		RELATED-PARTY MATTERS (Continued)
		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.
		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.
		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 management, distribution and administration 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.

Several of the guaranteed benefits are sensitive to equity market conditions. The Company uses the purchase of reinsurance and capital market hedging strategies to mitigate the risk of paying benefits in excess of account values as a result of significant downturns in equity markets. Risk mitigation may or may not reduce the volatility of net income resulting from equity market volatility. Reinsurance or hedges are secured when the cost is less than the risk reduction. The Company expects to use either additional reinsurance or capital market hedges for risk mitigation on an opportunistic basis. Despite the purchase of reinsurance or hedges, the reinsurance or hedge secured may be inadequate to completely offset the effects of changes in equity markets.

BUSINESS SEGMENTS

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 annuity contracts, universal life insurance contracts and guaranteed investment 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 Fixed Options. The Company earns fee income on amounts invested in the variable account options and net investment spread on the Fixed 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 managing, distributing and administering a diversified family of mutual funds, servicing as investment advisor to certain variable investment portfolios offered within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios.

RESULTS OF OPERATIONS

NET INCOME totaled $47.7 million in 2005, compared with net loss of $ 31.0 million in 2004.

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 and comprehensive income as a cumulative effect of accounting change for the quarter ended March 31, 2004.

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $67.0 million in 2005, compared with $43.8 million in 2004. The increase in 2005 compared to 2004 was primarily due to higher variable annuity policy fees and net investment gains, partially offset by higher amortization of DAC and other deferred expenses.

INCOME TAX EXPENSE totaled $19.3 million in 2005 and $12.2 million in 2004 representing effective tax rates of 29% and 28%, respectively.

ANNUITY OPERATIONS

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $59.3 million in 2005, compared with $34.8 million in 2004. The increase in 2005 compared to 2004 was primarily due to higher variable annuity policy fee income, higher net realized investment gains and lower expenses, partially offset by higher amortization of DAC and other expenses.

NET INVESTMENT SPREAD, a non-GAAP measure, represents investment income less interest credited to Fixed Options, fixed annuity contracts, guaranteed investment contracts and universal life insurance contracts (collectively “Fixed-Rate Products”) is a key measurement used by the Company in evaluating the profitability of its annuity business. Investment income includes income earned on invested assets, as well as the mark-to-market on

~~AIG~~both ~~SUNAMERICA~~purchased ~~LIFE~~derivatives ~~ASSURANCE~~and ~~COMPANY~~embedded derivatives inherent in certain product guarantees. ~~NOTES~~Accordingly, TOthe ~~CONSOLIDATED~~Company ~~FINANCIAL~~presents ~~STATEMENTS~~an ~~(Continued)~~analysis of net investment spread because the Company has ~~(Unaudited)~~determined this measure to be useful and meaningful.

5 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. ~~SEGMENT~~This basis ~~INFORMATION~~does not include unrealized gains and losses, which are reflected in the carrying value (~~Continued~~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 collateral received from a 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.

				Asset
	Annuity			Management
	Operations			Operations		Total
	(in thousands)
THREE MONTHS ENDED SEPTEMBER 30, 2004:
REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	91,932		$	—	$	91,932
Asset management fees		—			23,000		23,000
Universal life insurance policy fees, net of reinsurance		7,481			—		7,481
Surrender charges		6,482			—		6,482
Other fees		—			3,857		3,857
Total fee income		105,895			26,857		132,752
Investment income		87,932			234		88,166
Net realized investment losses		(15,151	)		—		(15,151	)
Total revenues		178,676			27,091		205,767
BENEFITS AND EXPENSES:
Interest expense		55,823			523		56,346
General and administrative expenses		23,272			9,377		32,649
Amortization of deferred acquisition costs and other deferred expenses		21,160			8,106		29,266
Annual commissions		15,114			—		15,114
Claims on universal life contracts, net of reinsurance recoveries		3,577			—		3,577
Guaranteed benefits, net of reinsurance recoveries		17,314			—		17,314
Total benefits and expenses		136,260			18,006		154,266
Pretax income before cumulative effect of accounting change	$	42,416		$	9,085	$	51,501
Total assets	$	29,917,921		$	195,948	$	30,113,869
Expenditures for long-lived assets	$	—		$	8	$	8

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 March 31,
	2005			2004

	(in thousands)

Investment income	$	81,897		$	90,777
Interest credited to fixed annuity contracts and Fixed Options		(31,831	)		(35,236	)
Interest credited to universal life insurance contracts		(17,672	)		(18,481	)
Interest credited to guaranteed investment contracts		(1,971	)		(1,335	)

Net investment spread		30,423			35,725
Net realized investment gains (losses)		17,841			(15,177	)
Amortization of bonus interest		(3,209	)		(1,938	)
Claims on UL contracts, net of reinsurance recoveries		(5,356	)		(4,823	)
Guaranteed benefits, net of reinsurance recoveries		(11,203	)		(17,774	)
Fee income, net of reinsurance		117,718			103,206
General and administrative expenses		(24,296	)		(27,328	)
Amortization of DAC and other deferred expenses		(44,291	)		(22,063	)
Annual commissions		(18,353	)		(15,014	)

Pretax income before cumulative effect of accounting change	$	59,274		$	34,814

Net investment spread totaled $30.4 million in 2005, compared with $35.7 million in 2004. These amounts equal 2.05% on average invested assets (computed on a daily basis) of $5.93 billion in 2005 and 2.28% on average invested assets of $6.28 billion in 2004. The decrease in the spread reflects the reinvesting in the historically low prevailing interest rate environment that persisted for most of 2004.

~~AIG~~ The ~~SUNAMERICA~~components ~~LIFE~~of ~~ASSURANCE~~net ~~COMPANY NOTES~~investment TOspread ~~CONSOLIDATED~~were ~~FINANCIAL~~as ~~STATEMENTS (Continued)~~follows: ~~(Unaudited)~~

5. SEGMENT INFORMATION (Continued)


	Three months ended March 31,
	2005			2004

	(in thousands)

Net investment spread	$	30,423		$	35,725
Average invested assets		5,925,825			6,279,002
Average interest-bearing liabilities		5,622,317			6,006,388

Yield on average invested assets		5.53	%		5.78	%
Rate paid on average interest bearing liabilities		3.66			3.67

Difference between yield and interest rate paid		1.87	%		2.11	%

Net investment spread as a percentage of average invested assets		2.05	%		2.28	%

				Asset
	Annuity			Management
	Operations			Operations		Total
	(in thousands)
THREE MONTHS ENDED SEPTEMBER 30, 2003:
REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	72,200		$	—	$	72,200
Asset management fees		—			17,625		17,625
Universal life insurance policy fees, net of reinsurance		8,192			—		8,192
Surrender charges		6,895			—		6,895
Other fees		—			3,578		3,578
Total fee income		87,287			21,203		108,490
Investment income		99,123			980		100,103
Net realized investment losses		(17,940	)		—		(17,940	)
Total revenues		168,470			22,183		190,653
BENEFITS AND EXPENSES:
Interest expense		59,827			542		60,369
General and administrative expenses		18,992			7,283		26,275
Amortization of deferred acquisition costs and other deferred expenses		44,400			5,869		50,269
Annual commissions		11,422			—		11,422
Claims on universal life contracts, net of reinsurance recoveries		4,022			—		4,022
Guaranteed benefits, net of reinsurance recoveries		14,723			—		14,723
Total benefits and expenses		153,386			13,694		167,080
Pretax income before cumulative effect of accounting change	$	15,084		$	8,489	$	23,573
Total assets	$	25,990,038		$	218,902	$	26,208,940
Expenditures for long-lived assets	$	—		$	48	$	48

The decline in average invested assets resulted primarily from net exchanges from Fixed Options into the separate accounts of variable annuity contracts, partially offset by new deposits of Fixed Options. Deposits of Fixed Options and renewal deposits on its universal life insurance contracts totaled $307.6 million in 2005 and $383.8 million in 2004, and are primarily deposits for the Fixed Options. On an annualized basis, these deposits represent 22% in 2005 and 26% in 2004, of the related reserve balances at the beginning of the respective periods.

Net investment spread includes 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 $303.5 million in 2005, compared with $272.6 million in 2004. The difference between the Company’s yield on average invested assets and the rate paid on average interest-bearing liabilities was 1.87% in 2005 and 2.11% in 2004.

Investment income (and the related yields on average invested assets) totaled $81.9 million (5.53%) in 2005, compared with $90.8 million (5.78%) in 2004. The decrease in the investment yield reflects the reinvesting in the historically low prevailing interest rate environment that persisted for most of 2004. Expenses incurred to manage the investment portfolio amounted to $0.9 million in 2005 and $1.1 million in 2004. These expenses are included as a reduction of investment income in the consolidated statement of operations and comprehensive income.

Interest expense (and the related rate paid on average interest-bearing liabilities) totaled $51.5 million (3.66%) in 2005 and $55.1 million (3.67%) in 2004. Interest-bearing liabilities averaged $5.62 billion during 2005 and $6.01 billion during 2004.

NET REALIZED INVESTMENT GAINS/LOSSES totaled $17.8 million of gains in 2005 and $15.2 million of losses in 2004. The net realized gain in 2005 included a $3.9 million in net gain from the mark to market of the S&P 500 put options and the GMAV and GMWB embedded derivatives, and impairment writedowns of $0.7 million. The net realized loss in 2004 included a $4.2 million in net loss from the mark to market of the S&P 500 put options and the GMAV and GMWB embedded derivatives, and impairment writedowns of $1.1 million. Thus, net realized gains from sales and redemptions of investments totaled $14.6 million in 2005, compared with net realized losses of $9.9 million in 2004.

The Company sold or redeemed invested assets, principally bonds and notes, aggregating $528.5 million in 2005 and $840.4 million in 2004. Sales of investments result from the active management of the Company’s investment portfolio. Because redemptions of investments are generally involuntary and sales of investments are made in both rising and falling interest rate environments, net gains and losses from sales and redemptions of investments fluctuate from period to period, and represent 0.99% and 0.63% of average invested assets for 2005 and 2004, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent of the Company’s active

~~AIG~~portfolio ~~SUNAMERICA~~management ~~LIFE~~is ~~ASSURANCE~~to ~~COMPANY~~maximize total returns on the investment portfolio, taking into ~~NOTES~~account TOcredit, ~~CONSOLIDATED~~option, ~~FINANCIAL~~liquidity ~~STATEMENTS~~and ~~(Continued)~~interest-rate risk. ~~(Unaudited)~~

5 Impairment writedowns include $0.7 million ~~SEGMENT~~and ~~INFORMATION~~$1.1 million ~~(Continued)~~of provisions principally applied to bonds in 2005 and 2004, respectively. On an annualized basis, impairment writedowns represent 0.05% and 0.07% of average invested assets in the respective periods. For the twenty quarters ended March 31, 2005, impairment writedowns as an annualized percentage of average invested assets have ranged from 0.05% to 1.95% and have averaged 0.69%. Such writedowns are based upon estimates of the fair value of invested assets and recorded when declines in the value of such assets are considered to be other than temporary. Actual realization will be dependent upon future events.

