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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|      |  |                                                                                          
|----- |  | -----------------------------------------------------------------------------------------
|[X]   |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|     
|      |  | OR                                                                                       
|     
|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

Commission File No. 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY

|                        |  |                                           
|----------------------- |  | ------------------------------------------
|Incorporated in Arizona |  | 86-0198983
IRS Employer
Identification No.

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

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

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

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK ON
AUGUST 14, 2003 WAS AS FOLLOWS:

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

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





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TABLE OF CONTENTS



|              |                                          |                                              |  |  |  |  |  | 
|------------- | ---------------------------------------- | -------------------------------------------- |  |  |  |  |  | 
|              |                                          | BALANCE SHEET                               
|              |                                          | BALANCE SHEET (Continued)                   
|              |                                          | STATEMENT OF INCOME AND COMPREHENSIVE INCOME
|              |                                          | STATEMENT OF INCOME AND COMPREHENSIVE INCOME
|              |                                          | STATEMENT OF CASH FLOWS                     
|              |                                          | NOTES TO FINANCIAL STATEMENTS               
|              | Item 1. Legal Proceedings               
|              | Item 5. Other Information               
|              | Item 6. Exhibits and Reports on Form 8-K
|EXHIBITS     
|SIGNATURES   
|Exhibit Index
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32   



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
INDEX

|                                |                                                                                                                     |  |           |       | 
|------------------------------- | ------------------------------------------------------------------------------------------------------------------- |  | --------- | ----- | 
|                                |                                                                                                                     |  | Page     
|                                |                                                                                                                     |  | Number(s)
|                                |                                                                                                                     |  |          
|Part I   Financial Information |                                                                                                                     |  |           |      
|                                | Balance Sheet (Unaudited)  June 30, 2003 and December 31, 2002                                                     |  |           | 3-4   | 
|                                | Statement of Income and Comprehensive Income (Unaudited)  Three Months and Six Months Ended June 30, 2003 and 2002 |  |           | 5-6   | 
|                                | Statement of Cash Flows (Unaudited)  Six Months Ended June 30, 2003 and 2002                                       |  |           | 7-8   | 
|                                | Notes to Financial Statements (Unaudited)                                                                           |  |           | 9-10  | 
|                                | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  |           | 11-33 | 
|                                | Quantitative and Qualitative Disclosures About Market Risk                                                          |  |           | 34    | 
|                                | Controls and Procedures                                                                                             |  |           | 35    | 
|Part II  Other Information     |                                                                                                                     |  | 36        |      
|                                | Exhibits and Reports on Form 8-K                                                                                    |  |           | 38    | 





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##### Table of Contents






AIG SUNAMERICA LIFE ASSURANCE COMPANY
BALANCE SHEET
(Unaudited)

|                                                  |                                                                                                                                                           |   |                |           |              |   |            |           | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------- | --------- | ------------ | - | ---------- | --------- | 
|                                                  |                                                                                                                                                           |   | June 30,       |           | December 31,
|                                                  |                                                                                                                                                           |   | 2003           |           | 2002        
|                                                  |                                                                                                                                                           |   |                |           |             
|                                                  |                                                                                                                                                           |   | (in thousands)
|ASSETS                                            |                                                                                                                                                           |   |                |           |              |   |            |          
|Investments and cash:                             |                                                                                                                                                           |   |                |           |              |   |            |          
|                                                  | Cash and short-term investments                                                                                                                           |   | $              | 280,808   |              |   | $          | 65,872    | 
|                                                  | Bonds, notes and redeemable
preferred stocks available for sale, at
fair value (amortized cost: June 30, 2003,
$5,686,567; December 31, 2002, $5,492,677) |   |                | 5,861,858 |              |   |            | 5,528,569 | 
|                                                  | Mortgage loans                                                                                                                                            |   |                | 754,586   |              |   |            | 738,601   | 
|                                                  | Policy loans                                                                                                                                              |   |                | 206,172   |              |   |            | 215,846   | 
|                                                  | Separate account seed money                                                                                                                               |   |                | 28,483    |              |   |            | 25,366    | 
|                                                  | Common stocks available for sale, at
fair value (cost: June 30, 2003 and
December 31, 2002, $4,111)                                                       |   |                | 3,291     |              |   |            | 2,609     | 
|                                                  | Real estate                                                                                                                                               |   |                | 22,091    |              |   |            | 22,315    | 
|                                                  | Securities lending collateral                                                                                                                             |   |                | 270,648   |              |   |            | 585,760   | 
|                                                  | Other invested assets                                                                                                                                     |   |                | 16,652    |              |   |            | 8,766     | 
|                                                  |                                                                                                                                                           |   |                |           |              |   |            |          
|                                                  | Total investments and cash                                                                                                                                |   |                | 7,444,589 |              |   |            | 7,193,704 | 
|Variable annuity assets held in separate
accounts |                                                                                                                                                           |   | 16,439,908     |           |              |   | 14,758,642 |          
|Accrued investment income                         |                                                                                                                                                           |   | 83,137         |           |              |   | 75,326     |          
|Deferred acquisition costs                        |                                                                                                                                                           |   | 1,368,587      |           |              |   | 1,364,748  |          
|Income taxes currently receivable from Parent     |                                                                                                                                                           |   | 106,921        |           |              |   | 100,123    |          
|Due from affiliates                               |                                                                                                                                                           |   |               |           |              |   | 26,304     |          
|Goodwill                                          |                                                                                                                                                           |   | 4,603          |           |              |   | 4,603      |          
|Other assets                                      |                                                                                                                                                           |   | 13,160         |           |              |   | 15,382     |          
|                                                  |                                                                                                                                                           |   |                |           |              |   |            |          
|TOTAL ASSETS                                      |                                                                                                                                                           | $ | 25,460,905     |           |              | $ | 23,538,832 |          
|                                                  |                                                                                                                                                           |   |                |           |              |   |            |          

See accompanying notes to financial statements

3



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

|                                                          |                                                 |   |                |           |              |   |            |           | 
|--------------------------------------------------------- | ----------------------------------------------- | - | -------------- | --------- | ------------ | - | ---------- | --------- | 
|                                                          |                                                 |   | June 30,       |           | December 31,
|                                                          |                                                 |   | 2003           |           | 2002        
|                                                          |                                                 |   |                |           |             
|                                                          |                                                 |   | (in thousands)
|LIABILITIES AND SHAREHOLDERS EQUITY                      |                                                 |   |                |           |              |   |            |          
|Reserves, payables and accrued
liabilities:               |                                                 |   |                |           |              |   |            |          
|                                                          | Reserves for fixed annuity contracts            |   | $              | 4,478,965 |              |   | $          | 4,285,098 | 
|                                                          | Reserves for universal life insurance
contracts |   |                | 1,635,684 |              |   |            | 1,676,073 | 
|                                                          | Reserves for guaranteed investment
contracts    |   |                | 357,284   |              |   |            | 359,561   | 
|                                                          | Securities lending payable                      |   |                | 270,648   |              |   |            | 585,760   | 
|                                                          | Modified coinsurance deposit liability          |   |                | 20,046    |              |   |            | 31,393    | 
|                                                          | Due to affiliates                               |   |                | 5,431     |              |   |            |          | 
|                                                          | Payable to brokers                              |   |                | 232,852   |              |   |            | 8,529     | 
|                                                          | Other liabilities                               |   |                | 172,225   |              |   |            | 160,265   | 
|                                                          |                                                 |   |                |           |              |   |            |          
|Total reserves, payables and accrued
liabilities          |                                                 |   | 7,173,135      |           |              |   | 7,106,679  |          
|Variable annuity liabilities related to
separate accounts |                                                 |   | 16,439,908     |           |              |   | 14,758,642 |          
|Deferred income taxes                                     |                                                 |   | 426,798        |           |              |   | 351,872    |          
|                                                          |                                                 |   |                |           |              |   |            |          
|Total liabilities                                         |                                                 |   | 24,039,841     |           |              |   | 22,217,193 |          
|                                                          |                                                 |   |                |           |              |   |            |          
|Shareholders equity:                                     |                                                 |   |                |           |              |   |            |          
|                                                          | Common stock                                    |   |                | 3,511     |              |   |            | 3,511     | 
|                                                          | Additional paid-in capital                      |   |                | 1,125,753 |              |   |            | 1,125,753 | 
|                                                          | Retained earnings                               |   |                | 209,204   |              |   |            | 175,871   | 
|                                                          | Accumulated other comprehensive income          |   |                | 82,596    |              |   |            | 16,504    | 
|                                                          |                                                 |   |                |           |              |   |            |          
|                                                          | Total shareholders equity                      |   |                | 1,421,064 |              |   |            | 1,321,639 | 
|                                                          |                                                 |   |                |           |              |   |            |          
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                |                                                 | $ | 25,460,905     |           |              | $ | 23,538,832 |          
|                                                          |                                                 |   |                |           |              |   |            |          

