e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2005


o		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 33-47472

AIG SUNAMERICA LIFE ASSURANCE COMPANY


Incorporated in Arizona		86-0198983 I.R.S. Employer Identification No.

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and 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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 8, 2005: 3,511

AIG SUNAMERICA LIFE ASSURANCE COMPANY

CONSOLIDATED BALANCE SHEET

(Unaudited)


	September 30,		December 31,
	2005		2004

	(in thousands)
ASSETS

Investments and cash:
Cash and short-term investments	$	393,729	$	201,117
Bonds, notes and redeemable preferred stocks available for sale, at fair value (amortized cost: September 30, 2005, $4,766,520; December 31, 2004, $4,987,728)		4,827,454		5,139,477
Mortgage loans		524,468		624,179
Policy loans		172,316		185,958
Mutual funds		21,773		6,131
Common stocks available for sale, at fair value (cost: September 30, 2005, $25,015; December 31, 2004, $25,015)		27,583		26,452
Securities lending collateral, at cost (approximates fair value)		974,379		883,792
Other invested assets		53,121		58,880


Total investments and cash		6,994,823		7,125,986

Variable annuity assets held in separate accounts		23,654,069		22,612,451
Accrued investment income		71,295		73,769
Deferred acquisition costs		1,376,059		1,349,089
Other deferred expenses		256,497		257,781
Income taxes currently receivable from Parent		44,110		9,945
Goodwill		14,038		14,038
Other assets		61,162		52,956


TOTAL ASSETS	$	32,472,053	$	31,496,015

See accompanying notes to consolidated financial statements.

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


	September 30,		December 31,
	2005		2004

	(in thousands)
LIABILITIES AND SHAREHOLDER’S EQUITY

Reserves, payables and accrued liabilities:
Reserves for fixed annuity and fixed accounts of variable annuity contracts	$	3,707,473	$	3,948,158
Reserves for universal life insurance contracts		1,485,683		1,535,905
Reserves for guaranteed investment contracts		116,888		215,331
Reserves for guaranteed benefits		69,102		76,949
Securities lending payable		974,379		883,792
Due to affiliates		13,565		21,655
Payable to brokers		109,660		—
Other liabilities		200,820		190,198


Total reserves, payables and accrued liabilities		6,677,570		6,871,988

Variable annuity liabilities related to separate accounts		23,654,069		22,612,451

Deferred income taxes		312,090		257,532


Total liabilities		30,643,729		29,741,971


Shareholder’s equity:
Common stock		3,511		3,511
Additional paid-in capital		760,890		758,346
Retained earnings		1,035,314		919,612
Accumulated other comprehensive income		28,609		72,575


Total shareholder’s equity		1,828,324		1,754,044


TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	32,472,053	$	31,496,015

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

For the three months and nine months ended September 30, 2005 and 2004

(Unaudited)


	Three Months					Nine Months
	2005		2004			2005		2004

			(in thousands)
REVENUES

Fee income:
Variable annuity policy fees, net of reinsurance	$	109,803	$	93,225		$	316,457	$	274,380
Asset management fees		20,933		21,707			61,727		62,633
Universal life insurance policy fees, net of reinsurance		7,939		7,481			25,025		25,188
Surrender charges		6,985		6,482			20,881		19,973
Other fees		3,655		3,857			11,740		11,049

Total fee income		149,315		132,752			435,830		393,223

Investment income		93,018		89,905			263,873		276,163
Net realized investment gains (losses)		857		(16,890	)		21,653		(27,783	)


Total revenues		243,190		205,767			721,356		641,603


BENEFITS AND EXPENSES
Interest expense:
Fixed annuity and fixed accounts of variable annuity contracts		31,073		35,799			94,529		106,606
Universal life insurance contracts		17,644		18,474			52,945		55,479
Guaranteed investment contracts		1,548		1,550			4,952		4,264
Subordinated notes payable to affiliates		—		523			—		1,621

Total interest expense		50,265		56,346			152,426		167,970
Amortization of bonus interest		5,963		2,544			13,093		7,768
Claims on universal life insurance contracts, net of reinsurance recoveries		5,411		3,577			13,891		13,499
Guaranteed benefits, net of reinsurance recoveries		3,963		17,314			20,739		48,240
General and administrative expenses		33,900		32,649			102,323		104,282
Amortization of deferred acquisition costs and other deferred expenses		61,893		26,722			165,943		106,237
Annual commissions		18,710		15,114			56,127		45,245


Total benefits and expenses		180,105		154,266			524,542		493,241


PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		63,085		51,501			196,814		148,362

Income tax expense		15,111		8,418			54,550		35,783


INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		47,974		43,083			142,264		112,579

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


NET INCOME	$	47,974	$	43,083		$	142,264	$	49,990

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

For the nine months ended September 30, 2005 and 2004

(Unaudited)


	2005			2004

	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	142,264		$	49,990
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change, net of tax		—			62,589
Interest credited to:
Fixed annuity and fixed accounts of variable annuity contracts		94,529			106,606
Universal life insurance contracts		52,945			55,479
Guaranteed investment contracts		4,952			4,264
Net realized investment (gains) losses		(21,653	)		27,783
Amortization of net premium/(accretion of net discount) on investments		6,380			(890	)
Amortization of deferred acquisition costs and other expenses		179,036			114,005
Acquisition costs deferred		(149,187	)		(190,437	)
Other expenses deferred		(32,435	)		(51,312	)
Provision for deferred income taxes		78,233			56,501
Change in:
Accrued investment income		2,474			(1,280	)
Income taxes currently payable to/receivable from Parent		(34,165	)		14,037
Other assets		(8,367	)		4,973
Due from/to affiliates		(8,090	)		(10,194	)
Other liabilities		2,550			2,818
Other, net		6,197			12,536


NET CASH PROVIDED BY OPERATING ACTIVITIES		315,663			257,468


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds, notes and redeemable preferred stocks		(1,510,343	)		(1,153,904	)
Mortgage loans		(71,307	)		(25,760	)
Other investments, excluding short-term investments		(35,191	)		(20,671	)
Sales of:
Bonds, notes and redeemable preferred stocks		1,166,975			755,843
Other investments, excluding short-term investments		56,523			14,589
Redemptions and maturities of:
Bonds, notes and redeemable preferred stocks		657,189			633,620
Mortgage loans		171,905			67,747
Other investments, excluding short-term investments		13,188			13,921


NET CASH PROVIDED BY INVESTING ACTIVITIES	$	448,939		$	285,385

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the nine months ended September 30, 2005 and 2004
(Unaudited)


	2005			2004

	(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits received on:
Fixed annuity and fixed accounts of variable annuity contracts	$	981,372		$	1,082,777
Universal life insurance contracts		31,122			32,532
Net exchanges from the fixed accounts of variable annuity contracts		(822,367	)		(962,641	)
Withdrawal payments on:
Fixed annuity and fixed accounts of variable annuity contracts		(435,145	)		(330,033	)
Universal life insurance contracts		(46,044	)		(54,943	)
Guaranteed investment contracts		(103,420	)		(6,673	)
Claims and annuity payments, net of reinsurance, on:
Fixed annuity and fixed accounts of variable annuity contracts		(77,425	)		(83,045	)
Universal life insurance contracts		(75,083	)		(84,879	)
Net payment related to a modified coinsurance transaction		—			(4,738	)
Dividend paid to Parent		(25,000	)		(2,500	)


NET CASH USED IN FINANCING ACTIVITIES		(571,990	)		(414,143	)


NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS		192,612			128,710

CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD		201,117			133,105


CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD	$	393,729		$	261,815


SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid on indebtedness	$	—		$	1,621


Income taxes paid to Parent	$	11,097		$	47,424

See accompanying notes to consolidated financial statements.

AIG SUNAMERICA LIFE ASSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.		BASIS OF PRESENTATION

		AIG SunAmerica Life Assurance Company (the “Company”) is a direct wholly owned subsidiary of SunAmerica Life Insurance Company (the “Parent”), which is a wholly owned subsidiary of AIG Retirement Services, Inc. (“AIGRS”) (formerly AIG SunAmerica Inc.), a wholly owned subsidiary of American International Group, Inc. (“AIG”).

