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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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(MARK ONE)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

OR



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

FOR THE TRANSITION PERIOD FROM              TO

COMMISSION FILE NUMBER 033-44202



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American Skandia Life Assurance

Corporation

(Exact Name of Registrant as Specified in its Charter)



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|                                                              |  |                                       
|------------------------------------------------------------- |  | --------------------------------------
|Connecticut                                                   |  | 06-1241288                            
|(State or Other Jurisdictionof Incorporation or Organization) |  | (I.R.S. EmployerIdentification Number)

One Corporate Drive

Shelton, Connecticut 06484

(203) 926-1888

(Address and Telephone Number of Registrants Principal Executive Offices)



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

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



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Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes ̈No  x

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated
filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act.)    Yes ̈No  x

Indicate the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant:

Voting:  NONE    Non-voting:  NONE

Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date:

As of March 23, 2007, 25,000 shares of the registrants Common Stock (par value $100) consisting of 100 voting shares and 24,900 non-voting shares, were outstanding. As of such date, American Skandia, Inc.,
an indirect wholly-owned subsidiary of Prudential Financial, Inc., a New Jersey corporation, owned all of the registrants Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

THE INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART III OF THIS FORM 10-K
IS SET FORTH IN, AND IS HEREBY INCORPORATED BY REFERENCE HEREIN FROM, THE DEFINITIVE PROXY STATEMENT OF PRUDENTIAL FINANCIAL, INC. FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 8, 2007, TO BE FILED BY PRUDENTIAL FINANCIAL, INC. WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER DECEMBER 31, 2006.

American
Skandia Life Assurance Corporation meets the conditions set

forth in General Instruction (I) (1) (a) and (b) on
Form 10-K and

is therefore filing this Form 10-K with the reduced disclosure format.



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TABLE OF CONTENTS



|           |  |          |  |                                                                                                              |  |           
|---------- |  | -------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----------
|           |  |          |  |                                                                                                              |  | PageNumber
|PART I     |  | Item 1.  |  | Business                                                                                                     |  | 2         
|           |  | Item 1A. |  | Risk Factors                                                                                                 |  | 5         
|           |  | Item 2.  |  | Properties                                                                                                   |  | 9         
|           |  | Item 3.  |  | Legal Proceedings                                                                                            |  | 9         
|PART II    |  | Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 10        
|           |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 10        
|           |  | Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 14        
|           |  | Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 17        
|           |  | Item 9.  |  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 17        
|           |  | Item 9A. |  | Controls and Procedures                                                                                      |  | 17        
|           |  | Item 9B. |  | Other Information                                                                                            |  | 17        
|PART III   |  | Item 10. |  | Directors, Executive Officers, and Corporate Governance                                                      |  | 18        
|           |  | Item 14. |  | Principal Accounting Fees and Services                                                                       |  | 18        
|PART IV    |  | Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 19        
|SIGNATURES |  | 20      



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Forward-Looking Statements

Some of the statements included in this Annual Report on Form 10-K, including but not limited to those in Managements Discussion and Analysis of Financial Condition and Results of Operations, may constitute forward-looking statements
within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as expects, believes, anticipates, includes, plans, assumes, estimates,
projects, intends, should, will, shall or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on managements current
expectations and beliefs concerning future developments and their potential effects upon American Skandia Life Assurance Corporation. There can be no assurance that future developments affecting American Skandia Life Assurance Corporation will be
those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially,
from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of stock, real estate and other financial
markets; (2) interest rate fluctuations; (3) reestimates of our reserves for future policy benefits and claims; (4) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest
rates, or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (5) changes in our assumptions related to deferred policy acquisition costs, valuation of business
acquired or goodwill; (6) changes in our claims-paying or credit ratings; (7) investment losses and defaults; (8) competition in our product lines and for personnel; (9) changes in tax law; (10) regulatory or legislative
changes; (11) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities; (12) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic
disease, or other events resulting in catastrophic loss of life; (13) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (14) effects of acquisitions, divestitures and restructurings,
including possible difficulties in integrating and realizing the projected results of acquisitions; (15) changes in statutory or U.S. GAAP accounting principles, practices or policies; and (16) changes in assumptions for retirement
expense. American Skandia Life Assurance Corporation does not intend, and is under no obligation, to update any particular forward-looking statement included in this document.



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PART 1



|Item 1. | Business
|------- | --------

Overview

American Skandia Life Assurance Corporation (the Company), with its principal offices in Shelton, Connecticut, is an indirect wholly-owned subsidiary of
Prudential Financial, Inc. (Prudential Financial), a New Jersey corporation. The Company is a wholly owned subsidiary of American Skandia, Inc. (ASI), which in turn is an indirect wholly owned subsidiary of Prudential
Financial. On December 19, 2002, Skandia Insurance Company Ltd. (publ) (Skandia), an insurance company organized under the laws of the Kingdom of Sweden, and the ultimate parent company of the Company prior to May 1, 2003,
entered into a definitive purchase agreement with Prudential Financial, a New Jersey corporation, whereby Prudential Financial would acquire the Company and certain of its affiliates (the Acquisition) and would be authorized to use the
American Skandia name through April, 2008. On May 1, 2003, the initial phase of the Acquisition was consummated. As such, the Company became an indirect wholly owned subsidiary of Prudential Financial on May 1, 2003. During 2007, we expect
to begin the process of changing the Companys name and the names of various legal entities that include the American Skandia name. See Note 5 for additional information on the Acquisition.

The Company was established in 1988 and is a significant provider of variable annuity contracts for the individual market in the United States. The Companys
products are sold primarily to individuals to provide for long-term savings and retirement needs and to address the economic impact of premature death, estate planning concerns and supplemental retirement income. The investment performance of the
registered investment companies supporting the variable annuity contracts, which is principally correlated to equity market performance, can significantly impact the market for the Companys products.

ASI, the direct parent of the Company, may make additional capital contributions to the Company, as needed, to enable the Company to comply with its reserve requirements
and fund expenses in connection with its business. Generally, ASI is under no obligation to make such contributions and its assets do not back the benefits payable under the Companys annuity contracts and life insurance. During 2006, 2005, and
2004, ASI made no capital contributions to the Company.

Products

The Company offers a wide array of annuities, including deferred and immediate variable annuities that are registered with the United States Securities and Exchange Commission (the SEC), which may include
(1) fixed interest rate allocation options, subject to a market value adjustment, and registered with the SEC, and (2) fixed rate allocation options not subject to a market value adjustment and not registered with the SEC. In addition, the
Company has in force a relatively small block of variable life insurance policies, but it no longer actively sells such policies.

The Company offers
variable annuities that provide our customers with a full suite of optional guaranteed death and living benefits. Our investment options within our variable annuities provide our customers with the opportunity to make allocations in proprietary and
non-proprietary mutual fund options, frequently under asset allocation programs, and fixed interest rate options. The allocations made by customers to the proprietary and non-proprietary mutual fund options represent an interest in separate
investment companies that provide a return linked to an underlying investment portfolio. The investments made in the fixed interest rate options are credited with a rate of return that we determine from time to time, subject to certain contractual
minimums. The Company also offers fixed annuities that provide a guarantee of principal and a guaranteed interest rate.

Annuity contracts represent the
insurers contractual obligation to make payments over a given period of time, often measured by the life of the annuitant, in return for a single deposit or a series of scheduled or flexible deposits. The insurers obligation to pay may
commence immediately or be deferred. If the insurers payments are deferred, the insurer generally incurs an obligation to offer a surrender value available during the deferral period based on an account value, and certain guarantees as
applicable. The account value consists of the deposits and may earn interest, or may vary with the performance of investments in the underlying fund options made available by the insurer and elected by contractholders. Gains on deposits made by the
contractholder, before distribution, generally are tax deferred for the contractholder. Distributions are taxed as ordinary income to the contractholder. For immediate annuities and annuitized deferred annuities, a portion of each distribution may
be treated as a return of the contractholders investment in the contract.

The Companys variable annuity contracts can be divided generally
into certain categories, that vary, among other things, according to their surrender or withdrawal charges structure. For example, for certain variable annuities, the surrender or withdrawal charge expires after a number of years have passed,
whereas other Company annuities either have a surrender or withdrawal charge that expires sooner or alternatively lack a surrender or withdrawal charge altogether. Another distinction among the Companys variable annuities may be the
distribution channel through which the variable annuity is sold. For example, the Company has tailored certain of its variable annuity products to the specifications of the distribution channel or broker-dealer through which the annuity
is sold. Subject to certain contract restrictions, a customer can choose one or more optional death benefits or living benefits to be added to the variable annuity. For example, for an additional fee, the annuity owner may elect a death benefit that
upon death may pay an amount in excess of account value or cumulative deposits. Similarly, for an additional fee, the annuity owner may elect one of several guaranteed minimum income and withdrawal benefits, which in general, create a guaranteed sum
that can be withdrawn over time even if account value declines. These optional features, and in particular, these optional guaranteed minimum income and withdrawal benefits, have had a significant, positive influence on sales in recent years.



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Marketing and Distribution

The Company sells its wide array of annuity products through multiple distribution channels, including (1) independent broker-dealer firms and financial planners; (2) broker-dealers that are members of the New York Stock Exchange,
including wirehouse and regional broker-dealer firms; and (3) broker-dealers affiliated with banks or that specialize in marketing to customers of banks. Although the Company is active in each of those distribution channels, the
majority of the Companys sales have come from the independent broker-dealer firms and financial planners. The Company has selling agreements with approximately eleven hundred broker-dealer firms and financial institutions. On June 1,
2006, The Prudential Insurance Company of America, an affiliate of the Company, acquired the variable annuity business of The Allstate Corporation (Allstate), which included access to the Allstate affiliated broker-dealer. The Company
began distributing variable annuities through the Allstate affiliated broker-dealer registered representatives in the third quarter of 2006.

Although many
of the Companys competitors have acquired or are seeking to acquire their distribution channels as a means of securing sales, the Company typically does not follow that model. Instead, the Company believes that its success is dependent on its
ability to enhance its relationships with both the selling firms and their registered representatives. In cooperation with its affiliated broker-dealer, American Skandia Marketing, Incorporated, the Company uses wholesalers to provide support to its
distribution channels.

Underwriting and Pricing

We
earn fees calculated on the average separate account assets invested in the underlying mutual funds offered in our variable annuity products, and mortality and expense fees and other fees for various insurance-related options and features based on
average daily net assets of the value of the annuity separate accounts. We declare the rate of return on our fixed interest rate options offered in our variable annuities based on certain assumptions, including but not limited to investment returns,
expenses and persistency. Competition also influences our pricing. We seek to maintain a spread between the return on our invested assets and the interest we credit on our fixed-rate option annuities. To encourage persistency, most of our variable
annuities are subject to surrender or withdrawal charges that decline over specified number of years. In addition, the living benefit features of our variable annuity products encourage persistency because the value of the living benefit typically
increases as the contract ages.

Reserves

We establish
reserves for future policy benefits and policyholders account balances to recognize our future obligations for our in force annuity contracts, including the minimum death benefit and living benefit guarantee features of some of these
contracts. We establish policyholders account balances representing cumulative gross premium payments plus credited interest and/or fund performance, less withdrawals, expenses and mortality charges.

Reinsurance

During 2006, the Company entered into two new
reinsurance agreements with an affiliate as part of its risk management and capital management strategies. Effective November 20, 2006, the Company entered into a coinsurance agreement with Pruco Reinsurance, Ltd. (Pruco Re)
providing for the 100% reinsurance of its Highest Daily Lifetime Five (HDLT5) benefit feature sold on certain of its annuities. Effective March 20, 2006, the Company entered into a new coinsurance agreement with Pruco Re providing
for the 100% reinsurance of its Spousal Lifetime Five benefit (SLT5) feature.

During 2005, the Company entered into reinsurance agreements
with affiliates as part of its risk management and capital management strategies. The Company entered into a coinsurance agreement with one of its affiliates, The Prudential Insurance Company of America (Prudential Insurance), providing
for the 100% reinsurance of its Lifetime Five benefit (LT5) feature sold on new business prior to May 6, 2005. Effective July 1, 2005, the Company entered into a new coinsurance agreement with Pruco Re providing for the 100%
reinsurance of its LT5 feature sold on new business after May 5, 2005, as well as for riders issued beginning March 15, 2005 on business inforce before that date.

During 2004, the Company entered into two reinsurance agreements with affiliates as part of our risk management and capital management strategies. The Company entered into a 100% coinsurance agreement with Prudential
Insurance Company providing for the reinsurance of its guaranteed minimum withdrawal benefit feature (GMWB). The Company also entered into a 100% coinsurance agreement with Pruco Re providing for the reinsurance of its guaranteed return
option (GRO). In prior years, the Company entered into reinsurance agreements to provide additional capacity for growth in supporting the cash flow strain from the Companys variable annuity and variable life insurance business.

Regulatory Environment

In order to continue to market
annuity products, the Company must meet or exceed the statutory capital and surplus requirements of the state insurance regulators of the states in which it conducts business. Statutory accounting practices differ from U.S. GAAP in two major
respects. First, under statutory accounting practices, the acquisition costs of new business are charged to expense, while under U.S. GAAP they are initially deferred and amortized over a period of time. Second, under statutory accounting practices,
the required additions to statutory reserves for new business in some cases may initially exceed the statutory revenues attributable to such business. These practices result in a reduction of statutory income and surplus at the time of recording new
business.

Insurance companies are subject to RBC guidelines, monitored by state insurance regulators, that measure the ratio of the Companys
statutory surplus with certain adjustments to its required capital, based on the risk characteristics of its insurance liabilities and investments.



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Required capital is determined by statutory formulas that consider risks related to the type and quality of invested assets, insurance-related risks
associated with the Companys products, interest rate risks and general business risks. The RBC calculations are intended to assist regulators in measuring the adequacy of the Companys statutory capitalization.

The Company considers RBC implications in its asset/liability management strategies. Each year, the Company conducts a thorough review of the adequacy of its statutory
insurance reserves and other actuarial liabilities. The review is performed to ensure that the Companys statutory reserves are computed in accordance with accepted actuarial standards, reflect all contractual obligations, meet the requirements
of state laws and regulations and include adequate provisions for any other actuarial liabilities that need to be established. All significant statutory reserve changes are reviewed by the Board of Directors and are subject to approval by the State
of Connecticut Insurance Department (the Insurance Department). The Company believes that its statutory capital is adequate for its currently anticipated levels of risk as measured by applicable regulatory guidelines.

Changes in statutory capital requirements for our variable annuity products under an NAIC initiative known as C-3 Phase II became effective as of
December 31, 2005. These changes had a favorable impact on our RBC ratios reducing the capital requirements associated with our variable annuity products.

The NAIC has developed a set of financial relationships or tests known as the Insurance Regulatory Information System (IRIS) to assist state regulators in monitoring the financial condition of insurance companies and identifying
companies that require special attention or action by insurance regulatory authorities. Insurance companies generally submit data annually to the NAIC, which in turn analyzes the data using prescribed financial data ratios, each with defined
usual ranges. Generally, regulators will begin to investigate or monitor an insurance company if its ratios fall outside the usual ranges for four or more of the ratios. If an insurance company has insufficient capital, regulators may
act to reduce the amount of insurance it can issue. The Company is not currently subject to regulatory scrutiny based on these ratios.

The Company is
subject to the regulations of the Insurance Department. A detailed financial statement in the prescribed form (the Annual Statement) is filed with the Insurance Department each year covering the Companys operations for the
preceding year and its financial position as of the end of that year. Regulation by the Insurance Department includes periodic examinations to verify the accuracy of our contract liabilities and reserves. The Companys books and accounts are
subject to review by the Insurance Department at all times. A full examination of the Companys operations is conducted periodically by the Insurance Department and under the auspices of the NAIC. The Company is currently undergoing a routine
financial examination for the five year period ended December 31, 2005.

The Company is subject to regulation under the insurance laws of all
jurisdictions in which it operates. The laws of the various jurisdictions establish supervisory agencies with broad administrative powers with respect to various matters, including licensing to transact business, overseeing trade practices,
licensing agents, approving contract forms, establishing reserve requirements, fixing maximum interest rates on life insurance contract loans and minimum rates for accumulation of surrender values, prescribing the form and content of required
financial statements and regulating the type and amounts of permitted investments. The Company is required to file the Annual Statement with supervisory agencies in each of the jurisdictions in which it does business, and its operations and accounts
are subject to examination by these agencies at regular intervals.

Although the federal government generally does not directly regulate the business of
insurance, federal initiatives often have an impact on our business in a variety of ways. Certain insurance products of the Company are subject to various federal securities laws and regulations. In addition, current and proposed federal measures
that may significantly affect the insurance business include regulation of insurance company solvency, employee benefit regulation, the removal of barriers preventing banks from engaging in the insurance business, tax law changes affecting the
taxation of insurance companies and the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles.

Market Conduct Regulation

State insurance laws and regulations include numerous provisions governing the marketplace activities of
insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices and complaint handling. State regulatory authorities generally enforce these provisions through periodic market
conduct examinations.

Insurance Guaranty Association Assessments

Each state has insurance guaranty association laws under which insurers doing business in the state are members and may be assessed by state insurance guaranty associations for certain obligations of insolvent
insurance companies to policyholders and claimants. Typically, states assess each member insurer in an amount related to the member insurers proportionate share of the business written by all member insurers in the state. While we cannot
predict the amount and timing of any future assessments on the Company under these laws, we have established reserves that we believe are adequate for assessments relating to insurance companies that are currently subject to insolvency proceedings.

State Securities Regulation

In certain states, our
variable annuity products are considered securities within the meaning of state securities laws. Sales activities with respect to these products generally are subject to state securities regulation. Such regulation may affect investment
advice, sales and related activities for these products.



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USA Patriot Act

The
USA Patriot Act of 2001, enacted in response to the terrorist attacks on September 11, 2001, contains anti-money laundering and financial transparency laws and mandates the implementation of various new regulations applicable to broker-dealers
and other financial services companies, including insurance companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or
money laundering. The increased obligations of financial institutions to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share
information with other financial institutions require the implementation and maintenance of internal practices, procedures and controls.

Legislative
and Regulatory Reforms

Federal and state regulators are devoting substantial attention to the variable annuity business. As a result of publicity
relating to widespread perceptions of industry abuses, numerous legislative and regulatory reforms have been proposed or adopted with respect to revenue sharing, market timing, late trading, and other issues. It is difficult to predict at this time
whether changes resulting from new laws and regulations will affect our product offerings and, if so, to what degree.

Privacy Regulation

Federal and state law and regulation require financial institutions to protect the security and confidentiality of personal information, including
health-related and customer information and to notify customers and other individuals about their policies and practices relating to their collection and disclosure of health-related and customer information and their practices relating to
protecting the security and confidentiality of that information. State laws regulate use and disclosure of social security numbers and require notice to affected individuals, law enforcement, regulators and others if there is a breach of the
security of certain personal information, including social security numbers. Federal and state laws and regulations regulate the ability of financial institutions to make telemarketing calls and to send unsolicited e-mail messages to consumers and
customers. Federal and state governments and regulatory bodies may be expected to consider additional or more detailed regulation regarding these subjects and the privacy and security of personal information.

Competition

The Company is competing for management of individuals savings dollars in the United States. Competitors in this business include banks, investment companies, insurance companies and other financial institutions. According to
Info-Ones Variable Annuity Research & Data Service (VARDS), the combined annuity business of Prudential Financial, which includes the Company, was ranked 4thin sales of variable annuities for the year ended December 31, 2006, and 4thin assets under management as of December 31, 2006. Competitive factors in this industry include investment performance, product design, visibility in
the marketplace, financial strength ratings, distribution capabilities, levels of charges and credited rates, reputation, customer service and sales force service and education. As of the filing date, the Companys financial strength or claims
paying ratings from Fitch Ratings, A.M. Best Co. and Standard and Poors is AA, A+ and AA-, respectively.

Segments

The Company currently operates as one reporting segment. Revenues, net income and total assets for this segment can be found on the Companys Statements of Financial
Position as of December 31, 2006 and 2005 and Statements of Operations and Comprehensive Income for the year ended December 31, 2006, year ended December 31, 2005, and year ended December 31, 2004. The Companys total assets
as of December 31, 2006, 2005, and 2004 were $38.6 billion, $32.9 billion, and $30.3 billion, respectively. Revenues and assets generated from the Companys variable life and qualified plan product offerings have been insignificant in
comparison to the revenues and assets generated from the Companys core product, variable annuities.

Employees

As of December 31, 2006, the Company had 437 employees.



|Item 1A. | Risk Factors
|-------- | ------------

The following risks could materially affect
our business, results of operations or financial condition or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company. These risks are not exclusive,
and additional risks to which we are subject include, but are not limited to, the factors mentioned under Forward-Looking Statements above and the risks of our businesses described elsewhere in this Annual Report on Form 10-K.

Market fluctuations and general economic, market and political conditions may adversely affect our business and profitability.

Our products, and our investment returns, are sensitive to stock and other market fluctuations and general economic, market and political conditions and these
fluctuations and changes could adversely affect our investment returns and results of operations, including in the following respects:



| |  |  | The profitability of our products depends in part on the value of the separate accounts supporting these products, which may fluctuate substantially depending on
the foregoing conditions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | A change in market conditions, including prolonged periods of high inflation, could cause a change in consumer sentiment adversely affecting sales and persistency
of our products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales of our products may decline and lapses of our products may increase if a market downturn, increased market volatility or other market conditions result in
customers becoming dissatisfied with their products.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A market decline could result in guaranteed minimum benefits contained in many of our variable annuity products being higher than current account values or our
pricing assumptions would support, requiring us to materially increase reserves for such products.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase. Accordingly, we may be forced to incur
additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms which could adversely affect the profitability of future business or our willingness to write future business.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest rate fluctuations could adversely affect our business and profitability.

Our products, and our investment returns, are sensitive to interest rate fluctuations, and changes in interest rates could adversely affect our investment returns and results of operations, including in the following
respects:



| |  |  | Some of our products expose us to the risk that changes in interest rates will reduce the spread between the amounts that we are required to pay under the contracts
and the rate of return we are able to earn on our general account investments supporting the contracts. When interest rates decline, we have to reinvest the cash income from our investments in lower yielding instruments. Since many of our policies
and contracts have guaranteed minimum interest or crediting rates or limit the resetting of interest rates, the spreads could decrease and potentially become negative. When interest rates rise, we may not be able to replace the assets in our general
account with the higher yielding assets needed to fund the higher crediting rates necessary to keep these products and contracts competitive.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in interest rates may reduce our spreads or result in potential losses in our investment activities in which we borrow funds and purchase investments to
earn additional spread income on the borrowed funds. A decline in market interest rates could also reduce our returns from investment of equity.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | When interest rates rise, policy loans and surrenders and withdrawals of annuity contracts may increase as policyholders seek to buy products with perceived higher
returns, requiring us to sell investment assets potentially resulting in realized investment losses, or requiring us to accelerate the amortization of deferred policy acquisition costs (DAC) or valuation of business acquired
(VOBA).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decline in interest rates accompanied by unexpected prepayments of certain investments could result in reduced investments and a decline in our profitability. An
increase in interest rates accompanied by unexpected extensions of certain lower yielding investments could result in a decline in our profitability.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in the relationship between long-term and short-term interest rates could adversely affect the profitability of some of our products.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

If our reserves for future policyholder benefits and claims are inadequate, we may be required to increase our reserves, which would
adversely affect our results of operations and financial condition.

We establish and carry reserves to pay future policyholder benefits and claims. Our
reserves do not represent an exact calculation of liability, but rather are actuarial or statistical estimates based on many assumptions and projections which are inherently uncertain and involve the exercise of significant judgment, including as to
the levels and/or timing of benefits, claims, expenses, investment results, mortality, morbidity and persistency. We cannot determine with precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits, claims and
expenses or whether the assets supporting our policy liabilities, will be sufficient for payment of benefits and claims. If we conclude that our reserves, are insufficient to cover future policy benefits and claims, we would be required to increase
our reserves and incur income statement charges for the period in which we make the determination, which would adversely affect our results of operations and financial condition.

Our profitability may decline if mortality rates, or persistency rates differ significantly from our pricing expectations.