See accompanying notes to financial statements

4



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months and six months ended June 30, 2003 and 2002
(Unaudited)

|                            |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |         |  
|--------------------------- | ----------------------------------------------------------------- |  | -------------- | ------- | ---------- |  | ------- | ------- | ---- |  | ------- | ------- | - |  | ------- | ------- | -
|                            |                                                                   |  | Three Months   |         | Six Months
|                            |                                                                   |  |                |         |           
|                            |                                                                   |  | 2003           |         | 2002       |  | 2003    |         | 2002
|                            |                                                                   |  |                |         |            |  |         |         |     
|                            |                                                                   |  | (In thousands)
|REVENUES                    |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |        
|                            | Fee income:                                                       |  |                |         |            |  |         |         |      |  |         |         |   |  |         |         |  
|                            | Variable annuity policy fees                                      |  | $              | 69,070  |            |  | $       | 97,036  |      |  | $       | 133,026 |   |  | $       | 161,759 |  
|                            | Universal life insurance policy fees                              |  |                | 9,378   |            |  |         | 9,031   |      |  |         | 18,348  |   |  |         | 18,256  |  
|                            | Surrender charges                                                 |  |                | 6,784   |            |  |         | 8,353   |      |  |         | 14,354  |   |  |         | 14,858  |  
|                            | Other fees                                                        |  |                |        |            |  |         | 1,004   |      |  |         |        |   |  |         | 2,032   |  
|                            |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |        
|                            | Total fee income                                                  |  |                | 85,232  |            |  |         | 115,424 |      |  |         | 165,728 |   |  |         | 196,905 |  
|                            | Investment income                                                 |  |                | 101,585 |            |  |         | 94,886  |      |  |         | 200,271 |   |  |         | 191,220 |  
|                            | Net realized investment losses                                    |  |                | (5,358  | )          |  |         | (10,679 | )    |  |         | (8,630  | ) |  |         | (13,714 | )
|                            |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |        
|                            | Total revenues                                                    |  |                | 181,459 |            |  |         | 199,631 |      |  |         | 357,369 |   |  |         | 374,411 |  
|                            |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |        
|BENEFITS AND EXPENSES       |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |        
|                            | Interest expense:                                                 |  |                |         |            |  |         |         |      |  |         |         |   |  |         |         |  
|                            | Fixed annuity contracts                                           |  |                | 39,328  |            |  |         | 33,866  |      |  |         | 78,093  |   |  |         | 67,835  |  
|                            | Universal life insurance contracts                                |  |                | 18,737  |            |  |         | 20,048  |      |  |         | 37,839  |   |  |         | 39,634  |  
|                            | Guaranteed investment contracts                                   |  |                | 2,031   |            |  |         | 3,072   |      |  |         | 4,047   |   |  |         | 6,097   |  
|                            | Securities lending agreements                                     |  |                | 1,545   |            |  |         | 3,417   |      |  |         | 3,446   |   |  |         | 6,035   |  
|                            |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |        
|                            | Total interest expense                                            |  |                | 61,641  |            |  |         | 60,403  |      |  |         | 123,425 |   |  |         | 119,601 |  
|                            | General and administrative expenses                               |  |                | 19,030  |            |  |         | 19,555  |      |  |         | 40,289  |   |  |         | 38,382  |  
|                            | Amortization of deferred acquisition
costs                        |  |                | 40,256  |            |  |         | 60,704  |      |  |         | 79,077  |   |  |         | 107,357 |  
|                            | Annual commissions                                                |  |                | 15,995  |            |  |         | 15,814  |      |  |         | 30,173  |   |  |         | 31,620  |  
|                            | Claims on universal life contracts,
net of reinsurance recoveries |  |                | 5,720   |            |  |         | 3,448   |      |  |         | 11,233  |   |  |         | 7,910   |  
|                            | Guaranteed minimum death benefits,
net of reinsurance recoveries  |  |                | 14,483  |            |  |         | 10,431  |      |  |         | 36,459  |   |  |         | 17,752  |  
|                            |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |        
|Total benefits and expenses |                                                                   |  | 157,125        |         |            |  | 170,355 |         |      |  | 320,656 |         |   |  | 322,622 |        
|                            |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |        
|PRETAX INCOME               |                                                                   |  | 24,334         |         |            |  | 29,276  |         |      |  | 36,713  |         |   |  | 51,789  |        
|Income tax expense          |                                                                   |  | 1,507          |         |            |  | 4,374   |         |      |  | 3,380   |         |   |  | 7,769   |        
|                            |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |        
|NET INCOME                  |                                                                   |  | 22,827         |         |            |  | 24,902  |         |      |  | 33,333  |         |   |  | 44,020  |        
|                            |                                                                   |  |                |         |            |  |         |         |      |  |         |         |   |  |         |        

See accompanying notes to financial statements

5



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the three months and six months ended June 30, 2003 and 2002
(Unaudited)

|                                                                                                       |  |                |         |            |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | -------------- | ------- | ---------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                       |  | Three Months   |         | Six Months
|                                                                                                       |  |                |         |           
|                                                                                                       |  | 2003           |         | 2002       |  | 2003 |         | 2002
|                                                                                                       |  |                |         |            |  |      |         |     
|                                                                                                       |  | (In thousands)
|OTHER COMPREHENSIVE INCOME, NET OF TAX:                                                                |  |                |         |            |  |      |         |      |  |   |         |   |  |   |         |  
|Net unrealized gains on debt and
equity securities available for
sale identified in the current
period |  | $              | 78,406  |            |  | $    | 52,200  |      |  | $ | 96,926  |   |  | $ | 20,788  |  
|Less reclassification adjustment
for net realized losses included
in net income                        |  |                | 3,400   |            |  |      | 8,405   |      |  |   | 4,755   |   |  |   | 10,831  |  
|Change related to cash flow hedges                                                                     |  |                |        |            |  |      | (1,335  | )    |  |   |        |   |  |   | (2,218  | )
|Income tax expense                                                                                     |  |                | (28,633 | )          |  |      | (20,745 | )    |  |   | (35,589 | ) |  |   | (10,291 | )
|                                                                                                       |  |                |         |            |  |      |         |      |  |   |         |   |  |   |         |  
|OTHER COMPREHENSIVE INCOME                                                                             |  |                | 53,173  |            |  |      | 38,525  |      |  |   | 66,092  |   |  |   | 19,110  |  
|                                                                                                       |  |                |         |            |  |      |         |      |  |   |         |   |  |   |         |  
|COMPREHENSIVE INCOME                                                                                   |  | $              | 76,000  |            |  | $    | 63,427  |      |  | $ | 99,425  |   |  | $ | 63,130  |  
|                                                                                                       |  |                |         |            |  |      |         |      |  |   |         |   |  |   |         |  

See accompanying notes to financial statements

6



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS
For the six months ended June 30, 2003 and 2002
(Unaudited)

|                                                                                  |                                                                     |                                               |         |                |         |      |          |          |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------------- | ------- | -------------- | ------- | ---- | -------- | -------- | ------- | -
|                                                                                  |                                                                     |                                               |         | 2003           |         | 2002
|                                                                                  |                                                                     |                                               |         |                |         |     
|                                                                                  |                                                                     |                                               |         | (In thousands)
|CASH FLOW FROM OPERATING ACTIVITIES:                                              |                                                                     |                                               |         |                |         |      |          |         
|Net income                                                                        |                                                                     | $                                             | 33,333  |                |         | $    | 44,020   |         
|Adjustments to reconcile net income to net
cash provided by operating activities: |                                                                     |                                               |         |                |         |      |          |         
|                                                                                  | Interest credited to:                                               |                                               |         |                |         |      |          |          |        
|                                                                                  |                                                                     | Fixed annuity contracts                       |         |                | 78,093  |      |          |          | 67,835  |  
|                                                                                  |                                                                     | Universal life insurance contracts            |         |                | 37,839  |      |          |          | 39,634  |  
|                                                                                  |                                                                     | Guaranteed investment contracts               |         |                | 4,047   |      |          |          | 6,097   |  
|                                                                                  | Net realized investment losses                                      |                                               |         | 8,630          |         |      |          | 13,714   |        
|                                                                                  | Amortization (Accretion) of net discounts
(premiums) on investments |                                               |         | 2,291          |         |      |          | (391     | )      
|                                                                                  | Amortization of deferred acquisition costs                          |                                               |         | 79,077         |         |      |          | 107,357  |        
|                                                                                  | Acquisition costs deferred                                          |                                               |         | (121,316       | )       |      |          | (126,019 | )      
|                                                                                  | Provision for deferred income taxes                                 |                                               |         | 39,337         |         |      |          | 69,885   |        
|                                                                                  | Change in:                                                          |                                               |         |                |         |      |          |          |        
|                                                                                  |                                                                     | Accrued investment income                     |         |                | (7,811  | )    |          |          | (3,628  | )
|                                                                                  |                                                                     | Other assets                                  |         |                | 2,222   |      |          |          | 4,881   |  
|                                                                                  |                                                                     | Income taxes currently receivable from Parent |         |                | (6,798  | )    |          |          | (7,566  | )
|                                                                                  |                                                                     | Due from/to affiliates                        |         |                | (18,265 | )    |          |          | (32,492 | )
|                                                                                  |                                                                     | Other liabilities                             |         |                | 22,303  |      |          |          | (9,749  | )
|                                                                                  | Other, net                                                          |                                               |         | 10,039         |         |      |          | 9,197    |        
|                                                                                  |                                                                     |                                               |         |                |         |      |          |         
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |                                                                     |                                               | 163,021 |                |         |      | 182,775  |         
|                                                                                  |                                                                     |                                               |         |                |         |      |          |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |                                                                     |                                               |         |                |         |      |          |         
|Purchases of:                                                                     |                                                                     |                                               |         |                |         |      |          |         
|                                                                                  | Bonds, notes and redeemable preferred stocks                        |                                               |         | (1,328,167     | )       |      |          | (921,523 | )      
|                                                                                  | Mortgage loans                                                      |                                               |         | (29,883        | )       |      |          | (41,166  | )      
|                                                                                  | Other investments, excluding short-term investments                 |                                               |         | (14,849        | )       |      |          | (1,514   | )      
|Sales of:                                                                         |                                                                     |                                               |         |                |         |      |          |         
|                                                                                  | Bonds, notes and redeemable preferred stocks                        |                                               |         | 858,085        |         |      |          | 336,574  |        
|                                                                                  | Other investments, excluding short-term investments                 |                                               |         | 67             |         |      |          | 396      |        
|Redemptions and maturities of:                                                    |                                                                     |                                               |         |                |         |      |          |         
|                                                                                  | Bonds, notes and redeemable preferred stocks                        |                                               |         | 492,682        |         |      |          | 255,012  |        
|                                                                                  | Mortgage loans                                                      |                                               |         | 14,560         |         |      |          | 49,933   |        
|                                                                                  | Other investments, excluding short-term investments                 |                                               |         | 59,927         |         |      |          | 99,999   |        
|                                                                                  |                                                                     |                                               |         |                |         |      |          |         
|NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                               |                                                                     | $                                             | 52,422  |                |         | $    | (222,289 | )       
|                                                                                  |                                                                     |                                               |         |                |         |      |          |         

