SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)
/X/		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]

Table of Contents

PART I

ITEM 1. BUSINESS

GENERAL DESCRIPTION

     AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance Company), (the “Company”) was incorporated under the laws of the State of Arizona on April 12, 1965. The Company is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the “Parent”), which is a wholly owned subsidiary of AIG Retirement Services, Inc. (“AIGRS”) (formerly AIG SunAmerica Inc.), a wholly owned subsidiary of American International Group, Inc. (“AIG”). AIG is a holding company, which through its subsidiaries is engaged in a broad range of insurance and insurance-related activities, financial services and retirement services and asset management.

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

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

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

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

     The Company believes that demographic trends have produced strong consumer demand for long-term, investment-oriented products. According to U.S. Census Bureau projections, the number of individuals between the ages of 45 to 64 grew from 48 million to 67 million from 1992 to 2002, making this age group the fastest-growing segment of the U.S. population. Between 1992

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and 2002, annual industry premiums from fixed and variable annuities and fund deposits increased from $130.7 billion to $268.4 billion.

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

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

     On January 1, 2002, the Company declared a distribution to the Parent of 100% of the outstanding capital stock of its then wholly owned subsidiary, Saamsun Holdings Corp. (“Saamsun”). Saamsun held the Company’s asset management and broker-dealer operations. This distribution decreased the Company’s shareholder’s equity by $552.4 million. Subsequent to this distribution, the Company’s earnings no longer included the asset management and broker-dealer operations (see Note 7 of Notes to Consolidated Financial Statements). This distribution was approved by the Arizona Department of Insurance.

     Prior to the distribution of Saamsun on January 1, 2002, the Company had three business segments: annuity operations (as discussed above), asset management operations and broker-dealer operations. The asset management operations were conducted by the Company’s former registered investment advisor subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCO”), and its related distributor, AIG SunAmerica Capital Services, Inc. (“SACS”). SAAMCO and SACS earn fee income by distributing and managing a diversified family of mutual funds, managing certain subaccounts within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios. The asset management operations also included SA Affordable Housing, LLC (“SAAH LLC”), a direct wholly owned subsidiary of SAAMCO. SAAH LLC was previously a direct wholly owned subsidiary of the Parent, until January 1, 2001 at which time all of SAAH LLC’s ownership interests were contributed to the Company. All of SAAH LLC’s ownership interests were subsequently contributed by the Company to SAAMCO. SAAH LLC was formed as a limited liability company whose primary purpose is the generation of rehabilitation tax credits, low-income housing credits and passive losses. Realized tax credits are recognized by its direct parent, SAAMCO (see Note 7 of Notes to Consolidated Financial Statements). The

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

     The following table shows the Company’s investment income, net realized investment losses and fee income for the year ended December 31, 2003 by primary product line or service:

NET INVESTMENT AND FEE INCOME

ANNUITY OPERATIONS — SEPARATE ACCOUNT

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

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

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increased significantly in recent years due to enhanced distribution efforts and growing consumer demand for flexible retirement savings products that offer a variety of equity, fixed-income and guaranteed fixed account investment choices.

     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 82,000 independent sales representatives nationally are appointed to sell the Company’s annuity products.

     At December 31, 2003, total variable product liabilities were $22.90 billion, of which $19.18 billion were held in separate accounts and $3.72 billion were the liabilities of the fixed-rate account options, which are held in the general account. The Company’s variable annuity products incorporate surrender charges to encourage persistency. At December 31, 2003, 75% of the Company’s variable annuity liabilities held in separate accounts were subject to surrender penalties or other restrictions. The Company’s variable annuity products also generally limit the number of transfers made in a specified period between account options without the assessment of a fee. The average size of a new variable annuity contract sold by the Company in 2003 was approximately $70,000.