				Asset
	Annuity			Management
	Operations			Operations		Total
	(in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 2004:
REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	270,492		$	—	$	270,492
Asset management fees		—			66,521		66,521
Universal life insurance policy fees, net of reinsurance		25,188			—		25,188
Surrender charges		19,973			—		19,973
Other fees		—			11,049		11,049
Total fee income		315,653			77,570		393,223
Investment income		272,708			549		273,257
Net realized investment losses		(24,877	)		—		(24,877	)
Total revenues		563,484			78,119		641,603
BENEFITS AND EXPENSES:
Interest expense		166,349			1,621		167,970
General and administrative expenses		75,873			28,409		104,282
Amortization of deferred acquisition costs and other deferred expenses		90,490			23,515		114,005
Annual commissions		45,245			—		45,245
Claims on universal life contracts, net of reinsurance recoveries		13,499			—		13,499
Guaranteed benefits, net of reinsurance recoveries		48,240			—		48,240
Total benefits and expenses		439,696			53,545		493,241
Pretax income before cumulative effect of accounting change	$	123,788		$	24,574	$	148,362
Total assets	$	29,917,921		$	195,948	$	30,113,869
Expenditures for long-lived assets	$	—		$	91	$	91

VARIABLE ANNUITY POLICY FEES, NET OF REINSURANCE are generally based on the market value of assets in the separate accounts supporting variable annuity contracts. Such fees totaled $102.6 million in 2005 and $87.0 million in 2004 and are net of reinsurance premiums of $7.2 million and $8.5 million, respectively. The increased fees in 2005 compared to 2004 primarily reflect the improved equity market conditions in the latter part of 2004, and the resulting favorable impact on market values of the assets in the separate accounts. On an annualized basis, variable annuity policy fees represent 1.8% of average variable annuity assets in both periods of $22.87 billion and $20.27 billion in 2005 and 2004, respectively. Variable annuity deposits, which exclude deposits allocated to the Fixed Options, totaled $574.6 million in 2005 and $742.3 million in 2004. On an annualized basis, these amounts represent 10% and 15% of variable annuity reserves at the beginning of the respective periods. The decrease in variable annuity deposits in 2005 reflected lower demand for variable annuity products due to the unfavorable equity market conditions in 2005. Transfers from the Fixed Options 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 Options (“Variable Annuity Product Sales”) amounted to $871.4 million and $1.11 billion in 2005 and 2004, respectively. Such sales primarily reflect those of the Company’s Polaris and Seasons families of variable annuity products which are multi-manager variable annuities that offer investors a choice of several variable funds as well as up to seven fixed funds, depending on the product. The decrease in Variable Annuity Product Sales in 2005 reflects the generally unfavorable equity market conditions in 2005.

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

UNIVERSAL LIFE INSURANCE POLICY FEES, NET OF REINSURANCE amounted to $8.6 million in 2005 and $9.2 million in 2004 and are net of reinsurance premiums of $8.4 million and $8.1 million, respectively. Universal life insurance policy fees consist of mortality charges, up-front fees earned on deposits received and administrative fees, net of reinsurance premiums. The administrative fees are assessed based on the number of policies in force as of the end of each month. The Company acquired its universal life insurance contracts as part of the acquisition of business from MBL Life Assurance Corporation on December 31, 1998 and does not actively market such contracts. Such fees annualized represent 2.3% of average reserves for universal life insurance contracts in both periods.

With respect to all 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.

SURRENDER CHARGES on variable annuity and universal life insurance contracts totaled $6.6 million in 2005 and $7.0 million in 2004. Surrender charge periods range up to nine years primarily from the date a deposit is received. Surrender charges generally are assessed on withdrawals at declining rates.

~~AIG~~ GENERAL AND ~~SUNAMERICA~~ADMINISTRATIVE ~~LIFE~~EXPENSES ~~ASSURANCE~~totaled ~~COMPANY~~$24.3 million in 2005 and $27.3 million in 2004. ~~NOTES~~The TOdecrease ~~CONSOLIDATED~~in ~~FINANCIAL~~2005 ~~STATEMENTS~~results ~~(Continued)~~from higher information technology costs and payroll related expenses ~~(Unaudited)~~in 2004. 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.

5 AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES totaled $44.3 million in ~~SEGMENT~~2005, ~~INFORMATION~~compared ~~(Continued)~~with $22.1 million in 2004. The increase in the amortization reflects higher variable annuity policy fee income, higher net realized investment gains and lower expenses.

				Asset
	Annuity			Management
	Operations			Operations		Total
	(in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 2003:
REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	201,179		$	—	$	201,179
Asset management fees		—			46,414		46,414
Universal life insurance policy fees, net of reinsurance		26,540			—		26,540
Surrender charges		21,249			—		21,249
Other fees		—			10,430		10,430
Total fee income		248,968			56,844		305,812
Investment income		295,948			3,218		299,166
Net realized investment losses		(26,570	)		—		(26,570	)
Total revenues		518,346			60,062		578,408
BENEFITS AND EXPENSES:
Interest expense		179,806			2,044		181,850
General and administrative expenses		59,281			25,326		84,607
Amortization of deferred acquisition costs and other deferred expenses		123,477			16,321		139,798
Annual commissions		41,595			—		41,595
Claims on universal life contracts, net of reinsurance recoveries		15,255			—		15,255
Guaranteed benefits, net of reinsurance recoveries		51,182			—		51,182
Total benefits and expenses		470,596			43,691		514,287
Pretax income before cumulative effect of accounting change	$	47,750		$	16,371	$	64,121
Total assets	$	25,990,038		$	218,902	$	26,208,940
Expenditures for long-lived assets	$	—		$	2,741	$	2,741

ANNUAL COMMISSIONS totaled $18.4 million in 2005, compared with $15.0 million in 2004. Annual commissions generally represent commissions paid quarterly in arrears to maintain the persistency of certain of the Company’s variable annuity contracts. Substantially all of the Company’s currently available variable annuity products allow for an annual commission payment option in return for a lower immediate commission. The vast majority of the Company’s average balances of its variable annuity products are currently subject to such annual commissions. The increase in annual commissions primarily reflects higher trail commissions.

CLAIMS ON UNIVERSAL LIFE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled $5.4 million in 2005, compared with $4.8 million in 2004 and are net of reinsurance recoveries of $6.9 million in 2005 and $9.3 million in 2004. The change in such claims resulted principally from changes in mortality experience and the reinsurance recoveries thereon.

GUARANTEED BENEFITS, NET OF REINSURANCE RECOVERIES on variable annuity contracts totaled $11.2 million in 2005, compared with $17.8 million in 2004 and are net of reinsurance recoveries of $0.4 million and $2.1 million, respectively. These guaranteed benefits consist primarily of guaranteed minimum death benefits as well as immaterial amounts of earnings enhancement benefits and guaranteed minimum income benefits. These guarantees are described in more detail in the following paragraphs. The decrease during 2005 reflects the generally improved equity market conditions in the latter part of 2004. Downturns in the equity markets could increase these expenses.

Guaranteed minimum death benefits (“GMDB”) features are issued on a majority of the Company’s variable annuity products. GMDB feature provide that, upon the death of a contract holder, the contract holder’s beneficiary will receive the greater of the contract holder’s account value or a guaranteed minimum death benefit that varies by product and election by the contract holder. The Company bears the risk that death claims following a decline in the debt and equity markets may exceed contract holder account balances and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided.

Earnings enhancement benefit (“EEB”) is a feature the Company offers on certain variable annuity products. For contract holders who elect the feature, the EEB provides an additional death benefit amount equal to a fixed percentage of earnings in the contract, subject to certain maximums. The Company bears the risk that account values following favorable performance of the financial markets will result in greater EEB death claims and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided.

Guaranteed minimum income benefit (“GMIB”) is a feature the Company offers on certain variable annuity products. This feature provides a minimum fixed 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 contract holder 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. As there is a waiting period to annuitize using the GMIB, there are no policies eligible to receive this benefit at March 31, 2005. The Company has eliminated offering a GMIB feature that guarantees a return in excess of the amount to be annuitized in order to mitigate its exposure.

Guaranteed minimum account value (“GMAV”) is a feature the Company offers on certain variable annuity products. If available and elected by the contract holder at the time of contract issuance, this feature guarantees that the account value under the contract will at least equal the amount of the deposits invested during the first ninety

~~AIG~~days ~~SUNAMERICA~~of ~~LIFE~~the ~~ASSURANCE~~contract, ~~COMPANY~~adjusted for any subsequent withdrawals, at the end of a ten-year ~~MANAGEMENT’~~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 has purchased put options on the S&P ~~DISCUSSION~~500 ~~AND~~index ~~ANALYSIS~~to partially OFoffset ~~FINANCIAL~~this ~~CONDITION~~risk. ~~AND~~Changes ~~RESULTS~~in OFthe ~~OPERATIONS~~market value of both the GMAV benefit and the put options are recorded in investment income in the accompanying consolidated statement of operations and comprehensive income.

~~Management’s~~Guaranteed ~~discussion~~minimum ~~and~~withdrawal ~~analysis~~benefit (“GMWB”) is a feature the Company began offering on certain variable annuity products in May of ~~financial~~2004. ~~condition~~If available and ~~results~~elected ofby the contract holder ~~operations~~at the time of ~~AIG~~contract ~~SunAmerica~~issuance, ~~Life~~this ~~Assurance~~feature ~~Company~~provides ~~(formerly~~a ~~Anchor~~guaranteed ~~National~~annual withdrawal stream, ~~Life~~regardless ~~Insurance~~of ~~Company)~~market (performance, equal to deposits invested during the first ninety days adjusted for any subsequent withdrawals (“~~Company~~Eligible Premium”). ~~for~~These ~~the~~guaranteed annual withdrawals of up to 10% of Eligible Premium are available after either a three-year ~~months~~or ~~and~~a ~~nine~~five-year ~~months~~waiting period, as ~~ended~~elected ~~September 30~~by the contract holder at the time of contract issuance, ~~2004~~without ~~and~~reducing ~~2003~~the ~~follows~~future amounts guaranteed. ~~Certain~~If ~~prior~~no withdrawals have been made during the waiting period of three or five years, the contract holder will realize an additional 10% or 20%, respectively, of Eligible Premium after all other amounts guaranteed under this benefit have been ~~reclassified~~paid. The Company bears the risk that protracted under-performance of the financial markets could result in GMWB benefits being higher than the underlying contract holder account balance and that the fees collected under the contract are insufficient to ~~conform~~cover the costs of the benefit to be provided. The Company has purchased put options on the ~~current~~S&P ~~period’s~~500 ~~presentation~~index to partially offset this risk. Changes in the market value of both the GMWB benefit and the put options are recorded in investment income in the accompanying consolidated statement of operations and comprehensive income.