See accompanying notes to financial statements

7



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AIG SUNAMERICA LIFE ASSURANCE COMPANY
STATEMENT OF CASH FLOWS (Continued)
For the six months ended June 30, 2003 and 2002
(Unaudited)

|                                                                                                                                 |                                    |   |                |          |      |   |          |          |  
|-------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | - | -------------- | -------- | ---- | - | -------- | -------- | -
|                                                                                                                                 |                                    |   | 2003           |          | 2002
|                                                                                                                                 |                                    |   |                |          |     
|                                                                                                                                 |                                    |   | (In thousands)
|CASH FLOW FROM FINANCING ACTIVITIES:                                                                                             |                                    |   |                |          |      |   |          |         
|Deposits received on:                                                                                                            |                                    |   |                |          |      |   |          |         
|                                                                                                                                 | Fixed annuity contracts            |   | $              | 803,595  |      |   | $        | 815,813  |  
|                                                                                                                                 | Universal life insurance contracts |   |                | 22,573   |      |   |          | 24,128   |  
|Net exchanges from the fixed accounts of of variable
annuity contracts Net realized investment losses
variable annuity contracts |                                    |   | (405,412       | )        |      |   | (463,914 | )       
|Withdrawal payments on:                                                                                                          |                                    |   |                |          |      |   |          |         
|                                                                                                                                 | Fixed annuity contracts            |   |                | (242,148 | )    |   |          | (180,037 | )
|                                                                                                                                 | Universal life insurance contracts |   |                | (33,365  | )    |   |          | (36,849  | )
|                                                                                                                                 | Guaranteed investment contracts    |   |                | (6,240   | )    |   |          | (5,365   | )
|Claims and annuity payments on:                                                                                                  |                                    |   |                |          |      |   |          |         
|                                                                                                                                 | Fixed annuity contracts            |   |                | (55,667  | )    |   |          | (49,881  | )
|                                                                                                                                 | Universal life insurance contracts |   |                | (62,153  | )    |   |          | (51,712  | )
|Net repayments of other short-term financings                                                                                    |                                    |   | (10,343        | )        |      |   | (13,660  | )       
|Net payment related to a modified coinsurance
transaction                                                                        |                                    |   | (11,347        | )        |      |   | (15,579  | )       
|Net cash and short-term investments transferred
to the Parent in the distribution of Saamsun
Holdings Corp.                      |                                    |   |               |          |      |   | (82,873  | )       
|                                                                                                                                 |                                    |   |                |          |      |   |          |         
|NET CASH USED IN FINANCING ACTIVITIES                                                                                            |                                    |   | (507           | )        |      |   | (59,929  | )       
|                                                                                                                                 |                                    |   |                |          |      |   |          |         
|NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS                                                                       |                                    |   | 214,936        |          |      |   | (99,443  | )       
|CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD                                                                           |                                    |   | 65,872         |          |      |   | 200,064  |         
|                                                                                                                                 |                                    |   |                |          |      |   |          |         
|CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD AT END OF PERIOD AT END OF PERIOD                                               |                                    | $ | 280,808        |          |      | $ | 100,621  |         
|                                                                                                                                 |                                    |   |                |          |      |   |          |         
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                                                              |                                    |   |                |          |      |   |          |         
|Interest paid on indebtedness                                                                                                    |                                    | $ | 3,446          |          |      | $ | 6,035    |         
|                                                                                                                                 |                                    |   |                |          |      |   |          |         
|Net income taxes refunded by Parent                                                                                              |                                    | $ | 29,159         |          |      | $ | 54,550   |         
|                                                                                                                                 |                                    |   |                |          |      |   |          |         

See accompanying notes to financial statements

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



|1. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | AIG SunAmerica Life Assurance Company (FKA Anchor National Life Insurance
Company) (the Company), is a direct wholly owned subsidiary of SunAmerica
Life Insurance Company (the Parent), which is a wholly owned subsidiary of
AIG SunAmerica Inc. (SAI), a wholly owned subsidiary of American
International Group, Inc. (AIG). AIG is a holding company which through its
subsidiaries is engaged in a broad range of insurance and insurance-related
activities, financial services and retirement savings and asset management.
The Company is an Arizona-domiciled life insurance company principally engaged
in the business of writing variable annuities directed to the market for
tax-deferred, long-term savings products. It also administers closed blocks of
fixed annuities, universal life policies and guaranteed investment contracts
(GICs) directed to the institutional marketplace.                                                                     
|  
|   |  | The Company changed its name to SunAmerica National Life Insurance Company on
October 5, 2001 and further changed its name to AIG SunAmerica Life Assurance
Company on January 24, 2002. The Company continued to do business as Anchor
National Life Insurance Company until February 28, 2003, at which time it began
doing business under its new name.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments necessary, consisting of normal recurring items, to
present fairly the Companys financial position as of June 30, 2003 and
December 31, 2002, the results of its operations and its cash flows for the
three months and six months ended June 30, 2003 and 2002. The results of
operations for the three months and six months ended June 30, 2003 are not
necessarily indicative of the results to be expected for the full year. The
accompanying unaudited financial statements should be read in conjunction with
the audited consolidated financial statements for the year ended December 31,
2002, contained in the Companys 2002 Annual Report on Form 10-K. Certain
prior period items have been reclassified to conform to the current periods
presentation.                                                                                                        
|  
|2. |  | CONTINGENT LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company has entered into eight agreements in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the event
there is no other buyer in the short-term marketplace. In return the Company
receives a fee. In addition, the Company guarantees the payment of these
securities upon redemption. The maximum liability under these guarantees at
June 30, 2003 is $794,930,000. Related to each of these agreements are
participation agreements with the Parent under which the Parent will share in
$345,333,000 of these liabilities in exchange for a proportionate percentage of
the fees received under these agreements. The expiration dates and related
amounts of these commitments are as follows: $249,000,000 in 2004, $387,930,000
in 2005 and $158,000,000 in 2006. Management does not anticipate any material
losses with respect to these commitments.