ANNUITY OPERATIONS – GENERAL ACCOUNT

     The Company’s general account obligations are fixed-rate products, principally fixed-rate options of its variable annuity contracts, but also including fixed annuities, GICs and universal life contracts issued in prior years. Such fixed-rate account options on its variable annuity contracts provide interest rate guarantees of one, three, five, seven or ten years. Although the Company’s annuity contracts remain in force an average of seven to ten years, a majority (approximately 81% at December 31, 2003) of the annuity contracts, as well as the universal life contracts, reprice annually at discretionary rates determined by the Company subject to 3% or 4% minimum rate guarantees, depending on the contract. In repricing, the Company takes into account yield characteristics of its investment portfolio, surrender assumptions and competitive industry pricing, among other factors. The Company’s small block of fixed annuities is serviced by an affiliate of the Company. The Company’s universal life products are serviced by a third party administrator whose activities are closely monitored by the Company.

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

     The Company 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on the calculation of investment yield used by the Company. The trends experienced during the three years ended December 31, 2003 in the Company’s average yield on its portfolio of bonds, notes, and redeemable preferred stocks (the “Bond Portfolio”) and rate of interest credited on average interest-bearing

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liabilities, compared to the market trend in long-term interest rates as illustrated by the average ten-year U.S. Treasury bond rate, are presented in the following table:

     The Company designs its fixed-rate products and conducts its investment operations in order to closely match the duration and cash flows of the assets in its investment portfolio to its fixed-rate obligations. The Company seeks to achieve a predictable spread between what it earns on its assets and what it pays on its liabilities by investing principally in fixed-rate securities. The Company’s fixed annuity and universal life products incorporate surrender charges and its GIC products incorporate other restrictions in order to encourage persistency. Approximately 79% of the Company’s fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at December 31, 2003.

     The Company believes a portfolio principally composed of fixed-rate investments that generate predictable rates of return should back its fixed-rate liabilities. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, default rates and general economic conditions. The majority of the Company’s invested assets are managed by a subsidiary of AIG. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety.

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

REGULATION

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

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regulation is for the protection of policyholders rather than security holders.

     Risk based capital (“RBC”) standards are designed to measure the adequacy of an insurer’s statutory capital and surplus in relation to the risks inherent in its business. The standards are intended to help identify inadequately capitalized companies and require specific regulatory actions in the event an insurer’s RBC is deficient. The RBC formula develops a risk-adjusted target level of adjusted statutory capital and surplus by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only as a result of the insurer’s size, but also on the risk profile of the insurer’s operations. The RBC Model Law provides four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The statutory capital and surplus of the Company exceeded its RBC requirements as of December 31, 2003.

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

     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 after-hours trading, short-term trading (sometimes referred to as market timing), revenue sharing arrangements and greater transparency regarding compensation arrangements. There are several rule proposals pending at the SEC and on a federal level which, if passed, could have an impact on the business of the Company.

COMPETITION

     The businesses conducted by the Company are highly competitive. The Company competes with other life insurers, and also competes for customers’ funds with a variety of investment products offered by financial services companies other than life insurance companies, such as banks, investment advisors, mutual fund companies and other financial institutions. In 2002, net annuity premiums written among the top 100 companies ranged from approximately $73 million to approximately $21 billion annually. The Company together with its affiliates is the largest of this group. The Company believes the primary competitive factors among life insurance companies for

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

ITEM 2. PROPERTIES

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

PART II

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

     Not applicable.

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ITEM 6. SELECTED FINANCIAL DATA

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

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     In 2001, the Company adopted EITF 99-20 and FAS 133, the effect of which was recorded as a cumulative effect of accounting change (See Note 2 of Notes to Consolidated Financial Statements).

     On January 1, 2002, the Company distributed 100% of the outstanding capital stock of its consolidated subsidiary, Saamsun Holdings Corp., to its Parent, SunAmerica Life Insurance Company (the “Parent”) (See Note 7 of Notes to Consolidated Financial Statements). Saamsun Holdings Corp. comprised two of the Company’s business segments. The Company also entered into a profit sharing agreement with an affiliate of the Company whereby the affiliate contributes to the Company its profits earned through the Company’s variable annuity contracts. The results of operations of the Company for 2003 and 2002 are affected by both the distribution of Saamsun Holdings Corp. and the profit sharing agreement.