InManagement ~~connection~~expects ~~with~~most ~~the “safe harbor” provisions~~ of the ~~Private Securities Litigation Reform Act of 1995, the~~ Company’s ~~cautions readers regarding certain forward~~near-~~looking~~term ~~statements~~exposure ~~contained~~to inguaranteed ~~this~~benefits ~~report~~will ~~and in any other statements~~relate ~~made~~to ~~by,~~death orbenefits. onAs ~~behalf~~sales of, ~~the~~products ~~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.~~guaranteed ~~Statements using~~benefits ~~verbs such as “expect~~increase,” ~~“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 expects ~~beliefs~~these ~~concerning~~other ~~future~~guarantees ~~levels~~to ofhave ~~sales~~an ~~and~~increasing ~~redemptions~~impact ofon ~~the Company’s~~operating ~~products~~results, ~~investment~~under ~~spreads and yields, or the earnings and~~current ~~profitability~~hedging ~~of the Company’s activities~~strategies.

~~Forward-looking~~ASSET ~~statements~~MANAGEMENT ~~are necessarily based on estimates and~~OPERATIONS ~~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~~ PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING ~~POLICIES~~CHANGE totaled $7.7 million in 2005, compared to $9.0 million in 2004.

~~The~~ASSET ~~Company~~MANAGEMENT ~~considers~~FEES, ~~its~~which ~~most~~include ~~critical~~investment ~~accounting~~advisory ~~policies~~fees ~~those~~and ~~policies~~certain 12b-1 distribution ~~with~~fees, ~~respect~~are tobased ~~valuation~~on the market value of assets managed by SAAMCo in its mutual funds and certain variable ~~financial~~annuity ~~instruments,~~portfolios. ~~amortization~~Such fees totaled $20.7 million on average assets managed of $10.05 ~~deferred~~billion ~~acquisition~~in ~~costs~~2005 and ~~other~~$22.1 million ~~deferred~~on ~~expenses~~average ~~and~~assets managed of $9.60 billion in 2004 The inverse relationship existing between the ~~reserve~~change ~~for~~in fees and assets under management was primarily due to a ~~guaranteed~~reduction ~~benefits~~in fees on variable annuity subaccounts. InMutual ~~the~~fund ~~implementation~~sales, ofexcluding ~~each~~sales of ~~the~~money market ~~aforementioned~~accounts and private accounts, totaled $417.0 million in 2005, compared to $698.4 million in ~~policies~~2004. Redemptions of mutual funds, ~~management~~excluding isredemptions ~~required~~of money market accounts, amounted to $518.6 million ~~exercise~~in ~~its~~2005 ~~judgment~~and on$362.9 million ~~both~~in a2004, which, annualized, represent 25.3% and 18.6%, ~~quantitative~~respectively, of average related mutual fund assets. This adverse change in both sales and redemptions ~~qualitative~~reflects ~~basis~~the generally unfavorable equity market conditions during the first quarter of 2005. ~~Further~~Additionally, ~~explanation~~approximately 30% of ~~how~~the ~~management~~change for first quarter 2005 compared to first ~~exercises~~quarter ~~that~~2004 ~~judgment~~was ~~follows~~attributable to one mutual fund, principally due to the fund’s relative performance within its peer group.

~~VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on~~GENERAL ~~debt~~AND ~~and~~ADMINISTRATIVE ~~equity~~EXPENSES ~~securities~~totaled ~~available for sale amounted to~~ $359.54 million ~~at September 30, 2004. In determining if and when a decline~~ in ~~fair~~2005 ~~value below amortized cost is other than temporary, the Company evaluates at each reporting period the market conditions, offering prices, trends of earnings, price multiples,~~ and ~~other~~$8.9 million ~~key measures for investments~~ in ~~debt and equity securities~~2004. ~~In particular, for debt securities, the Company assesses the~~ ~~probability~~General ~~that~~and ~~all~~administrative ~~amounts~~expenses ~~due~~remain ~~are~~closely ~~collectible~~controlled ~~according~~through toa ~~the~~company-wide ~~contractual~~cost ~~terms~~containment ofprogram ~~the~~and ~~obligation.~~continue ~~When such a decline in value is deemed~~ to berepresent ~~other~~ less than ~~temporary,~~1% ~~the Company recognizes an impairment loss in the current period operating results to the extent~~ of ~~the~~average ~~decline~~total ~~(See also discussion within “Capital Resources and Liquidity” herein)~~assets.

~~Securities~~AMORTIZATION inOF ~~the~~DEFERRED ~~Company’s~~ACQUISITION ~~portfolio~~COSTS ~~with~~AND aOTHER ~~carrying~~DEFERRED ~~value~~EXPENSES ~~of approximately~~includes ~~$892.1 million at September 30, 2004 do not have readily~~amortization ~~determinable~~of ~~market~~distribution ~~prices.~~costs ~~For~~that ~~these~~totaled ~~securities, the Company estimates the fair value with internally prepared valuations (including those based on estimates of future profitability)~~$7.7 million ~~Otherwise,~~in ~~the Company uses its most recent purchases and sales of similar unquoted securities~~2005, ~~independent~~compared ~~broker quotes or comparison to similar securities~~ with ~~quoted prices when possible to estimate the fair value of those securities~~$7.4 million ~~All~~in ~~such securities are classified as available for sale~~2004. ~~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~~

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDER’S EQUITY decreased to $1.74 billion at March 31, 2005 from $1.75 billion at December 31, 2004 due to a $41.2 million decrease in accumulated other comprehensive income and a $25.0 million dividend

to ~~dispose~~the Parent, partially offset by $47.7 million of ~~these~~net ~~investments~~income and $2.6 million in capital acontribution ~~timely~~for ~~manner~~the quarter. ~~Although~~The ~~the~~decrease ~~Company~~in ~~believes~~accumulated ~~its~~other ~~estimates~~comprehensive ~~reasonably~~income ~~reflect~~was related to the ~~fair~~decline in value of ~~those~~the ~~securities,~~Company’s ~~the~~portfolio ~~key~~of ~~assumptions~~bonds, ~~about~~notes and redeemable preferred stocks (the ~~risk-free~~“Bond Portfolio”) as interest rates have risen, ~~risk~~partially ~~premiums, performance~~offset ofby ~~underlying~~the ~~collateral,~~related ifamortization ~~any,~~of DAC and other ~~factors~~deferred ~~may~~expenses ~~not reflect~~and ~~those~~income oftax ~~an active market~~effects.

~~AMORTIZATION~~INVESTMENTS ~~OF DEFERRED ACQUISITION COSTS~~ AND ~~OTHER~~CASH ~~DEFERRED~~at ~~EXPENSES: Approximately~~March 31, ~~79%~~2005 oftotaled the amortization of deferred acquisition costs (“DAC”) and other deferred expenses was attributed to policy acquisition costs deferred by the annuity operations and 21% was attributed to the distribution costs deferred by the asset management operations$7. ~~For the annuity operations~~01 billion, ~~the Company~~compared ~~amortizes~~with DAC and other deferred expenses based on a percentage of expected gross profits (“EGPs”) over the life of the underlying policies over the estimated lives of the fund deposits on a straight-line basis$7.13 billion ~~EGPs are computed based on assumptions related to the~~at ~~underlying policies written~~December 31, ~~including~~2004. ~~their~~The ~~anticipated~~Company’s ~~duration,~~invested ~~the growth rate of the separate account~~ assets ~~(with~~are ~~respect~~managed toby ~~variable~~an ~~annuities)~~affiliate. ~~or general~~The ~~account~~following ~~assets (with respect to fixed annuities, fixed options of~~table ~~variable~~summarizes ~~annuities and universal life contracts) supporting~~ the ~~annuity obligations, costs of providing policy guarantees and the level of expenses necessary to maintain the policies. The~~ Company’s ~~adjusts~~Bond ~~amortization~~Portfolio ~~of DAC~~ and other ~~deferred~~investments ~~expenses~~and (acash ~~“DAC~~at ~~unlocking”)~~March 31, ~~when~~2005 ~~current or estimates of~~and ~~future gross profits to be realized from its annuity policies are revised. Approximately 96% of the DAC balance attributed to annuity operations at September~~December 3031, 2004 ~~related to variable annuity products and 4% 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.


	March 31, 2005					December 31, 2004
	Fair		Percent of			Fair		Percent of
	Value		Portfolio			Value		Portfolio
	(in thousands, except for percentages)
Bond Portfolio:

U.S. government securities	$	33,940		0.5	%	$	30,300		0.4	%
Mortgage-backed securities		993,442		14.2			956,567		13.4
Securities of public utilities		294,787		4.2			332,038		4.7
Corporate bonds and notes		2,733,878		39.0			2,902,829		40.8
Other debt securities		856,678		12.2			917,743		12.9


Total Bond Portfolio		4,912,725		70.1			5,139,477		72.2

Mortgage loans		638,870		9.1			624,179		8.7
Common stocks		27,513		0.4			26,452		0.4
Cash and short-term investments		363,187		5.2			201,117		2.8
Securities lending collateral		825,030		11.8			883,792		12.4
Other invested assets		239,686		3.4			250,969		3.5


Total investments and cash	$	7,007,011		100.0	%	$	7,125,986		100.0	%

The ~~assumption the~~ Company’s ~~uses~~general ~~for~~investment ~~the~~philosophy ~~long-term~~is ~~annual net growth of the separate account assets in the determination of DAC amortization with respect~~ to ~~its~~hold ~~variable annuity policies is 10% (the “long~~fixed-~~term growth~~ rate ~~assumption”).~~ ~~The~~assets ~~Company~~for ~~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~~investment. ~~For~~ ~~example~~However, ~~if performance was 15% during~~ the ~~first~~Company ~~year~~has ~~following~~determined ~~the~~that ~~introduction~~all of ~~a product,~~ the ~~DAC~~Bond ~~model~~Portfolio ~~would~~is ~~assume~~available ~~that~~to ~~market~~be ~~returns~~sold ~~for the~~in ~~following~~response ~~five~~to ~~years~~changes ~~(the~~in ~~“short-term~~market ~~growth~~interest ~~rate assumption”) would be~~rates, ~~approximately~~changes ~~9%, resulting~~ in anrelative ~~average~~value ~~annual growth rate~~ of ~~10%~~asset ~~during~~sectors ~~the life~~and ofindividual ~~the product. Similarly~~securities, ~~following~~changes ~~periods~~in ofprepayment ~~below 10% performance~~risk, ~~the~~changes ~~model~~in ~~will assume a short-term growth rate higher than 10%. A DAC unlocking will occur if management deems~~ the ~~short-term~~credit ~~growth~~quality ~~rate~~outlook ~~assumption (i.e.,~~for ~~the~~certain ~~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~~securities, the ~~parameters~~Company’s ~~used~~need infor ~~the methodology~~liquidity ~~are subject to judgment~~ and other ~~vary~~similar ~~within the industry~~factors.