		The Company owns 100% of the outstanding capital stock of its consolidated subsidiary, AIG SunAmerica Asset Management Corp. (“SAAMCo”) which in turn has two wholly owned subsidiaries: AIG SunAmerica Capital Services, Inc. (“SACS”) and AIG SunAmerica Fund Services, Inc. (“SFS”).

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

2.		RECENTLY ISSUED ACCOUNTING STANDARDS

		In September 2005, the American Institute of Certified Public Accountants issued SOP 05-1,”Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). This statement 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 Statement of Financial Accounting Standards No. 97. SOP 05-1 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. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company is evaluating the provisions of SOP 05-1. Based on current practices, management believes the adoption of SOP 05-1 will not have a material impact on the consolidated financial position, results of operations or cash flows of the Company.

3.		COMMITMENTS AND CONTINGENT LIABILITIES

		The Company has six agreements outstanding in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. In addition, pursuant to these agreements the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at September 30, 2005 is $185,492,000. The expiration dates of these commitments are as follows: $26,385,000 in the remainder of 2005 and $159,107,000 in 2006. Related to each of these agreements are participation agreements under which the Parent will share in $58,610,000 of these liabilities in exchange for a proportionate percentage of the fees received under these agreements.

		At September 30, 2005, the Company has a commitment to purchase a total of approximately $7,000,000 of asset-backed securities in the ordinary course of business. This commitment has a contractual maturity date in November of 2005.

		A purported class action captioned Nitika Mehta, as Trustee of the N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed on April 5, 2004 in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The action has been transferred to and is currently pending in the United States District Court for the District of Maryland, Case No. 04-md-15863, as part of a Multi-District Litigation proceeding. The lawsuit alleges certain improprieties in conjunction with alleged market timing activities. The probability of any particular outcome cannot be reasonably estimated at this time.

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

3.		COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

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

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

		On May 26, 2005, the New York Attorney General and the New York Superintendent of Insurance filed a civil complaint against AIG as well as its former Chairman and Chief Executive Officer and former Vice Chairman and Chief Financial Officer, in the Supreme Court of the State of New York. The complaint asserts claims under New York’s Martin Act and Insurance Law, among others, and makes allegations concerning certain transactions entered into by AIG and certain of its subsidiaries. Although none of the Company or its subsidiaries are named in the complaint, nor does the complaint seek any remedies against them, due to a provision in the law governing investment companies, if the lawsuit results in an injunction being entered against AIG, then the Company, SAAMCo and SACS will need to obtain permission from the Securities and Exchange Commission (“SEC”) to continue to service its variable annuity and asset management operations. While the SEC has granted this type of relief to others in the past in similar circumstances, there is no assurance that this permission would be granted. Accordingly, no assurance can be given that any further changes in circumstances for AIG will not impact the Company.

4.		RELATED PARTY TRANSACTION

		Starr International Company, Inc. (“SICO”) has provided a series of two-year Deferred Compensation Profit Participation Plans (“SICO Plans”) to certain employees of AIG, its subsidiaries and affiliates. The SICO Plans came into being in 1975 when the voting shareholders and Board of Directors of SICO, a private holding company whose principal asset is AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies, including the Company.

		In the past, participation in the SICO Plans by any person, and the amount of such participation was at the sole discretion of SICO’s Board of Directors. None of the costs of the various benefits provided under the SICO Plans has been paid by the Company, although the Company has recorded a charge to reported earnings for the deferred compensation amounts paid to employees of the Company or its subsidiaries and affiliates by SICO and allocated to the Company, with an offsetting entry to additional paid-in capital reflecting amounts deemed contributed by SICO. The SICO Plans provide that shares currently owned by SICO may be set aside by SICO for the benefit of the participant and distributed upon retirement. The SICO Board of Directors may permit an early payout under certain circumstances. Prior to payout, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant’s voluntary termination of employment with AIG or its subsidiaries and affiliates prior to normal retirement age. In addition, SICO’s Board of Directors may elect to pay a participant cash in lieu of shares of AIG common stock

		On June 27, 2005, AIG entered into agreements pursuant to which AIG agrees, subject to certain conditions, to make any payment that is not promptly paid with respect to the benefits accrued by certain employees of AIG and its subsidiaries under the SICO Plans.

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

4.		RELATED PARTY TRANSACTION (Continued)

		As total compensation expense related to the SICO Plans for each prior year would not have been material to any such prior year, in the first quarter of 2005 the Company has recorded the total amount of compensation expense related to the SICO Plans that would have been recorded in all prior periods through December 31, 2004, as a reduction of retained earnings on the consolidated balance sheet of $1,562,000, with a corresponding increase to additional paid-in capital, and with no effect on total shareholder’s equity, results of operations or cash flows. Compensation expense with respect to the SICO Plans aggregated $269,000 and $982,000 for the quarter and nine months ended September 30, 2005, respectively, and is included in general and administrative expenses in the consolidated statement of income and comprehensive income.

		The Company’s insurance policy obligations are guaranteed by American Home Assurance Company (“American Home”), a subsidiary of AIG, and a member of an AIG intercompany pool. This guarantee is unconditional and irrevocable, and the Company’s contract holders have the right to enforce the guarantee directly against American Home. American Home’s statutory financial statements are contained in the Company’s variable annuity registrations filed with the SEC. Additionally, American Home files statutory annual and quarterly reports with the New York State Insurance Department, through which such reports are available to the public. The Company expects that the American Home guarantee will be terminated within the next year. However, the insurance obligations on contracts issued prior to termination of the American Home guarantee would continue to be covered by the guarantee, including obligations arising from purchase payments received after termination, until satisfied in full.

5.		SEGMENT INFORMATION

		The Company conducts its business through two business segments, annuity operations and asset management operations. Annuity operations consists of the sale and administration of deposit-type insurance contracts, including fixed and variable annuity contracts, universal life insurance contracts and guaranteed investment contracts. Asset management operations, which includes the managing, distributing and administering a diversified family of mutual funds, managing certain subaccounts offered within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios, is conducted by SAAMCo and its subsidiary and distributor, SACS, and its subsidiary and servicing administrator, SFS. Following is selected information pertaining to the Company’s business segments.

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

SEGMENT INFORMATION (Continued)


			Asset
	Annuity		Management
	Operations		Operations		Total

	(in thousands)
THREE MONTHS ENDED SEPTEMBER 30, 2005:

REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	109,803	$	—	$	109,803
Asset management fees		—		20,933		20,933
Universal life insurance policy fees, net of reinsurance		7,939		—		7,939
Surrender charges		6,985		—		6,985
Other fees		—		3,655		3,655

Total fee income		124,727		24,588		149,315

Investment income		92,199		819		93,018
Net realized investment gains		794		63		857


Total revenues		217,720		25,470		243,190


BENEFITS AND EXPENSES:
Interest expense		50,265		—		50,265
Amortization of bonus interest		5,963		—		5,963
Claims on universal life insurance contracts, net of reinsurance recoveries		5,411		—		5,411
Guaranteed benefits, net of reinsurance recoveries		3,963		—		3,963
General and administrative expenses		23,253		10,647		33,900
Amortization of deferred acquisition costs and other deferred expenses		54,237		7,656		61,893
Annual commissions		18,710		—		18,710


Total benefits and expenses		161,802		18,303		180,105


Pretax income before cumulative effect of accounting change	$	55,918	$	7,167	$	63,085


Total assets	$	32,236,426	$	235,627	$	32,472,053


Expenditures for long-lived assets	$	—	$	92	$	92

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

BUSINESS SEGMENTS (Continued)


				Asset
	Annuity			Management
	Operations			Operations		Total

	(in thousands)
THREE MONTHS ENDED SEPTEMBER 30, 2004:

REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	93,225		$	—	$	93,225
Asset management fees		—			21,707		21,707
Universal life insurance policy fees, net of reinsurance		7,481			—		7,481
Surrender charges		6,482			—		6,482
Other fees		—			3,857		3,857

Total fee income		107,188			25,564		132,752

Investment income		89,671			234		89,905
Net realized investment losses		(16,890	)		—		(16,890	)