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES

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

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     VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on debt and equity securities available for sale amounted to $60.1 million at December 31, 2003 and $170.7 million at December 31, 2002. In determining if and when a decline in fair value below amortized cost is other-than-temporary, the Company evaluates at each reporting period the market conditions, offering prices, trends of earnings, price multiples, and other key measures for our investments in debt and marketable equity securities. In particular, for debt securities, the Company assesses the probability that all amounts due are collectible according to the contractual terms of the obligation. When such a decline in value is deemed to be other-than-temporary, the Company recognizes an impairment loss in the current period operating results to the extent of the decline (See also discussion within “Capital Resources and Liquidity” herein).

     Securities in the Company’s portfolio with a carrying value of approximately $1.24 billion at December 31, 2003 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 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: The Company amortizes deferred acquisition costs (“DAC”) based on a percentage of expected gross profits (“EGPs”) over the life of the underlying policies. EGPs are computed based on assumptions related to the underlying policies written, including their anticipated duration, the growth rate of the separate account assets (with respect to variable annuities) or general account assets (with respect to fixed annuities, fixed options of variable annuities and universal life contracts) supporting the annuity obligations, costs of providing for policy guarantees and the level of expenses necessary to maintain the policies. The Company adjusts DAC amortization (a “DAC unlocking”) when estimates of current or future gross profits to be realized from its annuity policies are revised. Approximately 95% of the Company’s DAC balance at December 31, 2003 related to variable annuity products and 5% related to fixed annuity and universal life products.

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

     The assumption the Company uses for the long-term annual net growth of the separate account assets in the determination of DAC amortization with respect to its variable annuity policies is 10% (the “long-term growth rate

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

BUSINESS SEGMENTS

     On January 1, 2002, the Company declared a distribution to its parent, SunAmerica Life Insurance Company (the “Parent”), of 100% of the outstanding capital stock of its then wholly owned subsidiary, Saamsun Holdings Corp. (“Saamsun”). Saamsun was comprised of the Company’s asset management and broker-dealer segments. This distribution decreased the Company’s shareholder’s equity by approximately $552.4 million (see Note 7 of Notes to Consolidated Financial Statements). Effective January 1, 2002, the Company’s earnings no longer include the asset management and broker-dealer operations. This distribution was approved by the Arizona Department of Insurance.

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

     Prior to the distribution of Saamsun as discussed above, the Company had three business segments: annuity operations (as discussed above), asset management operations and broker-dealer operations (see Note 10 of Notes to Consolidated Financial Statements). The asset management operations were conducted by the Company’s former registered investment advisor subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCO”), and its related distributor, AIG SunAmerica Capital Services, Inc. (“SACS”). SAAMCO and SACS earn fee income by distributing and managing a diversified family of mutual funds, managing certain subaccounts within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios. The asset management operations also included SA Affordable Housing, LLC (“SAAH LLC”). SAAH LLC was previously a direct wholly owned subsidiary of the Parent, until January 1, 2001, at which time all of SAAH LLC’s ownership interests were contributed to the Company. All of SAAH LLC’s ownership interests were subsequently contributed by the Company to SAAMCO. SAAH LLC was formed as a limited liability company whose primary purpose is the generation of rehabilitation tax credits, low-income housing credits and passive losses. Realized tax credits are recognized by

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

     On June 10, 2002, the Company entered into a profit sharing agreement with SAAMCO whereby SAAMCO contributes to the Company on a quarterly basis its profits earned in connection with its role as investment advisor and/or business manager to several open-end investment management companies registered under the Investment Company Act of 1940, as amended, that fund the variable investment options available to investors through the Company’s variable annuity contracts (the “SAAMCO Agreement”). The SAAMCO Agreement was retroactive to January 1, 2002. Amounts paid to or accrued by the Company under this agreement totaled $60.5 million in 2003 and $62.6 million in 2002.

RESULTS OF OPERATIONS

     NET INCOME totaled $85.7 million in 2003, compared to $34.3 million in 2002 and $90.4 million in 2001. The operating results of 2001 include those of the asset management and broker-dealer operations. Assuming the Saamsun distribution had occurred on January 1, 2001, the beginning of the prior periods discussed herein, net income would have been $99.9 million for 2001.