~~For~~THE ~~the~~BOND ~~asset management operations~~PORTFOLIO, ~~the~~which ~~Company~~constituted ~~defers~~70% ~~distribution~~of ~~costs that are directly related to~~ the ~~sale~~Company’s oftotal ~~mutual~~investment ~~funds~~portfolio ~~which~~at ~~have a 12b-1~~March ~~distribution~~31, ~~plan~~2005, ~~and/or~~had aan ~~contingent~~aggregate ~~deferred~~fair ~~sales~~value ~~charge~~that ~~feature, (collectively,~~was ~~“Distribution Fee Revenue”)~~$66.6 million ~~These~~greater ~~costs~~than ~~are~~its amortized oncost aat ~~straight-line basis~~March 31, ~~adjusted for redemptions~~2005, ~~over~~compared awith ~~period ranging from one year to eight years depending on share class~~$151.7 million ~~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~~December 31, ~~period the value of the deferred amount exceeds the projected Distribution Fee Revenue~~2004. ~~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~~At ~~FOR~~March 31, ~~GUARANTEED~~2005, ~~BENEFITS:~~the ~~Pursuant~~Bond toPortfolio ~~the~~had ~~adoption~~an ofaggregate ~~Statement~~fair value of ~~Position~~ ~~03-1,~~$4.91 billion ~~“Accounting~~ and ~~Reporting by Insurance Enterprises for Certain~~an ~~Nontraditional~~aggregate ~~Long-Duration~~amortized ~~Contracts~~cost ~~and~~of ~~for~~$4.85 billion. ~~Separate~~At ~~Accounts” (“SOP 03-1”) on January~~March 131, ~~2004~~2005, the ~~Company~~Bond isPortfolio ~~required~~included to$4.35 billion ~~recognize~~of abonds ~~liability~~rated ~~for guaranteed~~by ~~minimum~~Standard ~~death~~& ~~benefits~~Poor’s (“~~GMDB~~S&P”), ~~and~~Moody’s ~~other~~Investors ~~guaranteed~~Service ~~benefits.~~(“Moody’s”) Inor Fitch ~~calculating~~(“Fitch”) ~~the~~and ~~projected~~$561.7 million ~~liability,~~of ~~five~~bonds ~~thousand~~rated ~~stochastically~~by ~~generated investment~~the ~~performance~~National ~~scenarios~~Association ~~were~~of ~~developed~~Insurance ~~using~~Commissioners (“NAIC”) or the Company’s ~~best estimates.~~pursuant ~~These~~to ~~assumptions~~statutory ~~included,~~ratings ~~among~~guidelines ~~others,~~established ~~mean~~by ~~equity~~the ~~return~~NAIC. ~~and~~At March ~~volatility~~31, ~~mortality~~2005, ~~rates~~approximately ~~and lapse rates~~$4.55 billion ~~The estimation~~ of ~~cash~~the ~~flow~~Bond ~~and the~~Portfolio ~~determination~~was ofinvestment ~~the~~grade, ~~assumptions~~including ~~used~~$1.03 billion ~~require~~of ~~judgment,~~mortgage-backed ~~which~~securities ~~can,~~(“MBS”) ~~at times,~~and beU.S. ~~subjective~~government/agency securities.

At March 31, 2005, the Bond Portfolio included $358.4 million of bonds that were not investment grade. These non-investment-grade bonds accounted for approximately 1% of the Company’s total assets and approximately 5% 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

~~Several~~more ofvulnerable ~~the~~to ~~guaranteed~~adverse ~~benefits~~economic ~~are~~conditions ~~sensitive~~than toinvestment-grade ~~equity market conditions~~issuers. ~~The~~In ~~Company~~addition, ~~uses~~ the trading ~~purchase of reinsurance and capital~~ market ~~hedging~~ ~~strategies~~for tothese ~~mitigate~~securities ~~the~~is ~~risk~~usually ofmore ~~paying~~limited ~~benefits~~than infor ~~excess~~investment-grade ~~of account~~securities. ~~values~~An aseconomic adownturn ~~result~~could ofproduce ~~significant~~higher ~~downturns~~than inaverage ~~equity~~issuer ~~markets.~~defaults ~~Risk~~on ~~mitigation~~the non-investment-grade ~~may~~securities, orwhich ~~may~~could ~~not~~cause ~~reduce~~ the ~~volatility~~Company’s ofinvestment returns and net income ~~resulting~~to ~~from~~decline. ~~equity~~At ~~market~~March ~~volatility.~~31, ~~Reinsurance~~2005, orthe ~~hedges~~Company’s ~~are~~non-investment-grade ~~secured~~bond ~~when~~portfolio ~~the~~consisted ~~cost~~of is153 ~~less~~issues ~~than~~with ~~the~~no single ~~risk~~issuer ~~reduction.~~representing ~~The~~more ~~Company~~than ~~expects~~10% toof ~~use~~the ~~either~~total ~~additional~~non-investment-grade ~~reinsurance~~portfolio. orThese ~~capital~~non-investment-grade ~~market~~securities ~~hedges~~are ~~for~~comprised ~~risk~~of ~~mitigation~~bonds onspanning an10 ~~opportunistic~~industries ~~basis.~~with ~~Despite~~19%, 17%, 13% ~~the~~and ~~purchase~~13% ofconcentrated ~~reinsurance~~in ortelecommunications, ~~hedges~~utilities, ~~the~~transportation ~~reinsurance~~and orfinancial ~~hedge secured may be~~services ~~inadequate~~industries, torespectively. ~~completely~~No ~~offset~~other ~~the~~industry ~~effects~~concentration ofconstituted ~~changes~~more inthan ~~equity~~10% ~~markets~~of these assets.

~~RESULTS~~ The OFtable ~~OPERATIONS~~below summarizes the Company’s rated bonds by rating classification as of March 31, 2005.

~~NET~~RATED ~~INCOME~~BONDS ~~totaled~~BY ~~$43.1 million~~RATING ~~in the third quarter of 2004, compared~~CLASSIFICATION ~~with~~(Dollars ~~$18.2 million~~ in ~~the third quarter of 2003. For the nine months ended~~millions) ~~September 30, 2004, net income amounted to $50.0 million, compared to $49.4~~ ~~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 income and comprehensive income as a cumulative effect of accounting change for the nine months ended September 30, 2004.


					Issues not rated by S&P/Moody’s/
Issues rated by S&P/Moody’s/Fitch					Fitch, by NAIC category						Total
					NAIC										Percent of
S&P/Moody’s/Fitch			Estimated fair		category		Amortized		Estimated fair				Estimated fair		total invested
Category (1)	Amortized Cost		value		(2)		Cost		value		Amortized Cost		value		assets

AAA+ to A- (Aaa to A3) [AAA to A-]	$	2,938	$	2,963		1	$	245	$	246	$	3,183	$	3,209		45.80	%

BBB+ to BBB- (Baa to Baa3) [BBB+ to BBB-]		1,089		1,102		2		240		243		1,329		1,345		19.20	%

BB+ to BB- (Bal to Ba3) [BB+ to BB-]		145		145		3		36		38		181		183		2.61	%

B+ to B- (Bl to B3) [B+ to B-]		114		123		4		2		2		116		125		1.78	%

CCC+ to CCC- (Caal to Caa3) [CCC+ to CCC-]		13		13		5		19		27		32		40		0.57	%

CC to D (Ca to C) [CC to D]		2		5		6		3		6		5		11		0.16	%


TOTAL RATED ISSUES	$	4,301	$	4,351			$	545	$	562	$	4,846	$	4,913

~~PRETAX~~Footnotes INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $51.5 million in the third quarter of 2004, compared with $23.6 million in the third quarter of 2003. For the nine months, pretax income before cumulative effect of accounting change totaled $148.4 million in 2004, compared to ~~$64.1 million in 2003. The increase in both~~ the ~~third~~table ~~quarter and the nine months~~ of ~~2004 was~~Rated ~~primarily~~Bonds ~~due to higher variable annuity and asset management fee income and decreased amortization of deferred acquisition costs and other deferred expenses partially offset~~ by ~~lower~~ ~~investment~~Rating ~~income and higher general and administrative expenses.~~Classification

INCOME TAX EXPENSE totaled $8.4 million in the third quarter of 2004, $5.4 million in the third quarter of 2003, $35.8 million in the nine months of 2004 and $14.7 million in the nine months of 2003, representing effective tax rates of 16%, 23%, 24% and 23%, respectively. The decrease in the third quarter of 2004 results from the recognition of certain tax credits and a decrease in state taxes.

(1)	S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt’s relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody’s rates debt securities in rating categories ranging from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt’s relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody’s and Fitch ratings if rated by multiple agencies.

(2)	Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for non-defaulted bonds plus one category 6, for bonds in or near default. These six categories correspond with the S&P/Moody’s/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $54.6 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.

BUSINESS SEGMENTS

Effective January 1, 2004, SunAmerica Life Insurance Company (the “Parent”) contributed to the Company 100% of the outstanding capital stock of its consolidated 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, universal life insurance and guaranteed investment 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 managing, distributing and administering a diversified family of mutual funds, managing certain subaccounts offered within the Company’s variable annuity products and providing professional

management of individual, corporate and pension plan portfolios.

ANNUITY OPERATIONS

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $42.4 million in the third quarter of 2004, compared with $15.1 million in the third quarter of 2003. For the nine months, pretax income before cumulative effect of accounting change totaled $123.8 million in 2004, compared to $47.8 million in 2003. The increase in 2004 compared to 2003 was primarily due to higher variable annuity policy fee income and lower amortization of deferred acquisition costs and other deferred expenses partially offset by higher general and administrative and other expenses.

NET INVESTMENT SPREAD, a non-GAAP measure, which represents investment income earned on invested assets less interest credited to fixed annuity contracts, fixed accounts of variable 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 a 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.

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						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
	(in thousands)
Investment income	$	87,932		$	99,123		$	272,708		$	295,948
Interest credited to fixed annuity contracts and fixed accounts of variable annuity contracts		(35,799	)		(38,482	)		(106,606	)		(116,575	)
Interest credited to universal life insurance contracts		(18,474	)		(19,303	)		(55,479	)		(57,142	)
Interest credited to guaranteed investment contracts		(1,550	)		(2,042	)		(4,264	)		(6,089	)
Net investment spread		32,109			39,296			106,359			116,142
Net realized investment losses		(15,151	)		(17,940	)		(24,877	)		(26,570	)
Fee income, net of reinsurance		105,895			87,287			315,653			248,968
General administrative expenses, net of deferrals		(23,272	)		(18,992	)		(75,873	)		(59,281	)
Amortization of DAC and other deferred expenses		(21,160	)		(44,400	)		(90,490	)		(123,477	)
Annual commissions		(15,114	)		(11,422	)		(45,245	)		(41,595	)
Claims on UL contracts, net of reinsurance recoveries		(3,577	)		(4,022	)		(13,499	)		(15,255	)
Guaranteed benefits, net of reinsurance recoveries		(17,314	)		(14,723	)		(48,240	)		(51,182	)
Pretax income before cumulative effect of accounting change	$	42,416		$	15,084		$	123,788		$	47,750

Net investment spread totaled $32.1 million in the third quarter of 2004, compared to $39.3 million in the third quarter of 2003. These amounts equal 2.06% on average invested assets (computed on a daily basis) of $6.23 billion in the third quarter of 2004 and 2.35% on average invested assets of $6.69 billion in the third quarter of 2003. For the nine months, net investment spread totaled $106.4 million in 2004 and $116.1 million in 2003, representing 2.27% of average invested assets of $6.25 billion in 2004 and 2.30% of average invested assets of $6.72 billion in 2003 on an annualized basis.