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|   |  | In the third quarter of 2002, the Company began issuing certain variable
annuity products which offer an optional Guaranteed Minimum Account Value
(GMAV) living benefit. As of June 30, 2003, the premiums subject to
guarantee totaled approximately $354,658,000, and the estimated fair values of
the GMAV benefit were not material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Various lawsuits against the Company have arisen in the ordinary course of
business. Contingent liabilities arising from litigation, income taxes and
other similar types of matters are not considered material in relation to the
financial position, results of operations or cash flows of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|3. |  | RECENTLY ISSUED ACCOUNTING STANDARDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | 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 03-01, Accounting and Reporting by Insurance
Enterprises for Certain Non-traditional Long-Duration Contracts and for
Separate Accounts (SOP-03-01). This statement is effective for the Company
as of January 1, 2004. Under SOP 03-01, variable annuity assets held in
separate accounts will continue to be measured at fair value and reported in
summary total on the Companys financial statements, with an equivalent summary
total reported for related liabilities, if the separate account arrangement
meets certain specified conditions. Assets underlying the Companys interest
in a separate account (separate account seed money) do not qualify for separate
account accounting and reporting. The Company will be required to look
through the separate account for purposes of accounting for its interest
therein, and account for and classify separate account seed money based on its
nature as if the assets of the separate account underlying the Companys
interest were held directly by the general account rather than through the
separate account structure. The adoption of SOP 03-01 will not have a material
impact on the Companys separate accounts or separate account seed money.
|  
|   |  | In addition, SOP 03-01 will require the Company to recognize a liability for
guaranteed minimum death benefits, guaranteed minimum income benefits and
enhanced earnings benefits. The Company is currently evaluating the provisions
of SOP 03-01 and does not currently have an estimate of the liability.
However, the one-time cumulative accounting charge is expected to have a
material effect on the Companys results of operations, but is not expected to
be material to the Companys financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Managements discussion and analysis of financial condition and results of
operations of AIG SunAmerica Life Assurance Company (FKA Anchor National Life
Insurance Company) (the Company) for the three months and six months ended
June 30, 2003 and June 30, 2002 follows. Certain prior period amounts have
been reclassified to conform to the current periods presentation.

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

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

CRITICAL ACCOUNTING POLICIES

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

VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on
debt and equity securities available for sale amounted to $120.7 million at
June 30, 2003 and $170.7 million at December 31, 2002. When a decline in fair
value below amortized cost is deemed to be other-than-temporary, the Company
recognizes an impairment loss in the current period operating results

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to the extent of the decline (See also discussion within Capital Resources and
Liquidity herein).

Securities in our portfolio with a carrying value of approximately $1.32
billion at June 30, 2003 do not have readily determinable market prices. For
these securities, we estimate their fair value with internally prepared
valuations (including those based on estimates of future profitability).
Otherwise, we use our most recent purchases and sales of similar unquoted
securities, independent broker quotes or comparison to similar securities with
quoted prices when possible to estimate the fair value of those securities.
All such securities are classified as available for sale. Our ability to
liquidate our positions in these securities will be impacted to a significant
degree by the lack of an actively traded market, and we may not be able to
dispose of these investments in a timely manner. Although we believe our
estimates reasonably reflect the fair value of those securities, our 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: We amortize our 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 and fixed options of variable annuities) supporting the annuity
obligations, the anticipated volume of guaranteed minimum death benefits to be
paid 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.

The assumption we use for the long-term annual net growth of the separate
account assets in the determination of DAC amortization with respect to our
variable annuity policies is 10% (the long-term growth rate assumption). We
use a reversion to the mean methodology which allows us to maintain this 10%
long-term growth rate assumption, while also giving consideration to the effect
of short-term swings in the equity markets. For example, if performance were
15% during the first year following the introduction of a product, the DAC
model would assume that market returns for the following five years (the
short-term growth rate assumption) would 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

The Company has one business segment, annuity operations, which consists
of the sale and administration of deposit-type insurance contracts, such as
fixed and variable annuities and universal life insurance contracts. The
Company focuses primarily on the marketing of fixed and variable annuity

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products. The variable annuity products offer investors a broad spectrum
of fund alternatives, with a choice of investment managers, as well as
guaranteed fixed-rate account options. The Company earns fee income on
investments in the variable account options and net investment income on the
fixed-rate account options.

On June 10, 2002, the Company entered into a profit sharing agreement with
AIG SunAmerica Asset Management Corp. (SAAMCO), an affiliate, whereby SAAMCO
will contribute to the Company on a quarterly basis its profits earned in
connection with its role as investment advisor and/or business manager to
several open-end investment management companies registered under the
Investment Company Act of 1940, as amended, that fund the variable investment
options available to investors through the Companys variable annuity contracts
(the SAAMCO Agreement). The SAAMCO Agreement was retroactive to January 1,
2002. Amounts paid to or accrued by the Company under this agreement totaled
$12.8 million for the second quarter of 2003 and $24.5 million for the six
months of 2003. Amounts paid to or accrued by the Company under this agreement
totaled $29.8 million for the six months of 2002, approximately half of which
related to the first quarter of 2002.

RESULTS OF OPERATIONS

NET INCOME totaled $22.8 million in the second quarter of 2003, compared
to $24.9 million in the second quarter of 2002. For the six months, net income
amounted to $33.3 million in 2003, compared to $44.0 million in 2002.

PRETAX INCOME totaled $24.3 million in the second quarter of 2003,
compared to $29.3 million in the second quarter of 2002. For the six months,
pretax income totaled $36.7 million in 2003, compared to $51.8 million in 2002.
The decrease in 2003 primarily resulted from decreased variable annuity fee
income and increased guaranteed minimum death benefits, offset by decreased
amortization of deferred acquisition costs and increased investment income.

NET INVESTMENT SPREAD, which is the spread between the income earned on
invested assets and the interest credited to fixed annuity contracts and paid
on other interest-bearing liabilities, totaled $39.9 million in the second
quarter of 2003, compared to $34.5 million in the second quarter of 2002.
These amounts equal 2.22% on average invested assets (computed on a daily
basis) of $7.18 billion in the second quarter of 2003 and 2.15% on average
invested assets of $6.42 billion in the second quarter of 2002 on an annualized
basis. For the six months, net investment spread increased to $76.8 million in
2003 from $71.6 million in 2002, representing 2.12% of average invested assets
of $7.22 billion in 2003 and 2.26% of average invested assets of $6.35 billion
in 2002 on an annualized basis.

Growth in average invested assets resulted primarily from sales of the
fixed account options of the Companys variable annuity products (Fixed
Annuity 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. Such deposits totaled $386.7
million in the second quarter of 2003 and $467.6 million in the second quarter
of 2002, $826.2 million in the six months of 2003 and $839.9 million in the six
months of 2002, and are largely deposits for the fixed accounts of variable
annuities. On an annualized basis, these deposits represent 25%,

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36%, 28% and 32%, respectively, of the related reserve balances at the
beginning of the respective periods.

Under accounting principles generally accepted in the United States of
America, deposits collected on non-traditional life and annuity insurance
products, such as those sold by the Company, are not reflected as revenues in
the Companys statement of income, as they are recorded directly upon receipt
to reserves for fixed annuity and universal life contracts.

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 $245.1 million in the second quarter of 2003,
compared to $85.9 million in the second quarter of 2002. For the six months,
average invested assets exceeded average interest-bearing liabilities by $256.7
million in 2003, compared with $75.9 million in 2002. The increase in 2003
reflected a $200.0 million capital contribution from the Parent in the third
quarter of 2002. The difference between the Companys yield on average
invested assets and the rate paid on average interest-bearing liabilities (the
Spread Difference) was 2.11% in the second quarter of 2003, 2.10% in the
second quarter of 2002, 2.00% in the six months of 2003 and 2.21% in the six
months of 2002.

Investment income (and the related yields on average invested assets)
totaled $101.6 million (5.66%) in the second quarter of 2003, $94.9 million
(5.91%) in the second quarter of 2002, $200.3 million (5.55%) in the six months
of 2003 and $191.2 million (6.02%) in the six months of 2002. The decrease in
the investment yield in 2003 compared to 2002 primarily reflects a lower
prevailing interest rate environment. Investment income has been reduced by
expenses incurred to manage the investment portfolio amounted to $0.6 million
in the second quarter of 2003, $0.5 million in the second quarter of 2002, $1.1
million in the six months of 2003 and $1.0 million in the six months of 2002.

Interest expense totaled $61.6 million in the second quarter of 2003 and
$60.4 million in the second quarter of 2002. For the six months, interest
expense aggregated $123.4 million in 2003, compared with $119.6 million in
2002. The average rate paid on all interest-bearing liabilities was 3.55% in
the second quarter of 2003, compared to 3.81% in the second quarter of 2002.
For the six months, the average rate paid on all interest-bearing liabilities
was 3.55% in 2003 and 3.81% in 2002. Interest-bearing liabilities averaged
$6.94 billion during the second quarter of 2003 and $6.34 billion during the
second quarter of 2002, $6.96 billion during the six months of 2003 and $6.28
billion during the six months of 2002. The decline in the overall rates paid
in 2003 compared to 2002 resulted primarily from the impact of a declining
interest rate environment.

NET REALIZED INVESTMENT LOSSES totaled $5.4 million in the second quarter
of 2003 and $10.7 million in 2002 and include impairment writedowns of $10.4
million and $6.4 million, respectively. For the six months, net realized
investment losses totaled $8.6 million in 2003, compared with $13.7 million in
2002 and include impairment writedowns of $15.5 million and $11.4 million,
respectively. Thus, net realized gains from sales and redemptions of
investments totaled $5.0 million in the second quarter of 2003, compared to net
realized losses of $4.3 million in the second quarter of 2002. For the six
months, net realized gains from sales and redemptions of investments

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totaled $6.9 million in 2003, compared to net realized losses of $2.3
million in 2002.