We set prices for many of our products based upon expected claims and payment patterns, using assumptions for mortality rates, or likelihood of death, of our policyholders. Pricing of our products is also based in part upon expected
persistency of these products, which is the probability that a policy or contract will remain in force from one period to the next. Significant deviations in actual experience from our pricing assumptions could have an adverse effect on the
profitability of our products.

We may be required to accelerate the amortization of DAC or VOBA, which could adversely affect our results of operations
or financial condition.

Deferred policy acquisition costs, or DAC, represent the costs that vary with and are related primarily to the acquisition of
new and renewal insurance and annuity contracts, and we amortize these costs over the expected lives of the contracts. Valuation of business acquired, or VOBA, represents the present value of future profits embedded in acquired contracts and is
amortized over the expected effective lives of the acquired contracts. Management, on an ongoing basis, tests the DAC and VOBA recorded on our balance sheet to determine if these amounts are recoverable under current assumptions. In addition, we
regularly review the estimates and assumptions underlying DAC and VOBA for those products for which we amortize DAC and VOBA in proportion to gross profits. Given changes in facts and circumstances, these tests and reviews could lead to reductions
in DAC and/or VOBA that could have an adverse effect on the results of our operations and our financial condition.



6



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A downgrade or potential downgrade in our claims-paying or credit ratings could limit our ability to market products,
increase the number or value of policies being surrendered, increase our borrowing costs and/or hurt our relationships with creditors or trading counterparties.

Claims-paying ratings, which are sometimes referred to as financial strength ratings, represent opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under an insurance
policy, and are important factors affecting public confidence in an insurer and its competitive position in marketing products. Credit ratings represent the opinions of rating agencies regarding an entitys ability to repay its indebtedness,
and credit ratings are important to our ability to raise capital through the issuance of debt and to the cost of such financing. A downgrade in our claims-paying or credit ratings could limit our ability to market products, reduce our
competitiveness, increase the number or value of policies being surrendered, increase our borrowing costs and/or hurt our relationships with creditors or trading counterparties.

Losses due to defaults by others, including issuers of investment securities or reinsurance and derivative instrument counterparties, could adversely affect the value of our investments or reduce our profitability.

Issuers and borrowers whose securities or loans we hold, customers, trading counterparties, counterparties under swaps and other derivative contracts,
reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries and guarantors may default on their obligations to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure,
fraud or other reasons. Such defaults could have an adverse effect on our results of operations and financial condition.

Intense competition could
adversely affect our ability to maintain or increase our market share or profitability.

We face intense competition both for the ultimate customers for
our products and, in some cases, for distribution through non-affiliated distribution channels. We compete based on a number of factors including brand recognition, reputation, quality of service, investment performance of our products, product
features, scope of distribution and distribution arrangements, price, perceived financial strength and claims-paying and credit ratings. A decline in our competitive position as to one or more of these factors could adversely affect our
profitability and assets under management. Many of our competitors are large and well capitalized and some have greater market share, breadth of distribution, offer a broader range of products, services or features, assume a greater level of risk,
have lower profitability expectations or have higher claims-paying or credit ratings than we do. Competition for personnel for our annuities businesses is intense. The loss of personnel could have an adverse effect on our business and profitability.

Changes in U.S. federal income tax law or in the income tax laws of other jurisdictions in which we operate could make some of our products less
attractive to consumers and increase our tax costs.

Current U.S. federal income tax laws generally permit holders to defer taxation on the build-up of
value of annuities and life insurance products until payments are actually made to the policyholder or other beneficiary and to exclude from taxation the build-up of value which is paid as a death benefit under a life insurance contract. Congress
from time to time considers legislation that could make our products less attractive to consumers, including legislation that would reduce or eliminate the benefit of this deferral on some annuities and insurance products, as well as other types of
changes that could reduce or eliminate the attractiveness of annuities and life insurance products to consumers, such as repeal of the estate tax.

For
example, the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 generally provide for lower income tax, capital gains and dividend tax rates that might have the effect of reducing
the benefits of tax deferral on the build-up of value of annuities and life insurance products. The Bush Administration continues to propose that many of the rate reductions pursuant to these Acts be made permanent as well as to propose several
tax-favored savings initiatives. These proposals or other tax law changes might hinder our sales and result in the increased surrender of insurance and annuity products.

Congress, as well as state and local governments, also consider from time to time legislation that could increase our tax costs. If such legislation is adopted, our net income could decline.

Our businesses are heavily regulated and changes in regulation may reduce our profitability.

Our businesses are subject to comprehensive regulation and supervision. The purpose of this regulation is primarily to protect our customers and not our shareholder. Many of the laws and regulations to which we are
subject are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations.

The Company is subject to the rules and regulations of the SEC and the NYSE relating to public reporting and disclosure, securities trading, accounting and financial reporting, and corporate governance matters. The Sarbanes-Oxley Act of
2002 and rules and regulations adopted in furtherance of that Act have substantially increased the requirements in these and other areas for public companies.

Many insurance regulatory and other governmental or self-regulatory bodies have the authority to review our products and business practices and those of our agents and employees and to bring regulatory or other legal actions against us if,
in their view, our practices, or those of our agents or employees, are improper. These actions can result in substantial fines, penalties or prohibitions or restrictions on our business activities and could adversely affect our business, reputation,
results of operations or financial condition. For a discussion of material pending litigation and regulatory matters, see Legal Proceedings.



7



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Insurance regulators, as well as industry participants, have begun to consider potentially significant changes in the way
in which statutory reserves and statutory capital are determined, particularly for products with embedded options and guarantees. New regulatory capital requirements have already gone into effect for variable annuity products. The timing of, and
extent of, such changes to the statutory reporting framework are uncertain; however, the result could be increases to statutory reserves and capital, and an adverse effect on our products, sales and operating costs.

Legal and regulatory actions are inherent in our businesses and could adversely affect our results of operations or harm our businesses or reputation.

We are, and in the future may be, subject to legal and regulatory actions in the ordinary course of our businesses. Some of these proceedings have been brought on
behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Substantial legal liability in these or future legal or
regulatory actions could have an adverse affect on us or cause us reputational harm, which in turn could harm our business prospects.

Material pending
litigation and regulatory matters affecting us, and certain risks to our businesses presented by such matters, are discussed under Legal Proceedings. As described there, settlement of the market timing matters relating to certain Skandia
entities could involve, in addition to the payment of fines, penalties and restitution, continuing monitoring, changes to and/or supervision of our business practices, findings that may adversely affect existing or cause additional litigation,
adverse publicity and other adverse effects on our businesses.

Although we believe we have adequately reserved in all material respects for the costs of
our litigation and regulatory matters, we can provide no assurance of this. It is possible that our results of operations or cash flow in particular quarterly or annual periods could materially decline due to an ultimately unfavorable outcome in one
or more of these matters.

The occurrence of natural or man-made disasters could adversely affect our results of operations and financial condition.

The occurrence of natural disasters, including hurricanes, floods, earthquakes, tornadoes, fires, explosions, pandemic disease and man-made disasters,
including acts of terrorism and military actions, could adversely affect our results of operations or financial condition, including in the following respects:



| |  |  | Catastrophic loss of life due to natural or man-made disasters could cause us to pay benefits at higher levels and/or materially earlier than anticipated and could
lead to unexpected changes in persistency rates.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A natural or man-made disaster could result in losses in our investment portfolio or the failure of our counterparties to perform, or cause significant volatility
in global financial markets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A terrorist attack affecting financial institutions in the United States or elsewhere could negatively impact the financial services industry in general and our
business operations, investment portfolio and profitability in particular. As previously reported, in August 2004, the U.S. Department of Homeland Security identified our Newark, New Jersey facilities, along with those of several other financial
institutions in New York and Washington, D.C., as possible targets of a terrorist attack.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pandemic disease, caused by a virus such as H5N1 (the Avian flu virus), could have a severe adverse effect on the Companys business. The potential
impact of such a pandemic on the Companys results of operations, liquidity and financial position is highly speculative, and would depend on numerous factors, including: the probability of the virus mutating to a form that can be passed from
human to human; the rate of contagion if and when that occurs; the regions of the world most affected; the effectiveness of treatment for the infected population; the rates of mortality and morbidity among various segments of the insured versus the
uninsured population; the collectibility of reinsurance; the possible macroeconomic effects of a pandemic on the companys asset portfolio; the effect on lapses and surrenders of existing policies, as well as sales of new policies; and many
other variables.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There can be no assurance that our business continuation plans and insurance coverages would be effective in mitigating
any negative effects on our operations or profitability in the event of a terrorist attack, other disaster or pandemic.

Our risk management policies
and procedures may leave us exposed to unidentified or unanticipated risk, which could adversely affect our business.

Our policies and procedures to
monitor and manage risks may not be fully effective and leave us exposed to unidentified and unanticipated risks. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and
verify a large number of transactions and events, and these policies and procedures may not be fully effective. Past or future employee misconduct could result in violations of law by us, regulatory sanctions and/or serious reputational or financial
harm and the precautions we take to prevent and detect this activity may not be effective in all cases. A failure of our computer systems or a compromise of their security could also subject us to regulatory sanctions or other claims, harm our
reputation, interrupt our operations and adversely affect our business, results of operations or financial condition.

We face risks arising from
acquisitions, divestitures and restructurings, including client losses, surrenders and withdrawals and difficulties in integrating and realizing the projected results of acquisitions and contingent liabilities with respect to dispositions.

We face a number of risks arising from acquisition transactions, including the risk that, following the acquisition or reorganization of a business, we
could experience client losses, surrenders or withdrawals materially different from those we anticipate, as well as difficulties in



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integrating and realizing the projected results of acquisitions and restructurings and managing the litigation and regulatory matters to which acquired
entities are party.



|Item 2. | Properties
|------- | ----------

The Company occupies office space in Shelton,
Connecticut, which is leased from an affiliate, American Skandia Information Services and Technology Corporation. The Company entered into a lease for office space in Westminster, Colorado, effective January 1, 2001, and established an
additional customer service center at that location. Effective December 31, 2004, the Company closed its customer service center in Colorado. The Company believes that its current facilities are satisfactory for its near term needs.



|Item 3. | Legal Proceedings
|------- | -----------------

We are subject to legal and regulatory
actions in the ordinary course of our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to the Company and proceedings generally applicable to business practices in the industry in
which we operate. We are subject to class action lawsuits and other litigation alleging, among other things, that we made improper or inadequate disclosures in connection with the sale of annuity products or charged excessive or impermissible fees
on these products, recommended unsuitable products to customers, mishandled customer accounts or breached fiduciary duties to customers. We are also subject to litigation arising out of our general business activities, such as our investments,
contracts, leases and labor and employment relationships, including claims of discrimination and harassment, and could be exposed to claims or litigation concerning certain business or process patents. In some of our pending legal and regulatory
actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Finally, we are periodically subject to examinations and audits by federal and state regulators, and also on occasion receive and address
complaints from customers. The following is a summary of certain pending proceedings.

The Company commenced a remediation program to correct errors in the
administration of approximately 11,000 annuity contracts issued by the Company. The owners of these contracts did not receive notification that the contracts were approaching or past their designated annuitization date or default annuitization date
(both dates referred to as the contractual annuity date) and the contracts were not annuitized at their contractual annuity dates. Some of these contracts also were affected by data integrity errors resulting in incorrect contractual
annuity dates. The lack of notice and the data integrity errors, as reflected on the annuities administrative system, all occurred before the Acquisition. The remediation and administrative costs of the remediation program are subject to the
indemnification provisions of the Acquisition agreement.

Commencing in 2003, the Company received formal requests for information from the SEC and the New
York Attorney General (NYAG) relating to market timing in variable annuities by the Company and certain affiliated companies. In connection with these investigations, with the approval of Skandia an offer was made by the Company to the
authorities investigating its companies, the SEC and NYAG to settle these matters by paying restitution and a civil penalty of $95 million in the aggregate. While not assured, the Company believes these discussions are likely to lead to settlements
with these authorities. Any regulatory settlement involving the Company and certain affiliates would be subject to the indemnification provisions of the Acquisition agreement. If achieved, settlement of the matters relating to the Company and
certain affiliates also could involve continuing monitoring, changes to and/or supervision of business practices, findings that may adversely affect existing or cause additional litigation, adverse publicity and other adverse impacts to the
Companys businesses.

During the third quarter of 2004, the Company identified a system-generated calculation error in its annuity contract
administration system that existed prior to the Acquisition. This error related to the calculation of amounts due to customers for certain transactions subject to a market value adjustment upon the surrender or transfer of monies out of their
annuity contracts fixed allocation options. The error resulted in an underpayment to policyholders, as well as additional anticipated costs to the Company associated with remediation, breakage and other costs Recently, the Company retained a
consultant to assist it with the systems modifications needed to implement the remediation plan currently in place. The Company has advised Skandia that a portion of the remediation and related administrative costs are subject to the indemnification
provisions of the Acquisition agreement.

The Companys litigation and regulatory matters are subject to many uncertainties, and given their
complexity and scope, the outcomes cannot be predicted. It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of
pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. Management believes, however, that the ultimate outcome of all pending litigation and regulatory matters, after consideration
of applicable reserves and rights to indemnification, should not have a material adverse effect on the Companys financial position.

It should be
noted that the judgments, settlements and expenses associated with many of these lawsuits, administrative and regulatory matters, and contingencies, including certain claims described above, may, in whole or in part, after satisfaction of certain
retention requirements, fall within Skandias indemnification obligations to Prudential Financial and its subsidiaries under the terms of the Acquisition. Those obligations of Skandia provide for indemnification of certain judgments,
settlements, and costs and expenses associated with lawsuits and other claims against the Company (matters), and apply only to matters, or groups of related matters, for which the costs and expenses exceed $25,000 individually.
Additionally, those obligations only apply to such otherwise indemnifiable losses that exceed $10 million in the aggregate, subject to reduction for insurance proceeds, certain accruals and any realized tax benefit applicable to such amounts, and
those obligations do not apply to the extent that such aggregate exceeds $1 billion. We are in discussions with Skandia regarding the satisfaction of the $10 million deductible.



9



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PART II



|Item 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ----------------------------------------------------------------------------------------------------------------

The Company is a wholly-owned subsidiary of ASI. There is no public market for the Companys common stock.



|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

You should read the following analysis of the Companys financial condition and results of operations in conjunction with the Forward-Looking Statements included below the Table of Contents, Risk
Factors, and the Financial Statements included in this Annual Report on Form 10-K.

This Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) addresses the financial condition of American Skandia Life Assurance Corporation as of December 31, 2006, compared with December 31, 2005, and its results of operations for the
years ended December 31, 2006 and 2005.

Overview

The Company offers a wide array of annuities, including (1) deferred and immediate variable annuities that are registered with the SEC, including fixed interest rate allocation options that are offered in certain of our variable
annuities and are registered because of their market value adjustment feature and (2) fixed rate allocation options in certain of our variable and fixed annuities that are not registered with the SEC. In addition, the Company has in force a
relatively small block of variable life insurance policies, but it no longer actively sells such policies. The markets in which the Company operates are subject to regulatory oversight with particular emphasis placed on company solvency and sales
practices. These markets are also subject to increasing competitive pressure as the legal barriers, that have historically segregated the markets of the financial services industry, have been changed through both legislative and judicial processes.
Regulatory changes have opened the insurance industry to competition from other financial institutions, particularly banks and mutual funds that are positioned to deliver competing investment products through large, stable distribution channels.

In addition to policy charges and fee income, the Company earns revenues from asset management fees calculated on the average separate account fund
balances. The Companys operating expenses principally consist of insurance benefits provided, general business expenses, commissions and other costs of selling and servicing the various products we sell.

The Companys profitability depends principally on its ability to price and manage risk on insurance products, to attract and retain customer assets, and to manage
expenses. Specific drivers of our profitability include:



| |  |  | our ability to manufacture and distribute products and services and to introduce new products gaining market acceptance on a timely basis;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to price our products at a level that enables us to earn a margin over the cost of providing benefits and the expense of acquiring customers and
administering those products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our mortality and morbidity experience on annuity products;
| | - |  | -----------------------------------------------------------



| |  |  | our persistency experience, which affects our ability to recover the cost of acquiring new business over the lives of the contracts;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our cost of administering insurance contracts and providing asset management products and services;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | our returns on invested assets, net of the amounts we credit to policyholders accounts;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | our amount of assets under management and changes in their fair value, which affect the amount of asset management fees we receive;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to generate favorable investment results through asset liability management and strategic and tactical asset allocation; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to maintain our financial strength ratings.
| | - |  | -------------------------------------------------------

In addition, factors such as regulation, competition, interest rates, taxes and general economic conditions affect the Companys profitability. See Risk Factors for a discussion of risks that could materially affect our
business, results of operations or financial condition, or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company.



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Application of Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires the application of accounting policies that often involve a
significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given
current facts and circumstances, results of operations and financial position as reported in the Financial Statements could change significantly.

The
following sections discuss the accounting policies applied in preparing our financial statements that management believes are most dependent on the application of estimates and assumptions.

Valuation of investments

As prescribed by GAAP, we present
our investments classified as available for sale, including fixed maturity and equity securities, and our investments classified as trading, at fair value in the statements of financial position. The fair values for our public fixed maturity
securities and our public equity securities are based on quoted market prices or estimates from independent pricing services. However, for our investments in private securities such as private placement fixed maturity securities, which comprise 8%
of our investments as of December 31, 2006, this information is not available. For these private investments, fair value is determined typically by using a discounted cash flow model, which relies upon the average of spread surveys collected
from private market intermediaries who are active in both primary and secondary transactions and takes into account, among other things, the credit quality of the issuer and the reduced liquidity associated with private placements. Historically,
changes in estimated future cash flows or the assessment of an issuers credit quality have been the more significant factors in determining fair values.

For fixed maturities classified as available for sale, the impact of changes in fair value is recorded in Accumulated other comprehensive (loss) income, a separate component of equity. Adjustments to the costs of fixed
maturities of other than temporary impairments are included in Realized investment (loss) gains, net. In evaluating whether a decline in value is other than temporary, we consider : the extent (generally if greater than 20%) and duration
(generally if greater than six months) of the decline; the reasons for the decline in value (credit event interest related or market fluctuation); our ability and intent to hold the investment for a period of time to allow for a recovery of value;
and the financial condition and near-term prospects of the issuer. The level of impairment losses can be expected to increase when economic conditions worsen and decrease when economic conditions improve.

Equity securities held in support of a deferred compensation plan are designated as trading. Such investments are carried at fair value with changes in unrealized gains
and losses reported in the Statements of Operations and Comprehensive Income, as a component of Other income.

Deferred policy
acquisition costs

We capitalize costs that vary with and are related primarily to the acquisition of new and renewal annuity contracts. These costs
include primarily commissions, costs of policy issuance and other variable expenses. We amortize these deferred policy acquisition costs, or DAC, over the expected lives of the contracts, based on the level and timing of gross profits. As of
December 31, 2006 and 2005, DAC was $766.3 million and $528.9 million, respectively.

DAC is amortized over the expected life of the policy in
proportion to gross profits. In calculating gross profits, we consider mortality, persistency, and other elements as well as rates of return on investments associated with these contracts. We regularly evaluate and adjust the related DAC balance
with a corresponding charge or credit to current period earnings for the effects of our actual gross profits and changes in our assumptions regarding estimated future gross profits. DAC is sensitive to the effects of changes in our estimates of
gross profits due primarily to the significant portion of gross profits that is dependent upon the total rate of return on assets held in separate account investment options, and the shorter average life of the contracts. This rate of return
influences the fees we earn, costs we incur associated with minimum death benefit and other contractual guarantees specific to our variable annuity contracts, as well as other sources of profit.

Future rate of return assumptions used in evaluating DAC are derived using a reversion to mean approach, a common industry practice. Under this approach, we consider
actual returns over a period of time and project returns for the future period so that the assets grow at the expected rate of return for the entire period. If the projected future rate of return is greater than our maximum future rate of return, we
use our maximum reasonable future rate of return. As part of our approach, if the estimated gross profits under the previously projected rate of returns are greater than or less than a range of estimated gross profits determined by statistically
generated rate of returns, we change our future assumption to reflect the result of the reversion to the mean approach. Our expected rate of return is 8% per annum, which reflects an expected rate of return of 8.9% per annum for equity
type assets. The future equity rate of return used varies by product, but was under 6.0% per annum for our evaluation of deferred policy acquisition costs as of December 31, 2006.

To demonstrate the sensitivity of our DAC balance relative to our future rate of return, increasing or decreasing our future rate of return by 100 basis points would
have required us to consider adjustments, subject to the range of estimated gross profits determined by the statistically generated rate of returns described above, to that DAC balance as follows. The information provided in the table below
considers only the effect of changes in our future rate of return and not changes in any other assumptions such as persistency, mortality, or expenses included in our evaluation of DAC.



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|                                                         |  |                             |      |  
|-------------------------------------------------------- |  | --------------------------- | ---- | -
|                                                         |  | Increase/(Reduction) in DAC |     
|                                                         |  | (in millions)               |     
|Increase in projected rate of return by 100 basis points |  | $                           | 6.5  |  
|Decrease in projected rate of return by 100 basis points |  | $                           | (6.4 | )

In addition to DAC, we also recognize assets for capitalized sales inducements and valuation of business acquired
(VOBA). The deferred sales inducements are amortized using the same methodology and assumptions used to amortize deferred policy acquisition costs. For additional information about our deferred sales inducements, see Note 6 to the
Financial Statements. VOBA represents the present value of future profits embedded in acquired businesses. For additional information about VOBA including its bases for amortization, see Note 5 of the financial statements.

Future fees payable to ASI

In a series of transactions with
ASI, the Company sold certain rights to receive a portion of future fees and contract charges expected to be realized on designated blocks of deferred annuity contracts.

The proceeds from the sales have been recorded as a liability and are being amortized over the remaining surrender charge period of the designated contracts using the interest method. The Company did not sell the
right to receive future fees and charges after the expiration of the surrender charge period.

Under the terms of the securitization purchase agreements,
the rights sold provide for ASI to receive a percentage (60%, 80% or 100% depending on the underlying commission option) of future mortality and expense charges and contingent deferred sales charges, after reinsurance, expected to be realized over
the remaining surrender charge period of the designated contracts (generally 6 to 8 years). As a result of purchase accounting, the liability was reduced to reflect the discounted estimated future payments to be made and has been subsequently
reduced by amortization according to a revised schedule. If actual mortality and expense charges and contingent deferred sales charges are less than those projected in the original amortization schedules, calculated on a transaction by transaction
basis, ASI has no recourse against the Company.

Taxes on Income

Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. As a result, the effective tax rate reflected in the financial statements is
different than the actual rate applied on the tax return. Some of these differences are permanent such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as valuation of insurance
reserves. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our income
statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred, or expenditures for which we have already taken a deduction in our tax return but have not yet recognized
in our financial statements. The application of GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation allowance if necessary to reduce our deferred tax asset to an amount that is more likely than not to
be realized. Realization of certain deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carry-forward periods. Although realization is not assured, management
believes it is more likely than not the deferred tax assets, net of valuation allowances, will be realized.

Our accounting represents managements
best estimate of future events that can be appropriately reflected in the accounting estimates. Certain changes or future events, such as changes in tax legislation, geographic mix of earnings and completion of tax audits could have an impact on our
estimates and effective tax rate. To the extent our effective tax rate increases or decreases by 1 percent of income from operations before income taxes and cumulative effect of accounting change, income before and cumulative effect of accounting
change would have increased or declined by $2.0 million in 2006.

The amount of income taxes paid by the Company is subject to ongoing audits in various
jurisdictions. We reserve for our best estimate of potential payments/settlements to be made to the Internal Revenue Service (the Service) and other taxing jurisdictions for audits on-going or not yet commenced. In 2006, the Service
completed all fieldwork with regards to its examination of the Companys federal income tax returns for tax years 2002-2003. The Company anticipates the final report being submitted to the Joint Committee on Taxation for their review during the
first quarter of 2007. The statute of limitations for the 2002-2003 tax years expires in 2008. In addition, in January 2007, the IRS began an examination of tax years 2004 through 2006.