The components of net investment spread were as follows (percentages represent annualized rates):

	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2003			2004			2003
	(in thousands)
Net investment spread	$	32,109		$	39,296		$	106,359		$	116,142
Average invested assets		6,225,262			6,686,235			6,254,328			6,718,648
Average interest-bearing liabilities		5,966,369			6,440,801			5,986,790			6,465,731
Yield on average invested assets		5.65	%		5.93	%		5.81	%		5.87	%
Rate paid on average interest-bearing liabilities		3.74			3.72			3.70			3.71
Difference between yield and interest rate paid		1.91	%		2.21	%		2.11	%		2.16	%
Net investment spread as a percentage of average invested assets		2.06	%		2.35	%		2.27	%		2.30	%

The decline in average invested assets 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. Sales of fixed annuities and fixed annuity options (“Fixed Annuity Deposits”) and renewal deposits on its universal life product totaled $323.1 million in the third quarter of 2004, $389.3 million in the third quarter of 2003, $1.12 billion in the nine months of 2004 and $1.22 billion in the nine months of 2003, and are largely deposits for the fixed account options of variable annuities. On an annualized basis, Fixed Annuity Deposits represent 22%, 25%, 25% and 27%, 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 $258.9 million in the third quarter of 2004, compared with $245.4 million in the third quarter of 2003. For the nine months, average invested assets exceeded average interest-bearing liabilities by $267.5 million in 2004, compared with $252.9 million in 2003. The difference between the Company’s yield on average invested assets and the rate paid on average interest-bearing liabilities was 1.91% in the third quarter of 2004, 2.21% in the third quarter of 2003, 2.11% in the nine months of 2004 and 2.16% in the nine months of 2003.

Investment income (and the related yields on average invested assets) totaled $87.9 million (5.65%) in the third quarter of 2004, $99.1 million (5.93%) in the third quarter of 2003, $272.7 million (5.81%) in the nine months of 2004 and $295.9 million (5.87%) in the nine months of 2003. The decrease in the investment yield primarily reflects the historically low prevailing interest rate environment that has persisted throughout 2003 and 2004, as well as $1.7 million in losses from the mark to market of the S&P 500 put options and the GMAV embedded derivatives in the third quarter of 2004, compared to a $1.5 million income in the third quarter of 2003. Excluding the impact of the put options and embedded derivatives, investment income would have been $89.6 million (5.76%) and $97.6 (5.84%) in the third quarters of 2004 and 2003, respectively. Expenses incurred to manage the investment portfolio amounted to $0.5 million in the third quarter of 2004, $0.6 million in the third quarter of 2003, $1.8 million in the nine months of 2004 and $1.7 million in the nine months of 2003. These expenses are included as a reduction of investment income in the consolidated statement of income and comprehensive income.

Interest expense totaled $55.8 million in the third quarter of 2004 and $59.8 million in the third quarter of 2003. For the nine months, interest expense aggregated $166.3 million in 2004, compared with $179.8 million in 2003. The average rate paid on all interest-bearing liabilities was 3.74% in the third quarter of 2004, compared with 3.72% in the third quarter of 2003. For the nine months, the average rate paid on all interest-bearing liabilities was 3.70% in 2004 and 3.71% in 2003. Interest-bearing liabilities averaged $5.97 billion during the third quarter of 2004, $6.44 billion during the third quarter of 2003, $5.99 billion during the nine months of 2004 and $6.47 billion during the nine months of 2003.

NET REALIZED INVESTMENT LOSSES totaled $15.2 million in the third quarter of 2004, compared with $17.9 million in the third quarter of 2003 and include impairment writedowns of $15.4 million and $20.3 million, respectively. For the nine months, net realized investment losses totaled $24.9 million in 2004, compared with $26.6 million in 2003 and include impairment writedowns of $17.9 million and $35.9 million, respectively. Thus, net realized gains from sales and redemptions of investments totaled $0.2 million in the third quarter of 2004 and $2.4 million in the third quarter of 2003. For the nine months, net realized losses from sales and redemptions of investments totaled $7.0 million in 2004, compared to net realized gains of $9.3 million in 2003.

The Company sold or redeemed invested assets, principally bonds and notes, aggregating $320.3 million in the third quarter of 2004, $265.4 million in the third quarter of 2003, $1.50 billion in the nine months of 2004 and $1.62 billion in the nine months of 2003. Sales of investments result from the active management of the Company’s investment portfolio. Because redemptions of investments are generally involuntary and sales of investments are made in both rising and falling interest rate environments, net gains and losses from sales and redemptions of investments fluctuate from period to period, and represent 0.01%, 0.14%, 0.15% and 0.17% of average invested assets in the third quarter of 2004, the third quarter of 2003, the nine months of 2004 and the nine months of 2003, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent of the Company’s active portfolio management is to maximize total returns on the investment portfolio, taking into account credit, option, liquidity and interest-rate risk.

Impairment writedowns include $15.4 million, $20.3 million, $17.9 million and $35.9 million of provisions principally applied to bonds in the third quarter of 2004, the third quarter of 2003, the nine months of 2004 and the nine months of 2003, respectively. On an annualized basis, impairment writedowns represent 0.99%, 1.21%, 0.38% and 0.71% of average invested assets in the respective periods. For the twenty quarters ended September 30, 2004, impairment writedowns as an annualized percentage of average invested assets have ranged from 0.07% to 1.95% and have averaged 0.69%. Such writedowns are based upon estimates of the fair value of invested assets and recorded when declines in the value of such assets are considered to be other than temporary. Actual realization will be dependent upon future events.

VARIABLE ANNUITY POLICY FEES, NET OF REINSURANCE are based on the market value of assets in separate accounts supporting variable annuity contracts. Such fees totaled $91.9 million in the third quarter of 2004 and $72.2 million in the third quarter of 2003 and are net of reinsurance premiums of $6.7 million and $8.9 million, respectively. For the nine months, variable annuity policy fees totaled $270.5 million in 2004 and $201.2 million in 2003 and are net of reinsurance premiums of $21.7 million and $23.0 million, respectively. The increased fees in 2004 as compared to 2003 primarily reflect the improved equity market conditions in early 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 policy fees represent 1.8%, 1.7%, 1.8% and 1.7% of average variable annuity assets in the third quarters and nine months of 2004 and 2003, respectively. Variable annuity assets averaged $20.13 billion, $16.88 billion, $20.03 billion and $15.68 billion during the respective periods. Variable annuity deposits, which exclude deposits allocated to the fixed accounts of variable annuity products, totaled $586.0 million in the third quarter of 2004 and $484.1 million in the third quarter of 2003. For the nine months, variable annuity deposits totaled $2.09 billion in 2004, compared with $1.21 billion in 2003. On an annualized basis, these amounts represent 11%, 12%, 15% and 11% of variable annuity reserves at the beginning of the respective periods. The increase in variable annuity deposits in the nine months of 2004 reflected increased demand for variable annuity products due to the improved equity market conditions in early 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 $898.2 million, $863.2 million, $3.17 billion and $2.39 billion in the third quarters and the nine months of 2004 and 2003, respectively. Such sales primarily reflect those of the Company’s Polaris and Seasons families of variable annuity products. The Company’s variable annuity products are primarily multi-manager variable annuities that offer investors a choice of several variable funds as well as a number of

guaranteed fixed-rate funds. Investors can select from a choice of several variable funds and up to 7 guaranteed fixed-rate funds, depending on the product. The increase in Variable Annuity Product Sales for the nine months reflects the generally improved equity market conditions in early 2004 and the latter part of 2003. The 23% decrease in Variable Annuity Product Sales in the third quarter of 2004 compared to the prior quarter primarily reflects generally difficult equity market conditions during the third quarter.

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

UNIVERSAL LIFE INSURANCE POLICY FEES, NET OF REINSURANCE amounted to $7.5 million in the third quarter of 2004 and $8.2 million in the third quarter of 2003 and are net of reinsurance premiums of $9.3 million and $9.1 million, respectively. For the nine months, universal life insurance policy fees totaled $25.2 million in 2004 and $26.5 million in 2003 and are net of reinsurance premiums of $25.7 million and $25.4 million, respectively. Universal life insurance policy fees consist of mortality charges, up-front fees earned on deposits received and administrative fees, net of reinsurance premiums. The administrative fees are assessed based on the number of policies in force as of the end of each month. The Company acquired its universal life contracts as part of the acquisition of business from MBL Life Assurance Corporation on December 31, 1998 and does not actively market such contracts. Such fees annualized represent 2.0%, 2.1%, 2.2% and 2.2% of average reserves for universal life insurance contracts in the respective periods.

SURRENDER CHARGES on variable annuity and universal life insurance contracts totaled $6.5 million in the third quarter of 2004 and $6.9 million in the third quarter of 2003. For the nine months, such surrender charges totaled $20.0 million in 2004 and $21.2 million in 2003. Surrender charge periods range from zero to nine years from the date a deposit is received. Surrender charges generally are assessed on withdrawals at declining rates during the first seven or nine years following receipt of the deposit.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $23.3 million in the third quarter of 2004 and $19.0 million in the third quarter of 2003. For the nine months, general and administrative expenses totaled $75.9 million in 2004 and $59.3 million in 2003. The increase in 2004 results from higher information technology costs and payroll related expenses resulting from higher sales and the servicing of such additional business. 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 AND OTHER DEFERRED EXPENSES totaled $21.2 million in the third quarter of 2004, compared to $44.4 million in the third quarter of 2003. For the nine months, such amortization totaled $90.5 million in 2004 and $123.5 million in 2003. The prior year included accelerated amortization due to impairments of certain products and higher than anticipated surrenders on certain products with features which have been discontinued.

ANNUAL COMMISSIONS totaled $15.1 million in the third quarter of 2004, compared with $11.4 million in the third quarter of 2003. For the nine months, annual commissions totaled $45.2 million in 2004 and $41.6 million in 2003. Annual commissions represent renewal commissions paid quarterly in arrears to maintain the persistency of certain of the Company’s variable annuity contracts. Substantially all of the Company’s currently available variable annuity products allow for an annual commission payment option in return for a lower immediate commission. The vast majority of the Company’s average balances of its variable annuity products are currently subject to such annual commissions.

CLAIMS ON UNIVERSAL LIFE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled $3.6 million in the third quarter of 2004, compared to $4.0 million in the third quarter of 2003 and are net of reinsurance recoveries of $5.9 million and $9.0 million, respectively. For the nine months, such claims totaled $13.5 million in 2004 and $15.3 million in 2003 and are net of reinsurance recoveries of $28.6 million and $26.8 million, respectively. The change in such claims resulted principally from changes in mortality experience.