Total revenues		179,969			25,798		205,767


BENEFITS AND EXPENSES:
Interest expense		55,823			523		56,346
Amortization of bonus interest		2,544			—		2,544
Claims on universal life insurance contracts, net of reinsurance recoveries		3,577			—		3,577
Guaranteed benefits, net of reinsurance recoveries		17,314			—		17,314
General and administrative expenses		23,272			9,377		32,649
Amortization of deferred acquisition costs and other deferred expenses		18,616			8,106		26,722
Annual commissions		15,114			—		15,114


Total benefits and expenses		136,260			18,006		154,266


Pretax income before cumulative effect of accounting change	$	43,709		$	7,792	$	51,501


Total assets	$	29,917,921		$	195,948	$	30,113,869


Expenditures for long-lived assets	$	—		$	8	$	8

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

BUSINESS SEGMENTS (Continued)


			Asset
	Annuity		Management
	Operations		Operations		Total

	(in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 2005:

REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	316,457	$	—	$	316,457
Asset management fees		—		61,727		61,727
Universal life insurance policy fees, net of reinsurance		25,025		—		25,025
Surrender charges		20,881		—		20,881
Other fees		—		11,740		11,740

Total fee income		362,363		73,467		435,830

Investment income		261,854		2,019		263,873
Net realized investment gains		21,550		103		21,653


Total revenues		645,767		75,589		721,356


BENEFITS AND EXPENSES:
Interest expense		152,426		—		152,426
Amortization of bonus interest		13,093		—		13,093
Claims on universal life insurance contracts, net of reinsurance recoveries		13,891		—		13,891
Guaranteed benefits, net of reinsurance recoveries		20,739		—		20,739
General and administrative expenses		73,360		28,963		102,323
Amortization of deferred acquisition costs and other deferred expenses		142,907		23,036		165,943
Annual commissions		56,127		—		56,127


Total benefits and expenses		472,543		51,999		524,542


Pretax income before cumulative effect of accounting change	$	173,224	$	23,590	$	196,814


Total assets	$	32,236,426	$	235,627	$	32,472,053


Expenditures for long-lived assets	$	—	$	168	$	168

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

BUSINESS SEGMENTS (Continued)


				Asset
	Annuity			Management
	Operations			Operations		Total

	(in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 2004:

REVENUES:
Fee income:
Variable annuity policy fees, net of reinsurance	$	274,380		$	—	$	274,380
Asset management fees		—			62,633		62,633
Universal life insurance policy fees, net of reinsurance		25,188			—		25,188
Surrender charges		19,973			—		19,973
Other fees		—			11,049		11,049

Total fee income		319,541			73,682		393,223

Investment income		275,614			549		276,163
Net realized investment losses		(27,783	)		—		(27,783	)


Total revenues		567,372			74,231		641,603


BENEFITS AND EXPENSES:
Interest expense		166,349			1,621		167,970
Amortization of bonus interest		7,768			—		7,768
Claims on universal life insurance contracts, net of reinsurance recoveries		13,499			—		13,499
Guaranteed benefits, net of reinsurance recoveries		48,240			—		48,240
General and administrative expenses		75,873			28,409		104,282
Amortization of deferred acquisition costs and other deferred expenses		82,722			23,515		106,237
Annual commissions		45,245			—		45,245


Total benefits and expenses		439,696			53,545		493,241


Pretax income before cumulative effect of accounting change	$	127,676		$	20,686	$	148,362


Total assets	$	29,917,921		$	195,948	$	30,113,869


Expenditures for long-lived assets	$	—		$	91	$	91

AIG SUNAMERICA LIFE ASSURANCE COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations of AIG SunAmerica Life Assurance Company (the “Company”) for the three months and nine months ended September 30, 2005 and 2004 follows. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

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

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

OVERVIEW

The Company’s primary activities are retirement services, herein discussed as annuity operations, and asset management operations. The annuity operations consist of the sale and administration of deposit-type insurance contracts, such as variable and fixed annuity contracts, universal life insurance contracts and guaranteed investment contracts (“GICs”). The asset management operations are conducted by the Company’s wholly owned registered investment advisor subsidiary, AIG SunAmerica Asset Management Corp (“SAAMCo”), and its wholly owned distributor, AIG SunAmerica Capital Services, Inc. (“SACS”), and its wholly owned servicing administrator, AIG SunAmerica Fund Services, Inc. (“SFS”).

The Company ranks among the largest U.S. issuers of variable annuity contracts. The Company distributes its products and services through an extensive network of independent broker-dealers, full-service securities firms and financial institutions. In prior years, GICs were marketed directly to banks, municipalities, asset management firms and direct plan sponsors and through intermediaries, such as managers or consultants servicing these groups. In addition, the Company distributes its variable annuity products through a vast network of independent broker-dealers, full service securities firms, financial institutions and its nine affiliated broker-dealers which are among the largest networks of registered representatives in the nation.

The Company believes that demographic trends have produced strong consumer demand for long-term, investment-oriented products. According to U.S. Census Bureau projections, the number of individuals between the ages of 45 to 64 grew from 51 million to 69 million from 1994 to 2003, making this age group the fastest-growing segment of the U.S. population. Between 1994 and 2003, annual industry premiums from fixed and variable annuity contracts increased from $155 billion to $267 billion.

Benefiting from continued strong growth of the retirement savings market, industry sales of tax-deferred savings products have represented, for a number of years, a significantly larger source of new premiums for the U.S. life insurance industry than have traditional life insurance products. Recognizing the growth potential of this market, the Company focuses its life operations on the sale of variable annuity contracts. In recent years, the Company has

enhanced its marketing efforts and expanded its offerings of fee-based variable annuity contracts. Variable accounts within the Company’s variable annuity business entail no portfolio credit risk and requires significantly less capital support than the fixed accounts of variable annuity contracts (“Fixed Options”), which generate net investment income.

RECENT DEVELOPMENTS

The Company is in the process of de-registering all of its market value adjusted fixed account options previously offered through certain of its variable annuity products and anticipates completing the process prior to year end. At such time, the Company will no longer have any registered securities and will no longer be obligated to file financial reports under the Securities Exchange Act of 1934, as amended.

CRITICAL ACCOUNTING ESTIMATES

The Company considers its most critical accounting estimates those used with respect to valuation of certain financial instruments, amortization of deferred acquisition costs (“DAC”) and other deferred expenses and valuation of the reserve for guaranteed benefits. In the implementation of each of the aforementioned policies, management is required to exercise its judgment on both a quantitative and qualitative basis. Further explanation of how management exercises that judgment follows.

VALUATION OF CERTAIN FINANCIAL INSTRUMENTS: Gross unrealized losses on debt and equity securities available for sale amounted to $40.2 million at September 30, 2005. In determining if and when a decline in fair value below amortized cost is other than temporary, the Company evaluates at each reporting period the market conditions, offering prices, trends of earnings, price multiples, and other key measures for investments in debt and equity securities. In particular, for debt securities, the Company assesses the probability that all amounts due are collectible according to the contractual terms of the obligation. When such a decline in value is deemed to be other than temporary, the Company recognizes an impairment loss in the current period operating results to the extent of the decline. (See also discussion within “Capital Resources and Liquidity” herein.)

Securities in the Company’s portfolio with a carrying value of approximately $597.0 million at September 30, 2005 do not have readily determinable market prices. For these securities, the Company estimates the fair value with internally prepared valuations (including those based on estimates of future profitability). Otherwise, the Company uses its most recent purchases and sales of similar unquoted securities, independent broker quotes or comparison to similar securities with quoted prices when possible to estimate the fair value of those securities. All such securities are classified as available for sale. The Company’s ability to liquidate its positions in these securities will be impacted to a significant degree by the lack of an actively traded market, and the Company may not be able to dispose of these investments in a timely manner. Although the Company believes its estimates reasonably reflect the fair value of those securities, the key assumptions about the risk-free interest rates, risk premiums, performance of underlying collateral, if any, and other factors may not reflect those of an active market.

AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES: Contract acquisition costs include commissions and other costs that vary with, and are primarily related to, the production or acquisition of new business. Such costs are deferred and amortized over the estimated lives of the annuity contracts. Approximately 87% of the amortization of DAC and other deferred expenses was attributed to contract acquisition costs deferred by the annuity operations and 13% was attributed to the distribution costs deferred by the asset management operations. Substantially all of the DAC balance attributed to annuity operations at September 30, 2005 related to variable annuity contracts.

For the annuity operations, the Company amortizes DAC and other deferred expenses based on a percentage of expected gross profits (“EGPs”) over the life of the underlying contracts. EGPs are computed based on assumptions related to the underlying contracts written, including their anticipated duration, the growth rate of the separate account assets (with respect to variable options of the variable annuity contracts) or general account assets (with respect to fixed annuity contracts, Fixed Options and universal life insurance contracts) supporting these obligations, the costs of providing contract guarantees and the level of expenses necessary to maintain and administer the contracts. With respect to Fixed Options, the growth rate depends on the yield on the general account assets supporting those annuity contracts. With respect to the variable options of the variable annuity contracts, the

growth rate depends on the performance of the investment options available under the annuity contract and the allocation of assets among these various investment options.

Increases in future EGPs may result from higher growth rates, higher interest spread, a longer duration, lower guaranteed benefits and/or lower administrative costs, while decreases in future EGPs may result from lower growth rates, lower interest spread, a shorter duration, higher guaranteed benefits and/or higher administrative costs. Amortization of DAC and other deferred expenses for the current period is reduced when future EGPs are increased and amortization is increased when future EGPs are decreased. The Company adjusts amortization of DAC and other deferred expenses (a “DAC unlocking”) when estimates of future gross profits to be realized on its annuity contracts are revised.

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

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

RESERVE FOR GUARANTEED BENEFITS: Pursuant to the adoption of American Institute of Certified Public Accountants (“AICPA”) Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”) which was adopted on January 1, 2004, the Company is required to recognize a liability for guaranteed minimum death benefits and other guaranteed benefits. In calculating the projected liability, five thousand stochastically generated investment performance scenarios were developed using the Company’s best estimates. These estimates included, among others, mean equity return and volatility, mortality rates and lapse rates. The estimation of cash flow and the determination of the assumptions used require judgment, which can, at times, be subjective.

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

BUSINESS SEGMENTS

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

The asset management operations are conducted by the Company’s wholly owned registered investment advisor subsidiary, SAAMCo, and its wholly owned distributor, SACS, and its wholly owned servicing administrator, SFS. These companies earn fee income by managing, distributing and administering a diversified family of mutual funds, servicing as investment advisor to certain variable investment portfolios offered within the Company’s variable annuity products and providing professional management of individual, corporate and pension plan portfolios.

RESULTS OF OPERATIONS

NET INCOME totaled $48.0 million in the third quarter of 2005, compared with $43.1 million in the third quarter of 2004. For the nine months ended September 30, 2005, net income amounted to $142.3 million, compared to $50.0 million in 2004.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX reflected the adoption of SOP 03-1 on January 1, 2004. The Company recorded a loss of $62.6 million, net of tax, which is recognized in the consolidated statement of income and comprehensive income as a cumulative effect of accounting change for the nine months ended September 30, 2004.

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $63.1 million in the third quarter of 2005, compared with $51.5 million in the third quarter of 2004. For the nine months, pretax income before cumulative effect of accounting change totaled $196.8 million in 2005, compared to $148.4 million in 2004. The increase in the third quarter of 2005 and the nine months of 2005 compared to the third quarter of 2004 and the nine months of 2004, respectively, was primarily due to higher net realized investment gains, greater variable annuity policy fees and lower guaranteed minimum death benefits, partially offset by higher amortization of DAC and other deferred expenses.

INCOME TAX EXPENSE totaled $15.1 million in the third quarter of 2005, $8.4 million in the third quarter of 2004, $54.6 million in the nine months of 2005 and $35.8 million in the nine months of 2004 representing effective tax rates of 24%, 16%, 28% and 24%, respectively. The low effective tax rate in the third quarter of 2004 results from the recognition of certain tax credits.

ANNUITY OPERATIONS

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $55.9 million in the third quarter of 2005, compared with $43.7 million in the third quarter of 2004. For the nine months, pretax income before cumulative effect of accounting change totaled $173.2 million in 2005, compared to $127.7 million in 2004. The increase in the third quarter and nine months of 2005 compared to the third quarter and nine months of 2004, respectively, was primarily due to greater variable annuity policy fees, higher net realized investment gains and lower guaranteed minimum death benefits, partially offset by higher amortization of DAC and other deferred expenses and annual commissions.

NET INVESTMENT SPREAD, a non-GAAP measure, represents investment income less interest credited to Fixed Options, fixed annuity contracts, guaranteed investment contracts and universal life insurance contracts (collectively “Fixed-Rate Products”) and is a key measurement used by the Company in evaluating the profitability of its annuity business. Accordingly, the Company presents an analysis of net investment spread because the Company has determined this measure to be useful and meaningful.

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

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004

				(in thousands)

Investment income	$	92,199		$	89,671		$	261,854		$	275,614
Interest credited to fixed annuity contracts and Fixed Options		(31,073	)		(35,799	)		(94,529	)		(106,606	)
Interest credited to universal life insurance contracts		(17,644	)		(18,474	)		(52,945	)		(55,479	)
Interest credited to guaranteed investment contracts		(1,548	)		(1,550	)		(4,952	)		(4,264	)

Net investment spread		41,934			33,848			109,428			109,265

Net realized investment gains (losses)		794			(16,890	)		21,550			(27,783	)
Fee income, net of reinsurance		124,727			107,188			362,363			319,541
Amortization of bonus interest		(5,963	)		(2,544	)		(13,093	)		(7,768	)
Claims on UL insurance contracts, net of reinsurance recoveries		(5,411	)		(3,577	)		(13,891	)		(13,499	)
Guaranteed benefits, net of reinsurance recoveries		(3,963	)		(17,314	)		(20,739	)		(48,240	)
General and administrative expenses		(23,253	)		(23,272	)		(73,360	)		(75,873	)
Amortization of DAC		(54,237	)		(18,616	)		(142,907	)		(82,722	)
Annual commissions		(18,710	)		(15,114	)		(56,127	)		(45,245	)

Pretax income before cumulative effect of accounting change	$	55,918		$	43,709		$	173,224		$	127,676

Net investment spread totaled $41.9 million in the third quarter of 2005, compared with $33.8 million in the third quarter of 2004. These amounts equal 2.91% on average invested assets (computed on a daily basis) of $5.77 billion in the third quarter of 2005 and 2.17% on average invested assets of $6.23 billion in the third quarter of 2004. For the nine months, net investment spread totaled $109.4 million in 2005 and $109.3 million in 2004, representing 2.50% of average invested assets of $5.83 billion in 2005 and 2.33% of average invested assets of $6.25 billion in 2004 on an annualized basis. Included in the net investment spread during the quarter and nine months of 2005 was partnership income of $10.3 million. Excluding such partnership income, the investment spread (and the related yields on average invested assets) totals $31.6 million (2.20%) in the quarter of 2005 and $99.1 million (2.27%) in the nine months of 2005.

The components of net investment spread were as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004

	(in thousands, except for percentages)

Net investment spread	$	41,934		$	33,848		$	109,428		$	109,265
Average invested assets		5,766,264			6,225,262			5,831,338			6,254,328
Average interest-bearing liabilities		5,354,342			5,966,369			5,477,952			5,986,790

Yield on average invested assets		6.40	%		5.76	%		5.99	%		5.88	%
Rate paid on average interest bearing liabilities		3.76			3.74			3.71			3.70

Difference between yield and interest rate paid		2.64	%		2.02	%		2.28	%		2.18	%

Net investment spread as a percentage of average invested assets		2.91	%		2.17	%		2.50	%		2.33	%

The decline in average invested assets resulted primarily from annuity withdrawals, GIC maturities and net exchanges from Fixed Options into the separate accounts of variable annuity contracts, partially offset by new deposits of Fixed Options. Deposits of Fixed Options and renewal deposits on universal life insurance contracts totaled $353.8 million in the third quarter of 2005, $323.1 million in the third quarter of 2004, $1.01 billion in the nine months of 2005 and $1.12 billion in the nine months of 2004, and are primarily deposits for the Fixed Options. On an annualized basis, these deposits represent 27%, 22%, 25%, and 25%, respectively, of the related reserve balances at the beginning of the respective periods.