The Company sold or redeemed invested assets, principally bonds and notes,
aggregating $517.6 million in the second quarter of 2003, $275.7 million in the
second quarter of 2002, $1.35 billion in the six months of 2003 and $701.9
million in the six months of 2002. Sales of investments result from the active
management of the Companys investment portfolio. Because redemptions of
investments are generally involuntary and sales of investments are made in both
rising and falling interest rate environments, net gains and losses from sales
and redemptions of investments fluctuate from period to period, and represent
on an annualized basis 0.28%, 0.27%, 0.19% and 0.07% of average invested assets
in the second quarter of 2003, the second quarter of 2002, the six months of
2003 and the six months of 2002, 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 $10.4 million, $6.4 million, $15.5 million
and $11.4 million of provisions applied to bonds, partnerships and other
invested assets in the second quarter of 2003, the second quarter of 2002, the
six months of 2003 and the six months of 2002, respectively. On an annualized
basis, impairment writedowns represent 0.58%, 0.40%, 0.43% and 0.36% of average
invested assets in the respective periods. For the twenty quarters ended June
30, 2003, impairment writedowns as an annualized percentage of average invested
assets have ranged from 0.03 to 1.95% and have averaged 0.61%. 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.

VARIABLE ANNUITY POLICY FEES are based on the market value of assets in
separate accounts supporting variable annuity contracts. Such fees totaled
$69.1 million in the second quarter of 2003 and $97.0 million in the second
quarter of 2002 and are net of reinsurance premiums of $7.7 million and $5.3
million, respectively. These amounts include $14.6 million attributable to the
SAAMCO Agreement for the second quarter of 2003. For the six months, variable
annuity fees totaled $133.0 million in 2003, compared to $161.8 million in 2002
and are net of reinsurance premiums of $14.1 million and $9.7 million,
respectively. These amounts include $28.2 million and $33.8 million
attributable to the SAAMCO Agreement, respectively, with approximately half of
the 2002 amount relating to the first quarter of 2002. The decreased fees in
the six months of 2003 as compared to the six months of 2002 reflect the
unfavorable equity market conditions in 2003 and 2002, and the resulting
unfavorable impact on market values of assets in the separate accounts. On an
annualized basis, variable annuity fees represent 1.8%, 2.2%, 1.8% and 1.8% of
average variable annuity assets in the second quarters and six months of 2003
and 2002, respectively. Variable annuity assets averaged $15.67 billion,
$17.75 billion, $15.08 billion and $17.98 billion during the respective
periods. Variable annuity deposits, which exclude deposits allocated to the
fixed accounts of variable annuity products, totaled $394.3 million and $311.1
million in the second quarters of 2003 and 2002, respectively. For the six
months, variable annuity deposits totaled $722.7

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million in 2003, compared with $636.7 million in 2002. On an annualized
basis, these amounts represent 11%, 7%, 10% and 7% of separate account
liabilities at the beginning of the respective periods. Transfers from the
fixed accounts of the Companys variable annuity products to the separate
accounts are not classified as variable annuity deposits. Accordingly, changes
in variable annuity deposits are not necessarily indicative of the ultimate
allocation by customers among fixed and variable account options of the
Companys variable annuity products.

Sales of variable annuity products (which include deposits allocated to
the fixed accounts) (Variable Annuity Product Sales) amounted to $769.5
million, $766.8 million, $1.52 billion and $1.45 billion in the second quarters
and six months of 2003 and 2002, respectively. Such sales primarily reflect
those of the Companys Polaris, Seasons and Diversified Strategies variable
annuity product lines. 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 4 to 41 variable funds and up to 7 guaranteed
fixed-rate funds depending on the product. The increase in Variable Annuity
Product Sales reflect sales of the Companys new products, primarily Polaris
Platinum II, offset by decresed demand for variable annuities in general as a
result of unfavorable equity market conditions. Introduced in late 2002,
Polaris Platinum II product sales totaled $88.0 million in the second quarter
of 2003 and $156.0 million in the six months of 2003.

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

UNIVERSAL LIFE INSURANCE POLICY FEES amounted to $9.4 million in the
second quarter of 2003 and $9.0 million in the second quarter of 2002. For the
six months, universal life insurance policy fees totaled $18.3 million in both
2003 and 2002. Universal life insurance policy fees consist of mortality
charges, up-front fees earned on deposits received and administrative fees, net
of reinsurance premiums. The administrative fees are assessed based on the
number of policies in force as of the end of each month. The Company acquired
its universal life contracts as part of the acquisition of business from MBL
Life Assurance Corporation on December 31, 1998 and does not actively market
such contracts. Such fees annualized represent 2.3%, 2.2%, 2.3% and 2.2% of
average reserves for universal life insurance contracts in the respective
periods.

SURRENDER CHARGES on fixed annuity, variable annuity and universal life
contracts totaled $6.8 million in the second quarter of 2003 and $8.4 million
in the second quarter of 2002. For the six months, such surrender charges
totaled $14.4 million in 2003 and $14.9 million in 2002. 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 years of a contract. Withdrawal payments, which exclude
claims and annuitization benefits, totaled $500.5 million in the second quarter
of 2003, compared to $548.8 million in the second quarter of 2002. For the six
months, such withdrawal payments totaled $1.05 billion in 2003 and 2002.
Annualized, these payments when expressed as a percentage of average related
reserves represent 9.3%, 9.7%, 10.0% and 9.2% for the second quarters and six
months of 2003 and 2002, respectively. Withdrawals from the

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variable annuity separate accounts totaled $383.8 million (annualized
representing 9.8% of average variable annuity liabilities), $428.3 million
(annualized representing 9.7% of average variable annuity liabilities) $769.9
million (annualized representing 10.3% of average variable annuity liabilities)
and $833.8 million (annualized representing 9.3% of average variable annuity
liabilities) in the second quarters and six months of 2003 and 2002,
respectively. The increase in withdrawal rates in 2003 as compared to 2002
reflects a decrease in the market value of assets in separate accounts
supporting variable annuity contracts due to continual unfavorable equity
market conditions.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $19.0 million in the second
quarter of 2003 and $19.6 million in the second quarter of 2002. For the six
months, general and administrative expenses totaled $40.3 million in 2003 and
$38.4 million in 2002. 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 $40.3 million in the
second quarter of 2003, compared to $60.7 million in the second quarter of
2002. For the six months, such amortization totaled $79.1 million in 2003,
compared to $107.4 million in 2002. The decrease in amortization in 2003 was
due to lower income in 2003 as a result of decreased variable annuity policy
fee income and increased guaranteed minimum death benefits.

ANNUAL COMMISSIONS totaled $16.0 million in the second quarter of 2003,
compared to $15.8 million in the second quarter of 2002. For the six months,
annual commissions amounted to $30.2 million in 2003 and $31.6 million in 2002.
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. These commissions are expected to increase in future periods.

CLAIMS ON UNIVERSAL LIFE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled
$5.7 million in the second quarter of 2003, compared to $3.4 million in the
second quarter of 2002 (net of reinsurance recoveries of $7.0 million and $4.8
million in 2002, respectively). For the six months, claims on universal life
contracts, net of reinsurance recoveries amounted to $11.2 million in 2003 and
$7.9 million in 2002 (net of reinsurance recoveries of $17.8 million and $10.7
million, respectively). The increase in such claims in 2003 resulted
principally from increased mortality experience, which fluctuates and cannot
necessarily be expected to continue in future periods.

GUARANTEED MINIMUM DEATH BENEFITS, NET OF REINSURANCE RECOVERIES (Net
GMDB) totaled $14.5 million in the second quarter of 2003, compared to $10.4
million in the second quarter of 2002 (net of reinsurance recoveries of $2.8
million and $1.2 million, respectively). For the six months, Net GMDB amounted
to $36.5 million in 2003 and $17.8 million in 2002 (net of reinsurance
recoveries of $5.7 million and $2.7 million, respectively). 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

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increase in Net GMDB, which is related to the Companys variable annuity
contracts in 2003 reflects the downturn in the equity markets in 2002 and 2003.
Further 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 June 30, 2003, a portion of
the GMDB risk on approximately 38% of the account value with such features had
been reinsured. Approximately half of this reinsurance will cease at the time
the modified coinsurance deposit liability is fully paid down, which is
presently estimated to occur in early 2004. A substantial majority of all new
contracts sold have reinsurance coverage. However, the Company does not
currently have reinsurance coverage on contracts sold after 2003.
Reinsurance coverage is subject to limitations such as caps and deductibles.
GMDB-related contractholder benefits incurred, net of related reinsurance, were
$14.5 million (net of reinsurance recoveries of $2.8 million) for the second
quarter of 2003 and $10.4 million (net of reinsurance recoveries of $1.2
million ) for the second quarter of 2002. GMDB-related contractholder benefits
incurred, net of related reinsurance, were $36.5 million (net of reinsurance
recoveries of $5.7 million) for the six months of 2003 and $17.8 million (net
of reinsurance recoveries of $2.7 million) for the six months of 2002. 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 3 of Notes to Financial
Statements).