GUARANTEED BENEFITS, NET OF REINSURANCE RECOVERIES on variable annuity contracts totaled $17.3 million in the third quarter of 2004, compared with $14.7 million in the third quarter of 2003 and are

net of reinsurance recoveries of $0.1 million and $1.3 million, respectively. For the nine months, guaranteed benefits paid or accrued, net of reinsurance recoveries amounted to $48.2 million in 2004 and $51.2 million in 2003 and are net of reinsurance recoveries of $2.5 million and $7.1 million, respectively. These guaranteed benefits consist primarily of guaranteed minimum death benefits as well as immaterial amounts of earnings enhancement benefits and guaranteed minimum income benefits. These guarantees are described in more detail in the following paragraphs. The decrease during the nine months of 2004 reflects the generally improved equity market conditions in early 2004 and the latter part of 2003. Downturns in the equity markets could increase these expenses.

Guaranteed minimum death benefits (“GMDB”) are issued on a majority of the Company’s variable annuity products. GMDB provides that, upon the death of a contract holder, 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 contract holder. The Company bears the risk that death claims following a decline in the equity markets may exceed contract holder account balances and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. As of September 30, 2004, the Company has reinsurance coverage on approximately 30% of in-force contracts with GMDB (calculated based on account value) and will be ceding only a small number of new contracts through the end of 2004. The Company does not currently have reinsurance coverage on any contracts to be sold after December 2004. Reinsurance coverage is subject to limitations such as caps and deductibles. On January 1, 2004, the Company recorded a liability for GMDB (see Note 2 of Notes to Consolidated Financial Statements) pursuant to adoption of a new accounting standard, SOP 03-1.

Guaranteed minimum income benefit (“GMIB”) is a feature the Company offers on certain variable annuity products. This feature provides a minimum fixed 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. The majority of the Company’s products containing the GMIB feature have been reinsured. However, the Company does not have reinsurance coverage on contracts sold after July 2004. As there is a waiting period to annuitize using the GMIB, there are virtually no policies eligible to receive this benefit at September 30, 2004.

Guaranteed minimum account value (“GMAV”) is a feature the Company began offering on certain variable annuity products in the third quarter of 2002. If available and elected by the contract holder at the time of contract issuance, this feature guarantees that the account value under the contract will at least equal the amount of the deposits invested during the first ninety days of the contract, adjusted for any subsequent 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”) is a feature the Company began offering on certain variable annuity products in May of 2004. If available and elected by the contract holder at the time of contract issuance, this feature provides a guaranteed annual withdrawal stream, regardless of market performance, equal to deposits invested during the first ninety days adjusted for any subsequent withdrawals (“Eligible Premium”). These guaranteed annual withdrawals of up to 10% of Eligible Premium, are available after either a three-year or a five-year waiting period, as elected by the contract holder at the time of contract issuance, without reducing the future amounts guaranteed. If no withdrawals have been made during the waiting period of 3 or 5 years, the contract holder will

realize an additional 10% or 20%, respectively, of Eligible Premium after all other amounts guaranteed under this benefit have been paid. The Company bears the risk that protracted under-performance of the financial markets could result in GMWB 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 is in the process of implementing a capital market hedging strategy for this feature.

As of September 30, 2004, substantially all of the Company’s near-term exposure to guaranteed benefits relates to GMDB and EEB. However, as sales of products with other guaranteed benefits increase, the Company expects these newer guarantees to have a potential impact on operating results in periods when equity market returns are inadequate to support those contractual guarantees.

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 $9.1 million in the third quarter of 2004 compared to an $8.5 million in the third quarter of 2003. For the nine months, pretax income before cumulative effect of accounting change amounted to $24.6 million in 2004 and $16.4 million in 2003. The increases in the third quarter and nine months of 2004 from 2003 resulted from increased asset management fees, partially offset by increased amortization of DAC and other deferred expenses.

ASSET MANAGEMENT FEES, which include investment advisory fees and 12b-1 distribution fees, are based on the market value of assets managed in mutual funds by SAAMCo. Such fees totaled $23.0 million on average assets managed of $9.53 billion in the third quarter of 2004 and $17.6 million on average assets managed of $8.42 billion in the third quarter of 2003. For the nine months, asset management fees amounted to $66.5 million on average assets managed of $9.59 billion in 2004 and $46.4 million on average assets managed of $7.88 billion in 2003. The increase in asset management fees is primarily the result of a higher average asset base and higher margin on account servicing fees. Mutual fund sales, excluding sales of money market accounts and private accounts, totaled $466.6 million in the third quarter of 2004, compared to $572.6 million in the third quarter of 2003. For the nine months, mutual fund sales amounted to $1.70 billion in 2004 and $1.57 billion in 2003. Redemptions of mutual funds, excluding redemptions of money market accounts, amounted to $386.1 million in the third quarter of 2004, $340.8 million in the third quarter of 2003, $1.13 billion in the nine months of 2004 and $1.11 billion in the nine months of 2003, which, annualized, represent 20%, 21%, 19% and 25%, respectively, of average related mutual fund assets. The increase in sales in the nine months of 2004 principally reflects increasing demand for equity products, due to generally improved equity market conditions in early 2004 and the latter part of 2003. The 13% decrease in mutual fund sales in the third quarter of 2004 compared to the prior quarter primarily reflects generally difficult equity market conditions during the third quarter.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $9.4 million in the third quarter of 2004, $7.3 million in the third quarter of 2003, $28.4 million in the nine months of 2004 and $25.3 million in the nine months of 2003. General and administrative expenses increased in 2004 due primarily to increased costs associated with higher sales and the servicing of such additional business.

AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES includes amortization of distribution costs which totaled $8.1 million in the third quarter of 2004, compared with $5.9 million in the third quarter of 2003. For the nine months, such amortization totaled $23.5 million in 2004 and $16.3 million in 2003. The increase in amortization was primarily due to additional mutual fund sales since the third quarter of 2003 and amortization of the deferred commissions thereon.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDER’S EQUITY increased to $1.61 billion at September 30, 2004 from $1.56 billion at December 31, 2003. The increase reflected $50.0 million of net income partially offset by $3.2 million decrease in unrealized gains, net of the effect of taxes and DAC, and a $2.5 million dividend to the Parent.

INVESTMENTS AND CASH at September 30, 2004 totaled $7.78 billion, compared with $7.12 billion at December 31, 2003. The Company’s invested assets are managed by an affiliate. The following table summarizes the Company’s portfolio of bonds, notes and redeemable preferred stocks (the “Bond Portfolio”) and other investments and cash at September 30, 2004 and December 31, 2003:

	September 30, 2004					December 31, 2003
	Fair		Percent of			Fair		Percent of
	Value		Portfolio			Value		Portfolio
	(in thousands, except for percentages)
Bond Portfolio:
U.S. government securities	$	30,329		0.4	%	$	19,651		0.3	%
Mortgage-backed securities		1,012,221		13.0			1,162,757		16.3
Securities of public utilities		325,649		4.2			334,959		4.7
Corporate bonds and notes		2,926,886		37.5			2,845,597		39.9
Redeemable preferred stocks		21,550		0.3			22,175		0.3
Other debt securities		951,239		12.2			1,120,661		15.7
Total Bond Portfolio		5,267,874		67.6			5,505,800		77.2
Mortgage loans		675,778		8.7			716,846		10.1
Common stocks		4,889		0.1			727		0.0
Cash and short-term investments		261,815		3.4			133,105		1.9
Securities lending collateral		1,327,722		17.0			514,145		7.2
Other		251,054		3.2			254,010		3.6
Total investments and cash	$	7,789,132		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 68% of the Company’s total investment portfolio at September 30, 2004, had an aggregate fair value that was $152.6 million greater than its amortized cost at September 30, 2004, compared with $154.6 million at December 31, 2003.

At September 30, 2004, the Bond Portfolio had an aggregate fair value of $5.27 billion and an aggregate amortized cost of $5.12 billion. At September 30, 2004, the Bond Portfolio (excluding $21.6 million of redeemable preferred stocks) included $5.17 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 $71.5 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At September 30, 2004, approximately $4.86 billion of the Bond Portfolio was investment grade, including $1.04 billion of mortgage-backed securities and U.S. government/agency securities.

At September 30, 2004, the Bond Portfolio included $383.4 million of bonds that were not investment grade. These non-investment-grade bonds accounted for approximately 1.3% of the Company’s total assets and approximately 4.9% of its invested assets. Non-investment-grade securities generally provide higher yields and involve greater risks than investment-grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment-grade issuers. In addition, the trading market for these securities is usually more limited than for investment-grade securities. 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 September 30, 2004, the Company’s non-investment-grade bond portfolio consisted of 174 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 10 industries with 22% of these assets concentrated in telecommunications, 19% concentrated in utilities, 14% concentrated in financial services and 10% concentrated in noncyclical consumer products. No other industry concentration constituted more than 10% of these assets.

The table below summarizes the Company’s rated bonds by rating classification as of September 30, 2004.

RATED BONDS BY RATING CLASSIFICATION (Dollars in thousands)

					Issues not rated by S&P/Moody's/
Issues rated by S&P/Moody's/Fitch					Fitch, by NAIC category						Total
															Percent of
															total
S&P/Moody's/Fitch	Amortized		Estimated		NAIC		Amortized		Estimated		Amortized		Estimated		invested
Category (1)	Cost		fair value		category(2)		Cost		fair value		Cost		fair value		assets
AAA+ to A- (Aaa to A3) [AAA to A-]	$	2,911,087	$	2,999,279		1	$	297,954	$	305,611	$	3,209,041	$	3,304,890		42.47	%
BBB+ to BBB- (Baa to Baa3) [BBB+ to BBB-]		1,224,744		1,260,101		2		290,260		297,926		1,515,004		1,558,027		20.02	%
BB+ to BB- (Bal to Ba3) [BB+ to BB-]		139,007		144,124		3		36,450		36,885		175,457		181,009		2.33	%
B+ to B- (Bl to B3) [B+ to B-]		147,917		152,185		4		1,600		2,028		149,517		154,213		1.98	%
CCC+ to CCC- (Caal to Caa3) [CCC+ to CCC-]		31,919		29,743		5		7,306		6,695		39,225		36,438		0.47	%
CC to D (Ca to C) [CC to D]		2,686		5,921		6		4,202		5,826		6,888		11,747		0.15	%
TOTAL RATED ISSUES	$	4,457,360	$	4,591,353			$	637,772	$	654,971	$	5,095,132	$	5,246,324

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 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 $71.5 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.

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 $170.9 7 million and $351.91 million in ~~the~~2005 ~~nine~~and ~~months of~~ 2004 ~~and 2003~~, respectively. No individual impairment loss, net of DAC and taxes, during the year exceeded 10% of the Company’s net income for the ~~nine~~quarter ~~months~~ ended ~~September 30~~March 31, ~~2004~~ 2005.

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 ~~September~~March 3031, ~~2004~~2005, the fair value of the Company’s Bond Portfolio aggregated $54.2791 billion. Of this aggregate fair value, ~~approximately~~less than 0.301% represented securities trading at or below 75% of amortized cost. The impact of unrealized losses on net income will be further mitigated upon realization, because realization will result in current decreases in the amortization of DAC and ~~certain~~other deferred ~~acquisition~~expenses ~~costs~~ and decreases in income taxes.