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

     PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $107.4 million in 2003, compared to $36.3 million in 2002 and $121.6 million in 2001. Assuming the Saamsun distribution had occurred on January 1, 2001, the beginning of the prior periods discussed herein, pretax income before cumulative effect of accounting change would have been $142.8 million for 2001. The increase in 2003 compared to 2002 was primarily due to a reduction in net realized investment losses. The decline in 2002 results compared to 2001 primarily resulted from lower fee income and increased guaranteed minimum death benefits on variable annuities, partially offset by increased net investment income.

     INCOME TAX EXPENSE totaled $21.8 million in 2003, $2.1 million in 2002 and $20.9 million in 2001, representing effective tax rates of 20%, 6% and 17% in 2003, 2002 and 2001, respectively. The unusually low effective tax rate for 2002 is due primarily to the lower relative pretax income without corresponding reductions in permanent tax differences. Assuming that the Saamsun distribution had occurred on January 1, 2001, the beginning of the prior year period discussed herein, income tax expense would have been $32.6 million for 2001, representing an effective tax rate of 23%. The lower tax rate in 2001 is due to tax credits generated by SAAH LLC, a wholly-owned subsidiary of SAAMCO which reduced the effective tax rate by approximately 13% (see Note 7 of Notes to Consolidated Financial Statements).

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

ANNUITY OPERATIONS

     PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $107.4 million in 2003, compared with $36.3 million in 2002 and $142.8 million in 2001. The increase in 2003 compared to 2002 was primarily due to lower net realized investment losses and improved net investment income as customers allocated more dollars to the fixed-rate portion of variable annuity contracts. The decline in 2002 results compared to 2001 primarily resulted from increased guaranteed minimum death benefits on variable annuities, increased amortization of deferred acquisition costs, lower fee income, increased general and administrative expenses and increased net realized investment losses partially offset by higher net investment income.

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

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

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

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

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

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

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

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

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

     The Company sold or redeemed invested assets, principally bonds and notes, aggregating $2.21 billion in 2003, $1.60 billion in 2002 and $1.77 billion in 2001. Sales of investments result from the active management of the Company’s investment portfolio. Because redemptions of investments are generally involuntary and sales of investments are made in both rising and falling interest rate environments, net gains and losses from sales and

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redemptions of investments fluctuate from period to period, and represent 0.36%, 0.14% and 0.15% of average invested assets for 2003, 2002 and 2001, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent of the Company’s active portfolio management is to maximize total returns on the investment portfolio, taking into account credit, option, liquidity and interest-rate risk.

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

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

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     Sales of variable annuity products (which include deposits allocated to the fixed accounts) (“Variable Annuity Product Sales”) amounted to $3.27 billion, $2.92 billion and $3.69 billion in 2003, 2002 and 2001, respectively. Such sales primarily reflect those of the Company’s Polaris, Seasons and WM Diversified Strategies family of variable annuity products. The Company’s variable annuity products are multi-manager variable annuities that offer investors a choice of several variable funds as well as a number of guaranteed fixed-rate funds. Investors can select from a choice of several variable funds and up to 7 guaranteed fixed-rate funds depending on the product. The increase in Variable Annuity Product Sales reflect improving market conditions in 2003. Sales were higher by approximately $550 million in 2001 due to low margin Anchor Advisor sales allocated to one year fixed accounts in the third quarter of 2001 before the one year fixed account was discontinued from the product line at the end of September 2001.

     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” in Item 1).

     UNIVERSAL LIFE INSURANCE POLICY FEES, NET OF REINSURANCE amounted to $35.8 million in 2003, $36.3 million in 2002 and $36.5 million in 2001 and are net of reinsurance premiums of $33.7 million, $34.1 million and $34.0 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 represent 2.23%, 2.17% and 2.08% of average reserves for universal life insurance contracts in the respective periods.

     SURRENDER CHARGES on variable annuity and universal life contracts totaled $27.7 million in 2003, $32.5 million in 2002 and $24.9 million in 2001. 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 $83.0 million in 2003, $79.3 million in 2002 and $80.0 million in 2001. General and administrative expenses remain closely controlled through a company-wide cost containment program and continue to represent less than 1% of average total assets.

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

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     ANNUAL COMMISSIONS totaled $55.7 million in 2003, compared with $58.4 million in 2002 and $58.3 million in 2001. 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 $17.8 million in 2003, compared to $15.7 million in 2002 and $17.6 million in 2001 (net of reinsurance recoveries of $34.0 million in 2003, $29.2 million in 2002 and $31.6 million and 2001). The change in such claims resulted principally from changes in the mortality experience.