EARNINGS ENHANCEMENT BENEFIT (EEB): The Company issues certain variable
annuity products that offer an optional Earnings Enhancement Benefit (EEB)
feature. For contractholders who elect the feature, the EEB provides an
additional death benefit amount equal to a fixed percentage of earnings in the
contract, subject to certain maximums. The Company bears the risk that account
values following favorable performance of the financial markets will result in
greater EEB death claims and that the fees collected under the contract are
insufficient to cover the costs of the benefit to be provided. At June 30,
2003, approximately 8% (calculated based on current account value) of inforce
contracts include EEB coverage, with 97% of the EEB risk fully reinsured.

GUARANTEED MINIMUM INCOME BENEFIT (GMIB): The Company issues certain
variable annuity products that contain or offer a Guaranteed Minimum Income
Benefit (GMIB) living benefit feature. This feature provides a minimum annuity
payment guarantee for those contractholders who choose to receive fixed
lifetime annuity payments after a seven or ten-year waiting period in their
deferred annuity contracts. The Company bears the risk that the performance of
the financial markets will not be sufficient for accumulated policyholder
account balances to support GMIB benefits and that the fees collected under the
contract are insufficient to cover the costs of the benefit to be provided.
Substantially all of the Companys GMIB risk on contracts sold prior to June
30, 2003 has been reinsured.

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GUARANTEED MINIMUM ACCOUNT VALUE (GMAV): In the third quarter of 2002,
the Company began issuing certain variable annuity products which offer an
optional Guaranteed Minimum Account Value (GMAV) living benefit. If elected by
the policyholder at the time of contract issuance, this feature guarantees that
the account value under the contract will equal or exceed the amount of the
initial principal invested, adjusted for withdrawals, at the end of a ten-year
waiting period. The Company bears the risk that protracted under-performance
of the financial markets could result in GMAV guarantees being higher than the
underlying contractholder account balance and that the fees collected under the
contract are insufficient to cover the costs of the benefit to be provided. As
of June 30, 2003, the premiums subject to guarantee totaled approximately $355
million, and the estimated fair values of the GMAV were not material.

With respect to its reinsurance agreements, the Company could become
liable for all obligations of the reinsured policies if the reinsurers were to
become unable to meet the obligations assumed under the respective reinsurance
agreements. The Company monitors its credit exposure with respect to these
agreements. However, due to the credit ratings and continuous monitoring of
the ratings of these reinsurers, such risks are considered to be minimal.

INCOME TAX EXPENSE totaled $1.5 million in the second quarter of 2003,
$4.4 million in the second quarter of 2002, $3.4 million in the six months of
2003 and $7.8 million in the six months of 2002, representing effective
annualized tax rates of 6%, 15%, 9% and 15%, respectively. The decreases in
the effective tax rates for 2003 are due primarily to the lower relative pretax
income without corresponding reductions in permanent tax differences.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDERS EQUITY increased to $1.42 billion at June 30, 2003 from
$1.32 billion at December 31, 2002. The increase reflected net income of $33.3
million and other comprehensive income of $66.1 million.

INVESTMENTS AND CASH at June 30, 2003 totaled $7.44 billion, compared to
$7.19 billion at December 31, 2002. The Companys invested assets are managed
by its affiliates. The following table summarizes the Companys portfolio of
bonds, notes and redeemable preferred stocks (the Bond Portfolio) and other
investments and cash at June 30, 2003 and December 31, 2002:

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|                                                   |  |                                        |           |                   |  |          |       |            |  |   |           |  |  |  |       |  
|-------------------------------------------------- |  | -------------------------------------- | --------- | ----------------- |  | -------- | ----- | ---------- |  | - | --------- |  |  |  | ----- | -
|                                                   |  | June 30, 2003                          |           | December 31, 2002
|                                                   |  |                                        |           |                  
|                                                   |  | Carrying                               |           | Percent of        |  | Carrying |       | Percent of
|                                                   |  | Value                                  |           | Portfolio         |  | Value    |       | Portfolio 
|                                                   |  |                                        |           |                   |  |          |       |           
|                                                   |  | (In thousands, except for percentages)
|Bond Portfolio:                                    |  |                                        |           |                   |  |          |       |            |  |   |           |  |  |  |       |  
|U.S. government securities                         |  | $                                      | 16,661    |                   |  |          | 0.2   | %          |  | $ | 32,820    |  |  |  | 0.5   | %
|Mortgage-backed securities                         |  |                                        | 1,348,518 |                   |  |          | 18.1  |            |  |   | 1,547,568 |  |  |  | 21.5  |  
|Other bonds, notes and
redeemable preferred
stocks |  |                                        | 4,496,679 |                   |  |          | 60.4  |            |  |   | 3,948,181 |  |  |  | 54.9  |  
|                                                   |  |                                        |           |                   |  |          |       |            |  |   |           |  |  |  |       |  
|Total Bond Portfolio                               |  |                                        | 5,861,858 |                   |  |          | 78.7  |            |  |   | 5,528,569 |  |  |  | 76.9  |  
|Mortgage loans                                     |  |                                        | 754,586   |                   |  |          | 10.1  |            |  |   | 738,601   |  |  |  | 10.3  |  
|Common stocks                                      |  |                                        | 3,291     |                   |  |          | 0.0   |            |  |   | 2,609     |  |  |  | 0.0   |  
|Cash and short-term
investments                    |  |                                        | 280,808   |                   |  |          | 3.8   |            |  |   | 65,872    |  |  |  | 0.9   |  
|Other                                              |  |                                        | 544,046   |                   |  |          | 7.4   |            |  |   | 858,053   |  |  |  | 11.9  |  
|                                                   |  |                                        |           |                   |  |          |       |            |  |   |           |  |  |  |       |  
|Total investments and cash                         |  | $                                      | 7,444,589 |                   |  |          | 100.0 | %          |  | $ | 7,193,704 |  |  |  | 100.0 | %
|                                                   |  |                                        |           |                   |  |          |       |            |  |   |           |  |  |  |       |  

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

THE BOND PORTFOLIO, which constituted 79% of the Companys total
investment portfolio at June 30, 2003, had an aggregate fair value that was
$175.3 million greater than its amortized cost at June 30, 2003, compared with
$35.9 million at December 31, 2002. The increase in net unrealized gains on
the Bond Portfolio during 2003 principally reflected the impact of impairment
writedowns in 2003 as well as the decrease in prevailing interest rates and the
corresponding effect on the fair value of the Bond Portfolio at June 30, 2003.

At June 30, 2003, the Bond Portfolio had an aggregate carrying value (i.e.
fair value) of $5.86 billion and an aggregate amortized cost of $5.69 billion.
At June 30, 2003, the Bond Portfolio (excluding $1.4 million of redeemable
preferred stocks) included $5.53 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 $332.7 million of bonds
rated by the Company pursuant to statutory ratings guidelines established by
the NAIC. At June 30, 2003, approximately $5.54 billion of the Bond Portfolio
was investment grade, including $1.09 billion of mortgage-backed securities
(MBS) and U.S. government/agency securities.

At June 30, 2003, the Bond Portfolio included $322.9 million of bonds that
were not rated investment grade. These non-investment-grade bonds accounted
for approximately 1.3% of the Companys total assets and approximately 4.3% of
its invested assets. Non-investment-grade securities generally provide higher
yields and involve greater risks than investment-

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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 June 30, 2003, the Companys non-investment-grade portfolio consisted of 100
issues with no single issuer representing more than 5.5% of the total Bond
Portfolio. These non-investment-grade securities are comprised of bonds
spanning 11 industries with 17% of these assets concentrated in financial
institutions, 17% concentrated in utilities, 16% concentrated in consumer
goods, 15% concentrated in communications and 14% concentrated in
transportation. No other industry concentration constituted more than 10% of
these assets.

The table on the following page summarizes the Companys rated bonds by
rating classification as of June 30, 2003.