Net investment spread includes the effect of income earned or interest paid on the difference between average invested assets and average interest-bearing liabilities. Average invested assets exceeded average interest-bearing liabilities by $411.9 million in the third quarter of 2005, compared with $258.9 million in the third quarter of 2004. For the nine months, average invested assets exceeded average interest-bearing liabilities by $353.4 million in 2005, compared with $267.5 million in 2004. The difference between the Company’s yield on average invested assets and the rate paid on average interest-bearing liabilities was 2.64% in the third quarter of 2005, 2.02% in the third quarter of 2004, 2.28% in the nine months of 2005 and 2.18% in the nine months of 2004.

Investment income (and the related yields on average invested assets) totaled $92.2 million (6.40%) in the third quarter of 2005, $89.7 million (5.76%) in the third quarter of 2004, $261.9 million (5.99%) in the nine months of 2005 and $275.6 million (5.88%) in the nine months of 2004. Included in the net investment income during the quarter and nine months of 2005 was partnership income of $10.3 million. Excluding such partnership income, the investment income (and the related yields on average invested assets) totals $81.9 million (5.68%) in the quarter of 2005 and $251.6 million (5.75%) in the nine months of 2005. Included in investment income are expenses incurred to manage the investment portfolio amounted to $0.5 million in the third quarter of 2005, $0.5 million in the third quarter of 2004, $1.5 million in the nine months of 2005 and $1.8 million in the nine months of 2004.

Interest expense (and the related rate paid on average interest-bearing liabilities) totaled $50.3 million (3.76%) in the third quarter of 2005 and $55.8 million (3.74%) in the third quarter of 2004. For the nine months, interest expense (and the related rate paid on average interest-bearing liabilities) totaled $152.4 million (3.71%) in 2005, compared with $166.3 million (3.70%) in 2004. Interest-bearing liabilities averaged $5.35 billion during the third quarter of 2005, $5.97 billion during the third quarter of 2004, $5.48 billion during the nine months of 2005 and $5.99 billion during the nine months of 2004.

NET REALIZED INVESTMENT GAINS/LOSSES was a $0.8 million gain in the third quarter of 2005 and a $16.9 million loss in the third quarter of 2004 and included impairment writedowns of $15.4 million in the

third quarter of 2004. There were no impairment writedown in the third quarter of 2005. For the nine months, net realized investment gains totaled $21.6 million in 2005, compared with net realized investment losses of $27.8 million in 2004 and included impairment writedowns of $7.0 million and $17.9 million, respectively. The net realized gain includes the mark to market of the S&P 500 put options and futures and the guaranteed minimum account value (“GMAV”) and the guaranteed minimum withdrawal benefit (“GMWB”) embedded derivatives. The net impact from the mark to market of the S&P 500 put options, futures and the GMAV and GMWB embedded derivatives totaled net losses of $0.3 million in the third quarter of 2005, $1.7 million in the third quarter of 2004, $1.0 million in the nine months of 2005 and $2.9 million in the nine months of 2004, respectively. Thus, net realized gains from sales and redemptions of investments totaled $1.1 million in the third quarter of 2005 and $0.2 million in the third quarter of 2004. For the nine months, net realized gains from sales and redemptions of investments totaled $29.6 million in 2005, compared with net realized losses of $7.0 million in 2004.

The Company sold or redeemed invested assets, principally bonds and notes, aggregating $1.13 billion in the third quarter of 2005, $320.3 million in the third quarter of 2004, $2.04 billion in the nine months of 2005 and $1.50 billion in the nine months of 2004. Sales of investments result from the active management of the Company’s investment portfolio. Because redemptions of investments are generally involuntary and sales of investments are made in both rising and falling interest rate environments, net gains and losses from sales and redemptions of investments fluctuate from period to period, and represent 0.03%, 0.01%, 0.68% and 0.15% of average invested assets for the third quarter of 2005, the third quarter of 2004, the nine months of 2005 and the nine months of 2004, respectively. Active portfolio management involves the ongoing evaluation of asset sectors, individual securities within the investment portfolio and the reallocation of investments from sectors that are perceived to be relatively overvalued to sectors that are perceived to be relatively undervalued. The intent of the Company’s active portfolio management is to maximize total returns on the investment portfolio, taking into account credit, option, liquidity and interest-rate risk.

Impairment writedowns include $15.4 million, $7.0 million and $17.9 million of provisions principally applied to bonds in the third quarter of 2004, the nine months of 2005 and the nine months of 2004, respectively. On an annualized basis, impairment writedowns represent 0.99%, 0.16% and 0.38% of average invested assets in the respective periods. For the twenty quarters ended September 30, 2005, impairment writedowns, as an annualized percentage of average invested assets, have ranged up to 1.95% and have averaged 0.70%. Such writedowns are based upon estimates of the fair value of invested assets and recorded when declines in the value of such assets are considered to be other than temporary. Actual realization will be dependent upon future events.

VARIABLE ANNUITY POLICY FEES, NET OF REINSURANCE are generally based on the market value of assets in the separate accounts supporting variable annuity contracts. Such fees totaled $109.8 million in the third quarter of 2005 and $93.2 million in the third quarter of 2004 and are net of reinsurance premiums of $7.1 million and $6.7 million, respectively. For the nine months, variable annuity policy fees totaled $316.5 million in 2005 and $274.4 million in 2004 and are net of reinsurance premiums of $21.2 million and $21.7 million, respectively. On an annualized basis, variable annuity policy fees represent 1.9%, 1.9%, 1.9% and 1.8% of average variable annuity assets in the third quarters and nine months of 2005 and 2004, respectively. Variable annuity assets averaged $23.35 billion, $20.13 billion, $22.71 billion and $20.03 billion during the respective periods.

Variable annuity deposits, which exclude deposits allocated to the Fixed Options, totaled $417.2 million in the third quarter of 2005 and $586.0 million in the third quarter of 2004. For the nine months, variable annuity deposits totaled $1.41 billion, compared with $2.09 billion in 2004. On an annualized basis, these amounts represent 7%, 11%, 8% and 15% of variable annuity reserves at the beginning of the respective periods. Transfers from the Fixed Options to the separate accounts are not classified as variable annuity deposits. Accordingly, changes in variable annuity deposits are not necessarily indicative of the ultimate allocation by customers among fixed and variable account options of the Company’s variable annuity products.

Sales of variable annuity products, which include deposits allocated to the Fixed Options (“Variable Annuity Product Sales”) amounted to $760.7 million, $898.2 million, $2.40 billion and $3.17 billion in the third quarters and nine months of 2005 and 2004, respectively. Such sales primarily reflect those of the Company’s Polaris and Seasons families of variable annuity products which are multi-manager variable annuities that offer investors a choice of several variable and fixed funds, depending on the product. The decrease in variable annuity product sales in the 2005 compared to 2004 was largely attributable to a continued lackluster equity market, the

regulatory environment for variable annuities and more intense competition with regard to the living benefits, as well as the negative press associated with AIG’s regulatory issues.

Withdrawal payments of variable annuity products, which exclude claims and annuitization benefits, totaled $824.5 million, $639.5 million, $2.34 billion and $1.88 billion the third quarters and nine months of 2005 and 2004, respectively. Annualized, these payments when expressed as a percentage of average related reserves represent 11.6%, 10.0%, 11.2% and 9.8% for the third quarters and nine months of 2005 and 2004, respectively. The annualized surrender rates increased from the first quarter to the second quarter and remained constant in the third quarter of 2005. Management is monitoring emerging experience to determine if the increase is indicative of any unexpected long-term trends and to evaluate the factors that are influencing surrender behavior.