At ~~September~~ March 3031, ~~2004~~2005, approximately $42.2095 billion, at amortized cost, of the Bond Portfolio had a fair value of $43.3906 billion resulting in an aggregate ~~unrealized~~ unrealized gain of $~~188~~109.16 million. At ~~September~~March 3031, ~~2004~~2005, approximately $~~915~~1.~~8 million~~90 billion, at amortized cost, of the Bond Portfolio had a fair value of $~~880~~1.~~3 million~~85 billion resulting in an aggregate unrealized loss of $3543.50 million. ~~One issuer accounted for 11% of unrealized losses.~~ No ~~other~~ single issuer accounted for more than 10% of unrealized losses. Approximately 2738%, 2511% and 1211% of ~~unrealized~~ unrealized losses were from the financial services, transportation and ~~noncyclical~~ ~~consumer~~telecommunications ~~products~~ industries, respectively. No other industry accounted for more than 10% of unrealized losses.

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The amortized cost of the Bond Portfolio in an unrealized loss position at ~~September~~ March 3031, ~~2004~~2005, by contractual maturity, is shown below.

	Amortized Cost
	(in thousands)
Due in one year or less	$	1133,~~739~~160
Due after one year through five years		~~323~~870,~~510~~948
Due after five years through ten years		~~382~~553,~~726~~287
Due after ten years		~~197~~440,~~792~~216
Total	$	~~915~~1,~~767~~897,611

The aging of the Bond Portfolio in an unrealized loss position at ~~September~~ March 3031, ~~2004~~2005 is shown below:

(dollars	Less than or Equal to 20%							Greater than 20% to 50%							Greater than 50%
(dollars in
in thousands)	of Amortized Cost							of Amortized Cost							of Amortized Cost							Total
thousands)	Less than or Equal to 20%							Greater than 20% to 50%							Greater than 50%
	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	$	~~441~~1,~~204~~227,283	$	(716,~~377~~404	)		68204	$	—	$	—			—	$	—	$	—			—	$	~~441~~1,~~204~~227,283	$	(716,~~377~~404	)		68204
7-12		~~189~~333,~~106~~344		(59,~~305~~740	)		2356		—		—			—		—		—			—		~~189~~333,~~106~~344		(59,~~305~~740	)		2356
>12		~~180~~238,~~470~~338		(810,~~834~~234	)		2527		142,~~714~~752		(~~4,112~~552	)		21		—		—			—		~~195~~241,~~184~~090		(1210,~~946~~786	)		2728
Total	$	~~810~~1,~~780~~798,965	$	(2136,~~516~~378	)		~~116~~287	$	142,~~714~~752	$	(~~4,112~~552	)		21	$	—	$	—			—	$	~~825~~1,~~494~~801,717	$	(2536,~~628~~930	)		~~118~~288
Below Investment Grade Bonds
0-6	$	3452,~~796~~623	$	(21,~~442~~263	)		2827	$	~~175~~—	$	~~(61~~—	)		1—	$	—	$	—			—	$	3452,~~971~~623	$	(21,~~503~~263	)		2927
7-12		—6,638		—(734	)		—9		~~620~~161		(~~162~~50	)		12		~~599~~—		~~(469~~—	)		1—		16,~~219~~799		(~~631~~784	)		211
>12		4432,~~854~~397		(3,~~401~~118	)		98		94,~~229~~075		(~~3,313~~947	)		21		—		—			—		5436,~~083~~472		(64,~~714~~065	)		119
Total	$	7991,~~650~~658	$	(5,~~843~~115	)		3744	$	104,~~024~~236	$	(~~3,536~~997	)		43	$	~~599~~—	$	~~(469~~—	)		1—	$	9095,~~273~~894	$	(96,~~848~~112	)		4247
Total Bonds
0-6	$	~~476~~1,~~000~~279,906	$	(917,~~819~~667	)		96231	$	~~175~~—	$	~~(61~~—	)		1—	$	—	$	—			—	$	~~476~~1,~~175~~279,906	$	(917,~~880~~667	)		97231
7-12		~~189~~339,~~106~~982		(510,~~305~~474	)		2365		~~620~~161		(~~162~~50	)		12		~~599~~—		~~(469~~—	)		1—		~~190~~340,~~325~~143		(510,~~936~~524	)		2567
>12		~~225~~270,~~324~~735		(1213,~~235~~352	)		3435		236,~~943~~827		(71,~~425~~499	)		42		—		—			—		~~249~~277,~~267~~562		(1914,~~660~~851	)		3837
Total	$	1,890,~~430~~623	$	(2741,~~359~~493	)		~~153~~331	$	246,~~738~~988	$	(71,~~648~~549	)		64	$	~~599~~—	$	~~(469~~—	)		1—	$	~~915~~1,~~767~~897,611	$	(3543,~~476~~042	)		~~160~~335

In ~~2004~~2005, the pretax realized losses incurred with respect to the sale of fixed-rate securities in the Bond Portfolio ~~were~~was $63.92 million. The aggregate fair value of securities sold was $~~129~~57.0 million, which was approximately ~~91.0~~95% of amortized cost. The average period of time that securities sold at a loss during ~~2004~~2005 were trading continuously at a price below amortized cost was approximately 2113 months.

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. The aggregate fair value of these securities at ~~September~~ March 3031, ~~2004~~2005 was ~~approximately $892.1 million.~~

3323

~~The~~approximately ~~methodology~~$729.4 million. ~~used~~The toCompany ~~estimate~~estimates the fair value ofwith ~~non-traded~~internally ~~fixed income~~prepared ~~investments~~valuations is(including bythose ~~reference~~based toon ~~traded~~estimates ~~securities~~of ~~with~~future ~~similar~~profitability). ~~attributes~~Otherwise, ~~and~~the Company ~~using~~uses aits ~~matrix~~most ~~pricing~~recent ~~methodology.~~purchases ~~This~~and ~~technique~~sales ~~takes~~of ~~into~~similar ~~account~~unquoted ~~such factors as the industry~~securities, ~~the~~independent ~~security’s~~broker ~~rating~~quotes or ~~and~~comparison ~~tenor,~~to ~~its~~similar ~~coupon~~securities ~~rate,~~with ~~its position~~quoted inprices ~~the~~when ~~capital~~possible ~~structure~~to ofestimate the ~~issuer~~fair ~~and~~value ~~other~~of those ~~relevant factors~~securities. ~~The~~All ~~change~~such insecurities ~~fair~~are ~~value~~classified ~~is recognized~~ as aavailable ~~component~~for ~~of other comprehensive income~~sale.

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 $~~292~~226.56 million at ~~September~~March 3031, ~~2004~~2005. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At ~~September~~ March 3031, ~~2004~~2005, Secured Loans consisted of $~~197~~144.10 million of ~~privately~~ privately traded securities and $9582.46 million of publicly traded securities. These Secured Loans are composed of loans to 6251 borrowers spanning 109 industries, with 2831% ~~of these assets concentrated in utilities~~, 17%, ~~concentrated in communications~~15%, and 14% ~~concentrated~~from inthe utilities, transportation, ~~11%~~telecommunications ~~concentrated~~and ~~in noncyclical~~cyclical consumer products ~~and 10% concentrated in cyclical consumer~~industries, ~~products~~respectively. 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~~ 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 $~~675~~638.89 million at ~~September~~March 3031, ~~2004~~2005 and consisted of ~~100~~101 commercial first mortgage loans with an average loan balance of approximately $6.83 million, collateralized by properties located in 30 states. Approximately 3736% of this portfolio was office, 16% was ~~manufactured~~ manufactured housing, 15% was multifamily residential, 11% was industrial, 11% was hotels, and 1011% was other types. At ~~September~~March 3031, ~~2004~~2005, approximately 2530%, 1211% and 1110% of this portfolio were secured by properties located in California, ~~New~~Michigan ~~York~~ and ~~Michigan~~Massachusetts, respectively. No more than 10% of this portfolio was secured by properties located in any other single state. At ~~September~~March 3031, ~~2004~~2005, 14 mortgage loans have an outstanding balance of $10 million or more, which collectively aggregated approximately 4948% of this portfolio. At ~~September~~March 3031, ~~2004~~ 2005, approximately 3539% of the mortgage loan portfolio consisted of loans with balloon payments due before ~~October~~April 1, ~~2007~~2008. During ~~2004~~2005 and ~~2003~~2004, ~~loans~~ loans delinquent by more than 90 days, foreclosed loans and structured loans have not ~~been~~ 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 $1825.330 ~~billion~~million at ~~September~~March 3031, ~~2004~~2005, compared towith $~~514~~883.1 8 million at December 31, ~~2003~~2004, and consisted of cash collateral invested in highly rated short-term securities received in connection with the Company’s securities lending program. The change in securities lending collateral in 2005 results from change in demand for securities in the Company’s portfolio. 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

3424

~~Long-term investments include corporate notes with maturities of five years or less and a credit rating by at~~ least two nationally recognized statistical rating organizations (“NRSRO”), with no less than a S&P rating of A or equivalent by any other NRSRO.

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 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~~ 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~~Fixed-~~rate~~Rate ~~products~~Products incorporate incentives, surrender charges and/or other restrictions in order to encourage persistency. Approximately 77% of the Company’s ~~fixed~~reserves ~~annuity,~~for ~~universal~~Fixed-Rate ~~life~~Products ~~and GIC reserves~~ had surrender penalties or other restrictions at ~~September~~March 3031, ~~2004~~2005.

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~~Fixed-~~rate products~~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~~ 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 ~~September~~March 3031, ~~2004~~2005, these assets had an aggregate fair value of $6.4210 billion with an option-adjusted duration of 3.3 years. The Company’s fixed-rate liabilities include ~~fixed~~Fixed ~~options of variable annuities~~Options, as well as universal life insurance, fixed annuity and GIC contracts. At ~~September~~March 3031, ~~2004~~2005, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $5.8731 billion with an option-adjusted duration of 3.6 7 years. The Company’s potential exposure due to a relative 10% ~~decrease~~increase in prevailing interest rates from its ~~September~~March 3031, ~~2004~~2005 levels is a loss of approximately $1.6 million, representing ana ~~increase~~decrease in fair value of its fixed-rate ~~liabilities~~assets that is not offset by ana ~~increase~~decrease in fair value of its fixed-rate ~~assets~~ liabilities. Because the Company actively manages its assets and liabilities and has strategies in place to minimize its exposure to loss as interest rate changes occur, it expects that actual losses would be less than the estimated potential loss.

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 the option-adjusted duration of its assets and liabilities using a number of different interest rate scenarios, assuming continuation of existing 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.