For tax year 2007, the Company has chosen to participate in the Services new Compliance Assurance Program (the CAP). Under CAP, the Service assigns an examination team to review completed
transactions contemporaneously during the 2007 tax year in order to reach agreement with the Company on how they should be reported in the tax return. If disagreements arise, accelerated resolutions programs are available to resolve the
disagreements in a timely manner before the tax return is filed. It is managements expectation this new program will significantly shorten the time period between when the Company files its federal income tax return and the Service completes
its examination of the return.

Reserves for contingencies

A contingency is an existing condition that involves a degree of uncertainty that will ultimately be resolved upon the occurrence of future events. Under U.S. GAAP, reserves for contingencies are required to be
established when the future event is probable and its impact can be reasonably estimated. An example is the establishment of a reserve for losses in connection with an unresolved legal matter. The initial



12



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reserve reflects managements best estimate of the probable cost of ultimate resolution of the matter and is revised accordingly as facts and
circumstances change and, ultimately, when the matter is brought to closure. In situations in which the Company is to be indemnified by Skandia, there will be no financial impact on the Statements of Operations and Comprehensive Income. See Note 11
to the Financial Statements for a further discussion of indemnification provisions of the Agreement.

Other significant estimates

In addition to the items discussed above, the application of U.S. GAAP requires management to make other estimates and assumptions.

Recently Issued Accounting Pronouncements

See Note 2 to the
Financial Statements for a discussion of recently issued accounting pronouncements.

The Companys Changes in Financial Position and Results of
Operations are described below.

Changes in Financial Position

2006 versus 2005

From December 31, 2005 to December 31, 2006 total assets increased by $5.7 billion from $32.9 billion to $38.6
billion. Separate account assets increased by $5.8 billion, driven primarily by market value appreciation and positive net flows during 2006. Sales activity during the year ended December 31, 2006 drove an increase in capitalized costs
resulting in an increase in deferred policy acquisition costs (DAC) and deferred sales inducements of $237.4 million and $132.4 million, respectively. Partially offsetting these increases were decreased fixed maturities of $380.2 million
and decreased short term investments of $148.8 million primarily driven by a decline in policyholders account balances and cash collateral for loaned securities discussed below. Additionally, the valuation of business acquired decreased $43.4
million due to amortization.

From December 31, 2005 to December 31, 2006, total liabilities increased by $5.6 billion from $32.1 billion to
$37.7 billion. Separate account liabilities increased by $5.8 billion, driven by market value appreciation and positive net flows during 2006. Also, borrowings increased $221.0 million in order to fund the growth of the business. Partially
offsetting these increases was a decrease in policyholders account balances of $233.2 million primarily due to rebalancing of customer account values from the market value adjustment options to the separate account mutual fund options pursuant
to contract provisions driven by improved market conditions. In addition, cash collateral for loaned securities decreased by $134.0 million due to lower levels of corporate securities out on loan and future fees payable to ASI decreased $64.6
million during the year due to amortization.

Results of Operations

2006 versus 2005

Net Income

Net income increased $37.3 million from $158.4 million for the year ended December 31, 2005 to $195.7 million for the year ended December 31, 2006. Policy charges and fee income increased by $105.6 million
and asset management fees increased by $40.6 million year over year driven by increased net flows and market appreciation during the current year. Income tax expense decreased by $39.9 million, as a result of an increase in the projected amount of
nontaxable investment income earned by the Company. This increase was partially offset by a $35.1 million benefit in 2005 from a net reduction in amortization of deferred policy acquisition and other costs and a decrease in reserves for the
guaranteed minimum death benefit and guaranteed minimum income benefit features of our variable annuity products, due to decreased costs of actual and expected death claims and an increased estimate of total gross profits used as a basis for
amortizing deferred policy acquisition and other costs based on an annual review. In addition, amortization of DAC and other costs, excluding the item mentioned above, increased $55.8 million from 2005 to 2006 due to a higher level of actual gross
profits used to amortize DAC. Commissions, net of capitalization, increased $21.7 million driven by increased asset based commissions caused by growth in separate account assets, realized investment losses increased $15.9 million, and interest
expense increased $14.5 million. Further details regarding the components of revenues and expenses are described below.

Revenues

Revenues increased by $142.7 million, from $668.0 million for the year ended December 31, 2005 to $810.7 million for the year ended December 31, 2006. Premiums
of $40.5 million increased by $16.7 million, from $23.8 million in 2005, reflecting an increase in funds from customers electing to enter into the payout phase of their annuity contracts driven primarily by settlements in the current year related to
the annuitization remediation program. See Item 3, Legal Proceedings for further discussion.

Policy charges and fee income increased by $105.6
million, from $455.7 million in 2005 to $561.3 million in 2006. Mortality and expense charges increased by $76.5 million as a result of the increase in the inforce business and market appreciation. Generally, annuity fees are asset-based fees, which
are dependent on fund balances. Average annuity separate account fund balances have increased as a result of market appreciation and positive net flows, resulting in an increase in policy charges and fee income. Optional benefit charges on our
living and death benefit features increased $18.7 million primarily driven by increased sales of our Lifetime Five and Spousal Lifetime Five benefit features. This increase was primarily offset by the change in the value of our embedded derivatives
related to the reinsurance of these features included in realized investment losses, net. Additionally, policy charges increased $6.8 million from the prior year due to the change in realized market value adjustments related to the Companys
fixed, market value adjusted investment option (MVA option).



13



---

Realized investment losses, net, increased by $15.9 million from $32.1 million in 2005 to $48.0 million in 2006. This was
driven by increased investment losses on our MVA portfolio due to dispositions of fixed maturities in a rising rate environment to fund outflows. Also contributing to the increased losses was the change in the value of our embedded derivatives
related to our living benefit features. This was offset in policy charges and fee income as discussed in the preceding paragraph.

Asset management fees
increased by $40.6 million from $127.4 million in 2005 to $168.0 million in 2006 as a result of higher average assets under management compared to 2005 due to increased net flows and market appreciation. Asset management fees are asset-based fees,
which are dependent on the amount of assets under management.

Benefits and Expenses

Policyholders benefits increased by $38.4 million from $63.0 million in 2005 to $101.4 million in 2006. This was driven primarily by a $27.1 million adjustment in the prior year to reserves for the guaranteed
minimum death benefit feature of our variable annuity products due to decreased costs of actual and expected death claims as discussed previously. Also contributing to the increase was an increase in changes in reserves due to increased funds from
customers entering into the payout phase of their annuity contracts.

Interest credited to policyholders account balances increased by $7.2 million
from $69.9 million in 2005 to $77.1 million in 2006. This variance was primarily due to increased amortization of deferred sales inducements of $18.1 million driven by increased gross profits used as a basis for amortizing these costs, partially
offset by decreased interest credited on the MVA option of $9.7 million. As a result of improved market conditions, there were significant transfers of customer account values from the market value adjustment options to the separate account mutual
fund options which decreased interest credited.

General, administrative, and other expenses increased by $99.6 million from $330.6 million in 2005 to
$430.2 million in 2006. The increase was primarily due to an increase in the amortization of DAC and the valuation of business acquired of $52.3 million driven by a higher level of actual gross profits used to amortize DAC driven by increased fee
income discussed above as well as a benefit included in the prior year from the increased estimate of total gross profits. In addition, commissions, net of capitalization, also increased $21.7 million driven by increased asset based commissions
caused by growth in separate account assets and interest expense increased by $14.5 million resulting from higher borrowing levels. General expenses also increased $11.2 million from 2005 driven by increased benefit and salary expenses.



|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------

Risk Management and Market Risk

As an indirect wholly-owned subsidiary of Prudential Financial, the Company benefits from the risk
management strategies implemented by its parent. Risk management includes the identification and measurement of various forms of risk, establishment of acceptable risk thresholds, and creation of processes intended to maintain risks within these
thresholds while optimizing returns on the underlying assets or liabilities. Prudential Financial considers risk management an integral part of managing its core businesses.

Market risk is the risk of change in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates or equity or commodity prices. To varying degrees,
the investment activities supporting all of the Companys products and services generate market risks. Market risks incurred and the strategies for managing these risks vary by product.

With respect to our fixed rate options in our variable annuity products, the Company incurs market risk primarily in the form of interest rate risk. The Company manages
this risk through asset/liability management strategies that seek to match the interest rate sensitivity of the assets to that of the underlying liabilities. The Company also mitigates this risk through a MVA provision on the Companys fixed
investment option. This MVA provision limits interest rate risk when a contract owner withdraws funds or transfers funds to variable investment options before the end of the guarantee period. The Companys overall objective in these strategies
is to limit the net change in value of assets and liabilities arising from interest rate movements. While it is more difficult to measure the interest sensitivity of the Companys insurance liabilities than that of the related assets, to the
extent the Company can measure such sensitivities the Company believes that interest rate movements will generate asset value changes that substantially offset changes in the value of the liabilities relating to the underlying products.

For variable annuities, excluding the fixed rate options in these products, the Companys main exposure is the risk that asset-based fees may decrease as a
result of declines in assets under management due to changes in market performance. For variable annuity products with minimum guaranteed death and living benefits, the Company also faces the risk that declines in the value of underlying investments
as a result of changes in securities prices may increase the Companys net exposure to death and living benefits under these contracts. The Company has transferred some of these living benefit risks through 100% coinsurance agreements with
certain of its affiliates.

Asset/Liability Management

The Companys asset/liability management strategies seek to match the interest rate sensitivity of the assets to that of the underlying liabilities and to construct asset mixes consistent with product features, such as interest
crediting strategies. The Company also considers risk-based capital implications in its asset/liability management strategies. The Company seeks to maintain interest rate and equity exposures within established ranges, which are periodically
adjusted based on market conditions and the design of related insurance products sold to customers. The Companys risk managers, who work with portfolio and asset managers but under separate management, establish investment risk limits for
exposures to any issuer, or type of security and oversee efforts to manage risk within policy constraints set by management and approved by the Board of Directors.



14



---

We use duration and convexity analyses to measure price sensitivity to interest rate changes. Duration measures the
relative sensitivity of the fair value of a financial instrument to changes in interest rates. Convexity measures the rate of change of duration with respect to changes in interest rates. We seek to manage our interest rate exposure by legal entity
by matching the relative sensitivity of asset and liability values to interest rate changes, or controlling duration mismatch of assets and liabilities. We have target duration mismatch constraints for each entity. As of
December 31, 2006 and 2005, the difference between the pre-tax duration of assets and the target duration of liabilities in our duration managed portfolios was within our constraint limits. We consider risk-based capital implications in our
asset/liability management strategies.

The Company also performs portfolio stress testing as part of its regulatory cash flow testing. In this testing,
the Company evaluates the impact of altering its interest-sensitive assumptions under various moderately adverse interest rate environments. These interest-sensitive assumptions relate to the timing and amounts of redemptions and pre-payments of
fixed-income securities and lapses and surrenders of insurance products. The Company evaluates any shortfalls that this cash flow testing reveals to determine if there is a need to increase statutory reserves or adjust portfolio management
strategies.

Market Risk Related to Interest Rate Risk

Fluctuations in interest rates can potentially impact the Companys profitability and cash flows. At December 31, 2006, 97% of assets held under management by the Company are in non-guaranteed separate accounts for which the
Companys interest rate and equity market exposure is not significant, as the contract owner assumes substantially all of the investment risk. Of the remaining 3% of assets, the interest rate risk from contracts that carry interest rate
exposure is managed through an asset/liability matching program which takes into account estimates of the risk variables of the insurance liabilities supported by the assets.

At December 31, 2006, the Company held fixed maturity investments in its general account that are sensitive to changes in interest rates. These securities are held in support of the Companys fixed immediate
annuities, fixed supplementary contracts, the fixed investment option offered in its variable life insurance contracts, and in support of the Companys target solvency capital.



15



---

The Company assesses interest rate sensitivity for its financial assets, financial liabilities and derivatives using
hypothetical test scenarios which assume both upward and downward 100 basis point parallel shifts in the yield curve from prevailing interest rates. The following tables set forth the potential loss in fair value from a hypothetical 100 basis point
upward shift at December 31, 2006 and 2005, because this scenario results in the greatest net exposure to interest rate risk of the hypothetical scenarios tested at those dates. While the test scenario is for illustrative purposes only and does
not reflect managements expectations regarding future interest rates or the performance of fixed income markets, it is a near-term, reasonably possible hypothetical change that illustrates the potential impact of such events. These test
scenarios do not measure the changes in value that could result from non-parallel shifts in the yield curve, which would be expected to produce different changes in discount rates for different maturities. As a result, the actual loss in fair value
from a 100 basis point change in interest rates could be different from that indicated by these calculations.



|                               |  |                   |       |                                                                           |   |                                   |  |   |     |  
|------------------------------ |  | ----------------- | ----- | ------------------------------------------------------------------------- | - | --------------------------------- |  | - | --- | -
|                               |  | December 31, 2006 |      
|                               |  | Fair Value        |       | HypotheticalFair Value After + 100 Basis
Point Parallel Yield Curve Shift |   | Hypothetical Change in Fair
Value | 
|                               |  | (In millions)     |      
|Financial Assets with Interest |  |                   |       |                                                                           |   |                                   |  |   |     |  
|Rate Risk:                     |  |                   |       |                                                                           |   |                                   |  |   |     |  
|Financial Assets:              |  |                   |       |                                                                           |   |                                   |  |   |     |  
|Fixed Maturities:              |  |                   |       |                                                                           |   |                                   |  |   |     |  
|Available for Sale             |  | $                 | 1,174 |                                                                           | $ | 1,129                             |  | $ | (45 | )
|Commercial loans               |  |                   | 41    |                                                                           |   | 39                                |  |   | (2  | )
|                               |  |                   |      
|Policy Loans                   |  |                   | 13    |                                                                           |   | 13                                |  |   |    |  
|                               |  |                   |       |                                                                           |   |                                   |  |   |     |  
|Total Estimated Potential Loss |  | $                 | (47   | )                                                                        
|                               |  |                   |       |                                                                           |   |                                   |  |   |     |  



|                               |  |                   |       |                                                                           |   |                                   |   |   |     |  
|------------------------------ |  | ----------------- | ----- | ------------------------------------------------------------------------- | - | --------------------------------- | - | - | --- | -
|                               |  | December 31, 2005 |      
|                               |  | Fair Value        |       | HypotheticalFair Value After + 100 Basis
Point Parallel Yield Curve Shift |   | Hypothetical Change in Fair
Value |  
|                               |  | (In millions)     |      
|Financial Assets with Interest |  |                   |       |                                                                           |   |                                   |   |   |     |  
|Rate Risk:                     |  |                   |       |                                                                           |   |                                   |   |   |     |  
|Financial Assets:              |  |                   |       |                                                                           |   |                                   |   |   |     |  
|Fixed Maturities:              |  |                   |       |                                                                           |   |                                   |   |   |     |  
|Available for Sale             |  | $                 | 1,555 |                                                                           | $ | 1,493                             |   | $ | (62 | )
|Commercial loans               |  |                   | 6     |                                                                           |   | 6                                 |   |   |    |  
|Policy Loans                   |  |                   | 12    |                                                                           |   | 12                                |   |   |    |  
|                               |  |                   |       |                                                                           |   |                                   |   |   |     |  
|Total Estimated Potential Loss |  |                   |       |                                                                           | $ | (62                               | )
|                               |  |                   |       |                                                                           |   |                                   |   |   |     |  

The estimated changes in fair values of the financial assets shown above relate to assets invested in support of
the Companys insurance liabilities, but do not include assets associated with products for which investment risk is borne primarily by the contract holders rather than the Company.

The Companys deferred annuity products offer a fixed investment option which subjects the Company to interest rate risk. The fixed option guarantees a fixed rate of interest for a period of time selected by the
contract owner. Guarantee period options available range from one to ten years. Withdrawal of funds, or transfer of funds to variable investment options, before the end of the guarantee period subjects the contract owner to an MVA, with respect to
the Companys fixed investment options that provide for assessment of an MVA. In the event of rising interest rates, which make the fixed maturity securities underlying the guarantee less valuable, the MVA could be negative. In the



16



---

event of declining interest rates, which make the fixed maturity securities underlying the guarantee more valuable, the MVA could be positive. The resulting
increase or decrease in the value of the fixed option, from calculation of the MVA, should substantially offset the decrease or increase in the market value of the securities underlying the guarantee. However, the Company still takes on the default
risk for the underlying securities and the interest rate risk of reinvestment of interest payments.

Market Risk Related to Equity Prices

The Company has a portfolio of equity investments consisting of mutual funds, which are held in support of a deferred compensation program. In the
event of a decline in market values of underlying securities, the value of the portfolio would decline; however the accrued benefits payable under the related deferred compensation program would decline by a corresponding amount.

For equity investments within the separate accounts, the investment risk is borne primarily by the contract holder rather than by the Company.



|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

Information
required with respect to this Item 8 regarding Financial Statements and Supplementary Data is set forth commencing on page F-3 hereof. See Index to Financial Statements elsewhere in this Annual Report.



|Item 9. | Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------------------

None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

In order to ensure that the
information we must disclose in our filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, the Companys management, including our Chief Executive Officer and Chief Financial
Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2006. Based on such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of December 31, 2006, our disclosure controls and procedures were effective. No change in the Companys internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) and
15d-15(f) occurred during the year ended December 31, 2006 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.



|Item 9B. | Other Information
|-------- | -----------------

None.



17



---

PART III



|Item 10. | Directors , Executive Officers, and Corporate Governance
|-------- | --------------------------------------------------------

We
have adopted a code of business conduct and ethics, known as Making the Right Choices, which applies to our Chief Executive Officer, Chief Financial Officer, and our Controller, as well as to our directors and all other employees. Making
the Right Choices is posted at www.investor.prudential.com.

In addition, we have adopted Corporate Governance Guidelines, which we refer to as our
Corporate Governance Principles and Practices. Our Corporate Governance Principles and Practices are available free of charge at www.investor.prudential.com.



|Item 14. | Principal Accounting Fees and Services
|-------- | --------------------------------------

The Audit Committee
of the Board of Directors of Prudential Financial has appointed PricewaterhouseCoopers LLP as the independent auditor of Prudential Financial and certain of its domestic and international subsidiaries, including the Registrant. The Audit Committee
has established a policy requiring its pre-approval of all audit and permissible non-audit services provided by the independent auditor. The specific information called for by this item is hereby incorporated by reference to the section entitled
Item 2  Ratification of the Appointment of Independent Auditors in Prudential Financials definitive proxy statement for the Annual Meeting of Shareholders to be held on May 8, 2007, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 2006.



18



---

PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------

(a)



|                                     |  |                                                                                                                                                                                  
|------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)    Financial Statements          |  | Financial Statements of the Registrant and its subsidiary are listed in the accompanying Index to Financial Statements on page F-1 hereof and are filed as part of this
Report.
|                                     | 
|(2)    Financial Statement Schedules |  | None.*                                                                                                                                                                           
|                                     | 
|(3)    Exhibits                      |  |                                                                                                                                                                                  



| | 2. | None.
| | -- | -----



| | 3. | (i) Certificate Restating the Certificate of Incorporation of American Skandia Life Assurance Corporation, dated February 8, 1988 is incorporated by reference to the Companys
Form 10-K, Registration No. 33-44202, filed March 27, 2004.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(ii) Certificate of Amendment to the Restated Certificate of
Incorporation of American Skandia Life Assurance Corporation, dated December 17, 1999 is incorporated by reference to the Companys Form 10-K, Registration No. 33-44202, filed March 27, 2004.

(iii) By-Laws of American Skandia Life Assurance Corporation, as amended June 17, 1998, are incorporated by reference to the Companys Form 10-K,
Registration No. 33-44202, filed March 27, 2004.



| | 4. | Instruments defining the rights of security holders including indentures are incorporated by reference to the Companys Registration No. 33-88360, 33-89676, 33-91400,
333-00995, 333-02867, 333-24989, 333-25761, 333-97939, 333-26695, 333-97943, 333-136996 and 333-135494.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 9. | None.
| | -- | -----



| | 10. | None.
| | --- | -----



| | 11. | Not applicable.
| | --- | ---------------



| | 12. | Not applicable.
| | --- | ---------------



| | 13. | Not applicable.
| | --- | ---------------



| | 14. | Not applicable.
| | --- | ---------------



| | 16. | None.
| | --- | -----



| | 18. | None.
| | --- | -----



| | 21. | Not applicable.
| | --- | ---------------



| | 22. | None.
| | --- | -----



| | 23. | Not applicable.
| | --- | ---------------



| | 24. | Powers of Attorney are filed herewith.
| | --- | --------------------------------------



| | 31.1 | Section 302 Certification of the Chief Executive Officer.
| | ---- | ---------------------------------------------------------



| | 31.2 | Section 302 Certification of the Chief Financial Officer.
| | ---- | ---------------------------------------------------------



| | 32.1 | Section 906 Certification of the Chief Executive Officer.
| | ---- | ---------------------------------------------------------



| | 32.2 | Section 906 Certification of the Chief Financial Officer.
| | ---- | ---------------------------------------------------------

---

|* | Schedules are omitted because they are either not applicable or because the information required therein is included in the Notes to Financial Statements.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



19



---

SIGNATURES

Pursuant to the requirements of Section 13, or 15 (d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Shelton, and state of Connecticut on the 23rd day of March 2007.