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

UNIVERSAL LIFE INSURANCE POLICY FEES, NET OF REINSURANCE amounted to $7.9 million in the third quarter of 2005 and $7.5 million in the third quarter of 2004 and are net of reinsurance premiums of $8.6 million and $9.3 million, respectively. For the nine months, universal life insurance policy fees totaled $25.0 million in 2005 and $25.2 million in 2004 and are net of reinsurance premiums of $25.1 million and $25.7 million, respectively. Universal life insurance policy fees consist of mortality charges, up-front fees earned on deposits received and administrative fees, net of reinsurance premiums. The administrative fees are assessed based on the number of policies in force as of the end of each month. The Company acquired its universal life insurance contracts as part of the acquisition of business from MBL Life Assurance Corporation on December 31, 1998 and does not actively market such contracts. Such fees annualized represent 2.2%, 2.0%, 2.3% and 2.2% of average reserves for universal life insurance contracts in the respective periods.

SURRENDER CHARGES on variable annuity and universal life insurance contracts totaled $7.0 million in the third quarter of 2005 and $6.5 million in the third quarter of 2004. For the nine months, such surrender charges totals $20.9 million in 2005 and $20.0 million in 2004. Surrender charge periods range up to nine years primarily from the date a deposit is received. Surrender charges generally are assessed on withdrawals at declining rates.

CLAIMS ON UNIVERSAL LIFE INSURANCE CONTRACTS, NET OF REINSURANCE RECOVERIES totaled $5.4 million in the third quarter of 2005, compared with $3.6 million in the third quarter of 2004 and are net of reinsurance recoveries of $10.3 million and $5.9 million, respectively. For the nine months, such claims totaled $13.9 million in 2005 and $13.5 million in 2004 and are net of reinsurance recoveries of $24.8 million in 2005 and $28.6 million in 2004. The change in such claims resulted principally from changes in mortality experience and the reinsurance recoveries thereon.

GUARANTEED BENEFITS, NET OF REINSURANCE RECOVERIES on variable annuity contracts totaled $4.0 million in the third quarter of 2005, compared with $17.3 million in the third quarter of 2004 and are net of reinsurance recoveries of $0.3 million and $0.1 million, respectively. For the nine months, guaranteed benefits net of reinsurance recoveries amounted to $20.7 million in 2005 and $48.2 million in 2004 and are net of reinsurance recoveries of $0.9 million in 2005 and $2.5 million in 2004. The decrease during 2005 reflects the generally improved equity market performance in the fourth quarter of 2004. Downturns in the equity markets could increase these expenses. These guaranteed benefits consist primarily of guaranteed minimum death benefits as well as immaterial amounts of earnings enhancement benefits and guaranteed minimum income benefits. These guarantees are described in more detail in the following paragraphs.

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

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

Guaranteed minimum income benefit (“GMIB”) is a feature the Company offers on certain variable annuity products. This feature provides a minimum fixed annuity payment guarantee for those contract holders who choose to receive fixed lifetime annuity payments after a waiting period in their deferred annuity contracts. The Company bears the risk that the performance of the financial markets will not be sufficient for accumulated contract holder account balances to support GMIB benefits and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. As there is a waiting period to annuitize using the GMIB, there are no policies eligible to receive this benefit at September 30, 2005. The Company has eliminated offering a GMIB feature that guarantees the amount to be annuitized to exceed the amounts deposited in order to mitigate its exposure.

Guaranteed minimum account value (“GMAV”) is a feature the Company offers on certain variable annuity products. If available and elected by the contract holder at the time of contract issuance, this feature guarantees that the account value under the contract will at least equal the amount of the deposits invested during the first ninety days of the contract, adjusted for any subsequent withdrawals, at the end of a ten-year waiting period. The Company bears the risk that protracted under-performance of the financial markets could result in GMAV benefits being higher than the underlying contract holder account balance and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. The Company has purchased put options and futures on the S&P 500 index to partially offset this risk. Changes in the market value of the GMAV benefit, the put options and futures are recorded in net realized investment gains/losses in the accompanying consolidated statement of income and comprehensive income.

Guaranteed minimum withdrawal benefit (“GMWB”) is a feature the Company began offering on certain variable annuity products in May of 2004. If available and elected by the contract holder at the time of contract issuance, this feature provides a guaranteed annual withdrawal stream at the end of a specified wait period, if any, regardless of market performance. The guaranteed withdrawal stream is based upon deposits invested during a specified period adjusted for subsequent withdrawals and may include a guaranteed step-up bonus. The Company bears the risk that protracted under-performance of the financial markets could result in GMWB benefits being higher than the underlying contract holder account balance and that the fees collected under the contract are insufficient to cover the costs of the benefit to be provided. The Company has purchased put options and futures on the S&P 500 index to partially offset this risk. Changes in the market value of the GMWB benefit, the put options and futures are recorded in net realized investment gains/losses in the accompanying consolidated statement of income and comprehensive income.

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

Management expects most of the Company’s near-term exposure to guaranteed benefits will relate to death benefits. As sales of products with other guaranteed benefits increase, the Company expects these other guarantees to have an increasing impact on operating results, under current hedging strategies.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $23.3 million in the third quarter of 2005 and $23.3 million in the third quarter of 2004. For the nine months, general and administrative expenses totaled $73.4 million in 2005 and $75.9 million in 2004. General and administrative expenses remain closely controlled through a company-wide cost containment program and continue to represent less than 1% of average total assets.

AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES totaled $54.2 million in the third quarter of 2005, compared with $18.6 million in the third quarter of 2004. For the nine months, such amortization totaled $142.9 million in 2005, compared with $82.7 million in 2004. The increase

in the amortization in 2005 reflects higher variable annuity policy fee income, higher net realized investment gains and lower guaranteed benefits.

ANNUAL COMMISSIONS totaled $18.7 million in the third quarter of 2005, compared with $15.1 million in the third quarter of 2004. For the nine months, annual commissions totaled $56.1 million in 2005 and $45.2 million in 2004. Annual commissions generally represent commissions paid quarterly in arrears to maintain the persistency of certain of the Company’s variable annuity contracts. Substantially all of the Company’s currently available variable annuity products allow for an annual commission payment option in return for a lower immediate commission. The vast majority of the Company’s average balances of its variable annuity products are currently subject to such annual commissions. The increase in annual commissions primarily reflects trail commissions on higher level of assets.

ASSET MANAGEMENT OPERATIONS

PRETAX INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE totaled $7.2 million in the third quarter of 2005, compared to $7.8 million in the third quarter of 2004. For the nine months, pretax income before cumulative effect of accounting change amounted to $23.6 million in 2005 and $20.7 million in 2004. The increase in pretax income for the nine months of 2005 was primarily due to higher investment income, the absence of subordinated debt interest expense and a grant received from the State of New Jersey pursuant to a business employment incentive program partially offset by higher general and administrative expenses associated with the launch of a new closed-end fund product line.

ASSET MANAGEMENT FEES, which include investment advisory fees and certain 12b-1 distribution fees, are based on the market value of assets managed by SAAMCo in its mutual funds and certain funds that serve as investment vehicles to variable annuity portfolios. Such fees totaled $20.9 million based primarily on mutual fund average assets managed of $10.36 billion in the third quarter of 2005 and $21.7 million on average assets managed of $9.53 billion in the third quarter of 2004. For the nine months, asset management fees amounted to $61.7 million on average assets managed of $10.09 billion in 2005 and $62.6 million on average assets managed of $9.59 billion in 2004. Asset management fees included $0.4 million in the third quarter and $1.5 million for the nine months of 2004 from the terminated variable annuity directed brokerage program.

Mutual fund sales, excluding sales of money market funds, totaled $737.3 million in the third quarter of 2005, compared to $466.6 million in the third quarter of 2004. For the nine months, mutual fund sales amounted to $1.61 billion in 2005 and $1.70 billion in 2004. The third quarter and nine months of 2005 includes $407.0 million of sales from the introduction of a new closed-end fund product line in July 2005. Excluding the sale of the new fund, mutual fund sales totaled $330.3 million in the third quarter of 2005 and $1.20 billion in the nine months of 2005. Redemptions of such funds, excluding redemptions of money market funds, amounted to $523.4 million in the third quarter of 2005, $386.1 million in the third quarter of 2004, $1.53 billion in the nine months of 2005 and $1.13 billion in the nine months of 2004 which, annualized, represent 25%, 20%, 25% and 19%, respectively, of average related mutual fund assets. Management believes the continued lackluster equity market during the nine months of 2005 coupled with a short term shift in marketing efforts toward closed-end fund sales in the third quarter led to the decrease in open-end net sales. Management continues to monitor the adverse developments in sales and redemptions to determine if they are indicative of any unexpected trends.