     GUARANTEED MINIMUM DEATH BENEFITS, NET OF REINSURANCE RECOVERIES (“Net GMDB”) on variable annuity contracts totaled $63.3 million in 2003, compared with $67.5 million in 2002 and $17.8 million in 2001 (net of reinsurance recoveries of $8.0 million in 2003, $8.4 million in 2002 and $3.8 million in 2001). Net GMDB consists primarily of guaranteed minimum death benefits as well as immaterial amounts of earnings enhancement benefits, guaranteed minimum income benefits and guaranteed minimum account value benefits. These guarantees are described in more detail in the following paragraphs. The decrease in Net GMDB in 2003 reflects the upturn in the equity markets in 2003. The increase in Net GMDB related to the Company’s variable annuity separate account contracts in 2002 reflects the downturn in the equity markets in 2002. Future downturns in the equity markets could increase these expenses.

     A majority of the Company’s variable annuity products are issued with a death benefit feature which provides that, upon the death of a contractholder, the contractholder’s beneficiary will receive the greater of (1) the contractholder’s account value, or (2) a guaranteed minimum death benefit that varies by product (the GMDB). The Company bears the risk that death claims following a decline in the equity markets may exceed contractholder account balances, and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. At December 31, 2003, a portion of the GMDB risk on approximately 33% of the account value with such features had been reinsured. Approximately half of this reinsurance will cease at March 31, 2004. In 2003, a substantial majority of contracts sold have reinsurance coverage. However, the Company does not currently have reinsurance coverage on the majority of the contracts to be sold after December 2004. Reinsurance coverage is subject to limitations such as caps and deductibles. In accordance with Generally Accepted Accounting Principles, the Company expenses such benefits in the period incurred, and therefore does not provide reserves for future benefits. However, effective January 1, 2004, the Company will be required to record a liability for GMDBs (See Note 2 of Notes to Consolidated Financial Statements).

     EARNINGS ENHANCEMENT BENEFIT (“EEB”): The Company issues certain variable annuity products that offer an optional EEB feature. 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

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to cover the costs of the benefit to be provided. At December 31, 2003, approximately 8% (calculated based on current account value) of in-force contracts include EEB coverage, with 95% of the EEB risk fully reinsured.

     GUARANTEED MINIMUM INCOME BENEFIT (“GMIB”): The Company issues certain variable annuity products that contain or offer a GMIB living benefit feature. This feature provides a minimum annuity payment guarantee for those contract-holders who choose to receive fixed lifetime annuity payments after a seven, nine, or ten-year waiting period in their deferred annuity contracts. The Company bears the risk that the performance of the financial markets will not be sufficient for accumulated policyholder account balances to support GMIB benefits and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. Substantially all of the Company’s products containing the GMIB feature have been reinsured; furthermore, substantially all of the GMIB risk per individual reinsured contract has been transferred to the reinsurer. However, the Company does not have reinsurance coverage on contracts to be sold after July 2004.

     GUARANTEED MINIMUM ACCOUNT VALUE (“GMAV”): In the third quarter of 2002, the Company began issuing certain variable annuity products which offer an optional GMAV living benefit. If elected by the policyholder at the time of contract issuance, this feature guarantees that the account value under the contract will equal or exceed the amount of the initial principal invested, adjusted for withdrawals, at the end of a ten-year waiting period. The Company bears the risk that protracted under-performance of the financial markets could result in GMAV benefits being higher than the underlying contractholder account balance and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. The Company purchased put options on the S&P 500 index to partially offset this risk. Changes in the market value of the GMAV benefit are recorded in investment income in the accompanying consolidated statement of income and comprehensive income.

     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 continuous monitoring of these ratings of the reinsurers, such risks are considered to be minimal.

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

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CAPITAL RESOURCES AND LIQUIDITY

     SHAREHOLDER’S EQUITY increased to $1.46 billion at December 31, 2003 from $1.32 billion at December 31, 2002. The increase reflected net income of $85.7 million and other comprehensive income of $56.1 million.