AMERICAN SKANDIA LIFE ASSURANCE CORPORATION(Registrant)By:

/s/ Michael A. BohmMichael A. BohmExecutive Vice President and Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities indicated on March 23, 2007.



|                          |  |                                                     
|------------------------- |  | ----------------------------------------------------
|Name                      |  | Title                                               
|/s/ James J. Avery, Jr. * |  | Director                                            
|James J. Avery, Jr.       |  |                                                     
|                          | 
|/s/ Michael A. Bohm       |  | Executive Vice President and Chief Financial Officer
|Michael A. Bohm           |  |                                                     
|                          | 
|/s/ Bernard J. Jacob *    |  | Director                                            
|Bernard J. Jacob          |  |                                                     
|                          | 
|/s/ Helen M. Galt *       |  | Director                                            
|Helen M. Galt             |  |                                                     
|                          | 
|/s/ Kenneth Y. Tanji *    |  | Director                                            
|Kenneth Y. Tanji          |  |                                                     
|                          | 
|/s/ Ronald Paul Joelson * |  | Director                                            
|Ronald Paul Joelson       |  |                                                     
|                          | 
|/s/ David R. Odenath, Jr. |  | Chief Executive Officer, President and Director     
|David R. Odenath, Jr.     |  |                                                     

*By:

/s/ Michael A. BohmMichael A. Bohm(Attorney-in-Fact)




20



---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT

AMERICAN SKANDIA LIFE ASSURANCE CORPORATION

Financial Statements and

Report of Independent Registered Public Accounting Firm

Years Ended December 31, 2006 and 2005



---

AMERICAN SKANDIA LIFE ASSURANCE CORPORATION

INDEX TO FINANCIAL STATEMENTS



|                                                        |  |                                                                                                                                                |  |         
|------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                                                        |  |                                                                                                                                                |  | Page No.
|Financial Statements                                    |  |                                                                                                                                               
|AMERICAN SKANDIA LIFE ASSURANCE CORPORATION             |  |                                                                                                                                               
|                                                        | 
|Report of Independent Registered Public Accounting Firm |  | F-2                                                                                                                                           
|                                                        | 
|Financial Statements:                                   |  |                                                                                                                                               
|                                                        |  |                                                                                                                                               
|                                                        |  | Statements of Financial Position December 31, 2006 and 2005                                                                                    |  | F-3     
|                                                        |  |                                                                                                                                               
|                                                        |  | Statements of Operations and Comprehensive Income Year ended December 31, 2006, Year ended December 31, 2005, and Year ended December 31, 2004 |  | F-4     
|                                                        |  |                                                                                                                                               
|                                                        |  | Statements of Stockholders Equity Year ended December 31, 2006, Year ended December 31, 2005, and Year ended December 31, 2004                |  | F-5     
|                                                        |  |                                                                                                                                               
|                                                        |  | Statements of Cash Flows Year ended December 31, 2006, Year ended December 31, 2005, and Year ended December 31, 2004                          |  | F-6     
|                                                        |  |                                                                                                                                               
|                                                        |  | Notes to Financial Statements                                                                                                                  |  | F-7     



F-1



---

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of

American Skandia Life Assurance Corporation:

In our opinion, the financial
statements listed in the accompanying index present fairly, in all material respects, the financial position of American Skandia Life Assurance Corporation (a indirect wholly owned subsidiary of Prudential Financial, Inc., effective May 1,
2003) at December 31, 2006 and December 31, 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 2 of
the financial statements, the Company adopted American Institute of Certified Public Accountants Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts as of January 1, 2004.



|                              
|------------------------------
|                              
|/s/ PricewaterhouseCoopers LLP
|New York, New York            
|March 23, 2007                



F-2



---

American Skandia Life Assurance Corporation

Statements of Financial Position

December 31, 2006 and 2005 (in thousands, except share amounts)

---



|                                                                                                       |  |      |            |      |   |            |  
|------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | -
|                                                                                                       |  | 2006 |            | 2005 |  
|ASSETS                                                                                                 |  |      |            |      |   |            |  
|Fixed maturities available for sale, at fair value (amortized cost, 2006: $1,161,335 2005: $1,559,777) |  | $    | 1,174,353  |      | $ | 1,554,569  |  
|Trading account assets, at fair value                                                                  |  |      | 18,144     |      |   | 30,778     |  
|Equity securities available for sale, at fair value (cost  2006: $18,487; 2005: $19,238)              |  |      | 18,344     |      |   | 19,098     |  
|Commercial loans                                                                                       |  |      | 40,846     |      |   | 6,000      |  
|Policy loans                                                                                           |  |      | 12,638     |      |   | 11,779     |  
|Short-term investments                                                                                 |  |      | 60,872     |      |   | 209,691    |  
|Other long-term investments                                                                            |  |      | 6,105      |      |   |           |  
|                                                                                                       |  |      |            |      |   |            |  
|Total investments                                                                                      |  |      | 1,331,302  |      |   | 1,831,915  |  
|                                                                                                       |  |      |            |      |   |            |  
|Cash and cash equivalents                                                                              |  |      | 664        |      |   | 3,507      |  
|Deferred policy acquisition costs                                                                      |  |      | 766,277    |      |   | 528,899    |  
|Accrued investment income                                                                              |  |      | 12,456     |      |   | 16,847     |  
|Reinsurance recoverable                                                                                |  |      |           |      |   | 4,271      |  
|Receivables from parent and affiliates                                                                 |  |      | 94,221     |      |   | 6,170      |  
|Income taxes receivable                                                                                |  |      | 217,768    |      |   | 229,802    |  
|Valuation of business acquired                                                                         |  |      | 152,650    |      |   | 196,023    |  
|Deferred sales inducements                                                                             |  |      | 359,815    |      |   | 227,415    |  
|Other assets                                                                                           |  |      | 17,036     |      |   | 67,432     |  
|Separate account assets                                                                                |  |      | 35,608,409 |      |   | 29,786,393 |  
|                                                                                                       |  |      |            |      |   |            |  
|TOTAL ASSETS                                                                                           |  | $    | 38,560,598 |      | $ | 32,898,674 |  
|                                                                                                       |  |      |            |      |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                   |  |      |            |      |   |            |  
|Liabilities                                                                                            |  |      |            |      |   |            |  
|Policyholders account balances                                                                        |  | $    | 993,260    |      | $ | 1,226,551  |  
|Future policy benefits and other policyholder liabilities                                              |  |      | 114,854    |      |   | 69,766     |  
|Payables to parent and affiliates                                                                      |  |      | 45,667     |      |   | 50,218     |  
|Cash collateral for loaned securities                                                                  |  |      | 39,962     |      |   | 173,987    |  
|Securities sold under agreements to repurchase                                                         |  |      |           |      |   | 7,147      |  
|Short-term borrowing                                                                                   |  |      | 159,546    |      |   | 208,584    |  
|Long-term borrowing                                                                                    |  |      | 405,000    |      |   | 135,000    |  
|Future fees payable to American Skandia, Inc. (ASI)                                                  |  |      | 48,531     |      |   | 113,151    |  
|Other liabilities                                                                                      |  |      | 268,497    |      |   | 304,971    |  
|Separate account liabilities                                                                           |  |      | 35,608,409 |      |   | 29,786,393 |  
|                                                                                                       |  |      |            |      |   |            |  
|Total liabilities                                                                                      |  | $    | 37,683,726 |      | $ | 32,075,768 |  
|                                                                                                       |  |      |            |      |   |            |  
|Commitments and Contingent Liabilities (See Note 11)                                                   |  |      |            |      |   |            |  
|                                                                                                       |  |     
|Stockholders Equity                                                                                   |  |      |            |      |   |            |  
|Common stock, $100 par value; 25,000 shares, authorized, issued and outstanding                        |  |      | 2,500      |      |   | 2,500      |  
|Additional paid-in capital                                                                             |  |      | 334,096    |      |   | 484,096    |  
|Retained earnings                                                                                      |  |      | 534,899    |      |   | 339,182    |  
|Accumulated other comprehensive income (loss)                                                          |  |      | 5,377      |      |   | (2,872     | )
|                                                                                                       |  |      |            |      |   |            |  
|Total stockholders equity                                                                             |  |      | 876,872    |      |   | 822,906    |  
|                                                                                                       |  |      |            |      |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                             |  | $    | 38,560,598 |      | $ | 32,898,674 |  
|                                                                                                       |  |      |            |      |   |            |  

See Notes to Financial Statements



F-3



---

American Skandia Life Assurance Corporation

Statements of Operations and Comprehensive Income

Years ended December 31, 2006, December 31, 2005, and December 31, 2004 (in thousands)

---



|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                      |  | 2006 |         |   | 2005 |   |         | 2004 | 
|REVENUES                                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                      |  |      |        
|Premiums                                                                              |  | $    | 40,511  |   |      | $ | 23,756  |      |  | $ | 17,568  |  
|Policy charges and fee income                                                         |  |      | 561,295 |   |      |   | 455,675 |      |  |   | 370,589 |  
|Net investment income                                                                 |  |      | 88,291  |   |      |   | 92,881  |      |  |   | 90,459  |  
|Realized investment (losses), net                                                     |  |      | (48,035 | ) |      |   | (32,121 | )    |  |   | (20,465 | )
|Asset management fees                                                                 |  |      | 167,964 |   |      |   | 127,401 |      |  |   | 112,100 |  
|Other income                                                                          |  |      | 654     |   |      |   | 393     |      |  |   | 5,331   |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Total revenues                                                                        |  |      | 810,680 |   |      |   | 667,985 |      |  |   | 575,582 |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|BENEFITS AND EXPENSES                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                      |  |      |        
|Policyholders benefits                                                               |  |      | 101,367 |   |      |   | 62,973  |      |  |   | 86,948  |  
|Interest credited to policyholders account balances                                  |  |      | 77,137  |   |      |   | 69,901  |      |  |   | 80,120  |  
|General, administrative and other expenses                                            |  |      | 430,244 |   |      |   | 330,645 |      |  |   | 264,514 |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Total benefits and expenses                                                           |  |      | 608,748 |   |      |   | 463,519 |      |  |   | 431,582 |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Income from operations before income taxes and cumulative effect of accounting change |  |      | 201,932 |   |      |   | 204,466 |      |  |   | 144,000 |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Income taxes:                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Current                                                                               |  |      | 67      |   |      |   | 51      |      |  |   | 4,071   |  
|Deferred                                                                              |  |      | 6,148   |   |      |   | 45,991  |      |  |   | 32,948  |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Income tax expense                                                                    |  |      | 6,215   |   |      |   | 46,042  |      |  |   | 37,019  |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Income from operations before cumulative effect of accounting change                  |  |      | 195,717 |   |      |   | 158,424 |      |  |   | 106,981 |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Cumulative effect of accounting change, net of taxes                                  |  |      |        |   |      |   |        |      |  |   | (17,079 | )
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|NET INCOME                                                                            |  |      | 195,717 |   |      |   | 158,424 |      |  |   | 89,902  |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Change in net unrealized investment gains (losses), net of taxes                      |  |      | 8,249   |   |      |   | (23,562 | )    |  |   | 21,341  |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|COMPREHENSIVE INCOME                                                                  |  | $    | 203,966 |   |      | $ | 134,862 |      |  | $ | 111,243 |  
|                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  

See Notes to Financial Statements



F-4



---

American Skandia Life Assurance Corporation

Statements of Stockholders Equity

Years ended December 31, 2006, December 31, 2005, and December 31, 2004 (in thousands)

---



|                                                                 |  |              |       |                          |   |          |                  |  |                       |         |  |                                               |      |   |                            |   |         |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------ | ----- | ------------------------ | - | -------- | ---------------- |  | --------------------- | ------- |  | --------------------------------------------- | ---- | - | -------------------------- | - | ------- | - |  | - | -------- | -
|                                                                 |  | Common Stock |       | Additionalpaid-incapital |   |          | Retainedearnings |  | Deferred compensation |         |  | Accumulated other comprehensive income (loss) |      |   | Total stockholders equity |  
|Balance, December 31, 2003                                       |  | $            | 2,500 |                          | $ | 485,100  |                  |  | $                     | 90,856  |  | $                                             | (360 | ) |                            | $ | (1,599  | ) |  | $ | 576,497  |  
|Net income                                                       |  |              |      |                          |   |         |                  |  |                       | 89,902  |  |                                               |     |   |                            |   |        |   |  |   | 89,902   |  
|Purchase of fixed maturities from an affiliate, net of taxes     |  |              |      |                          |   | (948     | )                |  |                       |        |  |                                               |     |   |                            |   | 948     |   |  |   |         |  
|Stock-based compensation                                         |  |              |      |                          |   | 273      |                  |  |                       |        |  |                                               |     |   |                            |   |        |   |  |   | 273      |  
|Deferred compensation program                                    |  |              |      |                          |   |         |                  |  |                       |        |  |                                               | (544 | ) |                            |   |        |   |  |   | (544     | )
|Change in net unrealized investment gains (losses), net of taxes |  |              |      |                          |   |         |                  |  |                       |        |  |                                               |     |   |                            |   | 21,341  |   |  |   | 21,341   |  
|                                                                 |  |              |       |                          |   |          |                  |  |                       |         |  |                                               |      |   |                            |   |         |   |  |   |          |  
|Balance, December 31, 2004                                       |  |              | 2,500 |                          |   | 484,425  |                  |  |                       | 180,759 |  |                                               | (904 | ) |                            |   | 20,690  |   |  |   | 687,470  |  
|                                                                 |  |              |       |                          |   |          |                  |  |                       |         |  |                                               |      |   |                            |   |         |   |  |   |          |  
|Net income                                                       |  |              |      |                          |   |         |                  |  |                       | 158,424 |  |                                               |     |   |                            |   |        |   |  |   | 158,424  |  
|Stock-based compensation                                         |  |              |      |                          |   | (329     | )                |  |                       |        |  |                                               |     |   |                            |   |        |   |  |   | (329     | )
|Deferred compensation program                                    |  |              |      |                          |   |         |                  |  |                       |        |  |                                               | 904  |   |                            |   |        |   |  |   | 904      |  
|Change in net unrealized investment gains (losses), net of taxes |  |              |      |                          |   |         |                  |  |                       |        |  |                                               |     |   |                            |   | (23,562 | ) |  |   | (23,562  | )
|                                                                 |  |              |       |                          |   |          |                  |  |                       |         |  |                                               |      |   |                            |   |         |   |  |   |          |  
|Balance, December 31, 2005                                       |  |              | 2,500 |                          |   | 484,096  |                  |  |                       | 339,182 |  |                                               |     |   |                            |   | (2,872  | ) |  |   | 822,906  |  
|                                                                 |  |              |       |                          |   |          |                  |  |                       |         |  |                                               |      |   |                            |   |         |   |  |   |          |  
|Net income                                                       |  |              |      |                          |   |         |                  |  |                       | 195,717 |  |                                               |     |   |                            |   |        |   |  |   | 195,717  |  
|Distribution to parent                                           |  |              |      |                          |   | (150,000 | )                |  |                       |        |  |                                               |     |   |                            |   |        |   |  |   | (150,000 | )
|Change in net unrealized investment gains (losses), net of taxes |  |              |      |                          |   |         |                  |  |                       |        |  |                                               |     |   |                            |   | 8,249   |   |  |   | 8,249    |  
|                                                                 |  |              |       |                          |   |          |                  |  |                       |         |  |                                               |      |   |                            |   |         |   |  |   |          |  
|Balance, December 31, 2006                                       |  | $            | 2,500 |                          | $ | 334,096  |                  |  | $                     | 534,899 |  | $                                             |     |   |                            | $ | 5,377   |   |  | $ | 876,872  |  
|                                                                 |  |              |       |                          |   |          |                  |  |                       |         |  |                                               |      |   |                            |   |         |   |  |   |          |  

See Notes to Financial Statements



F-5



---

American Skandia Life Assurance Corporation

Statements of Cash Flows

Year ended December 31, 2006, Year ended December 31, 2005, and Year ended December 31, 2004

(in thousands)

---



|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                           |  | 2006 |            |   | 2005 |   |            | 2004 | 
|CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES:                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                 |  | $    | 195,717    |   |      | $ | 158,424    |      |  | $ | 89,902     |  
|Adjustments to reconcile net income to net cash from operating activities: |  |      |            |   |      |   |            |      |  |   |            |  
|Realized investment losses, net                                            |  |      | 48,035     |   |      |   | 32,121     |      |  |   | 20,465     |  
|Amortization and depreciation                                              |  |      | 40,209     |   |      |   | 47,974     |      |  |   | 46,765     |  
|Cumulative effect of accounting change, net of taxes                       |  |      |           |   |      |   |           |      |  |   | 17,079     |  
|Interest credited to policyholders account balances                       |  |      | 60,215     |   |      |   | 60,058     |      |  |   | 70,331     |  
|Change in:                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Policy reserves                                                            |  |      | 45,088     |   |      |   | 18,688     |      |  |   | 34,361     |  
|Accrued investment income                                                  |  |      | 4,392      |   |      |   | 5,474      |      |  |   | 6,035      |  
|Trading account assets                                                     |  |      | 12,633     |   |      |   | 16,538     |      |  |   | 14,017     |  
|Net receivable/payable to affiliates                                       |  |      | (42,150    | ) |      |   | 24,963     |      |  |   | 5,888      |  
|Deferred sales inducements                                                 |  |      | (132,400   | ) |      |   | (74,999    | )    |  |   | (74,087    | )
|Deferred policy acquisition costs                                          |  |      | (239,470   | ) |      |   | (227,619   | )    |  |   | (177,935   | )
|Income taxes payable (receivable)                                          |  |      | 7,513      |   |      |   | 28,015     |      |  |   | (24,826    | )
|Other, net                                                                 |  |      | (91,066    | ) |      |   | (8,487     | )    |  |   | 73,901     |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Cash Flows (Used In) From Operating Activities                             |  |      | (91,283    | ) |      |   | 81,150     |      |  |   | 101,896    |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                      |  |      |            |   |      |   |            |      |  |   |            |  
|Proceeds from the sale/maturity of fixed maturities available for sale     |  |      | 3,594,021  |   |      |   | 2,199,373  |      |  |   | 2,580,125  |  
|Payments for the purchase of fixed maturities available for sale           |  |      | (3,226,546 | ) |      |   | (2,048,890 | )    |  |   | (2,196,424 | )
|Proceeds from the sale of equity securities                                |  |      |           |   |      |   | 1,000      |      |  |   |           |  
|Payments for the purchase of commercial loans                              |  |      | (34,846    | ) |      |   | (6,000     | )    |  |   |           |  
|Proceeds from the maturity of policy loans                                 |  |      | 1,548      |   |      |   | 503        |      |  |   |           |  
|Payments for the issuance of policy loans                                  |  |      | (2,407     | ) |      |   | (1,935     | )    |  |   | (1,952     | )
|Proceeds for the sale of other long-term investments                       |  |      | 5,358      |   |      |   |            |      |  |   |            |  
|Payments for the purchase of other long-term investments                   |  |      | (6,104     | ) |      |   |           |      |  |   |           |  
|Other short-term investments, net                                          |  |      | 148,819    |   |      |   | 211,762    |      |  |   | (377,888   | )
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Cash Flows From Investing Activities                                       |  |      | 479,843    |   |      |   | 355,813    |      |  |   | 3,861      |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS (USED IN) FINANCING ACTIVITIES:                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Return of capital                                                          |  |      | (150,000   | ) |      |   |           |      |  |   | (948       | )
|Decrease in future fees payable to ASI, net                                |  |      | (64,619    | ) |      |   | (87,447    | )    |  |   | (107,282   | )
|Cash collateral for loaned securities                                      |  |      | (134,025   | ) |      |   | (117,312   | )    |  |   | 291,299    |  
|Securities sold under agreement to repurchase                              |  |      | (7,147     | ) |      |   | (26,226    | )    |  |   | 12,523     |  
|Proceeds from the issuance of debt (maturities longer than 90 days)        |  |      | 300,000    |   |      |   |           |      |  |   |            |  
|Repayments of debt (maturities longer than 90 days)                        |  |      | (30,000    | ) |      |   |           |      |  |   | 135,000    |  
|Net (decrease) increase in short-term borrowing                            |  |      | (49,038    | ) |      |   | 68,221     |      |  |   | 24,363     |  
|Drafts outstanding                                                         |  |      | 38,736     |   |      |   | (88,620    | )    |  |   | 103,736    |  
|Policyholders account balances                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Deposits                                                                   |  |      | 1,211,772  |   |      |   | 951,563    |      |  |   | 66,268     |  
|Withdrawals                                                                |  |      | (1,507,082 | ) |      |   | (1,206,489 | )    |  |   | (564,162   | )
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Cash Flows (Used in) Financing Activities                                  |  |      | (391,403   | ) |      |   | (506,310   | )    |  |   | (39,203    | )
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Net (decrease) increase in cash and cash equivalents                       |  |      | (2,843     | ) |      |   | (69,347    | )    |  |   | 66,554     |  
|Cash and cash equivalents, beginning of period                             |  |      | 3,507      |   |      |   | 72,854     |      |  |   | 6,300      |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                   |  | $    | 664        |   |      | $ | 3,507      |      |  | $ | 72,854     |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|SUPPLEMENTAL CASH FLOW INFORMATION                                         |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Income taxes (received) paid                                               |  | $    | (1,297     | ) |      | $ | (2,540     | )    |  | $ | 39,199     |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Interest paid                                                              |  | $    | 45,689     |   |      | $ | 4,783      |      |  | $ | 11,261     |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  

See Notes to Financial Statements



F-6



---

American Skandia Life Assurance Corporation

Notes to Financial Statements

---



|1. | BUSINESS
|-- | --------

American Skandia Life Assurance Corporation (the
Company), with its principal offices in Shelton, Connecticut, is an indirect wholly-owned subsidiary of Prudential Financial, Inc. (Prudential Financial), a New Jersey corporation. The Company is a wholly-owned subsidiary of
American Skandia, Inc. (ASI), which in turn is an indirect wholly-owned subsidiary of Prudential Financial. On December 19, 2002, Skandia Insurance Company Ltd. (publ) (Skandia), an insurance company organized under the
laws of the Kingdom of Sweden, and the ultimate parent company of the Company prior to May 1, 2003, entered into a definitive purchase agreement with Prudential Financial whereby Prudential Financial would acquire the Company and certain of its
affiliates (the Acquisition) and would be authorized to use the American Skandia name through April, 2008. On May 1, 2003, the initial phase of the Acquisition was consummated. As such, the Company became an indirect wholly owned
subsidiary of Prudential Financial. During 2007, the Company expects to begin the process of changing the Companys name and names of various legal entities that include the American Skandia name. See Note 5 for additional
information on the Acquisition.

The Company develops long-term savings and retirement products, which are distributed through its affiliated broker/dealer
company, American Skandia Marketing, Incorporated. The Company currently issues variable deferred and immediate annuities for individuals and groups in the United States of America and its territories.

American Skandia, Inc. (ASI), the direct parent of the Company, intends to make additional capital contributions to the Company, as needed, to enable it to
comply with its reserve requirements and fund expenses in connection with its business. The Company has complied with the National Association of Insurance Commissioners (NAIC) Risk-Based Capital (RBC) reporting
requirements and has total adjusted capital well above required capital. The Company expects to maintain statutory capital above 300% of Company Action Level Risk Based Capital. Generally, ASI is under no obligation to make such contributions and
its assets do not back the benefits payable under the Companys policyholder contracts. The Company received no capital contributions during 2006, 2005, and 2004.

The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities engaged in marketing insurance products, and individual and
group annuities.



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------

Basis of
presentation

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP). The Company has extensive transactions and relationships with Prudential Financial affiliates, as more fully described in Footnote 13. Due to these relationships, it is possible that the terms of these transactions
are not the same as those that would result from transactions among wholly unrelated parties.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, in particular deferred policy acquisition costs (DAC) and future policy benefits, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.

The most significant estimates include those used in determining deferred policy
acquisition costs, valuation of business acquired, valuation of investments including derivatives, future policy benefits including guarantees, provision for income taxes, reserves for contingent liabilities and reserves for losses in connection
with unresolved legal matters.

Investments

Fixed maturities classified as available for sale are carried at fair value. The amortized cost of fixed maturities is written down to estimated fair value if a decline in value is considered to be other than temporary.
See the discussion below on realized investment gains and losses for a description of the accounting for impairment adjustments. Unrealized gains and losses on fixed maturities available for sale are included in Accumulated other
comprehensive (loss) income, net of income taxes.

Trading account assets, at fair value, represent the equity securities held in support of a
deferred compensation plan. Such investments are carried at fair value with changes in unrealized gains and losses reported in the Statements of Operations and Comprehensive Income, as a component of Other income.

Equity securities, available for saleare comprised of common and non-redeemable preferred stock and are carried at fair value. The associated unrealized gains
and losses, net of tax and the effect on deferred policy acquisition costs, valuation of business acquired, and future policy benefits that would result from the realization of unrealized gains and losses, are included in Accumulated other
comprehensive income (loss). The cost of equity securities is written down to estimated fair value



F-7



---

when a decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses for a description of the
accounting for impairment adjustments.

Commercial loans are carried at unpaid principal balances, net of unamortized premiums or discounts and an
allowance for losses. Interest income, as well as prepayment fees and the amortization of related premiums or discounts, is included in Net investment income. The allowance for losses includes a loan specific reserve for non-performing
loans and a portfolio reserve for probable incurred but not specifically identified losses. Non-performing loans include those loans for which it is probable that amounts due according to the contractual terms of the loan agreement will not all be
collected. These loans are measured at the present value of expected future cash flows discounted at the loans effective interest rate, or at the fair value of the collateral if the loan is collateral dependent. Interest received on
non-performing loans, including loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as net investment income, according to managements judgment as to the collectibility of
principal. Management discontinues accruing interest on non-performing loans after the loans are 90 days delinquent as to principal or interest, or earlier when management has doubts about collectibility. When a loan is recognized as non-performing,
any accrued but uncollectible interest is charged to interest income in the period the loan is deemed non-performing. Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the
case of loans where the payment of interest has been interrupted for a substantial period, a regular payment performance has been established. The portfolio reserve for incurred but not specifically identified losses considers the Companys
past loan loss experience, the current credit composition of the portfolio, historical credit migration, property type diversification, default and loss severity statistics and other relevant factors. The changes in the allowance for loan losses,
are reported in Realized investment (losses), net.

Policy loans are carried at unpaid principal balances.

Short-term investments consist of highly liquid debt instruments with a maturity of greater than three months and less than twelve months when purchased. These
investments are carried at amortized cost, which because of their short-term nature, approximates fair value.

Other long-term investments consist
of the Companys investments in joint ventures and limited partnerships other than operating joint ventures in which the Company does not exercise control, as well as investments in the Companys own separate accounts, which are carried at
fair value, and investment real estate. Joint venture and partnership interests are generally accounted for using the equity method of accounting, except in instances in which the Companys interest is so minor that it exercises virtually no
influence over operating and financial policies. In such instances, the Company applies the cost method of accounting. The Companys share of net income from investments in joint ventures and partnerships is generally included in Net
investment income.

Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial
indices, or the value of securities or commodities. Derivative financial instruments used by the Company include swaps and futures, and may be exchange-traded or contracted in the over-the-counter market. Derivative positions are carried at fair
value, generally by obtaining quoted market prices or through the use of pricing models. Values can be affected by changes in interest rates, foreign exchange rates, credit spreads, market volatility and liquidity. Values can also be affected by
changes in estimates and assumptions used in pricing models.