OTHER FEES totaled $3.7 million and $3.9 million for the third quarters of 2005 and 2004, respectively and $11.7 million and $11.0 million for the nine months ended September 30, 2005 and 2004, respectively. The increase in the nine months ended September 30, 2005 results from a New Jersey state grant for maintaining employment in certain areas of the state in 2004.

INVESTMENT INCOME (and the related yields on average invested assets) totaled $0.8 million (3.10%) in the third quarter of 2005, $0.2 million (1.22%) in the third quarter of 2004, $2.0 million (2.59%) in the nine months of 2005 and $0.5 million (1.03%) in the nine months of 2004. Invested assets averaged $105.8 million during the third quarter of 2005, $76.3 million during the third quarter of 2004, $104.1 million during the nine months of 2005 and $71.1 million during the nine months of 2004. The increase in the quarter and nine months of 2005 is directly attributable to higher yields and increased average invested assets in 2005.

INTEREST EXPENSE was $0.5 million and $1.6 million in the third quarter and nine months of 2004, respectively. All subordinated notes were retired on December 29, 2004.

GENERAL AND ADMINISTRATIVE EXPENSES totaled $10.6 million in the third quarter of 2005, $9.4 million in the third quarter of 2004, $29.0 million in the nine months of 2005 and $28.4 million in the nine months of 2004. The increase in the third quarter and nine months of 2005 was the result of $1.1 million in selling expenses associated with the launch of the new closed-end fund product line and professional fees related to proof of claim filings on behalf of the mutual funds. This increase was partially offset by the absence of expenses related to the terminated variable annuity directed brokerage program.

AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER DEFERRED EXPENSES includes amortization of distribution costs that totaled $7.7 million in the third quarter of 2005, compared with $8.1 million in the third quarter of 2004. For the nine months, such amortization totaled $23.0 million in 2005 and $23.5 million in 2004.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDER’S EQUITY increased to $1.83 billion at September 30, 2005 from $1.75 billion at December 31, 2004 primarily due to $142.3 million of net income partially offset by a $25.0 million dividend to the Company’s direct parent, SunAmerica Life Insurance Company (the “Parent”) and a $44.0 million decrease in accumulated other comprehensive income. The decrease in accumulated other comprehensive income was related to the decline in value of the Company’s portfolio of bonds, notes and redeemable preferred stocks (the “Bond Portfolio”) as interest rates have risen, partially offset by the related amortization of DAC and other deferred expenses and income tax effects.

INVESTMENTS AND CASH at September 30, 2005 totaled $6.99 billion, compared with $7.13 billion at December 31, 2004. The Company’s invested assets are managed by an affiliate. The following table summarizes the Company’s Bond Portfolio and other investments and cash at September 30, 2005 and December 31, 2004:


	September 30, 2005					December 31, 2004
	Fair		Percent of			Fair		Percent of
	Value		Portfolio			Value		Portfolio

	(in thousands, except for percentages)

Bond Portfolio:

U.S. government securities	$	33,839		0.5	%	$	30,300		0.4	%
Mortgage-backed securities		1,040,167		14.9			956,567		13.4
Securities of public utilities		278,554		4.0			332,038		4.7
Corporate bonds and notes		2,722,305		38.9			2,902,829		40.7
Other debt securities		752,589		10.7			917,743		12.9


Total Bond Portfolio		4,827,454		69.0			5,139,477		72.1

Mortgage loans		524,468		7.5			624,179		8.8
Common stocks		27,583		0.4			26,452		0.4
Cash and short-term investments		393,729		5.6			201,117		2.8
Securities lending collateral		974,379		13.9			883,792		12.4
Other invested assets		247,210		3.6			250,969		3.5


Total investments and cash	$	6,994,823		100.0	%	$	7,125,986		100.0	%

The Company’s general investment philosophy is to hold fixed-rate assets for long-term investment. However, the Company has determined that all of the Bond Portfolio is available to be sold in response to changes in market interest rates, changes in relative value of asset sectors and individual securities, changes in prepayment

risk, changes in the credit quality outlook for certain securities, the Company’s need for liquidity and other similar factors.

THE BOND PORTFOLIO, which constituted 69% of the Company’s total investment portfolio at September 30, 2005, had an aggregate fair value that was $60.9 million greater than its amortized cost at September 30, 2005, compared with $151.7 million at December 31, 2004.

At September 30, 2005, the Bond Portfolio had an aggregate fair value of $4.83 billion and an aggregate amortized cost of $4.77 billion. At September 30, 2005, the Bond Portfolio included $4.27 billion of bonds rated by Standard & Poor’s (“S&P”), Moody’s Investors Service (“Moody’s”) or Fitch (“Fitch”) and $559.3 million of bonds rated by the National Association of Insurance Commissioners (“NAIC”) or the Company pursuant to statutory ratings guidelines established by the NAIC. At September 30, 2005, approximately $4.55 billion of the Bond Portfolio was investment grade, including $1.07 billion of mortgage-backed securities (“MBS”) and U.S. government/agency securities.

At September 30, 2005, the Bond Portfolio included $280.7 million of bonds that were not investment grade. These non-investment-grade bonds accounted for approximately 1% of the Company’s total assets and approximately 4% of its invested assets. Non-investment-grade securities generally provide higher yields and involve greater risks than investment-grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment-grade issuers. In addition, the trading market for these securities is usually more limited than for investment-grade securities. An economic downturn could produce higher than average issuer defaults on the non-investment-grade securities, which could cause the Company’s investment returns and net income to decline. At September 30, 2005, the Company’s non-investment-grade Bond Portfolio consisted of 134 issues with no single issuer representing more than 10% of the total non-investment-grade Bond Portfolio. These non-investment-grade securities are comprised of bonds spanning 10 industries with 17%, 17%, 17%, and 15% concentrated in financial services, telecommunications, utilities and cyclical consumer industries, respectively. No other industry concentration constituted more than 10% of these assets.

The following summarizes the Company’s rated bonds by rating classification as of September 30, 2005.

RATED BONDS BY RATING CLASSIFICATION

(dollars in millions)


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

AAA+ to A- (Aaa to A3) [AAA to A-]	$	3,077	$	3,096		1	$	266	$	268	$	3,343	$	3,364		48.09	%

BBB+ to BBB- (Baa to Baa3) [BBB+ to BBB-]		952		964		2		216		218		1,168		1,182		16.90	%

BB+ to BB- (Bal to Ba3) [BB+ to BB-]		138		140		3		14		21		152		161		2.30	%

B+ to B- (Bl to B3) [B+ to B-]		50		53		4		7		7		57		60		0.86	%

CCC+ to CCC- (Caal to Caa3) [CCC+ to CCC-]		13		11		5		13		17		26		28		0.40	%

CC to D (Ca to C) [CC to D]		1		4		6		20		28		21		32		0.46	%


TOTAL RATED ISSUES	$	4,231	$	4,268			$	536	$	559	$	4,767	$	4,827

Footnotes to the table of Rated Bonds by Rating Classification


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

(2)		Bonds and short-term promissory instruments are divided into six quality categories for NAIC rating purposes, ranging from 1 (highest) to 5 (lowest) for non-defaulted bonds plus one category 6, for bonds in or near default. These six categories correspond with the S&P/Moody’s/Fitch rating groups listed above, with categories 1 and 2 considered investment grade. The NAIC categories include $45.5 million of assets that were rated by the Company pursuant to applicable NAIC rating guidelines.