     INVESTMENTS AND CASH at December 31, 2003 totaled $7.07 billion, compared with $7.19 billion at December 31, 2002. The Company’s invested assets are managed by a subsidiary of AIG. The following table summarizes the Company’s Bond Portfolio and other investments and cash at December 31, 2003 and December 31, 2002:

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

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     At December 31, 2003, the Bond Portfolio had an aggregate carrying value (i.e. fair value) of $5.51 billion and an aggregate amortized cost of $5.35 billion. At December 31, 2003, the Bond Portfolio (excluding $22.2 million of redeemable preferred stocks) included $5.21 billion of bonds rated by Standard & Poor’s (“S&P”), Moody’s Investors Service (“Moody’s”), Fitch (“Fitch”) or the National Association of Insurance Commissioners (“NAIC”), and $269.5 million of bonds rated by the Company pursuant to statutory ratings guidelines established by the NAIC. At December 31, 2003, approximately $5.14 billion of the Bond Portfolio was investment grade, including $1.22 billion of mortgage-backed securities (“MBS”) and U.S. government/agency securities.

     At December 31, 2003, the Bond Portfolio included $339.1 million of bonds that were not investment grade. These non-investment-grade bonds accounted for approximately 1.2% of the Company’s total assets and approximately 4.8% 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 December 31, 2003, the Company’s non-investment-grade portfolio consisted of 102 issues with no issuer representing more than 10% of the total non-investment grade portfolio. These non-investment-grade securities are comprised of bonds spanning 11 industries with 21% of these assets concentrated in financial institutions, 17% of these assets concentrated in utilities, 15% of these assets concentrated in telecommunications, 11% of these assets concentrated in transportation and 10% concentrated in noncyclical consumer products. No other industry concentration constituted more than 10% of these assets.

     The table on the next page summarizes the Company’s rated bonds by rating classification as of December 31, 2003.

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RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)

Footnotes appear on the following page.

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Footnotes to the table of Rated Bonds by Rating Classification

(1)		S&P and Fitch rate debt securities in rating categories ranging from AAA (the highest) to D (in payment default). A plus (+) or minus (-) indicates the debt’s relative standing within the rating category. A security rated BBB- or higher is considered investment grade. Moody’s rates debt securities in rating categories range from Aaa (the highest) to C (extremely poor prospects of ever attaining any real investment standing). The number 1, 2 or 3 (with 1 the highest and 3 the lowest) indicates the debt’s relative standing within the rating category. A security rated Baa3 or higher is considered investment grade. Issues are categorized based on the highest of the S&P, Moody’s and Fitch ratings if rated by multiple agencies.
(2)		Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for non-defaulted bonds plus one category, 6, for bonds in or near default. These six categories correspond with the S&P/Moody’s/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $269.5 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.

     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; or (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.

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     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 $54.1 million in the 2003, $57.3 million in 2002 and $68.0 million in 2001.

     One individual impairment loss accounted for 14% of the Company’s pre-tax income in 2003 and no other individual impairment loss exceeded 10% of the Company’s pre-tax income for the year ended December 31, 2003.

     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 December 31, 2003, the Company’s Bond Portfolio had gross unrealized gains of $214.7 million and gross unrealized losses of $60.1 million. One issuer accounted for 16% of unrealized losses. No other single issuer accounted for more than 10% of unrealized losses.

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

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

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     The amortized cost of the Bond Portfolio in an unrealized loss position at December 31, 2003, by contractual maturity, is shown below.

     The aging of the Bond Portfolio in an unrealized loss position at December 31, 2003 is shown below:

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

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

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

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

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

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

     While the trading market for the Company’s privately traded Secured Loans is more limited than for publicly traded issues, participation in these transactions has enabled the Company to improve its investment yield. As a result of restrictive financial covenants, these Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities. However, management believes that the risk of loss upon default for these Secured Loans is mitigated by such financial covenants and the collateral values underlying the Secured Loans. The Company’s Secured Loans are rated by S&P, Moody’s, Fitch, the NAIC or by the Company, pursuant to comparable statutory ratings guidelines established by the NAIC.

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

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     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.