Derivatives are used to manage the characteristics of the Companys asset/liability mix,
and manage the interest rate and currency characteristics of assets or liabilities. Additionally, derivatives may be used to seek to reduce exposure to interest rate and foreign currency risks associated with assets held or expected to be purchased
or sold, and liabilities incurred or expected to be incurred.

Derivatives are recorded as assets, within Other long-term investments, or as
liabilities, within Other liabilities, in the Statement of Financial Position, except for embedded derivatives, which are recorded in the Statement of Financial Position with the associated host contract. As discussed in detail below,
all realized and unrealized changes in fair value of derivatives, with the exception of the effective portion of cash flow hedges, are recorded in current earnings. Cash flows from these derivatives are reported in the operating or investing
activities section in the Statements of Cash Flows.

The Company designates derivatives as either (1) a hedge of the fair value of a recognized asset
or liability or unrecognized firm commitment (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow
hedge), (3) a foreign currency fair value or cash flow hedge (foreign currency hedge), (4) a hedge of a net investment in a foreign operation, or (5) a derivative entered into as an economic hedge that does not qualify for
hedge accounting. During the years ended December 31, 2006, 2005 and 2004 none of the Companys derivatives qualified for hedge accounting treatment.

If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and payments, are included in Realized investment (losses), net without considering changes in the fair value of the
economically associated assets or liabilities.



F-8



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The Company is a party to financial instruments that contain derivative instruments that are embedded in the
financial instruments. At inception, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e.,
the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics
that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host
contract, carried at fair value, and changes in its fair value are included in Realized investment gains (losses), net. The Company has entered into reinsurance agreements to transfer the risk related to the embedded derivatives to
affiliates. These reinsurance agreements are derivatives and have been accounted in the same manner as the embedded derivative.

Realized investment
(losses), netare computed using the specific identification method. Adjustments to the costs of fixed maturities and equity securities for other than temporary impairments are included in Realized investment (losses) gains, net. In
evaluating whether a decline in value is other than temporary, the Company considers several factors including, but not limited to the following: (1) the extent (generally if greater than 20%) and the duration (generally if greater than six
months) of the decline; (2) the reasons for the decline in value (credit event, interest related or market fluctuation); (3) the Companys ability and intent to hold the investment for a period of time to allow for a recovery of
value; and (4) the financial condition of and near-term prospects of the issuer.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, money market instruments, and other debt issues with a maturity of three months or less when purchased, other than cash
equivalents that are included in Trading account assets, at fair value.

Valuation of business acquired

As a result of purchase accounting, the Company reports a financial asset representing the valuation of business acquired (VOBA). VOBA represents the present
value of future profits embedded in acquired insurance and annuity contracts. VOBA is determined by estimating the net present value of future cash flows from the contracts in force at the date of acquisition. Future positive cash flows generally
include fees and other charges assessed to the contracts as long as they remain in force as well as fees collected upon surrender, if applicable, while future negative cash flows include costs to administer contracts and benefit payments. The
Company amortizes VOBA over the effective life of the acquired contracts. VOBA is amortized in proportion to estimated gross profits arising from the contracts and anticipated future experience, which is evaluated regularly. The effect of changes in
estimated gross profits on unamortized VOBA is reflected in General, administrative and other expenses in the period such estimates of expected future profits are revised.

Deferred policy acquisition costs

The costs that vary with and that are related primarily to the production
of new insurance and annuity business are deferred to the extent such costs are deemed recoverable from future profits. Such costs include commissions, costs of policy issuance and underwriting, and variable expenses. DAC is subject to
recoverability testing at the end of each accounting period. DAC, for applicable products, is adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges
included in Accumulated other comprehensive income (loss).

Deferred acquisition costs are amortized over the expected life of the contracts
(approximately 25 years) in proportion to estimated gross profits arising principally from investment results, mortality and expense margins, and surrender charges based on historical and anticipated future experience, which is updated periodically.
The effect of changes to estimated gross profits on unamortized deferred acquisition costs is reflected in General administrative and other expenses in the period such estimated gross profits are revised. The deferred policy acquisition
cost asset was assigned a fair value of zero, net of tax, as part of purchase accounting.

Securities sold under agreements to repurchase and
securities lending transactions

Securities repurchase and resale agreements and securities borrowed and loaned transactions are used to earn spread
income, to borrow funds, or to facilitate trading activity. Securities repurchase and resale agreements are generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value. Securities repurchase and
resale agreements are collateralized principally by U.S. government and government agency securities. Securities borrowed or loaned are collateralized principally by cash or U.S. government securities. For securities repurchase agreements and
securities loaned transactions used to earn spread income, the cash received is typically invested in cash equivalents, short-term investments or fixed maturities.

Securities repurchase and resale agreements that satisfy certain criteria are treated as collateralized financing arrangements. These agreements are carried at the amounts at which the securities will be subsequently resold or reacquired,
as specified in the respective agreements. For securities purchased under agreements to resell, the Companys policy is to take possession or control of the securities and to value the securities daily. Securities to be resold are the same, or
substantially the same, as the securities received. For securities sold under agreements to repurchase, the market value of the securities to be repurchased is monitored, and additional collateral is obtained where appropriate, to protect against
credit exposure. Securities to be repurchased are the same, or substantially the same as those sold. Income and expenses related to these transactions are reported as Net investment income.



F-9



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Securities borrowed and securities loaned transactions are treated as financing arrangements and are recorded at the
amount of cash advanced or received. With respect to securities loaned transactions, the Company obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the
market value of the securities borrowed and loaned on a daily basis with additional collateral obtained or provided as necessary. Substantially all of the Companys securities borrowed transactions are with brokers and dealers, commercial banks
and institutional clients. Substantially all of the Companys securities loaned transactions are with large brokerage firms. Income and expenses associated with securities borrowing transactions are reported as Net investment
income. Income and expenses associated with securities loaned transactions used to earn spread income are reported as Net investment income; however, for securities loaned transactions used for funding purposes the associated
rebate is reported as interest expense (included in General, administrative and other expenses).

Separate account assets and liabilities

Separate account assets and liabilities are reported at fair value and represent segregated funds, which are invested for certain policyholders and
other customers. Separate account assets are predominantly shares in American Skandia Trust co-managed by American Skandia Investment Services, Incorporated (ASISI) and Prudential Investments LLC, which utilizes various fund
managers as sub-advisors. The remaining assets are shares in other mutual funds, which are managed by independent investment firms. The contract holder has the option of directing funds to a wide variety of investment options, most of which invest
in mutual funds. The investment risk on the variable portion of a contract is borne by the contract holder, except to the extent of any guarantees by the Company, which are not separate account liabilities. The assets of each account are legally
segregated and are generally not subject to claims that arise out of any other business of the Company. The investment income and gains or losses for separate accounts accrue to the policyholders and are not included in the Statements of Operations
and Comprehensive Income. Mortality, policy administration and surrender charges on the accounts are included in Policy charges and fee income. Asset management fees calculated on account assets are included in Asset management
fees.

Deferred sales inducements

The
Company provides sales inducements to contract holders, which primarily reflect an up-front bonus added to the contract holders initial deposit for certain annuity contracts. These costs are deferred and recognized in Deferred sales
inducements. They are amortized using the same methodology and assumptions used to amortize DAC. The amortization expense is included as a component of Interest credited to policyholders account balances.

Other assets and other liabilities

Other assets
consists primarily of accruals of fund manager income. Other liabilities consists primarily of accrued expenses, technical overdrafts and a liability to the participants of a deferred compensation plan.

Other assets also consists of state insurance licenses. Licenses to do business in all states have been capitalized and reflected at the purchase price of
$4.0 million. Due to the adoption of SFAS No. 142 Goodwill and Other Intangible Assets, the cost of the licenses is no longer being amortized but is subjected to an annual impairment test. As of December 31, 2006, the Company
estimated the fair value of the state insurance licenses to be in excess of book value and, therefore, no impairment charge was required.

Future
policy benefits

The Companys liability for future policy benefits is primarily comprised of the present value of estimated future payments to
or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality, less the present value of future net premiums. Expected mortality is generally based on the Companys historical experience or standard
industry tables. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality and interest rate assumptions are locked-in upon the issuance of new insurance or annuity
business with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves. The Companys liability for
future policy benefits is also inclusive of liabilities for guarantee benefits related to certain nontraditional long-duration life and annuity contracts, which are discussed more fully in Note 6.

Policyholders account balances

The Companys
liability for policyholders account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. This liability is generally equal to the accumulated account deposits, plus interest
credited, less policyholder withdrawals and other charges assessed against the account balance. These policyholders account balances also include provision for benefits under non-life contingent payout annuities.

Contingent liabilities

Amounts related to contingencies are
accrued if it is probable that a liability has been incurred and an amount is reasonably estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution of the matter that are
reasonably estimable and, if so, they are included in the accrual.



F-10



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Insurance revenue and expense recognition

Revenues for variable deferred annuity contracts consist of charges against contract owner account values or separate accounts for mortality and expense risks, administration fees, surrender charges and an annual
maintenance fee per contract. Revenues for mortality and expense risk charges and administration fees are recognized as assessed against the contract holder. Surrender charge revenue is recognized when the surrender charge is assessed against the
contract holder at the time of surrender.

Benefit reserves for the variable investment options on annuity contracts represent the account value of the
contracts and are included in Separate account liabilities.

Revenues for variable immediate annuity and supplementary contracts with life
contingencies consist of certain charges against contract owner account values including mortality and expense risks and administration fees. These charges and fees are recognized as revenue as assessed against the contract holder. Benefit reserves
for variable immediate annuity contracts represent the account value of the contracts and are included in Separate account liabilities.

Revenues for fixed immediate annuity and fixed supplementary contracts with and without life contingencies consist of net investment income. In addition, revenues for fixed immediate annuity contracts with life contingencies also consist of
single premium payments recognized as annuity considerations when received. Benefit reserves for these contracts are based on applicable actuarial standards with assumed interest rates that vary by issue year. Reserves for contracts without life
contingencies are included in Policyholders account balances while reserves for contracts with life contingencies are included in future policy benefits and other policyholder liabilities. Assumed interest rates ranged
from 1.83% to 8.25% at December 31, 2006 and 2005.

Revenues for variable life insurance contracts consist of charges against contract owner account
values or separate accounts for mortality and expense risk fees, administration fees, cost of insurance fees, taxes and surrender charges. Certain contracts also include charges against premium to pay state premium taxes. All of these charges are
recognized as revenue when assessed against the contract holder. Benefit reserves for variable life insurance contracts represent the account value of the contracts and are included in Separate account liabilities.

Certain individual annuity contracts provide the holder a guarantee that the benefit received upon death or annuitization will be no less than a minimum prescribed
amount. These benefits are accounted for as insurance contracts and are discussed in further detail in Note 6. The Company also provides contracts with certain living benefits that are considered embedded derivatives. These contracts are discussed
in further detail in Note 6.

Premiums, benefits and expenses are stated net of reinsurance ceded to other companies. Estimated reinsurance recoverables
and the cost of reinsurance are recognized over the life of the reinsured policies using assumptions consistent with those used to account for the underlying policies.

Asset management fees

In accordance with an agreement with ASISI, the Company receives fee income calculated
on contractholder separate account balances invested in the American Skandia Trust. In addition, the Company receives fees calculated on contractholder separate account balances invested in funds managed by companies other than ASISI. Asset
management fees are recognized as income when earned. These revenues are recorded as Asset management fees in the Statements of Operations and Comprehensive Income.

Income taxes

Due to provisions in the Internal Revenue Code, the Company will not be eligible to join in the
filing of the Prudential Financial federal income tax return until 2009. As a result, the Company will file a separate federal tax return through 2008. In addition, the Company will continue to file separate state income tax returns.

Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A
valuation allowance is recorded to reduce a deferred tax asset to the amount expected to be realized.

Future fees payable to ASI

In a series of transactions with ASI, the Company sold certain rights to receive a portion of future fees and contract charges expected to be realized on designated
blocks of deferred annuity contracts. The proceeds from the sales have been recorded as a liability and are being amortized over the remaining surrender charge period of the designated contracts using the interest method.

Share-based Payments

The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-based Payment on January 1, 2006, using the modified prospective application transition method prescribed by this standard. This standard requires that the
cost resulting from all share-based payments be recognized in the financial statements and requires all entities to apply the fair value based measurement method in accounting for share-based payment transactions with employees except for equity
instruments held by employee share ownership plans. The Company had previously adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended, prospectively for all new stock
options granted to employees on or after January 1, 2003. Upon adoption of SFAS No. 123(R), there were no unvested stock options



F-11



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issued prior to January 1, 2003, and, therefore, the adoption of SFAS No. 123(R) had no impact to the Companys financial condition or results
of operations with respect to the unvested employee options.

New accounting pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115. This statement provides companies with an option to report selected financial assets and liabilities at fair value. This statement is effective for fiscal years beginning
after November 15, 2007 with early adoption permitted. The Company is currently assessing the impact of SFAS No. 159 on its financial position and results of operations.

In September 2006, the staff of the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements. The interpretations in this SAB express the Staffs views regarding the process of quantifying financial statement misstatements. Specifically, the SEC Staff believes that registrants must quantify the impact on
current period financial statements of correcting all misstatements, including both those occurring in the current period and the effect of reversing those that have accumulated from prior periods. The SAB should be applied beginning with the first
fiscal year ending after November 15, 2006, with early adoption encouraged. Since the Companys method for quantifying financial statement misstatements already considers those occurring in the current period and the effect of reversing
those that have accumulated from prior periods, the adoption of SAB No. 108 should have no effect to the financial position and results of operations of the Company.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and requires additional disclosures about fair value measurements. This Statement does not require any new fair value measurements, but the application of this Statement could change current practices in determining fair value. The
Company plans to adopt this guidance effective January 1, 2008. The Company is currently assessing the impact of SFAS No. 157 on the Companys consolidated financial position and results of operations.

In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109. FIN No.48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return.
This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company has adopted FIN No. 48 on January 1, 2007. The Companys adoption of this guidance will not have a material effect on the
Companys financial position and results of operations.

On February 16, 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Instruments. SFAS No. 155 provides an election, on an instrument by instrument basis, to measure at fair value an entire hybrid financial instrument that contains an embedded derivative requiring bifurcation, rather than measuring
only the embedded derivative on a fair value basis. This statement also removes an exception from the requirement to bifurcate an embedded derivative feature from a beneficial interest in securitized financial assets. The Company has used this
exception for investments the Company has made in securitized financial assets in the normal course of operations, and thus has not previously had to consider whether such investments contain an embedded derivative. The new requirement to identify
embedded derivatives in beneficial interest will be applied on a prospective basis only to beneficial interest acquired, issued, or subject to certain remeasurement conditions after the adoption date of the new guidance. The Company has adopted SFAS
No. 155 effective January 1, 2007. The Companys adoption of this guidance will not have a material effect on the Companys financial position and results of operations.

In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application
to Certain Investments. This FSP provides impairment models for determining whether to record impairment losses associated with investments in certain equity and debt securities, primarily by referencing existing accounting guidance. It also
requires income to be accrued on a level-yield basis following an impairment of debt securities, where reasonable estimates of the timing and amount of future cash flows can be made. The Companys current policy is generally to record income
only as cash is received following an impairment of a debt security. The Company adopted this guidance on January 1, 2006, for other than temporary impairments recorded subsequent to December 31, 2005.

In September 2005, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts. SOP 05-1 provides guidance on accounting by insurance
enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97. The SOP defines an internal replacement as a modification in product benefits,
features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. This SOP is effective for internal
replacements occurring in fiscal years beginning after December 15, 2006. The Company has adopted SOP 05-1 on January 1, 2007. The Companys adoption of this guidance will not have a material effect on the Companys financial
position or results of operation.



F-12



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In June 2004, the FASB issued FSP No. 97-1, Situations in Which Paragraphs 17(b) and 20 of FASB Statement
No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability. FSP 97-1 clarifies
the accounting for unearned revenue liabilities of certain universal-life type contracts under SOP 03-1. The Companys adoption of FSP 97-1 on July 1, 2004 did not change the accounting for unearned revenue liabilities and, therefore, had
no impact on the Companys financial position or results of operations. In September 2004, the AICPA SOP 03-1 Implementation Task Force issued a Technical Practice Aid (TPA) to clarify certain aspects of SOP 03-1. The implementation
of this TPA during the third quarter of 2004 had no impact on the Companys financial position or results of operations.

In July 2003, the Accounting
Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts. AcSEC issued the SOP 03-1 to address the need for interpretive guidance to be developed in three areas: separate account presentation and valuation; the accounting recognition
given sales inducements (bonus interest, bonus credits, persistency bonuses); and the classification and valuation of certain long-duration contract liabilities.

The Company adopted SOP 3-01 effective January 1, 2004. The effect of initially adopting SOP 03-1 was a charge of $17.1 million, net of $9.4 million of taxes, which was reported as a cumulative effect of accounting change, net of
taxes in the results of operations for year ended December 31, 2004. This charge reflects the net impact of converting certain individual market value adjusted annuity contracts from separate account accounting treatment to general
account accounting treatment and the effect of establishing reserves for guaranteed minimum death benefit provisions of the Companys annuity contracts. The Company also recognized a cumulative effect of accounting change related to unrealized
investment gains within Other comprehensive income, net of taxes of $3.4 million, net of $1.9 million of taxes. Upon adoption of SOP 3-01 $1.8 billion in separate account assets were reclassified resulting in a $1.7 billion
increase in fixed maturities, available for sale, as well as changes in other non-separate account assets. Similarly, upon adoption, $1.8 billion in separate account liabilities were reclassified resulting in increases in
policyholders account balances, as well as changes in other non-separate account liabilities.

As of December 31, 2006, the death
benefit coverage in force (representing the amount that we would have to pay if all annuitants had died on that date) was approximately $2.0 billion. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the
account value. The GMDB feature provides annuity contract holders with a guarantee that the benefit received at death will be no less than a prescribed minimum amount. This minimum amount is generally based on the net deposits paid into the contract
and, for greater than 80% of the business in force as of December 31, 2006, this minimum guarantee is applicable only for the first ten contract years or until a specified attained age. To the extent that the GMDB is higher than the current
account value at the time of death, the Company incurs a cost. This results in increased annuity policy benefits in periods of declining financial markets and in periods of stable financial markets following a decline. Effective January 1,
2004, the Company adopted SOP 03-1, which requires us to record such a liability based on application of an expected benefit ratio to cumulative assessments through the balance sheet date, and then subtracting cumulative excess
payments from that date. The GMDB reserve as of December 31, 2006 amounted to $44.5 million. See Note 6 for further details.

In addition to
establishing a liability associated with the GMDB feature, SOP 03-1 required a change in valuation and presentation of our liability associated with the market value adjustment (MVA) feature contained in certain annuity contracts. The
MVA feature requires the Company to pay to the contract holder upon surrender the accreted value of the fund as well as a MVA based on the crediting rates on the contract surrendered compared to crediting rates on newly issued contracts. The MVA may
increase or decrease the amount due to the contract holder. At December 31, 2003, this liability was recorded at market value, which considered the effects of unrealized gains and losses in contract value resulting from changes in crediting
rates. Upon adoption of SOP 03-1, the Company reclassified this liability from Separate account liabilities to Policyholders account balances and reduced it by $117.1 million to reflect accreted value, which excludes
the effect of unrealized gains and losses in contract value resulting from changes in crediting rates. However, in valuing the valuation of business acquired (VOBA) established at the date of acquisition, we considered the effect of
unrealized gains and losses in contract value associated with annuities containing the MVA feature on future cash flows. As a result, the reduction in the liability for the MVA feature resulted in a net decrease in VOBA of $128.9 million, and lower
future amortization. See Note 6 for further details.

Reclassifications

Certain amounts in the prior years have been reclassified to conform to the current year presentation.



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|3. | INVESTMENTS
|-- | -----------

Fixed Maturities and Equity Securities:

The following tables provide additional information relating to fixed maturities and equity securities (excluding investments classified as
trading) as of December 31:



|                                                                                      |                |      |                      |  |                       |        |            |   |       |  |   |          
|------------------------------------------------------------------------------------- | -------------- | ---- | -------------------- |  | --------------------- | ------ | ---------- | - | ----- |  | - | ---------
|                                                                                      |                | 2006
|                                                                                      | Amortizedcost  |      | Grossunrealizedgains |  | Grossunrealizedlosses |        | Fair value
|                                                                                      | (in thousands)
|Fixed maturities available for sale                                                   |                |      |                      |  |                       |        |            |   |       |  |   |          
|Bonds:                                                                                |                |      |                      |  |                       |        |            |   |       |  |   |          
|                                                                                      |                |      |                      | 
|U.S. Treasury securities and obligations of U.S. government corporations and agencies |                | $    | 20,109               |  | $                     | 337    |            | $ | 11    |  | $ | 20,434   
|                                                                                      |                |      |                      | 
|Obligations of U.S. states, and their political subdivisions                          |                |      | 1,973                |  |                       | 419    |            |   | 1     |  |   | 2,392    
|                                                                                      |                |      |                      | 
|Foreign government bonds                                                              |                |      | 10,821               |  |                       | 836    |            |   | 0     |  |   | 11,656   
|                                                                                      |                |      |                      | 
|Mortgage-backed securities                                                            |                |      | 156,327              |  |                       | 2,242  |            |   | 143   |  |   | 158,426  
|                                                                                      |                |      |                      | 
|Public utilities                                                                      |                |      | 114,662              |  |                       | 1,656  |            |   | 574   |  |   | 115,74 4 
|                                                                                      |                |      |                      | 
|All other corporate bonds                                                             |                |      | 857,443              |  |                       | 12,083 |            |   | 3,825 |  |   | 865,701  
|                                                                                      |                |      |                      |  |                       |        |            |   |       |  |   |          
|Total fixed maturities available for sale                                             |                | $    | 1,161,335            |  | $                     | 17,573 |            | $ | 4,554 |  | $ | 1,174,353
|                                                                                      |                |      |                      |  |                       |        |            |   |       |  |   |          
|Equity securities available for sale                                                  |                | $    | 18,487               |  | $                     | 9      |            | $ | 152   |  | $ | 18,344   
|                                                                                      |                |      |                      |  |                       |        |            |   |       |  |   |          



|                                                                                      |                |      |                      |  |                       |        |            |   |        |  |   |          
|------------------------------------------------------------------------------------- | -------------- | ---- | -------------------- |  | --------------------- | ------ | ---------- | - | ------ |  | - | ---------
|                                                                                      |                | 2005
|                                                                                      | Amortizedcost  |      | Grossunrealizedgains |  | Grossunrealizedlosses |        | Fair value
|                                                                                      | (in thousands)
|Fixed maturities available for sale                                                   |                |      |                      |  |                       |        |            |   |        |  |   |          
|Bonds:                                                                                |                |      |                      |  |                       |        |            |   |        |  |   |          
|U.S. Treasury securities and obligations of U.S. government corporations and agencies |                | $    | 61,392               |  | $                     | 301    |            | $ | 73     |  | $ | 61,620   
|                                                                                      |                |      |                      | 
|Foreign government bonds                                                              |                |      | 12,393               |  |                       | 898    |            |   |       |  |   | 13,291   
|                                                                                      |                |      |                      | 
|States, municipalities and political subdivisions                                     |                |      | 90,728               |  |                       | 282    |            |   | 299    |  |   | 90,711   
|                                                                                      |                |      |                      | 
|Mortgage-backed securities                                                            |                |      | 189,286              |  |                       | 111    |            |   | 2,771  |  |   | 186,626  
|                                                                                      |                |      |                      | 
|Public utilities                                                                      |                |      | 146,037              |  |                       | 1,228  |            |   | 983    |  |   | 146,282  
|                                                                                      |                |      |                      | 
|All other corporate bonds                                                             |                |      | 1,059,941            |  |                       | 8,166  |            |   | 12,068 |  |   | 1,056,039
|                                                                                      |                |      |                      |  |                       |        |            |   |        |  |   |          
|Total fixed maturities available for sale                                             |                | $    | 1,559,777            |  | $                     | 10,986 |            | $ | 16,194 |  | $ | 1,554,569
|                                                                                      |                |      |                      |  |                       |        |            |   |        |  |   |          
|Equity securities available for sale                                                  |                | $    | 19,238               |  | $                     | 5      |            | $ | 145    |  | $ | 19,098   
|                                                                                      |                |      |                      |  |                       |        |            |   |        |  |   |          



F-14



---

The amortized cost and fair value of fixed maturities, by contractual maturities at December 31, 2006 is shown
below:



|                                       |                |                    |            |  |   |          
|-------------------------------------- | -------------- | ------------------ | ---------- |  | - | ---------
|                                       |                | Available for sale
|                                       | AmortizedCost  |                    | Fair value
|                                       | (in thousands)
|Due in one year or less                |                | $                  | 49,438     |  | $ | 49,429   
|                                       |                |                   
|Due after one year through five years  |                |                    | 412,516    |  |   | 416,025  
|                                       |                |                   
|Due after five years through ten years |                |                    | 273,227    |  |   | 276,043  
|                                       |                |                   
|Due after ten years                    |                |                    | 269,827    |  |   | 274,430  
|                                       |                |                   
|Mortgage-backed securities             |                |                    | 156,327    |  |   | 158,426  
|                                       |                |                    |            |  |   |          
|Total                                  |                | $                  | 1,161,335  |  | $ | 1,174,353
|                                       |                |                    |            |  |   |          

Actual maturities may differ from contractual maturities because issuers have the right to call or prepay
obligations.