A significant portion of the Company’s fixed annuity contracts ~~(including~~ and the ~~fixed~~Fixed ~~option~~Options ~~of variable contracts) have~~ has reached or ~~are~~is near the minimum contractual guaranteed rate (generally 3% ~~or 4%~~). Continual declines 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~~2005 ~~nine months~~and ~~ended September 30,~~ 2004 ~~and~~in 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

3525

~~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:

	Nine months ended
	Three months
	September 30,			Years ended December, 31
	ended March 31,			Years ended December, 31
	2004			2003			2002			2001
	2005			2004			2003			2002
Average 10-year U.S. Treasury bond rate:		4.29	%		4.0126	%		4.6101	%		54.0261	%
AIG SunAmerica Life Assurance Company:
Average yield on Bond Portfolio		5.62			5.7566			65.2375			6.8223
Rate paid on average interest-bearing liabilities		3.7066			3.71			3.9371			43.5893

AsSince athe ~~component~~Company’s ofinvesting ~~its asset-liability management~~ strategy, ~~the~~is ~~Company~~to ~~may utilize~~hold ~~interest~~ fixed-rate ~~swap~~assets ~~agreements~~for ~~(“Swap~~long-term ~~Agreements”)~~investment, the toCompany’s ~~match~~average ~~assets~~yield ~~more closely~~tends to ~~liabilities.~~trail ~~Swap~~movements ~~Agreements~~in ~~are~~the ~~agreements~~average toU.S. ~~exchange~~treasury ~~with~~yield. aFor ~~counterparty~~further ~~interest~~discussion ~~rate~~on ~~payments~~average ofyield ~~differing~~on ~~character~~the ~~(for~~bond ~~example, variable-rate~~portfolio ~~payments~~and ~~exchanged~~the ~~for fixed-~~rate ~~payments)~~paid ~~based~~ on anaverage ~~underlying~~interest-bearing ~~principal~~liabilities, ~~balance~~see ~~(notional~~discussion ~~principal)~~on to“Investment ~~hedge against interest rate changes~~Spread.”

~~The~~As ~~Company~~a ~~seeks~~component toof ~~enhance~~ its ~~spread~~asset-liability ~~income~~management ~~with~~strategy, ~~dollar~~the ~~roll~~Company ~~repurchase agreements~~may ~~(“Dollar~~utilize ~~Roll Repos”). Dollar Roll Repos involve a sale of~~interest ~~mortgage-backed~~rate ~~securities~~swap agreements (“~~MBS~~Swap Agreements”) byto ~~the~~match ~~Company~~assets ~~and~~more anclosely ~~agreement~~ to ~~repurchase~~ ~~substantially~~liabilities. ~~similar~~Swap Agreements ~~MBS~~exchange atinterest arate ~~later~~payments ~~date~~of atdiffering ancharacter ~~agreed~~(for ~~upon~~example, ~~price.~~variable-rate ~~The~~payments ~~Company~~exchanged ~~also~~for ~~seeks~~fixed-rate topayments) ~~provide~~with ~~liquidity~~a bycounterparty, ~~investing~~based inon ~~MBS.~~an ~~MBS~~underlying ~~are~~principal ~~generally~~balance ~~investment-grade~~(notional ~~securities collateralized by large pools of mortgage loans. MBS generally pay~~ principal) ~~and~~to ~~interest~~hedge ~~monthly.~~against ~~The amount of principal and~~ interest ~~payments~~rate ~~may fluctuate as a result of prepayments of the underlying mortgage loans~~changes.

~~There~~The ~~are risks associated with some of the techniques the~~ Company ~~uses~~seeks to provide liquidity, ~~enhance~~by ~~its~~investing ~~spread income and match its assets and~~in ~~liabilities~~MBS. ~~The~~MBS 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~~generally ~~and~~investment-grade ~~that~~securities ~~the~~collateralized ~~counterparty~~by ~~risk~~large ~~associated~~pools ~~with~~of ~~those transactions~~mortgage ~~is minimal~~loans. ItMBS isgenerally ~~the~~pay ~~Company’s~~principal ~~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~~monthly. ~~However, the Company’s Swap Agreements are intended to hedge variable-rate assets or liabilities.~~ The ~~primary~~amount ~~risk~~of ~~associated~~principal ~~with MBS~~and ~~is that a changing~~ interest ~~rate environment might cause prepayment of the~~ ~~underlying~~payments ~~obligations~~may atfluctuate ~~speeds~~as ~~slower or faster than anticipated at the time of their purchase. As part of its decision to purchase such~~ a ~~security,~~result ~~the Company assesses the risk~~ of ~~prepayment~~prepayments ~~by analyzing the security’s projected performance over an array~~ of ~~interest-rate scenarios. Once such a security is purchased,~~ the ~~Company~~underlying ~~monitors~~mortgage ~~its actual prepayment experience monthly to reassess the relative attractiveness of the security with the intent to maximize total return~~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 Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its 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 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 of their purchase. As part of its decision to purchase such a security, the Company assesses the risk of prepayment by analyzing the security’s 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 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~~26 ~~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~~

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~~ disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. Impairment losses on securitized assets are recognized if the fair value of the security is less than its book value, and the net present value of expected future cash flows is less than the net present value of expected future cash flows at ~~the~~ the most recent (prior) estimation date.

DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $40.26 million of bonds at ~~September~~ March 3031, ~~2004~~2005, ~~which~~and constituted approximately 0.56% of total invested assets. At December 31, ~~2003~~2004, defaulted investments totaled $4940.61 million of bonds, which constituted approximately 0.76% 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~~ reverse repurchase agreement 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 ~~September~~March 3031, ~~2004~~2005, approximately $43.3906 billion of the Bond Portfolio had an aggregate unrealized gain of $~~188~~109.1 6 million, while approximately $~~880~~1.385 ~~million~~billion of the Bond Portfolio had an aggregate unrealized ~~loss~~ loss of $3543.50 million. In addition, the Company’s investment portfolio currently provides approximately $4542.8 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~~ 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~~Fixed-Rate Products 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~~instruments, thereby avoiding the sale of fixed-rate assets in an unfavorable bond market.

In a declining interest rate environment, the Company’s cost of funds would decrease over time, reflecting lower interest crediting rates on its ~~fixed annuities~~Fixed-Rate Products. 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 six agreements outstanding 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 ~~September~~ March 3031, ~~2004~~2005 is $195.4 million. ~~These~~The ~~commitments~~expiration ~~have~~dates ~~contractual maturity~~of ~~dates~~these commitments are as follows: $2081.50 million in ~~the remainder of 2004~~ 2005 and $~~174~~114.9 4 million in ~~2005~~2006. Related to each of these agreements are participation agreements with the Parent, under which the Parent will share in $62.6 million of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. ~~The Internal Revenue Service has completed~~ ~~examinations into the transactions underlying these commitments, including the~~ ~~Company’s role in the transactions. The examination did not result in a~~ ~~material loss to the Company.~~

3727

At ~~September~~ March 3031, ~~2004~~2005, the Company held reserves for GICs with maturity dates as follows: $~~186~~187.10 million in 2005 and $2829.61 million in ~~2006 and thereafter~~2024.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2003, the American Institute of Certified Public Accountants issued ~~Statement~~SOP ~~of Position~~ 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. (~~For~~“SOP ~~further~~03-1”). ~~discussion~~This ~~see~~statement ~~Note~~was 2effective as of ~~Notes~~January 1, 2004, and requires the Company to recognize a liability for GMDB and certain living benefits ~~Consolidated~~related ~~Financial~~to ~~Statements~~its variable annuity contracts, account for enhanced crediting rates or bonus payments to contract holders 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 certain other expenses. 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 DAC as of January 1, 2004.

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,~~ contract, deposits of securities for the benefit of ~~policyholders~~contract holders, 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~~contract holders 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~~ target level of adjusted statutory capital and surplus by applying certain factors to ~~various~~ 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~~ 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 ~~September~~ March 3031, ~~2004~~ 2005.

The federal government does not directly regulate the business of insurance, however, the Company, its subsidiaries and its products are governed by federal agencies, including the Securities and Exchange Commission (“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~~ 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 the ~~ERISA~~Employee Retirement Income Security Act 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~~ 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), suitability, revenue sharing arrangements and greater transparency ~~regarding~~ ~~compensation arrangements. There are several rule proposals pending and or~~ ~~adopted at the SEC, the NASD and on a federal level, which could~~ ~~have an impact on the business of the Company and/or its subsidiaries.~~

~~Various~~28 federal, state and other regulatory agencies are reviewing certain transactions and practices of the Company and its subsidiaries in connection with industry-wide and other inquiries. In the opinion of the Company’s management and based on the current status of these inquiries, it is not likely that any of these inquiries will have a material adverse effect on the Company’s consolidated financial condition or operation.

~~QUANTITATIVE~~regarding ~~AND~~compensation ~~QUALITATIVE~~arrangements. ~~DISCLOSURES~~There ~~ABOUT~~are ~~MARKET~~several ~~RISK~~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.

~~The~~Item 3. ~~quantitative and qualitative disclosures about market risk are~~Quantitative ~~contained in the Asset-Liability Matching section of Management’s Discussion~~ and ~~Analysis~~Qualitative ofDisclosures ~~Financial~~About ~~Condition~~Market ~~and Results of Operations on~~Risk ~~pages 35 to 36~~ ~~herein.~~

~~DISCLOSURE~~ The ~~CONTROLS~~quantitative ~~AND~~and ~~PROCEDURES~~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 27 to 28 herein.

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 CommissionItem 4. ~~Disclosure~~ ~~controls~~Controls and ~~procedures include controls and procedures designed to~~ ~~ensure that information required to be disclosed by the Company in the reports~~Procedures ~~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.

39 The Company’s disclosure controls and procedures are designed to provide reasonable assurance 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 (“SEC”). Disclosure controls and procedures include controls and procedures reasonably 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 were effective as of the end of the period covered by this report to provide reasonable assurance that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. In addition, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II —– OTHER INFORMATION

Item 1. Legal Proceedings

Various lawsuits against the Company and its subsidiaries 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 consolidated 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.

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 on April 5, 2004 in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The action has been transferred to and is currently pending in the United States District Court for the District of Maryland, Case No. 04-md-15863, as part of a Multi-District Litigation proceeding. 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.

See also Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments for a discussion of circumstances affecting AIG that could impact the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~Not~~ The Company ~~applicable~~had no unregistered sales of equity securities.

Item 3. Defaults Upon Senior Securities

~~Not~~ The Company ~~applicable~~had no defaults upon senior securities.

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

~~Not~~ No ~~applicable~~matters were submitted during the quarter ending March 31, 2005 to a vote of security holders, through the solicitation of proxies or otherwise.

Item 5. Other Information

~~Not~~ The Company ~~applicable~~did not file timely with the SEC its Form 10-K for the fiscal year December 31, 2004. Pursuant to a Form 12b-25 filed with the SEC on March 31, 2005, the Company’s filing deadline for its Form 10-K was extended to April 15, 2005. The Company filed its Form 10-K with the SEC on April 18, 2005.

Item 6. Exhibits

See accompanying Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities 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: November 12, 2004	/s/ N. SCOTT GILLIS
	/s/ N. SCOTT GILLIS
	N. Scott Gillis
Date: May 13, 2005	N. Scott Gillis
	Senior Vice President, Chief Financial Officer and Director

Date: November 12, 2004	/s/ STEWART POLAKOV
Date: May 13, 2005	/s/ STEWART POLAKOV
	Stewart Polakov
	Senior Vice President and Controller (Principal Accounting Officer)

4131

Exhibit Index


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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Filing Compare · SUNAMERICA ANNUITY & LIFE ASSURANCE CO