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

     SEPARATE ACCOUNT SEED MONEY totaled $17.8 million at December 31, 2003, compared to $25.4 million at December 31, 2002, and consists principally of seed money for mutual funds used as investment vehicles for the Company’s variable annuity separate accounts. The decrease in 2003 is due primarily to redemptions.

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

     ASSET-LIABILITY MATCHING is utilized by the Company in an effort to minimize the risks of interest rate fluctuations and disintermediation (i.e. the risk of being forced to sell investments during unfavorable market conditions). The Company believes that its fixed-rate liabilities should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, default rates and general economic conditions. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. The Company’s fixed-rate products incorporate surrender charges or other restrictions in order to encourage persistency. Approximately 79% of the Company’s fixed annuity, universal life and GIC reserves had surrender penalties or other restrictions at December 31, 2003.

     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

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protect its economic value and achieve a predictable spread between what it earns on its invested assets and what it pays on its liabilities by designing its fixed-rate products and conducting its investment operations to closely match the duration and cash flows of the fixed-rate assets to that of its fixed-rate liabilities. The fixed-rate assets in the Company’s asset-liability modeling include: cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; policy loans; and investments in limited partnerships that invest primarily in fixed-rate securities. At December 31, 2003, these assets had an aggregate fair value of $6.56 billion with an option-adjusted duration of 3.3 years. The Company’s fixed-rate liabilities include fixed options of variable annuities, as well as universal life, fixed annuity and GIC contracts. At December 31, 2003, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $6.25 billion with an option-adjusted duration of 3.4 years. The Company’s potential exposure due to a relative 10% decrease in prevailing interest rates from its December 31, 2003 levels is a loss of approximately $0.1 million, representing an increase in fair value of its fixed-rate liabilities that is not offset by an increase in fair value of its fixed-rate assets. Because the 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 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.

     The overall interest-credited rate environment has continued to decline in 2003. A significant portion of the Company’s fixed annuity contracts (including the fixed option of variable contracts) has reached or is near the minimum contractual guaranteed rate (generally 3%). 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. The trends experienced during the three years ended December 31, 2003 in the Company’s yield on average invested assets and rate of interest credited on average interest-bearing liabilities, compared to the market trend in long-term interest rates as illustrated by the average ten-year U.S. Treasury bond rate, are presented in the following table:

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     As a component of its asset-liability management strategy, the Company may utilize interest rate swap agreements (“Swap Agreements”) to match assets more closely to liabilities. Swap Agreements are agreements to exchange with a counterparty interest rate payments of differing character (for example, variable-rate payments exchanged for fixed-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes.

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

     There are risks associated with some of the techniques the Company uses to provide liquidity, enhance its spread income and match its assets and liabilities. The primary risk associated with the Company’s Dollar Roll Repos and Swap Agreements is counterparty risk. The Company believes, however, that the counterparties to its Dollar Roll Repos and Swap Agreements are financially responsible and that the counterparty risk associated with those transactions is minimal. It is the Company’s policy that these agreements are entered into with counterparties who have a debt rating of A/A2 or better from both S&P and Moody’s. The Company continually monitors its credit exposure with respect to these agreements. In addition to counterparty risk, Swap Agreements also have interest rate risk. However, the Company’s Swap Agreements are intended to hedge variable-rate assets or liabilities. The primary risk associated with MBSs 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

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covenants, the borrower’s recent financial performance, news reports and other externally generated information concerning the creditor’s affairs. In the case of publicly traded bonds, management also considers market value quotations, if available. For mortgage loans, management generally considers information concerning the mortgaged property and, among other things, factors impacting the current and expected payment status of the loan and, if available, the current fair value of the underlying collateral. For investments in partnerships, management reviews the financial statements and other information provided by the general partners.

     The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in the case of bonds, no further accruals of interest are made. The provisions for impairment on mortgage loans are based on losses expected by management to be realized on transfers of mortgage loans to real estate, on the disposition and settlement of mortgage loans and on mortgage loans that management believes may not be collectible in full. Accrual of interest is suspended when principal and interest payments on mortgage loans are past due more than 90 days. Impairment losses on securitized assets are recognized if the fair value of the security is less than its book value, and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date.

     DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, totaled $49.6 million of bonds at December 31, 2003, which constituted approximately 0.7% of total invested assets. At December 31, 2002, defaulted investments totaled $15.6 million ($8.9 million of bonds and $6.7 million of mortgage loans), which constituted approximately 0.2% of total invested assets.

     SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company’s existing portfolio of cash and short-term investments, Dollar Roll Repo capacity on invested assets and, if required, proceeds from invested asset sales. The Company’s liquidity is primarily derived from operating cash flows. At December 31, 2003, approximately $4.59 billion of the Company’s Bond Portfolio had an aggregate unrealized gain of $214.7 million, while approximately $911.8 million of the Bond Portfolio had an aggregate unrealized loss of $60.1 million. In addition, the Company’s investment portfolio currently provides approximately $51.2 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 and GIC products have been more than sufficient in amount to satisfy the Company’s liquidity needs.

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

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

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

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

GUARANTEES AND OTHER COMMITMENTS

     The Company has entered into seven agreements in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. In addition, the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at December 31, 2003 is $557.8 million. Related to each of these agreements are participation agreements with the Company’s Parent, under which the Parent will share in $222.5 million of these liabilities in exchange for a proportionate percentage of the fees received under these agreements. The expiration dates of these commitments are as follows: $21.9 million in 2004, $385.9 million in 2005 and $150.0 million in 2006. The Internal Revenue Service has initiated examinations into the transactions underlying these commitments, including the Company’s role in the transactions. The Company is fully cooperating with the IRS. Management does not anticipate any material losses with respect to these commitments.

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

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

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

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

     In June 2001, Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires the Company to discontinue the amortization of goodwill on its consolidated statement of income and comprehensive income and is effective as of January 1, 2002. SFAS 142 requires goodwill to be subject to an assessment of impairment on an annual basis, or more frequently if circumstances indicate that a possible impairment has occurred. The assessment of impairment involves a two-step process prescribed in SFAS 142, whereby an initial assessment for potential impairment is performed, followed by a measurement of the amount of impairment, if any. SFAS 142 also requires the completion of a transitional impairment test in the year of adoption, with any identified impairments recognized as a cumulative effect of an accounting change. The Company has evaluated the impact of the impairment provisions of SFAS 142 as of December 31, 2003, and has determined that no impairment is required to be recorded to the carrying value of the Company’s goodwill balance.

     In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which requires that, for guarantees within the scope of FIN 45 issued or amended by the Company after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be recognized. FIN 45 also requires additional disclosures in financial statements starting with the Company’s 2002 year-end financial statements. The adoption of FIN 45 did not have a significant impact on the Company’s results of operations or financial condition.

     In July 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts (“SOP-03-1”). FASB did not object to the issuance of SOP 03-1. This statement is effective for the Company as of January 1, 2004. Under SOP 03-1, variable annuity assets held in separate accounts will continue to be measured at fair value and reported in summary total on the Company’s financial statements, with an equivalent summary total reported for related liabilities, if the separate account arrangement meets certain specified conditions. Assets underlying the Company’s interest in a separate account (separate account seed money) do not qualify for separate account accounting and reporting. The Company will be required to “look through” the separate account for purposes of accounting for its interest therein, and account for and classify separate account seed money based on its nature as if the assets of the separate account underlying the Company’s interest were held directly by the general account rather than through the separate account

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structure. The adoption of SOP 03-1 on January 1, 2004 will not have a material impact on the Company’s separate accounts or separate account seed money.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The quantitative and qualitative disclosures about market risk are contained in the Asset-Liability Matching section of Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 28 to 30 herein.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     None.

ITEM 9A. DISCLOSURE CONTROLS & PROCEDURES

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

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PART III

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

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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

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

PART IV

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

FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

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

EXHIBITS

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

36

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

37

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

REPORTS ON FORM 8-K

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

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SIGNATURES

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

March 29, 2004

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated:

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AIG SUNAMERICA LIFE ASSURANCE COMPANY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

Report of Independent Auditors

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

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

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

PricewaterhouseCoopers LLP
Los Angeles, California
March 29, 2004

F-2

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET

See accompanying notes to consolidated financial statements

F-3

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)

See accompanying notes to consolidated financial statements

F-4

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

See accompanying notes to consolidated financial statements

F-5

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