The following table depicts the sources of fixed maturity proceeds and related gross investment gains (losses), as well as losses on
impairments of both fixed maturities and equity securities:



|                                                              |                |      |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------- | -------------- | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                              |                | 2006 |           |   | 2005 |   |           | 2004 | 
|                                                              | (in thousands) |     
|Fixed maturities, available for sale:                         |                |      |           |   |      |   |           |      |  |   |           |  
|Proceeds from sales                                           |                | $    | 3,573,598 |   |      | $ | 2,155,754 |      |  | $ | 2,529,073 |  
|Proceeds from maturities/repayments                           |                |      | 20,350    |   |      |   | 49,472    |      |  |   | 51,052    |  
|Gross investment gains from sales, prepayments and maturities |                |      | 5,965     |   |      |   | 5,966     |      |  |   | 9,003     |  
|Gross investment losses from sales and maturities             |                |      | (32,082   | ) |      |   | (17,397   | )    |  |   | (18,074   | )

Commercial Loans

The following table provides the breakdown of the gross carrying values of commercial loans by property type as of December 31:



|                                  |  |                |        |      |   |      
|--------------------------------- |  | -------------- | ------ | ---- | - | -----
|                                  |  | 2006           |        | 2005
|                                  |  | (in thousands)
|Commercial loans by property type |  |                |        |      |   |      
|Office buildings                  |  | $              | 6,099  |      | $ |     
|Retail stores                     |  |                | 3,918  |      |   |     
|Apartment complexes               |  |                | 10,692 |      |   |     
|Agricultural properties           |  |                | 8,205  |      |   | 6,000
|Other                             |  |                | 11,932 |      |   |     
|                                  |  |                |        |      |   |      
|Total Commercial Loans            |  | $              | 40,846 |      | $ | 6,000
|                                  |  |                |        |      |   |      

The following table sets forth the breakdown of our commercial loan portfolio by contractual maturity as of
December 31, 2006:



|                       |                |      |       
|---------------------- | -------------- | ---- | ------
|                       |                | 2006
|                       | (in thousands)
|Maturing in 2007       |                | $    |      
|Maturing in 2008       |                |      |      
|Maturing in 2009       |                |      |      
|Maturing in 2010       |                |      |      
|Maturing in 2011       |                |      | 30,421
|Maturing in 2012       |                |      |      
|Maturing in 2013       |                |      | 5,510 
|Maturing in 2014       |                |      |      
|Maturing in 2015       |                |      |      
|Maturing in 2016       |                |      | 4,915 
|                       |                |      |       
|Total Commercial Loans |                | $    | 40,846
|                       |                |      |       



F-15



---

Other Long-Term Investments

The following table provides information relating to other long-term investments as of December 31:



|                                          |                |      |      
|----------------------------------------- | -------------- | ---- | -----
|                                          |                | 2006
|                                          | (in thousands)
|Joint ventures and limited partnerships   |                | $    | 6,063
|Companys investment in Separate accounts |                |      |     
|Derivatives                               |                |      | 42   
|Equity securities                         |                |      |     
|                                          |                |      |      
|Total other long- term investments        |                | $    | 6,105
|                                          |                |      |      

Investment Income and Investment Gains and Losses

Net investment incomearose from the following sources for 2006, 2005, and 2004:



|                                            |                |                            |        |   |                            |   |         |                            |  |   |        |  
|------------------------------------------- | -------------- | -------------------------- | ------ | - | -------------------------- | - | ------- | -------------------------- |  | - | ------ | -
|                                            |                | Year endedDecember 31,2006 |        |   | Year endedDecember 31,2005 |   |         | Year endedDecember 31,2004 | 
|                                            | (in thousands) |                           
|Fixed maturities  available for sale       |                | $                          | 82,976 |   |                            | $ | 87,920  |                            |  | $ | 89,930 |  
|Equity securities  available for sale      |                |                            | 1,254  |   |                            |   | 752     |                            |  |   | 703    |  
|Policy loans                                |                |                            | 702    |   |                            |   | 627     |                            |  |   | 547    |  
|Short-term investments and cash equivalents |                |                            | 9,937  |   |                            |   | 10,495  |                            |  |   | 4,903  |  
|Oher                                        |                |                            | 2,504  |   |                            |   | 2,316   |                            |  |   | (3     | )
|                                            |                |                            |        |   |                            |   |         |                            |  |   |        |  
|Gross investment income (loss)              |                |                            | 97,373 |   |                            |   | 102,110 |                            |  |   | 96,080 |  
|                                            |                |                            |        |   |                            |   |         |                            |  |   |        |  
|Less: investment expenses                   |                |                            | (9,082 | ) |                            |   | (9,229  | )                          |  |   | (5,621 | )
|                                            |                |                            |        |   |                            |   |         |                            |  |   |        |  
|Net investment income (loss)                |                | $                          | 88,291 |   |                            | $ | 92,881  |                            |  | $ | 90,459 |  
|                                            |                |                            |        |   |                            |   |         |                            |  |   |        |  



F-16



---

Realized investment (losses) gains, net including charges for other than temporary reductions in value, for
year ended December 31, 2006, year ended December 31, 2005, and year ended December 31, 2004 were from the following sources:



|                                        |                |                              |         |   |                            |   |         |                             |  |   |         |  
|--------------------------------------- | -------------- | ---------------------------- | ------- | - | -------------------------- | - | ------- | --------------------------- |  | - | ------- | -
|                                        |                | Year ended December 31, 2006 |         |   | Year endedDecember 31,2005 |   |         | Year ended December 31,2004 | 
|                                        | (in thousands) |                             
|Fixed maturities                        |                | $                            | (26,155 | ) |                            | $ | (11,431 | )                           |  | $ | (9,071  | )
|Equity securities  available for sale  |                |                              | (858    | ) |                            |   |        |                             |  |   |        |  
|Derivatives                             |                |                              | (21,022 | ) |                            |   | (20,690 | )                           |  |   | (11,394 | )
|                                        |                |                              |         |   |                            |   |         |                             |  |   |         |  
|Realized investment (losses) gains, net |                | $                            | (48,035 | ) |                            | $ | (32,121 | )                           |  | $ | (20,465 | )
|                                        |                |                              |         |   |                            |   |         |                             |  |   |         |  

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains (losses) on securities available for sale are included in the Statements of Financial Position as a component of Accumulated other comprehensive (loss) income. Changes in
these amounts include reclassification adjustments to exclude from Other comprehensive (loss) income, those items that are included as part of Net income for a period that also had been part of Other comprehensive
(loss) income in earlier periods. The amounts for the years ended December 31, net of tax, are as follows:



|                                                                                                                           |  |                                            |         |   |                                                                |   |        |                                      |  |   |                                                                                              |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | - | -------------------------------------------------------------- | - | ------ | ------------------------------------ |  | - | -------------------------------------------------------------------------------------------- | - |  | - | ------- | -
|                                                                                                                           |  | Net UnrealizedGains (Losses)on Investments |         |   | DeferredPolicyAcquisitionCosts andValuation ofBusinessAcquired |   |        | DeferredIncome Tax(Liability)Benefit |  |   | Accumulated OtherComprehensiveIncome
(Loss)Related To NetUnrealizedInvestment Gains (Losses) |  
|Balance, December 31, 2003                                                                                                 |  | $                                          | (2,474  | ) |                                                                | $ |       |                                      |  | $ | 875                                                                                          |   |  | $ | (1,599  | )
|Net investment gains (losses) on investments arising during the period                                                     |  |                                            | 21,109  |   |                                                                |   |        |                                      |  |   | (13,006                                                                                      | ) |  |   | 8,103   |  
|Cumulative effect of change in accounting principle                                                                        |  |                                            | 6,615   |   |                                                                |   | (1,319 | )                                    |  |   |                                                                                             |   |  |   | 5,296   |  
|Reclassification adjustment for losses (gains) included in net income                                                      |  |                                            | 9,071   |   |                                                                |   |       |                                      |  |   |                                                                                             |   |  |   | 9,071   |  
|Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and valuation of business acquired |  |                                            |        |   |                                                                |   | (1,000 | )                                    |  |   | 819                                                                                          |   |  |   | (181    | )
|                                                                                                                           |  |                                            |         |   |                                                                |   |        |                                      |  |   |                                                                                              |   |  |   |         |  
|Balance, December 31, 2004                                                                                                 |  |                                            | 34,321  |   |                                                                |   | (2,319 | )                                    |  |   | (11,312                                                                                      | ) |  |   | 20,690  |  
|Net investment gains (losses) on investments arising during the period                                                     |  |                                            | (51,100 | ) |                                                                |   |       |                                      |  |   |                                                                                             |   |  |   | (51,100 | )
|Reclassification adjustment for losses (gains) included in net income                                                      |  |                                            | 11,431  |   |                                                                |   |       |                                      |  |   |                                                                                             |   |  |   | 11,431  |  
|Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and valuation of business acquired |  |                                            |        |   |                                                                |   | 3,221  |                                      |  |   | 12,886                                                                                       |   |  |   | 16,107  |  
|                                                                                                                           |  |                                            |         |   |                                                                |   |        |                                      |  |   |                                                                                              |   |  |   |         |  
|Balance, December 31, 2005                                                                                                 |  |                                            | (5,348  | ) |                                                                |   | 902    |                                      |  |   | 1,574                                                                                        |   |  |   | (2,872  | )
|Net investment gains (losses) on investments arising during the period                                                     |  |                                            | (8,789  | ) |                                                                |   |       |                                      |  |   |                                                                                              |   |  |   | (8,789  | )
|Reclassification adjustment for losses (gains) included in net income                                                      |  |                                            | 27,013  |   |                                                                |   |       |                                      |  |   |                                                                                              |   |  |   | 27,013  |  
|Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and valuation of business acquired |  |                                            |        |   |                                                                |   | (5,453 | )                                    |  |   | (4,522                                                                                       | ) |  |   | (9,975  | )
|                                                                                                                           |  |                                            |         |   |                                                                |   |        |                                      |  |   |                                                                                              |   |  |   |         |  
|Balance, December 31, 2006                                                                                                 |  | $                                          | 12,876  |   |                                                                | $ | (4,551 | )                                    |  | $ | (2,948                                                                                       | ) |  | $ | 5,377   |  
|                                                                                                                           |  |                                            |         |   |                                                                |   |        |                                      |  |   |                                                                                              |   |  |   |         |  



F-17



---

The table below presents unrealized gains (losses) on investments by asset class at December 31,



|                                         |                |      |        |   |      |   |        |      |  |   |       
|---------------------------------------- | -------------- | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------
|                                         |                | 2006 |        |   | 2005 |   |        | 2004
|                                         | (in thousands)
|Fixed maturities                         |                | $    | 13,018 |   |      | $ | (5,208 | )    |  | $ | 34,027
|Equity securities, available for sale    |                |      | (142   | ) |      |   | (140   | )    |  |   | 294   
|                                         |                |      |        |   |      |   |        |      |  |   |       
|Unrealized gains (losses) on investments |                | $    | 12,876 |   |      | $ | (5,348 | )    |  | $ | 34,321
|                                         |                |      |        |   |      |   |        |      |  |   |       

Duration of Gross Unrealized Loss Positions for Fixed Maturities and Equity Securities

The following table shows the fair value and gross unrealized losses aggregated by investment category and length of time that individual fixed maturities and equity
securities have been in a continuous unrealized loss position, as of December 31, 2006 and 2005:



|                                                                                      |                |                         |                  |                       |            |            |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|------------------------------------------------------------------------------------- | -------------- | ----------------------- | ---------------- | --------------------- | ---------- | ---------- | ---------------- | ---------------- | ---------- | ---------- | ---------------- | ---------------- |  | - | ------- |  | - | ------
|                                                                                      |                | Less than twelve months |                  | Twelve months or more |            | Total     
|                                                                                      |                | Fair Value              |                  | UnrealizedLosses      |            | Fair Value |                  | UnrealizedLosses |            | Fair Value |                  | UnrealizedLosses
|                                                                                      |                | (in thousands)         
|2006                                                                                  |                |                         |                  |                       |            |            |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|U.S. Treasury securities and obligations of U.S. government corporations and agencies |                | $                       | 3,784            |                       | $          | 4          |                  | $                | 637        |            | $                | 7                |  | $ | 4,421   |  | $ | 11    
|State, municipalities and political subdivisions                                      |                |                         | 51               |                       |            | 1          |                  |                  |           |            |                  |                 |  |   | 51      |  |   | 1     
|Corporate securities                                                                  |                |                         | 90,891           |                       |            | 1,013      |                  |                  | 96,146     |            |                  | 3,387            |  |   | 187,037 |  |   | 4,400 
|Mortgage-backed securities                                                            |                |                         |                 |                       |            |           |                  |                  | 4,112      |            |                  | 143              |  |   | 4,112   |  |   | 143   
|                                                                                      |                |                         |                  |                       |            |            |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|Total fixed maturities, available for sale                                            |                | $                       | 94,726           |                       | $          | 1,018      |                  | $                | 100,895    |            | $                | 3,537            |  | $ | 195,621 |  | $ | 4,555 
|                                                                                      |                |                         |                  |                       |            |            |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|Total equity securities, available for sale                                           |                | $                       | 6,437            |                       | $          | 3          |                  | $                | 11,898     |            | $                | 149              |  | $ | 18,335  |  | $ | 152   
|                                                                                      |                |                         |                  |                       |            |            |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|                                                                                      |                |                         |                 
|                                                                                      |                | Less than twelve months |                  | Twelve months or more |            | Total     
|                                                                                      | Fair Value     |                         | UnrealizedLosses |                       | Fair Value |            | UnrealizedLosses |                  | Fair Value |            | UnrealizedLosses
|                                                                                      | (in thousands)
|2005                                                                                  |                |                         |                  |                       |            |            |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|U.S. Treasury securities and obligations of U.S. government corporations and agencies |                | $                       | 28,787           |                       | $          | 73         |                  | $                |           |            | $                |                 |  | $ | 28,787  |  | $ | 73    
|State, municipalities and political subdivisions                                      |                |                         | 27,353           |                       |            | 29         |                  |                  | 8,866      |            |                  | 270              |  |   | 36,219  |  |   | 299   
|Corporate securities                                                                  |                |                         | 682,823          |                       |            | 9,051      |                  |                  | 72,605     |            |                  | 4,000            |  |   | 755,428 |  |   | 13,051
|Mortgage-backed securities                                                            |                |                         | 163,451          |                       |            | 2,665      |                  |                  | 3,894      |            |                  | 106              |  |   | 167,345 |  |   | 2,771 
|                                                                                      |                |                         |                  |                       |            |            |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|Total fixed maturities                                                                |                | $                       | 902,414          |                       | $          | 11,818     |                  | $                | 85,365     |            | $                | 4,376            |  | $ | 987,779 |  | $ | 16,194
|                                                                                      |                |                         |                  |                       |            |            |                  |                  |            |            |                  |                  |  |   |         |  |   |       
|Total equity securities, available for sale                                           |                | $                       | 6,682            |                       | $          | 145        |                  | $                |           |            | $                |                 |  | $ | 6,682   |  | $ | 145   
|                                                                                      |                |                         |                  |                       |            |            |                  |                  |            |            |                  |                  |  |   |         |  |   |       

As of December 31, 2006, unrealized gains (losses) on fixed maturities and equity securities was comprised of
$4.7 million of gross unrealized losses and $17.6 million of gross unrealized gains. Gross unrealized losses includes $3.5 million of gross losses that have been in such a position for twelve months or greater. Writedowns for impairments, which were
deemed to be other than temporary were $896 thousand.

As of December 31, 2005, unrealized gains (losses) on fixed maturities and equity securities
was comprised of $16.3 million of gross unrealized losses and $11.1 million of gross unrealized gains. Gross unrealized losses includes $4.4 million of gross losses that have been in such a position for twelve months or greater. Writedowns for
impairments, which were deemed to be other than temporary were $560 thousand.



F-18



---

Securities Pledged and Special Deposits

The Company pledges investment securities it owns to unaffiliated parties through securities sold under agreements to repurchase transactions. At December 31, 2006 there were no fixed maturities available for
sale pledged to third parties. At December 31, 2005, the carrying value of fixed maturities available for sale pledged to third parties as reported in the Statements of Financial Position was $7.1 million.

Fixed maturities of $4.8 million and $4.6 million at December 31, 2006 and 2005, respectively, were on deposit with governmental authorities or trustees as required
by certain insurance laws.



|4. | DEFERRED POLICY ACQUISITION COSTS
|-- | ---------------------------------

The balances of and changes in
DAC as of and for the year ended December 31, 2006, year ended December 31, 2005, and year ended December 31, 2004, are as follows:



|                                                        |  |      |          |   |      |   |         |      |  |   |         |  
|------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                        |  | 2006 |          |   | 2005 |   |         | 2004 | 
|Balance, beginning of year                              |  | $    | 528,899  |   |      | $ | 300,901 |      |  | $ | 122,572 |  
|Capitalization of commissions, sales and issue expenses |  |      | 343,907  |   |      |   | 278,823 |      |  |   | 207,018 |  
|Amortization                                            |  |      | (104,438 | ) |      |   | (51,206 | )    |  |   | (29,083 | )
|Changes in unrealized investment gains and losses       |  |      | (2,091   | ) |      |   | 381     |      |  |   |        |  
|Impact of adoption of SOP 03-1                          |  |      |         |   |      |   |        |      |  |   | 394     |  
|                                                        |  |      |          |   |      |   |         |      |  |   |         |  
|Balance, end of year                                    |  | $    | 766,277  |   |      | $ | 528,899 |      |  | $ | 300,901 |  
|                                                        |  |      |          |   |      |   |         |      |  |   |         |  



F-19



---

|5. | VALUATION OF BUSINESS ACQUIRED
|-- | ------------------------------

Details of VOBA and related
interest and gross amortization for the year ended December 31, 2006, year ended December 31, 2005, and year ended December 31, 2004 is as follows (in thousands):



|                                  |  |      |         |   |      |   |         |      |  |   |          |  
|--------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                  |  | 2006 |         |   | 2005 |   |         | 2004 | 
|Balance, beginning of period      |  | $    | 196,023 |   |      | $ | 234,167 |      |  | $ | 402,169  |  
|Amortization(1)                   |  |      | (50,154 | ) |      |   | (53,400 | )    |  |   | (37,921  | )
|Interest(2)                       |  |      | 10,143  |   |      |   | 12,416  |      |  |   | 14,866   |  
|Change in unrealized gains/losses |  |      | (3,362  | ) |      |   | 2,840   |      |  |   | (1,000   | )
|Impact of adoption of SOP 03-1    |  |      |        |   |      |   |        |      |  |   | (130,211 | )
|Opening balance adjustments       |  |      |        |   |      |   |        |      |  |   | (13,736  | )
|                                  |  |      |         |   |      |   |         |      |  |   |          |  
|Balance, end of period            |  | $    | 152,650 |   |      | $ | 196,023 |      |  | $ | 234,167  |  
|                                  |  |      |         |   |      |   |         |      |  |   |          |  

---

|(1) | The average expected life of VOBA was approximately 10 years from the date of acquisition.
|--- | ------------------------------------------------------------------------------------------

|(2) | The interest accrual rate was 5.96% for the VOBA related to the businesses acquired.
|--- | ------------------------------------------------------------------------------------

Certain contracts issued by the Company include a market value adjustment (MVA) feature that requires the Company to pay to the contractholder upon surrender the accreted value of the fund as well as a
market value adjustment based on the crediting rates on the contract surrendered compared to crediting rates on newly issued contracts or index rate at time of surrender, if applicable. As of December 31, 2003, this liability was reflected at
market value, which considers the effects of unrealized gains and losses in contract value resulting from changes in crediting rates. Upon the adoption of SOP 03-1 on January 1, 2004, the Company changed its accounting for these contracts as
described previously under New Accounting Pronouncements. The Companys net VOBA balance decreased $130 million upon the adoption of SOP 03-1, primarily due to the change in the liability for the MVA feature since the expected cash
flows on this business in force at the time of acquisition that corresponded to obligations covered by SOP 03-1 were considered in establishing the initial VOBA.

Estimated future net amortization of VOBA as of December 31, 2006 is as follows (in thousands):



|                    |  |   |        
|------------------- |  | - | -------
|2007                |  | $ | 33,920 
|2008                |  |   | 26,528 
|2009                |  |   | 20,404 
|2010                |  |   | 15,123 
|2011                |  |   | 11,714 
|2012 and thereafter |  |   | 44,961 
|                    |  |   |        
|Total               |  | $ | 152,650
|                    |  |   |        



|6. | CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS
|-- | ----------------------------------------------

The Company issues
traditional variable annuity contracts through its separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder. The Company also issues variable annuity
contracts with separate account options where the Company contractually guarantees to the contract holder a return of no less than (1) total deposits made to the contract less any partial withdrawals, (2) total deposits made to the
contract less any partial withdrawals plus a minimum return (minimum return), or (3) the highest contract value on a specified date minus any withdrawals (contract value). These guarantees include benefits that are
payable in the event of death, annuitization or at specified dates during the accumulation period including income and withdrawal benefits payable during specified periods.

The Company also issues annuity contracts with market value adjusted investment options (MVAs), which provide for a return of principal plus a fixed rate of return if held to maturity, or, alternatively, a
market adjusted value if surrendered prior to maturity. The market value adjustment may result in a gain or loss to the Company, depending on crediting rates or an indexed rate at surrender, as applicable.

The assets supporting the variable portion of both traditional variable annuities and certain variable contracts with guarantees are carried at fair value and reported
as Separate account assets with an equivalent amount reported as Separate account liabilities. Amounts assessed against the contract holders for mortality, administration, and other services are included within revenue in
Policy charges and fee income and changes in liabilities for minimum guarantees are generally included in Policyholders benefits.

In 2006 there were no gains or losses on transfers of assets from the general account to a separate account.