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RATED BONDS BY RATING CLASSIFICATION
(Dollars in thousands)

|                                  |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |          |  |   |           |         |           |   |           |           |  |   |           |           |  |  |         |       |  
|--------------------------------- | ----------------------------- | ----------------------- | --------- | --------- |  | -------- | --------- | --------- | ---- | ----- | -------------------------------- | --------- |  | ----- | --------- | -------- |  | - | --------- | ------- | --------- | - | --------- | --------- |  | - | --------- | --------- |  |  | ------- | ----- | -
|                                  |                               |                         |           |           |  |          |           |           |      |       | Issues not rated by S&P/Moody's/ |           |  |       |           |          |  |   |           |         |           |   |          
|Issues rated by S&P/Moody's/Fitch |                               | Fitch, by NAIC category |           | Total    
|                                  |                               |                         |           |          
|                                  |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |          |  |   |           |         |           |   |           |           |  |   |           |           |  |  | Percent
|                                  |                               |                         |           |           |  |          | Estimated |           | NAIC |       |                                  |           |  |       | Estimated |          |  |   |           |         | Estimated |   | of total 
|S&P/Moody's/Fitch                 |                               | Amortized               |           | fair      |  | category |           | Amortized |      | fair  |                                  | Amortized |  | fair  |           | invested
|Category (1)                      |                               | cost                    |           | value     |  | (2)      |           | cost      |      | value |                                  | cost      |  | value |           | assets  
|                                  |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |         
|AAA+ to A-                        |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |          |  |   |           |         |           |   |           |           |  |   |           |           |  |  |         |      
|                                  | (Aaa to A3)
[AAA to A-]       |                         | $         | 3,045,323 |  |          | $         | 3,174,786 |      |       |                                  | 1         |  |       | $         | 659,278  |  |   | $         | 683,573 |           |   | $         | 3,704,601 |  |   | $         | 3,858,359 |  |  |         | 51.83 | %
|BBB+ to BBB-                      |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |          |  |   |           |         |           |   |           |           |  |   |           |           |  |  |         |      
|                                  | (Baa1 to Baa3)
[BBB+ to BBB-] |                         |           | 1,294,069 |  |          |           | 1,353,580 |      |       |                                  | 2         |  |       |           | 322,386  |  |   |           | 325,666 |           |   |           | 1,616,455 |  |   |           | 1,679,246 |  |  |         | 22.56 | %
|BB+ to BB-                        |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |          |  |   |           |         |           |   |           |           |  |   |           |           |  |  |         |      
|                                  | (Ba1 to Ba3)
[BB+ to BB-]     |                         |           | 170,216   |  |          |           | 161,758   |      |       |                                  | 3         |  |       |           | 14,224   |  |   |           | 15,126  |           |   |           | 184,440   |  |   |           | 176,884   |  |  |         | 2.38  | %
|B+ to B-                          |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |          |  |   |           |         |           |   |           |           |  |   |           |           |  |  |         |      
|                                  | (B1 to B3)
[B+ to B-]         |                         |           | 99,587    |  |          |           | 86,471    |      |       |                                  | 4         |  |       |           | 3,083    |  |   |           | 3,108   |           |   |           | 102,670   |  |   |           | 89,579    |  |  |         | 1.20  | %
|CCC+ to C                         |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |          |  |   |           |         |           |   |           |           |  |   |           |           |  |  |         |      
|                                  | (Caa to C)
[CCC]              |                         |           | 58,105    |  |          |           | 38,864    |      |       |                                  | 5         |  |       |           | 16,350   |  |   |           | 15,208  |           |   |           | 74,455    |  |   |           | 54,072    |  |  |         | 0.73  | %
|C1 to D                           |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |          |  |   |           |         |           |   |           |           |  |   |           |           |  |  |         |      
|                                  | [DD]
{D}                      |                         |           |          |  |          |           |          |      |       |                                  | 6         |  |       |           | 2,571    |  |   |           | 2,343   |           |   |           | 2,571     |  |   |           | 2,343     |  |  |         | 0.03  | %
|                                  |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |          |  |   |           |         |           |   |           |           |  |   |           |           |  |  |         |      
|TOTAL RATED
ISSUES                |                               | $                       | 4,667,300 |           |  | $        | 4,815,459 |           |      |       |                                  |           |  | $     | 1,017,892 |          |  | $ | 1,045,024 |         |           | $ | 5,685,192 |           |  | $ | 5,860,483 |           |  |  |         |      
|                                  |                               |                         |           |           |  |          |           |           |      |       |                                  |           |  |       |           |          |  |   |           |         |           |   |           |           |  |   |           |           |  |  |         |      

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 $332.7 million of assets that were
rated by the Company pursuant to applicable NAIC rating guidelines.                                                                                                                                                                                                                                            

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The valuation of invested assets involves obtaining a market value for
each security. The source for the market 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. However, the market price following a significant credit event
of any issuer may be volatile after such an event. Factors such as market
liquidity, hedge fund activity, sensitivity to headline risk, and the
widening of bid/ask spreads contribute to price volatility. Because of such
volatility, the market price may not be indicative of the fair value or a
reasonable estimate of realizable value.

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

As a result of these policies, the Company recorded pretax impairment
writedowns of $12.3 million and $11.4 million in the six months of 2003 and 2002, respectively.

Excluding the impairments noted above, the changes in market 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.

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At June 30, 2003, the Companys Bond Portfolio had gross unrealized gains
of $295.0 million and gross unrealized losses of $119.7 million. One issuer
accounted for 11% of unrealized losses. No other single issuer accounted for
more than 10% of unrealized losses.

At June 30, 2003, the fair value of the Companys Bond Portfolio
aggregated $5.86 billion. Of this aggregate fair value, approximately 1.6%
represented securities trading at or below 75% of amortized cost. The impact
of unrealized losses on net income will be further mitigated upon realization
by the impact of the realized losses on DAC amortization and income taxes.

At June 30, 2003, approximately $794.1 million of the Companys Bond
Portfolio had gross unrealized losses of $119.7 million. The gross unrealized
losses in the Bond Portfolio included the following concentrations:

|                                      |  |                |        | 
|------------------------------------- |  | -------------- | ------ | 
|                                      |  | Gross         
|                                      |  | Unrealized    
|Concentration                         |  | Losses        
|                                      |  |               
|                                      |  | (In thousands)
|Investment Grade:                     |  |                |        | 
|Finance companies                     |  | $              | 41,681 | 
|Transportation                        |  |                | 7,354  | 
|Non-corporate                         |  |                | 15,748 | 
|Other                                 |  |                | 4,256  | 
|Not Rated and Below Investment Grade: |  |                |        | 
|Finance companies                     |  |                | 9,288  | 
|Transportation                        |  |                | 23,453 | 
|Non-corporate                         |  |                | 4,230  | 
|Other                                 |  |                | 13,683 | 

The amortized cost of the Bond Portfolio in an unrealized loss position at
June 30, 2003, by contractual maturity, is shown below:

|                                       |  |                |         | 
|-------------------------------------- |  | -------------- | ------- | 
|                                       |  | Amortized     
|                                       |  | Cost          
|                                       |  |               
|                                       |  | (In thousands)
|Due in one year or less                |  | $              | 11,910  | 
|Due after one year through five years  |  |                | 322,089 | 
|Due after five years through ten years |  |                | 392,482 | 
|Due after ten years                    |  |                | 187,356 | 
|                                       |  |                |         | 
|Total                                  |  | $              | 913,837 | 
|                                       |  |                |         | 

In the six months ended June 30, 2003, the pretax realized losses incurred
with respect to the sale of fixed securities in the Bond Portfolio were $7.0
million. The aggregate fair value of securities sold was $230.7 million, which
was approximately 97.1% 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 6 months.

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The aging of the Bond Portfolio in an unrealized loss position at June 30,
2003, is shown below:

|                        |  |                |         |            |          |        |         |  |  |  |     | 
|----------------------- |  | -------------- | ------- | ---------- | -------- | ------ | ------- |  |  |  | --- | 
|                        |  | Amortized      |         | Unrealized |          | Number
|                        |  | Cost           |         | Losses     | Of Items
|                        |  |                |         |            |         
|                        |  | (In thousands)
|Investment Grade:       |  |                |         |            |          |        |         |  |  |  |     | 
|0-6 months              |  | $              | 753,040 |            |          | $      | 104,893 |  |  |  | 135 | 
|7-12 months             |  |                | 21,011  |            |          |        | 1,362   |  |  |  | 9   | 
|>12 months              |  |                | 84,035  |            |          |        | 13,032  |  |  |  | 17  | 
|Below Investment Grade: |  |                |         |            |          |        |         |  |  |  |     | 
|0-6 months              |  | $              | 4,242   |            |          | $      | 185     |  |  |  | 4   | 
|7-12 months             |  |                | 26,301  |            |          |        | 136     |  |  |  | 3   | 
|>12 months              |  |                | 25,208  |            |          |        | 85      |  |  |  | 3   | 
|Total:                  |  |                |         |            |          |        |         |  |  |  |     | 
|0-6 months              |  | $              | 757,282 |            |          | $      | 105,078 |  |  |  | 139 | 
|7-12 months             |  |                | 47,312  |            |          |        | 1,498   |  |  |  | 12  | 
|>12 months              |  |                | 109,243 |            |          |        | 13,117  |  |  |  | 20  | 

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 June 30, 2003 was
approximately $1.32 billion.

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 $320.8 million at June 30, 2003. Secured Loans are senior to
subordinated debt and equity and are secured by assets of the issuer. At June
30, 2003, Secured Loans consisted of $69.5 million of publicly traded
securities and $251.3 million of privately traded securities. These Secured
Loans are composed of loans to 66 borrowers spanning 19 industries, with 14% of
these assets concentrated in energy and 10% concentrated in food. No other
industry constituted more than 10% of these assets.