For those guarantees of benefits
that are payable in the event of death, the net amount at risk is generally defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. For guarantees of benefits



20



---

that are payable at annuitization, the net amount at risk is generally defined as the present value of the minimum guaranteed annuity payments available to
the contract holder determined in accordance with the terms of the contract in excess of the current account balance. For guarantees of accumulation balances, the net amount at risk is generally defined as the guaranteed minimum accumulation balance
minus the current account balance. The Companys contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed may not be mutually exclusive. As of December 31, 2006 and 2005, the
Company had the following guarantees associated with its contracts, by product and guarantee type:



|                                                      |                      |                   |                                  |                   |                      |            |                                  |   |            |  |   |           
|----------------------------------------------------- | -------------------- | ----------------- | -------------------------------- | ----------------- | -------------------- | ---------- | -------------------------------- | - | ---------- |  | - | ----------
|                                                      |                      | December 31, 2006 |                                  | December 31, 2005
|                                                      | In the Eventof Death |                   | AtAnnuitization/ Accumulation(1) |                   | In the Event ofDeath |            | AtAnnuitization/ Accumulation(1)
|                                                      |                      | (in millions)    
|Variable Annuity Contracts                            |                      |                   |                                  |                   |                      |            |                                  |   |            |  |   |           
|                                                      |                      |                   |                                  |                  
|Return of Net Deposits                                |                      |                   |                                  |                   |                      |            |                                  |   |            |  |   |           
|Account value                                         |                      | $                 | 29,966.2                         |                   |                      | N/A        |                                  | $ | 25,582.1   |  |   | N/A       
|Net amount at risk                                    |                      | $                 | 1,487.6                          |                   |                      | N/A        |                                  | $ | 1,970.0    |  |   | N/A       
|Average attained age of contractholders               |                      |                   | 60.4 years                       |                   |                      | N/A        |                                  |   | 60.1 years |  |   | N/A       
|                                                      |                      |                   |                                  |                  
|Anniversary contract value or minimum return          |                      |                   |                                  |                   |                      |            |                                  |   |            |  |   |           
|Account value                                         |                      | $                 | 6,134.5                          |                   | $                    | 16,783.0   |                                  | $ | 4,881.9    |  | $ | 10,733.0  
|Net amount at risk                                    |                      | $                 | 502.6                            |                   | $                    | 3.2        |                                  | $ | 602.0      |  | $ | 3.5       
|Average attained age of contractholders               |                      |                   | 62.2 years                       |                   |                      | 58.7 years |                                  |   | 62.1 years |  |   | 58.3 years
|Average period remaining until expected annuitization |                      |                   | N/A                              |                   |                      | 5.6 years  |                                  |   | N/A        |  |   | 6.4 years 

---

|(1) | Includes income and withdrawal benefits described herein
|--- | --------------------------------------------------------



|                                |                 |                   |                |                   |                  |       |               |   |         |  |   |        
|------------------------------- | --------------- | ----------------- | -------------- | ----------------- | ---------------- | ----- | ------------- | - | ------- |  | - | -------
|                                |                 | December 31, 2006 |                | December 31, 2005
|                                | UnadjustedValue |                   | Adjusted Value |                   | Unadjusted Value |       | AdjustedValue
|Market value adjusted annuities |                 |                   |                |                   |                  |       |               |   |         |  |   |        
|Account value                   |                 | $                 | 863.8          |                   | $                | 871.8 |               | $ | 1,105.2 |  | $ | 1,115.0

Account balances of variable annuity contracts with guarantees were invested in separate account investment
options as follows:



|                   |  |                   |          |                   |   |         
|------------------ |  | ----------------- | -------- | ----------------- | - | --------
|                   |  | December 31, 2006 |          | December 31, 2005
|                   |  | (in millions)     |          | (in millions)    
|Equity funds       |  | $                 | 18,154.9 |                   | $ | 19,223.3
|                   |  |                  
|Bond funds         |  |                   | 4,470.5  |                   |   | 5,058.3 
|                   |  |                  
|Balanced funds     |  |                   | 8,733.5  |                   |   | 1,253.2 
|                   |  |                  
|Money market funds |  |                   | 1,630.5  |                   |   | 1,642.2 
|                   |  |                  
|Specialty funds    |  |                   | 2,247.5  |                   |   | 2,181.8 
|                   |  |                   |          |                   |   |         
|                   |  |                  
|Total              |  | $                 | 35,236.9 |                   | $ | 29,358.8
|                   |  |                   |          |                   |   |         

In addition to the above mentioned amounts invested in separate account investment options, $863.8 million and
$1,105.2 million of account balances of variable annuity contracts with guarantees, inclusive of contracts with MVA features, were invested in general account investment options as of December 31, 2006 and 2005, respectively.



F-21



---

Liabilities For Guarantee Benefits

The table below summarizes the changes in general account liabilities for guarantees on variable contracts. The liabilities for GMDB and guaranteed minimum income benefits (GMIB) are included in
Future policy benefits and the related changes in the liabilities are included in Policyholders benefits. Guaranteed minimum withdrawal benefits (GMWB), guaranteed minimum income and withdrawals benefits
(GMIWB), and guaranteed return option (GRO) features are considered to be derivatives under SFAS No. 133, and changes in the fair value of the derivative are recognized through Realized investment gains (losses),
net. At December 31, 2006 and 2005, the liabilities recorded related to these derivatives were reinsured entirely to an affiliate. See Note 7 and Note 12 for further details.



|                                |               |      |       |   |           |   |      |       |  |   |       |   |        |   |     |  |   |       |  
|------------------------------- | ------------- | ---- | ----- | - | --------- | - | ---- | ----- |  | - | ----- | - | ------ | - | --- |  | - | ----- | -
|                                |               | GMDB |       |   | GMWB/ GRO |   |      | GMIWB |  |   | GMIB  |   | Totals |  
|                                | (in millions) |     
|Balance as of January 1, 2004   |               | $    | 8.6   |   |           | $ |     |       |  |   |      |   |        | $ |    |  | $ | 8.6   |  
|                                |               |      |       |   |           |   |      |       |  |   |       |   |        |   |     |  |   |       |  
|Incurred guarantee benefits (1) |               |      | 62.5  |   |           |   |     |       |  |   |      |   |        |   | 0.7 |  |   | 63.2  |  
|Paid guarantee benefits         |               |      | (44.7 | ) |           |   |     |       |  |   |      |   |        |   |    |  |   | (44.7 | )
|                                |               |      |       |   |           |   |      |       |  |   |       |   |        |   |     |  |   |       |  
|Balance as of December 31, 2004 |               |      | 26.4  |   |           |   |     |       |  |   |      |   |        |   | 0.7 |  |   | 27.1  |  
|                                |               |      |       |   |           |   |      |       |  |   |       |   |        |   |     |  |   |       |  
|Incurred guarantee benefits (1) |               |      | 35.5  |   |           |   | 2.5  |       |  |   | (3.0  | ) |        |   | 1.7 |  |   | 36.7  |  
|Paid guarantee benefits         |               |      | (35.8 | ) |           |   |     |       |  |   |      |   |        |   |    |  |   | (35.8 | )
|                                |               |      |       |   |           |   |      |       |  |   |       |   |        |   |     |  |   |       |  
|Balance as of December 31, 2005 |               |      | 26.1  |   |           |   | 2.5  |       |  |   | (3.0  | ) |        |   | 2.4 |  |   | 28.0  |  
|                                |               |      |       |   |           |   |      |       |  |   |       |   |        |   |     |  |   |       |  
|Incurred guarantee benefits (1) |               |      | 49.5  |   |           |   | (3.6 | )     |  |   | (29.0 | ) |        |   | 1.9 |  |   | 18.8  |  
|Paid guarantee benefits         |               |      | (31.1 | ) |           |   |     |       |  |   |      |   |        |   |    |  |   | (31.1 | )
|                                |               |      |       |   |           |   |      |       |  |   |       |   |        |   |     |  |   |       |  
|Balance as of December 31, 2006 |               | $    | 44.5  |   |           | $ | (1.1 | )     |  | $ | (32.0 | ) |        | $ | 4.3 |  | $ | 15.7  |  
|                                |               |      |       |   |           |   |      |       |  |   |       |   |        |   |     |  |   |       |  

---

|(1) | Incurred guarantee benefits include the portion of assessments established as additions to reserve as well as changes in estimate effecting the reserves. Also includes changes in
the fair value of features considered to be derivatives.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The GMDB liability is determined each period end by estimating the accumulated
value of a portion of the total assessments to date less the accumulated value of the death benefits in excess of the account balance. The portion of assessments used is chosen such that, at issue or at the acquisition date for contracts in-force at
the time of the acquisition, the present value of expected death benefits in excess of the projected account balance and the portion of the present value of total expected assessments over the lifetime of the contracts are equal. The GMIB liability
was determined at December 31, 2006 and 2005 by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the projected income benefits in excess of the account balance. The Company regularly
evaluates the estimates used and adjusts the GMDB and GMIB liability balances, with a related charge or credit to earnings, if actual experience or other evidence suggests that earlier assumptions should be revised.

The present value of death benefits in excess of the projected account balance and the present value of total expected assessments for GMDBs were determined over a
reasonable range of stochastically generated scenarios. For variable annuities, 5,000 scenarios were stochastically generated and, from these, 200 scenarios were selected using a sampling technique.

The GRO features predominantly provide for a guaranteed return of initial account value over a contractually defined period equal to seven years. One other variation of
the GRO feature has an additional optional benefit that will provide for a base guarantee of account value seven years after the benefit is effective and every anniversary date thereafter and, if elected, an enhanced guarantee equal to the account
value seven years after the effective date of any step-up and every anniversary date thereafter. All guaranteed amounts include any additional purchase payments and credits less withdrawals. Significant or prolonged declines in the value
of any variable investment options a customer may choose as part of their GRO benefit may result in all or a substantial portion of their account values being allocated to fixed investment allocations, in conjunction with the Companys
automatic rebalancing program associated with this feature.

The GMWB feature guarantees the contractholders ability to withdraw amounts equal to an
initial principal value (the GMWB Protected Value), regardless of the impact of market performance on the contractholders account value. The GMWB Protected Value is determined as of the date that the contractholder makes his/her
first withdrawal under the annuity following



F-22



---

election of GMWB. The initial GMWB Protected Value is equal to the greater of (a) the account value on the date that GMWB is elected, plus any
additional purchase payments (and credits, for bonus annuities) before the date of the first withdrawal or (b) the account value of as the date of the first withdrawal. The contractholder also has the option, after a specified period of time,
to reset the GMWB Protected Value to the then-current account value, if greater.

The GMIWB features predominantly present a benefit that provides a
contractholder with two optional methods to receive guaranteed minimum payments over timea withdrawal option and an income option. The withdrawal option guarantees that, upon the election of such benefit, a
contractholder can withdraw an amount each year until the cumulative withdrawals reach a total guaranteed balance. The guaranteed remaining balance is generally equal to the protected value under the contract, which is initially established as the
greater of: (1) the account value on the date of first withdrawal; (2) cumulative premiums when withdrawals commence, less cumulative withdrawals plus a minimum return; or (3) the highest contract value on a specified date minus any
withdrawals. The income option guarantees that a contractholder can, upon the election of this benefit, withdraw a lesser amount based on the total guaranteed balance each year for the annuitants life. The withdrawal or income benefit can be
elected by the contractholder upon issuance of an appropriate deferred variable annuity contract or at any time following contract issue prior to annuitization. The Company has several variations of this GMIWB that vary, among other things, with
regard to how the Protected Withdrawal Value is calculated and how the customer may make withdrawals.

Sales Inducements

The Company defers sales inducements and amortizes them over the life of the policy using the same methodology and assumptions used to amortize deferred policy
acquisition costs. These deferred sales inducements are included in Deferred Sales Inducements in the Companys Statements of Financial Position. The Company offers a bonus whereby the policyholders initial account balance is
increased by an amount equal to a specified percentage of the customers initial deposit. Changes in deferred sales inducements are as follows:



|                                  |               |                   |  
|--------------------------------- | ------------- | ----------------- | -
|                                  |               | Sales Inducements |  
|                                  | (in millions) |                  
|Balance as of January 1, 2004 $   |               | 70.3              |  
|Capitalization                    |               | 84.1              |  
|Amortization                      |               | (10.0             | )
|                                  |               |                   |  
|Balance as of December 31, 2004   |               | 144.4             |  
|                                  |               |                   |  
|Capitalization                    |               | 99.6              |  
|Amortization                      |               | (16.6             | )
|                                  |               |                   |  
|Balance as of December 31, 2005   |               | 227.4             |  
|                                  |               |                   |  
|Capitalization                    |               | 167.0             |  
|Amortization                      |               | (34.6             | )
|                                  |               |                   |  
|Balance as of December 31, 2006 $ |               | 359.8             |  
|                                  |               |                   |  



|7. | REINSURANCE
|-- | -----------

The Company cedes insurance to other insurers in order
to fund the cash strain generated from commission costs on current sales and to limit its risk exposure. The Company utilizes both affiliated and unaffiliated reinsurance arrangements. On its unaffiliated arrangements, the Company uses primarily
modified coinsurance reinsurance arrangements whereby the reinsurer shares in the experience of a specified book of business. These reinsurance transactions result in the Company receiving from the reinsurer an upfront ceding commission on the book
of business ceded in exchange for the reinsurer receiving in the future, a percentage of the future fees generated from that book of business. Such transfer does not relieve the Company of its primary liability and, as such, failure of reinsurers to
honor their obligation could result in losses to the Company. The Company reduces this risk by evaluating the financial condition and credit worthiness of reinsurers.

On its affiliated arrangements, the Company uses automatic coinsurance reinsurance arrangements. These agreements cover all significant risks under features of the policies reinsured. The Company is not relieved of
its primary obligation to the policyholder as a result of these reinsurance transactions. These affiliated agreements include the reinsurance of the Companys GMWB, GMIWB, and GRO features. These features are considered to be derivatives under
SFAS No. 133, and changes in the fair value of the derivative are recognized through Realized investment gains (losses), net. Please see Note 13 for further details around the affiliated reinsurance agreements.

The effect of reinsurance for the year ended December 31, 2006, year ended December 31, 2005, and year ended December 31, 2004, was as
follows (in thousands):



F-23



---

|                                           |  |       |         |   |                   |   |         |                 |  |   |         |   |  |   |         |  
|------------------------------------------ |  | ----- | ------- | - | ----------------- | - | ------- | --------------- |  | - | ------- | - |  | - | ------- | -
|                                           |  | Gross |         |   | UnaffiliatedCeded |   |         | AffiliatedCeded |  |   | Net     |  
|2006                                       |  |       |         |   |                   |   |         |                 |  |   |         |   |  |   |         |  
|Policy charges and fee income              |  | $     | 586,985 |   |                   | $ | (25,690 | )               |  | $ |        |   |  | $ | 561,295 |  
|Realized investment (losses) gains, net    |  | $     | 31,053  |   |                   | $ |        |                 |  | $ | (79,088 | ) |  | $ | (48,035 | )
|Policyholders benefits                    |  | $     | 101,748 |   |                   | $ | (381    | )               |  | $ |        |   |  | $ | 101,367 |  
|General, administrative and other expenses |  | $     | 435,721 |   |                   | $ | (5,450  | )               |  | $ | (27     | ) |  | $ | 430,244 |  
|                                           |  |       |         |  
|2005                                       |  |       |         |   |                   |   |         |                 |  |   |         |   |  |   |         |  
|Policy charges and fee income              |  | $     | 484,645 |   |                   | $ | (28,970 | )               |  | $ |        |   |  | $ | 455,675 |  
|                                           |  |       |         |  
|Realized investment (losses) gains, net    |  | $     | (8,326  | ) |                   | $ |        |                 |  | $ | (23,795 | ) |  | $ | (32,121 | )
|Policyholders benefits                    |  | $     | 67,244  |   |                   | $ | (4,271  | )               |  | $ |        |   |  | $ | 62,973  |  
|General, administrative and other expenses |  | $     | 336,856 |   |                   | $ | (6,211  | )               |  | $ |        |   |  | $ | 330,645 |  
|                                           |  |       |         |  
|2004                                       |  |       |         |   |                   |   |         |                 |  |   |         |   |  |   |         |  
|Policy charges and fee income              |  | $     | 400,809 |   |                   | $ | (30,220 | )               |  | $ |        |   |  | $ | 370,589 |  
|Realized investment (losses) gains, net    |  | $     | (7,500  | ) |                   | $ |        |                 |  | $ | (12,965 | ) |  | $ | (20,465 | )
|Policyholders benefits                    |  | $     | 86,948  |   |                   | $ |        |                 |  | $ |        |   |  | $ | 86,948  |  
|General, administrative and other expenses |  | $     | 268,318 |   |                   | $ | (3,804  | )               |  | $ |        |   |  | $ | 264,514 |  



|8. | INCOME TAXES
|-- | ------------

The components of income tax expense (benefit) for
the year ended December 31, 2005, year ended December 31, 2004, eight months ended December 31, 2003, and four months ended April 30, 2003 are as follows:



|                                   |  |      |       |      |   |        |  |   |       
|---------------------------------- |  | ---- | ----- | ---- | - | ------ |  | - | ------
|                                   |  | 2006 |       | 2005 |   | 2004  
|Current tax (benefit) expense:     |  |      |       |      |   |        |  |   |       
|U.S. and foreign                   |  | $    | 67    |      | $ | 51     |  | $ | 3,936 
|State and local                    |  |      |      |      |   |       |  |   | 135   
|Total                              |  |      | 67    |      |   | 51     |  |   | 4,071 
|                                   |  |      |      
|Deferred tax expense (benefit):    |  |      |       |      |   |        |  |   |       
|U.S. and foreign                   |  |      | 5,759 |      |   | 45,202 |  |   | 31,595
|State and local                    |  |      | 389   |      |   | 789    |  |   | 1,353 
|Total                              |  |      | 6,148 |      |   | 45,991 |  |   | 32,948
|                                   |  |      |      
|Total income tax expense (benefit) |  | $    | 6,215 |      | $ | 46,042 |  | $ | 37,019



F-24



---

The income tax expense (benefit) for the years ended December 31, 2006, December 31, 2005, and
December 31, 2004, differs from the amount computed by applying the expected federal income tax rate of 35% to income from operations before income taxes for the following reasons:



|                                              |                |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------- | -------------- | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                              |                | 2006 |         |   | 2005 |   |         | 2004 | 
|                                              | (in thousands) |     
|Expected federal income tax expense (benefit) |                | $    | 70,676  |   |      | $ | 71,563  |      |  | $ | 50,400  |  
|Dividends received deduction                  |                |      | (55,567 | ) |      |   | (21,848 | )    |  |   | (14,052 | )
|Tax credits                                   |                |      | (9,464  | ) |      |   | (4,841  | )    |  |   |        |  
|State income taxes, net of federal benefit    |                |      | 253     |   |      |   | 513     |      |  |   | 435     |  
|Other                                         |                |      | 317     |   |      |   | 655     |      |  |   | 236     |  
|                                              |                |      |         |   |      |   |         |      |  |   |         |  
|Total income tax expense (benefit)            |                | $    | 6,215   |   |      | $ | 46,042  |      |  | $ | 37,019  |  
|                                              |                |      |         |   |      |   |         |      |  |   |         |  

Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table:



|                                                  |                |      |          |   |      |   |          |  
|------------------------------------------------- | -------------- | ---- | -------- | - | ---- | - | -------- | -
|                                                  |                | 2006 |          |   | 2005 |  
|                                                  | (in thousands) |     
|Deferred tax assets                               |                |      |          |   |      |   |          |  
|Insurance reserves                                |                | $    | 334,909  |   |      | $ | 303,736  |  
|Income taxed in advance                           |                |      | 15,734   |   |      |   | 34,410   |  
|Compensation reserves                             |                |      | 13,341   |   |      |   | 11,954   |  
|Net operating loss carryforwards                  |                |      | 114,334  |   |      |   | 92,142   |  
|Tax credit carryforwards                          |                |      | 22,007   |   |      |   | 7,448    |  
|Net unrealized losses on securities               |                |      |         |   |      |   | 1,889    |  
|Other                                             |                |      | 33,260   |   |      |   | 25,731   |  
|                                                  |                |      |          |   |      |   |          |  
|Deferred tax assets                               |                |      | 533,585  |   |      |   | 477,310  |  
|                                                  |                |      |          |   |      |   |          |  
|Deferred tax liabilities                          |                |      |          |   |      |   |          |  
|VOBA and deferred acquisition cost                |                |      | (311,540 | ) |      |   | (247,383 | )
|Net unrealized gains on fixed maturity securities |                |      | (4,558   | ) |      |   |         |  
|Other                                             |                |      | (581     | ) |      |   | (2,351   | )
|                                                  |                |      |          |   |      |   |          |  
|Deferred tax liabilities                          |                |      | (316,679 | ) |      |   | (249,734 | )
|                                                  |                |      |          |   |      |   |          |  
|Net deferred tax asset/(liability)                |                | $    | 216,906  |   |      | $ | 227,576  |  
|                                                  |                |      |          |   |      |   |          |  

The Companys federal and state net operating loss carryforwards, totaling approximately $323 million, will
expire if not used, between 2009 and 2021. The companys tax credit carryforwards, totaling approximately $22 million, will expire if not used, between 2014 and 2016.

Management believes that based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets. It is intended that the Company will join in the
federal income tax return of Prudential Financial once it becomes an eligible company. A valuation allowance would be recorded in the event of a change in managements assessment of the amount of the deferred tax asset that is realizable.

The amount of income taxes paid by the Company is subject to ongoing audits in various jurisdictions. We reserve for our best estimate of potential
payments/settlements to be made to the Internal Revenue Service (the Service) and other taxing jurisdictions for audits ongoing or not yet commenced. In 2006, the Service completed all fieldwork with regards to its examination of the
Companys federal income tax returns for tax years 2002-2003. The Company anticipates the final report being submitted to the Joint Committee on Taxation for their review during the first quarter of 2007. The statute of limitations for the
2002-2003 tax year expires in 2008. In addition, in January 2007, the Service began an examination of tax years 2004 through 2006.

The Companys
liability for income taxes includes managements best estimate of potential payments and settlements for audit periods still subject to review by the Service or other taxing jurisdictions. Audit periods remain open for review until the statute
of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could



F-25



---

result in an adjustment to our liability for income taxes. Any such adjustment could be material to our results of operations for any given quarterly or
annual period based, in part, upon the results of operations for the given period.

For tax year 2007, the Company has chosen to participate in the
Services new Compliance Assurance Program (the CAP). Under CAP, the Service assigns an examination team to review completed transactions contemporaneously during the 2007 tax year in order to reach agreement with the Company on how
they should be reported in the tax return. If disagreements arise, accelerated resolutions programs are available to resolve the disagreements in a timely manner before the tax return is filed. It is managements expectation this new program
will significantly shorten the time period between when the Company files its federal income tax return and the Service completes its examination of the return.



F-26



---

|9. | STATUTORY NET INCOME AND SURPLUS AND DIVIDEND RESTRICTIONS
|-- | ----------------------------------------------------------

The
Company is required to prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the State of Connecticut Insurance Department. Prescribed statutory accounting practices include publications of the
NAIC, as well as state laws, regulations and general administrative rules. Statutory accounting practices primarily differ from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities
using different actuarial assumptions and valuing investments, deferred taxes, and certain assets on a different basis.

Statutory net income (loss) of the
Company amounted to $110.2 million, $(31.4) million, and $101.1 million, for the years ended December 31, 2006, 2005, and 2004, respectively. Statutory surplus of the Company amounted to $327.2 million and $367.3 million at December 31,
2006 and 2005, respectively.

Without prior approval of its domiciliary commissioner, dividends to shareholders are limited by the laws of the
Companys state of incorporation, Connecticut. The State of Connecticut restricts dividend payments to the greater of 10% of the prior years surplus or net gain from operations from the prior year. Net gain from operations is defined as
income after taxes but prior to realized capital gains, as reported on the Summary of Operations. Based on 2006 earnings, there is capacity to pay a dividend of $112.2 million without prior approval in 2007.



|10. | FAIR VALUE OF FINANCIAL INSTRUMENTS
|--- | -----------------------------------

The fair values presented
below have been determined using available market information and by applying valuation methodologies. Considerable judgment is applied in interpreting data to develop the estimates of fair value. These fair values may not be realized in a current
market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the fair values. The methods and assumptions discussed below were used in calculating the fair values of the instruments.

Fixed maturities and Equity securities

The
fair values of public fixed maturity securities are based on quoted market prices or estimates from independent pricing services. However, for investments in private placement fixed maturity securities, this information is not available. For these
private investments, the fair value is determined typically by using a discounted cash flow model, which considers current market credit spreads for publicly traded issues with similar terms by companies of comparable credit quality, and an
additional spread component for the reduced liquidity associated with private placements. This additional spread component is determined based on surveys of various third party financial institutions. Historically, changes in estimated future cash
flows or the assessment of an issuers credit quality have been the more significant factors in determining fair values.

Commercial Loans

The fair value of commercial loans, other than those held by the Companys commercial mortgage operations, is primarily based upon the present
value of the expected future cash flows discounted at the appropriate U.S. Treasury rate, and adjusted for the current market spread for similar quality loans.