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While the trading market for the Companys privately traded Secured Loans
is more limited than for publicly traded issues, management believes that
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 $754.6 million at June 30, 2003 and consisted of
125 commercial first mortgage loans with an average loan balance of
approximately $6.0 million, collateralized by properties located in 32 states.
The properties collateralizing the portfolios were approximately 33% office,
19% multifamily residential, 15% manufactured housing, 10% industrial, 9%
hotels, 5% retail, and 9% other types. At June 30, 2003, approximately 29% and
11% of this portfolio were secured by properties located in California and New
York, respectively, and no more than 10% of this portfolio was secured by
properties located in any other single state. At June 30, 2003, there were 16
mortgage loans with outstanding balances of $10 million or more, which
collectively aggregated approximately 47% of the portfolio. At the time of
their origination or purchase by the Company, virtually all mortgage loans had
loan-to-value ratios of 75% or less. At June 30, 2003, approximately 28% of
the mortgage loan portfolio consisted of loans with balloon payments due before
July 1, 2006. During 2003 and 2002, loans delinquent by more than 90 days,
foreclosed loans and restructured loans have not been significant in relation
to the total mortgage loan portfolio.

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

POLICY LOANS totaled $206.2 million at June 30, 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 $28.5 million at June 30, 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.

SECURITIES LENDING COLLATERAL totaled $270.6 million at June 30, 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

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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 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, market value
adjustments or other restrictions in order to encourage persistency.
Approximately 78% of the Companys fixed annuity, universal life and GIC
reserves had surrender penalties or other restrictions at June 30, 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 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 included: 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 June 30, 2003, these assets had
an aggregate fair value of $7.44 billion with an option-adjusted duration of
3.9. The Companys fixed-rate liabilities included fixed annuity, universal
life and GIC contracts. At June 30, 2003, these liabilities had an aggregate
fair value (determined by discounting future contractual cash flows by related
market rates of interest) of $6.69 billion with an option-adjusted duration of
3.9. The Companys potential exposure due to a relative 10% decrease in
prevailing interest rates from its June 30, 2003 levels is a loss of
approximately $8.6 million, representing an increase in fair value of its
fixed-rate liabilities that is not offset by a 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

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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 as a result of the declining interest rate environment. 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.

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 reverse repurchase
agreements (Reverse Repos). Reverse Repos involve a sale of securities by
the Company and an agreement to repurchase the same securities at a later date
at an agreed upon price and are generally over-collateralized. 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 Reverse Repos and
Swap Agreements is counterparty risk. The Company believes, however, that the
counterparties to its Reverse 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

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

The carrying values of investments that are determined to have declines in
value that are other than temporary are reduced to fair value. 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 $26.4 million ($19.7 million
of bonds and $6.7 million of mortgage loans) at June 30, 2003, which
constituted approximately 0.3% 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, Reverse
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 June 30, 2003, approximately $5.07 billion of the Companys Bond Portfolio
had an aggregate unrealized gain of $295.0 million, while approximately $794.1
million of the Bond Portfolio had an aggregate unrealized loss of $119.7
million. In addition, the Companys investment portfolio currently provides
approximately $52.0 million of monthly cash flow from scheduled principal and
interest payments. Historically, cash flows from operations and from the sale
of the Companys annuity products have been more than sufficient in amount to
satisfy the Companys liquidity needs.

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

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Reverse Repos on the Companys substantial MBS segment of the Bond
Portfolio, thereby avoiding the sale of fixed-rate assets in an unfavorable
bond market.

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

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

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

GUARANTEES AND OTHER COMMITMENTS

The Company has entered into eight agreements in which it has provided
liquidity support for certain short-term securities of municipalities and
non-profit organizations by agreeing to purchase such securities in the event
there is no other buyer in the short-term marketplace. In return the Company
receives a fee. In addition, the Company guarantees the payment of these
securities upon redemption. The maximum liability under these guarantees at
June 30, 2003 is $794.9 million. Related to each of these agreements are
participation agreements with the Companys Parent, under which the Parent will
share in $345.3 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: $249.0 million in 2004, $387.9 million in
2005 and $158.0 million in 2006.

RECENTLY ISSUED ACCOUNTING STANDARDS

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 03-01, Accounting and Reporting by Insurance
Enterprises for Certain Non-traditional Long-Duration Contracts and for
Separate Accounts (SOP-03-1). This statement is effective for the Company as
of January 1, 2004. Under SOP 03-01, 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

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qualify for separate account accounting and reporting. The Company will be
required to look through the separate account for purposes of accounting for
its interest therein, and account for and classify separate account seed money
based on its nature as if the assets of the separate account underlying the
Companys interest were held directly by the general account rather than
through the separate account structure. The adoption of SOP 03-01
will not have a material impact on the Company's separate accounts or
separate account seed money.

In addition, SOP 03-01 will require the Company to recognize a liability
for guaranteed minimum death benefits, guaranteed minimum income benefits and
enhanced earnings benefits. The Company is currently evaluating the provisions
of SOP 03-01 and does not currently have an estimate of the liability.
However, the one-time cumulative accounting charge is expected to have a
material effect on the Companys results of operations, but is not expected to
be material to the Companys financial position.

REGULATION

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

Risk based capital (RBC) standards are designed to measure the adequacy
of an insurers statutory capital and surplus in relation to the risks inherent
in its business. The standards are intended to help identify inadequately
capitalized companies and require specific regulatory actions in the event an
insurers RBC is deficient. The RBC formula develops a risk-adjusted target
level of adjusted statutory capital and surplus by applying certain factors to
various asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus, the
target level of statutory surplus varies not only as a result of the insurers
size, but also on the risk profile of the insurers operations. The RBC Model
Law provides four incremental levels of regulatory attention for insurers whose
surplus is below the calculated RBC target. These levels of attention range in
severity from requiring the insurer to submit a plan for corrective action to
actually placing the insurer under regulatory control. The statutory capital
and surplus of the Company exceeded its RBC requirements as of June 30, 2003.

Privacy provisions of the Gramm-Leach-Bliley Act became fully effective in
2001 and established new consumer protections regarding the security,
confidentiality, and uses of nonpublic personal information of individuals.
The law also requires financial institutions to fully disclose their privacy
policies to their customers. Additional privacy legislation pending in the
United States Congress and several states is designed to provide further
privacy protections to consumers of financial products and services. These

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statutes and regulations may result in additional regulatory compliance
costs, may limit the Companys ability to market its products, and may
otherwise constrain the nature or scope of the Companys insurance and
financial services operations. The Gramm-Leach-Bliley Act also allows
combinations between insurance companies, banks and other entities. In
addition, from time to time, Federal initiatives are proposed that could affect
the Companys businesses. Such initiatives include employee benefit plan
regulations and tax law changes affecting the taxation of insurance companies
and the tax treatment of insurance and other investment products. Proposals
made in recent years to limit the tax deferral of annuities or otherwise modify
the tax rules related to the treatment of annuities have not been enacted.
While certain of such proposals, if implemented, could have an adverse effect
on the Companys sales of affected products, and, consequently, on its results
of operations, the Company believes these proposals have a small likelihood of
being enacted, because they would discourage retirement savings and there is
strong public and industry opposition to them.

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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 29
herein.

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CONTROLS & PROCEDURES

The Companys disclosure controls and procedures are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934, as amended (Exchange
Act), is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the Companys management, including the Companys Chief Executive Officer
and Principal Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. The Companys Chief Executive Officer and the
Principal Financial Officer have reviewed the effectiveness of its disclosure
controls and procedures as of June 30, 2003 and have concluded that the
disclosure controls and procedures are effective. There was no change in the
Companys internal control over financial reporting that occurred during the
three months ended June 30, 2003 that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial
reporting.

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AIG SUNAMERICA LIFE ASSURANCE COMPANY
OTHER INFORMATION




Item 1. Legal Proceedings

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




Item 5. Other Information

Not applicable.




Item 6. Exhibits and Reports on Form 8-K




EXHIBITS

Exhibits are listed in the Exhibit Index beginning on page 38 herein.

REPORTS FOR FORM 8-K

There were no current reports on Form 8-K filed during the three months ended
June 30, 2003.

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SIGNATURES

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

|                      |  |                                                                                 
|--------------------- |  | --------------------------------------------------------------------------------
|                      |  | AIG SUNAMERICA LIFE ASSURANCE COMPANYRegistrant                                 
|                      |  |                                                                                 
|Date: August 14, 2003 |  | /s/ N. SCOTT GILLIS                                                             
|                      |  |                                                                                 
|                      |  | N. Scott Gillis
Senior Vice President and Director
(Principal Financial Officer)
|                      |  |                                                                                 
|Date: August 14, 2003 |  | /s/ MAURICE S. HEBERT                                                           
|                      |  |                                                                                 
|                      |  | Maurice S. Hebert
Vice President and Controller
(Principal Accounting Officer)  

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Exhibit Index

|        |  |                                        
|------- |  | ---------------------------------------
|Exhibit |  |                                        
|        |  |                                        
|(31.1)  |  | Rule 13a-14(a)/15d-14(a) Certifications
|(31.2)  |  | Rule 13a-14(a)/15d-14(a) Certifications
|(32)    |  | Section 1350 Certifications            

38