The fair value of commercial loans held by the Companys commercial mortgage operations is based upon various factors, including the terms of the loans, the intended exit strategy for the loans based upon either a securitization
pricing model or commitments from investors, prevailing interest rates, and credit risk.



F-27



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The following table discloses the carrying amounts and estimated fair values of the Companys financial instruments
at December 31:



|                                               |                |      |                     |      |                |            |                     |   |            |  |   |           
|---------------------------------------------- | -------------- | ---- | ------------------- | ---- | -------------- | ---------- | ------------------- | - | ---------- |  | - | ----------
|                                               |                | 2006 |                     | 2005
|                                               | Carrying value |      | Estimatedfair value |      | Carrying value |            | Estimatedfair value
|                                               | (in thousands)
|Financial assets:                              |                |      |                     |      |                |            |                     |   |            |  |   |           
|Fixed maturities                               |                | $    | 1,174,353           |      | $              | 1,174,353  |                     | $ | 1,554,569  |  | $ | 1,554,569 
|Trading securities                             |                |      | 18,144              |      |                | 18,144     |                     |   | 30,778     |  |   | 30,778    
|Equity securities                              |                |      | 18,344              |      |                | 18,344     |                     |   | 19,098     |  |   | 19,098    
|Commercial Loans                               |                |      | 40,846              |      |                | 41,104     |                     |   | 6,000      |  |   | 6,037     
|Policy loans                                   |                |      | 12,638              |      |                | 12,638     |                     |   | 11,779     |  |   | 11,779    
|Short-term investments                         |                |      | 60,872              |      |                | 60,872     |                     |   | 209,691    |  |   | 209,691   
|Cash and cash equivalents                      |                |      | 664                 |      |                | 664        |                     |   | 3,507      |  |   | 3,507     
|Separate account assets                        |                |      | 35,608,409          |      |                | 35,608,409 |                     |   | 29,786,393 |  |   | 29,786,393
|                                               |                |      |                     |     
|Financial liabilities:                         |                |      |                     |      |                |            |                     |   |            |  |   |           
|Securities sold under agreements to repurchase |                |      |                    |      |                |           |                     |   | 7,147      |  |   | 7,147     
|Short-term borrowing                           |                |      | 159,546             |      |                | 159,546    |                     |   | 208,584    |  |   | 208,584   
|Long-term borrowing                            |                |      | 405,000             |      |                | 405,000    |                     |   | 135,000    |  |   | 135,000   
|Separate account liabilities                   |                |      | 35,608,409          |      |                | 35,608,409 |                     |   | 29,786,393 |  |   | 29,786,393



F-28



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|11. | CONTINGENT LIABILITIES AND LITIGATION
|--- | -------------------------------------

Contingent Liabilities

On an ongoing basis, our internal supervisory and control functions review the quality of our sales, marketing, administration and servicing, and
other customer interface procedures and practices and may recommend modifications or enhancements. From time to time, this review process results in the discovery of administration, servicing or other errors, including errors relating to the timing
or amount of payments or contract values due to customers. In these cases, we may offer customers appropriate remediation and may incur charges and expenses, including the costs of such remediation, administrative costs and regulatory fines.

Litigation and Regulatory Matters

We are
subject to legal and regulatory actions in the ordinary course of our business, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to the Company and proceedings generally applicable to business
practices in the industry in which we operate. We are subject to class action lawsuits and other litigation alleging, among other things, that we made improper or inadequate disclosures in connection with the sale of annuity products or charged
excessive or impermissible fees on these products, recommended unsuitable products to customers, mishandled customer accounts or breached fiduciary duties to customers. We are also subject to litigation arising out of our general business
activities, such as our investments, contracts, leases and labor and employment relationships, including claims of discrimination and harassment, and could be exposed to claims or litigation concerning certain business or process patents. In some of
our pending legal and regulatory actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Finally, we are periodically subject to examinations and audits by federal and state regulators, and also on
occasion receive and address complaints from customers. The following is a summary of certain pending proceedings.

The Company commenced a remediation
program to correct errors in the administration of approximately 11,000 annuity contracts issued by the Company. The owners of these contracts did not receive notification that the contracts were approaching or past their designated annuitization
date or default annuitization date (both dates referred to as the contractual annuity date) and the contracts were not annuitized at their contractual annuity dates. Some of these contracts also were affected by data integrity errors
resulting in incorrect contractual annuity dates. The lack of notice and the data integrity errors, as reflected on the annuities administrative system, all occurred before the Acquisition. The remediation and administrative costs of the remediation
program are subject to the indemnification provisions of the Acquisition agreement.

Commencing in 2003, the Company received formal requests for
information from the SEC and the New York Attorney General (NYAG) relating to market timing in variable annuities by the Company and certain affiliated companies. In connection with these investigations, with the approval of Skandia, an
offer was made by the Company to the authorities investigating its companies, the SEC and NYAG to settle these matters by paying restitution and a civil penalty of $95 million in the aggregate. While not assured, the Company believes these
discussions are likely to lead to settlements with these authorities. Any regulatory settlement involving the Company and certain affiliates would be subject to the indemnification provisions of the Acquisition agreement. If achieved, settlement of
the matters relating to the Company and certain affiliates also could involve continuing monitoring, changes to and/or supervision of business practices, findings that may adversely affect existing or cause additional litigation, adverse publicity
and other adverse impacts to the Companys businesses.

During the third quarter of 2004, the Company identified a system-generated calculation error
in its annuity contract administration system that existed prior to the Acquisition. This error related to the calculation of amounts due to customers for certain transactions subject to a market value adjustment upon the surrender or transfer of
monies out of their annuity contracts fixed allocation options. The error resulted in an underpayment to policyholders, as well as additional anticipated costs to the Company associated with remediation, breakage and other costs Recently, the
Company retained a consultant to assist it with the systems modifications needed to implement the remediation plan currently in place. The Company has advised Skandia that a portion of the remediation and related administrative costs are subject to
the indemnification provisions of the Acquisition agreement.

The Companys litigation and regulatory matters are subject to many uncertainties, and
given their complexity and scope, the outcomes cannot be predicted. It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected by an ultimate unfavorable
resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. Management believes, however, that the ultimate outcome of all pending litigation and regulatory matters, after
consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Companys financial position.

It
should be noted that the judgments, settlements and expenses associated with many of these lawsuits, administrative and regulatory matters, and contingencies, including certain claims described above, may, in whole or in part, after satisfaction of
certain retention requirements, fall within Skandias indemnification obligations to Prudential Financial and its subsidiaries under the terms of the Acquisition. Those obligations of Skandia provide for indemnification of certain judgments,
settlements, and costs and expenses associated with lawsuits and other claims against the Company (matters), and apply only to matters, or groups of related matters, for which the costs and expenses exceed $25,000 individually.
Additionally, those obligations only apply to such otherwise indemnifiable losses that exceed $10 million in the aggregate, subject to reduction for insurance proceeds, certain accruals and any realized tax benefit applicable to such amounts, and
those obligations do not apply to the



F-29



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extent that such aggregate exceeds $1 billion. We are in discussions with Skandia regarding the satisfaction of the $10 million deductible.



|12. | RELATED PARTY TRANSACTIONS
|--- | --------------------------

In addition to the following related
party transactions, the Company has extensive transactions and relationships with ASI and other affiliates. It is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated
parties.

Affiliated Asset Management Fee Income

In
accordance with an agreement with ASISI, the Company receives fee income calculated on contractholder separate account balances invested in the American Skandia Trust. Income received from ASISI related to this agreement was $121.9 million, $82.3
million, and $72.0 million, for the year ended December 31 2006, year ended December 31, 2005, and year ended December 31, 2004, respectively. These revenues are recorded as Asset management fees in the Statements of
Operations and Comprehensive Income.

Cost Allocation Agreements with Affiliates

Certain operating costs (including rental of office space, furniture, and equipment) have been charged to the Company at cost by American Skandia Information Services and Technology Corporation (ASIST), an
affiliated company. ASLAC signed a written service agreement with ASIST for these services executed and approved by the Connecticut Insurance Department in 1995. This agreement automatically continues in effect from year to year and may be
terminated by either party upon 30 days written notice.

Allocated lease expense was $6.5 million, $8.6 million, and $9.1 million, for the year ended
December 31, 2006, year ended December 31, 2005, and year ended December 31, 2004, respectively. Allocated sub-lease rental income, recorded as a reduction to lease expense, was $3.1 million, $2.5 million, and $2.3 million, for the
year ended December 31, 2006, year ended December 31, 2005, and year ended December 31, 2004, respectively. Assuming that the written service agreement between ASLAC and ASIST continues indefinitely, ASLACs allocated future
minimum lease payments and sub-lease receipts per year and in aggregate as of December 31, 2006 are as follows (in thousands):



|                    |  |       |        |           |   |       
|------------------- |  | ----- | ------ | --------- | - | ------
|                    |  | Lease |        | Sub-Lease
|2007                |  | $     | 8,307  |           | $ | 3,204 
|2008                |  |       | 8,307  |           |   | 2,818 
|2009                |  |       | 8,269  |           |   | 2,796 
|2010                |  |       | 8,079  |           |   | 2,415 
|2011                |  |       | 8,079  |           |   | 2,329 
|2012 and thereafter |  |       | 18,530 |           |   | 2,068 
|                    |  |       |        |           |   |       
|Total               |  | $     | 59,571 |           | $ | 15,630
|                    |  |       |        |           |   |       

Beginning in 1999, the Company was reimbursed by its affiliate American Skandia Marketing, Incorporated
(ASM) for certain distribution related costs associated with the sales of variable annuities from revenues ASM receives under a 12b-1 plan of AST. Under this agreement, the expenses reimbursed were $4.3 million for the year ended
December 31, 2004. This agreement was terminated at the end of 2004.



F-30



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The Company and ASM have a written Service Agreement, approved by the Connecticut Insurance Department on
September 13, 1996, whereby ASM pays, on behalf of the Company, information consulting fees payable in connection with the sale of the Companys insurance products. The Company reimburses ASM for ASMs payment of such fees on the
Companys behalf. The Company paid ASM $32.8 million during the twelve months ended December 31, 2004. Beginning in 2005, information consulting fees are paid directly by the Company.

The Company pays commissions and certain other fees to ASM in consideration for ASMs marketing and underwriting of the Companys products, which commissions
and fees are paid by ASM to unaffiliated broker-dealers who sell the Companys products. Commissions and fees paid by the Company to ASM during the year ended December 31, 2006, year ended December 31, 2005, and year ended
December 31, 2004 were $384.4 million, $312.3 million, and $222.0 million, respectively.

Reinsurance Agreements

Effective November 20, 2006, the Company entered into a coinsurance agreement with Pruco Reinsurance, Ltd. (Pruco Re) providing for the 100% reinsurance
of its Highest Daily Lifetime Five benefit (HDLT5) feature sold on its annuities. Fees ceded on this agreement, included in Realized investments (losses) gains, net on the financial statements, were $42 thousand as of
December 31, 2006.

Effective March 20, 2006, the Company entered into a new coinsurance agreement with Pruco Re providing for the 100%
reinsurance of its Spousal Lifetime Five benefit (SLT5) feature. Fees ceded on this agreement, included in Realized investments (losses) gains, net on the financial statements, were $2.0 million as of December 31, 2006.

During 2005, the Company entered into reinsurance agreements with affiliates as part of its risk management and capital management strategies. The Company
entered into a coinsurance agreement with The Prudential Insurance Company of America (Prudential Insurance) providing for the 100% reinsurance of its Lifetime Five benefit (LT5) feature sold on new business prior to
May 6, 2005. Fees ceded on this agreement, included in Realized investments (losses) gains, net on the financial statements, were $1.4 million as of December 31, 2006 and $850 thousand as of December 31, 2005. Effective
July 1, 2005, the Company entered into a new coinsurance agreement with Pruco Re providing for the 100% reinsurance of its LT5 feature sold on new business after May 5, 2005 as well as for riders issued from March 15, 2005 forward on
business in-force before March 15, 2005. Fees ceded on this agreement, included in Realized investments (losses) gains, net on the financial statements, were $20.8 million as of December 31, 2006 and $3.8 million as of
December 31, 2005.

During 2004, the Company entered into two reinsurance agreements with affiliates as part of our risk management and capital
management strategies. We entered into a 100% coinsurance agreement with Prudential Insurance providing for the reinsurance of its guaranteed minimum withdrawal benefit feature (GMWB). Fees ceded on this agreement, included in
Realized investments (losses) gains, net on the financial statements, were $3.1 million, $2.4 million, and $0.9 million for 2006, 2005, and 2004, respectively. The Company also entered into a 100% coinsurance agreement with Pruco Re
providing for the reinsurance of its guaranteed return option (GRO). In prior years, the Company entered into reinsurance agreements to provide additional capacity for growth in supporting the cash flow strain from the Companys
variable annuity and variable life insurance business. Fees ceded on this agreement, included in Realized investments (losses) gains, net on the financial statements, were $19.1 million, $16.2 million, and $12.1 million for 2006, 2005,
and 2004, respectively.

Debt Agreements

Short-term
and Long-term borrowings

On December 14, 2006, the Company entered into a $300 million loan with Prudential Financial. This loan has an interest
rate of 5.18% and matures on December 14, 2011. Accrued interest payable was $734 thousand as of December 31, 2006.

On January 3, 2002, the
Company entered into a $150 million credit facility agreement with ASI. This credit facility terminated on December 31, 2005 and no amounts were outstanding under this credit facility. Interest expense related to these borrowings was $490
thousand and $2.6 million for the year ended December 31, 2005 and year ended December 31, 2004.

On March 12, 2004, the Company entered
into a $45 million loan with Prudential Funding LLC. This loan had an interest rate of 2.78% and matured on March 10, 2005. The loan was subsequently rolled over with a new interest rate of 5.67% and new maturity date of March 12, 2007.
Interest paid related to these borrowings was $2.4 million for the year ended December 31, 2006, $1.6 million for the year ended December 31, 2005 and $248 thousand for the year ended December 31, 2004. Accrued interest payable was
$142 thousand as of December 31, 2006 and $114 thousand as of December 31, 2005.



F-33



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On March 10, 2005, the Company entered into a $30 million loan with Prudential Funding, LLC. This loan has an
interest rate of 4.68% and matured on March 10, 2006. The total related interest expense to the Company was $269 thousand for the year ended December 31, 2006 and $869 thousand for the year ended December 31, 2005. Accrued interest
payable was $74 thousand as of December 31, 2005.

On March 10, 2005, the Company entered into a $30 million loan with Prudential Funding, LLC.
This loan has an interest rate of 5.67% and matures on March 12, 2007. The total related interest expense to the Company was $1.6 million for the year ended December 31, 2006 and $897 thousand for the year ended December 31, 2005.
Accrued interest payable was $95 thousand as of December 31, 2006 and $76 thousand as of December 31, 2005.

On March 10, 2005, the Company
entered into a $30 million loan with Prudential Funding, LLC. This loan has an interest rate of 5.73% and matures on March 11, 2008. The total related interest expense to the Company was $1.6 million for the year ended December 31, 2006
and $912 thousand for the year ended December 31, 2005. Accrued interest payable was $96 thousand as of December 31, 2006 and $77 thousand as of December 31, 2005.

On May 1, 2004, the Company entered into a $500 million credit facility agreement with Prudential Funding LLC. Effective December 1, 2004, the credit facility agreement was increased to $750 million.
Interest paid related to these borrowings was $8.7 million, $1.7 million, and $678 thousand for the year ended December 31, 2006, December 31, 2005, and December 31, 2004, respectively. As of December 31, 2006 and 2005,
$159.5 million and $208.6 million, respectively, was outstanding under this credit facility. Accrued interest payable was $515 thousand and $223 thousand as of December 31, 2006 and 2005, respectively.

Future fees payable to ASI

In a series of transactions with ASI, the
Company sold certain rights to receive a portion of future fees and contract charges expected to be realized on designated blocks of deferred annuity contracts.

The proceeds from the sales have been recorded as a liability and are being amortized over the remaining surrender charge period of the designated contracts using the interest method. The Company did not sell the right to receive future
fees and charges after the expiration of the surrender charge period.

Under the terms of the securitization purchase agreements, the rights sold provide
for ASI to receive a percentage (60%, 80% or 100% depending on the underlying commission option) of future mortality and expense charges and contingent deferred sales charges, after reinsurance, expected to be realized over the remaining surrender
charge period of the designated contracts (generally 6 to 8 years). As a result of purchase accounting, the liability was reduced to reflect the discounted estimated future payments to be made and has been subsequently reduced by amortization
according to a revised schedule. If actual mortality and expense charges and contingent deferred sales charges are less than those projected in the original amortization schedules, calculated on a transaction by transaction basis, ASI has no
recourse against the Company.

Payments, representing fees and charges in the aggregate amount, of $74.8 million, $96.6 million, and $122.2 million, were
made by the Company to ASI during the year ended December 31, 2006, year ended December 31, 2005, and year ended December 31, 2004, respectively. Related expense (income) of $10.1 million, $9.2 million, and $12.7 million has been
included in the Statements of Operations and Comprehensive Income for the year ended December 31, 2006, year ended December 31, 2005, and year ended December 31, 2004 respectively.

The Commissioner of the State of Connecticut has approved the transfer of future fees and charges; however, in the event that the Company becomes subject to an order of
liquidation or rehabilitation, the Commissioner has the ability to restrict the payments due to ASI, into a restricted account, under the Purchase Agreement subject to certain terms and conditions.



F-34



---

The present values of the transactions that are still active as of 12/31/2006 as of the respective effective date were as
follows (dollars in thousands):



|            |  |              |  |                |  |                       |  |               |   |  |              
|----------- |  | ------------ |  | -------------- |  | --------------------- |  | ------------- | - |  | -------------
|Transaction |  | Closing Date |  | Effective Date |  | Contract Issue Period |  | Discount Rate |   |  | Present Value
|            |  |              |  |               
|1999-1      |  | 6/23/99      |  | 6/1/99         |  | 4/1/94    4/30/99    |  | 7.5           | % |  | 120,632      
|1999-2      |  | 12/14/99     |  | 10/1/99        |  | 11/1/98    7/31/99   |  | 7.5           | % |  | 145,078      
|2000-1      |  | 3/22/00      |  | 2/1/00         |  | 8/1/99    1/31/00    |  | 7.5           | % |  | 169,459      
|2000-2      |  | 7/18/00      |  | 6/1/00         |  | 2/1/00    4/30/00    |  | 7.25          | % |  | 92,399       
|2000-3      |  | 1/18/01      |  | 12/1/00        |  | 5/1/00    10/31/00   |  | 7.25          | % |  | 107,138      
|2000-4      |  | 12/28/00     |  | 12/1/00        |  | 1/1/98    10/31/00   |  | 7.25          | % |  | 107,291      
|2002-1      |  | 4/12/02      |  | 3/1/02         |  | 11/1/00    12/31/01  |  | 6.0           | % |  | 101,713      

Future amortization of future fees payable to ASI as of December 31, 2006, according to a revised
amortization schedule, are as follows (in thousands):



|      |  |        |       
|----- |  | ------ | ------
|Year  |  | Amount
|2007  |  |        | 36,361
|2008  |  |        | 11,421
|2009  |  |        | 750   
|      |  |        |       
|Total |  | $      | 48,532
|      |  |        |       



|13. | LEASES
|--- | ------

The Company entered into an eleven-year lease agreement for
office space in Westminster, Colorado, effective January 1, 2001. Lease expense for the year ended December 31, 2006, year ended December 31, 2005, and year ended December 31 2004, was $3.3 million, $3.0 million, and $2.9
million, respectively. Sub-lease rental income was $635 thousand, $405 thousand, and $455 thousand for the year ended December 31, 2006, year ended December 31, 2005, and year ended December 31 2004. Future minimum lease payments and
sub-lease receipts per year and in aggregate as of December 31, 2006 are as follows (in thousands):



|                    |  |       |        |           |   |      
|------------------- |  | ----- | ------ | --------- | - | -----
|                    |  | Lease |        | Sub-Lease
|2007                |  | $     | 2,889  |           | $ | 1,052
|2008                |  |       | 3,024  |           |   | 1,000
|2009                |  |       | 3,024  |           |   | 735  
|2010                |  |       | 3,025  |           |   | 752  
|2011                |  |       | 2,772  |           |   | 764  
|2012 and thereafter |  |       |       |           |   |     
|                    |  |       |        |           |   |      
|Total               |  | $     | 14,734 |           | $ | 4,303
|                    |  |       |        |           |   |      



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|14. | EMPLOYEE BENEFITS
|--- | -----------------

The Companys employees are covered by
funded non-contributory defined benefit pensions plans of Prudential Insurance. Prudential Insurance also has several non-funded non-contributory defined benefit plans covering certain executives. Benefits for transitioned former employees of the
Company are based on a notional account balance that takes into consideration age, service and salary during their careers. Prudential Insurances funding policy is to contribute annually an amount necessary to satisfy the Internal Revenue Code
contribution guidelines, but no contributions have been required in recent years.

The Company has no legal obligation for benefits under these plans.

Substantially all of the Companys employees may become eligible to receive postretirement benefits under Prudential Insurance plans if they retire
after age 55 with at least 10 years of service. These benefits are funded as considered necessary.

Postretirement benefits are accounted for in accordance
with prescribed NAIC policy.

The Companys share of net expense for the pension plans was $4.3 million, 3.1 million and $7.2 million for the
twelve months ended December 31, 2006, twelve months ended December 31, 2005, and twelve months ended December 31, 2004, respectively.

Prudential Insurance sponsors voluntary savings plan for the Companys employees (401(k) plans). The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual
salary. The expense charged the Company for the matching contribution to the plans was $1.5 million, $1.4 million, and $1.2 million in 2006, 2005, and 2004, respectively.



|15. | CONTRACT WITHDRAWAL PROVISIONS
|--- | ------------------------------

Approximately 99% of the
Companys separate account liabilities are subject to discretionary withdrawal by contract owners at market value or with market value adjustment. Separate account assets, which are carried at fair value, are adequate to pay such withdrawals,
which are generally subject to surrender charges ranging from 9% to 1% for contracts held less than 10 years.



F-36



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---



|16. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
|--- | -------------------------------------------

The unaudited
quarterly results of operations for the years ended December 31, 2006, 2005 and 2004 are summarized in the table below:



|                                                                                             |          |                    |         |  |              |         |             |   |         |  |   |        
|-------------------------------------------------------------------------------------------- | -------- | ------------------ | ------- |  | ------------ | ------- | ----------- | - | ------- |  | - | -------
|                                                                                             |          | Three months ended
|                                                                                             | March 31 |                    | June 30 |  | September 30 |         | December 31
|                                                                                             |          | (in thousands)    
|2006                                                                                         |          |                    |        
|Total revenues                                                                               |          | $                  | 178,823 |  | $            | 191,201 |             | $ | 217,304 |  | $ | 223,352
|Total benefits and expenses                                                                  |          |                    | 136,437 |  |              | 134,426 |             |   | 169,589 |  |   | 168,295
|Income (loss) from operations before income taxes and cumulative effect of accounting change |          |                    | 42,386  |  |              | 56,775  |             |   | 47,715  |  |   | 55,057 
|Net income (loss)                                                                            |          |                    | 37,555  |  |              | 54,551  |             |   | 41,170  |  |   | 62,441 



|                                                                                             |          |                    |         |  |              |         |             |   |         |  |   |        
|-------------------------------------------------------------------------------------------- | -------- | ------------------ | ------- |  | ------------ | ------- | ----------- | - | ------- |  | - | -------
|                                                                                             |          | Three months ended
|                                                                                             | March 31 |                    | June 30 |  | September 30 |         | December 31
|                                                                                             |          | (in thousands)    
|2005                                                                                         |          |                    |        
|Total revenues                                                                               |          | $                  | 165,864 |  | $            | 164,677 |             | $ | 168,608 |  | $ | 168,836
|Total benefits and expenses                                                                  |          |                    | 123,726 |  |              | 122,891 |             |   | 101,247 |  |   | 115,655
|Income (loss) from operations before income taxes and cumulative effect of accounting change |          |                    | 42,138  |  |              | 41,786  |             |   | 67,361  |  |   | 53,181 
|Net income (loss)                                                                            |          |                    | 30,119  |  |              | 35,585  |             |   | 49,419  |  |   | 43,301 



F-37