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

Another aspect of valuation pertains to impairment. As a matter of policy, the determination that a security has incurred an other-than-temporary decline in value and the amount of any loss recognition requires the judgment of the Company’s management and a continual review of its investments. In general, a security is considered a candidate for impairment if it meets any of the following criteria:

	•		Trading at a significant discount to par, amortized cost (if lower) or cost for an extended period of time;

	•		The occurrence of a discrete credit event resulting in: (i) the issuer defaulting on a material outstanding obligation; (ii) the issuer seeking protection from creditors under the bankruptcy laws or similar laws intended for the court supervised reorganization of insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than the par value of their claims; or

	•		In the opinion of the Company’s management, it is unlikely the Company will realize a full recovery on its investment, irrespective of the occurrence of one of the foregoing events.

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

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

As a result of these policies, the Company recorded pretax impairment writedowns of $7.0 million and $17.9 million in the nine months of 2005 and 2004, respectively. No individual impairment loss, net of DAC and taxes, exceeded 10% of the Company’s net income for the nine months ended September 30, 2005.

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

At September 30, 2005, the fair value of the Company’s Bond Portfolio aggregated $4.83 billion. Of this aggregate fair value, less than 0.08% represented securities trading at or below 75% of amortized cost. The impact of unrealized losses on net income will be further mitigated upon realization, because realization will result in current decreases in the amortization of DAC and other deferred expenses and decreases in income taxes.

At September 30, 2005, approximately $2.57 billion, at amortized cost, of the Bond Portfolio had a fair value of $2.67 billion resulting in an aggregate unrealized gain of $101.1 million. At September 30, 2005, approximately $2.19 billion, at amortized cost, of the Bond Portfolio had a fair value of $2.15 billion resulting in an aggregate unrealized loss of $40.2 million. No single issuer accounted for more than 10% of unrealized losses. Approximately 37% of unrealized losses were from the financial services industry. No other industry accounted for more than 10% of unrealized losses.

The amortized cost of the Bond Portfolio in an unrealized loss position at September 30, 2005, by contractual maturity, is shown below.


	Amortized Cost

	(in thousands)

Due in one year or less	$	74,975
Due after one year through five years		785,160
Due after five years through ten years		737,863
Due after ten years		595,015

Total	$	2,193,013

The aging of the Bond Portfolio in an unrealized loss position at September 30, 2005 is shown below:



(dollars in thousands)	Less than or Equal to 20%							Greater than 20% to 50%							Greater than 50%
	of Amortized Cost							of Amortized Cost							of Amortized Cost							Total
	Amortized		Unrealized					Amortized		Unrealized					Amortized		Unrealized					Amortized		Unrealized
Months	Cost		Loss			Items		Cost		Loss			Items		Cost		Loss			Items		Cost		Loss			Items
Investment Grade Bonds

0-6	$	22,237	$	(619	)		8	$	—	$	—			—	$	7	$	(7	)		1	$	22,244	$	(626	)		9
7-12		39,959		(1,179	)		13		78		(28	)		1		—		—			—		40,037		(1,207	)		14
>12		8,946		(638	)		6		6,469		(1,809	)		3		82		(62	)		2		15,497		(2,509	)		11

Total	$	71,142	$	(2,436	)		27	$	6,547	$	(1,837	)		4	$	89	$	(69	)		3	$	77,778	$	(4,342	)		34

Below Investment Grade Bonds
0-6	$	1,301,882	$	(13,667	)		219	$	—	$	—			—	$	—	$	—			—	$	1,301,882	$	(13,667	)		219
7-12		486,329		(9,773	)		81		—		—			—		—		—			—		486,329		(9,773	)		81
>12		327,024		(12,418	)		57		—		—			—		—		—			—		327,024		(12,418	)		57

Total	$	2,115,235	$	(35,858	)		357	$	—	$	—			—	$	—	$	—			—	$	2,115,235	$	(35,858	)		357

Total Bonds
0-6	$	1,324,119	$	(14,286	)		227	$	—	$	—			—	$	7	$	(7	)		1	$	1,324,126	$	(14,293	)		228
7-12		526,288		(10,952	)		94		78		(28	)		1		—		—			—		526,366		(10,980	)		95
>12		335,970		(13,056	)		63		6,469		(1,809	)		3		82		(62	)		2		342,521		(14,927	)		68

Total	$	2,186,377	$	(38,294	)		384	$	6,547	$	(1,837	)		4	$	89	$	(69	)		3	$	2,193,013	$	(40,200	)		391

In the nine months of 2005, the pretax realized losses incurred with respect to the sale of fixed-rate securities in the Bond Portfolio was $12.2 million. The aggregate fair value of securities sold was $633.2 million, which was approximately 98% of amortized cost. The average period of time that securities sold at a loss during the nine months of 2005 and were trading continuously at a price below amortized cost was approximately 7 months.

The valuation for the Company’s Bond Portfolio comes from market exchanges or dealer quotations, with the exception of non-traded securities. The Company considers non-traded securities to mean certain fixed income

investments and certain structured securities. The aggregate fair value of these securities at September 30, 2005 was approximately $597.0 million. The Company estimates the fair value with internally prepared valuations (including those based on estimates of future profitability). Otherwise, the Company uses its most recent purchases and sales of similar unquoted securities, independent broker quotes or comparison to similar securities with quoted prices when possible to estimate the fair value of those securities. All such securities are classified as available for sale.

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

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

Senior secured loans (“Secured Loans”) are included in the Bond Portfolio and aggregated $191.7 million at September 30, 2005. Secured Loans are senior to subordinated debt and equity and are secured by assets of the issuer. At September 30, 2005, Secured Loans consisted of $127.6 million of privately traded securities and $64.1 million of publicly traded securities. These Secured Loans are composed of loans to 46 borrowers spanning 10 industries, with 36% and 17% from the utilities and telecommunications industries, respectively. No other industry constituted more than 10% of these assets.

While the trading market for the Company’s privately traded Secured Loans is more limited than for publicly traded issues, participation in these transactions has enabled the Company to improve its investment yield. As a result of restrictive financial covenants, these Secured Loans involve greater risk of technical default than do publicly traded investment-grade securities. However, management believes that the risk of loss upon default for these Secured Loans is mitigated by such financial covenants and the collateral values underlying the Secured Loans.

MORTGAGE LOANS aggregated $524.5 million at September 30, 2005 and consisted of 86 commercial first mortgage loans with an average loan balance of approximately $6.1 million, collateralized by properties located in 29 states. Approximately 32% of this portfolio was office, 18% was multifamily residential, 14% was industrial, 13% was hotels and 23% was other types. At September 30, 2005, approximately 29%, 12% and 10% of this portfolio were secured by properties located in California, Massachusetts and Michigan, respectively. No more than 10% of this portfolio was secured by properties located in any other single state. At September 30, 2005, 14 mortgage loans have an outstanding balance of $10 million or more, which collectively aggregated approximately 51% of this portfolio. At September 30, 2005, approximately 32% of the mortgage loan portfolio consisted of loans with balloon payments due before October 1, 2008. During 2005 and 2004, loans delinquent by more than 90 days, foreclosed loans and restructured loans have not been significant in relation to the total mortgage loan portfolio.

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

POLICY LOANS totaled $172.3 million at September 30, 2005, compared with $186.0 million at December 31, 2004, and primarily present loans taken against universal life insurance contracts.

SECURITIES LENDING COLLATERAL totaled $974.4 million at September 30, 2005, compared with $883.8 million at December 31, 2004, and consisted of cash collateral invested in highly rated short-term securities received in connection with the Company’s securities lending program. The increase in securities lending collateral in 2005 resulted from increased demand for securities in the Company’s portfolio. Although the cash collateral is currently invested in highly rated short-term securities, the applicable collateral agreements permit the cash

collateral to be invested in highly liquid short and long-term investment portfolios. At least 75% of the portfolio’s short-term investments must have external issue ratings of A-1/P-1, one of the highest ratings for short-term credit quality. Long-term investments include corporate notes with maturities of five years or less and a credit rating by at least two nationally recognized statistical rating organizations (“NRSRO”), with no less than a S&P rating of A or equivalent by any other NRSRO.

ASSET-LIABILITY MATCHING is utilized by the Company in an effort to minimize the risks of interest rate fluctuations and disintermediation (i.e. the risk of being forced to sell investments during unfavorable market conditions). The Company believes that its liabilities for Fixed-Rate Products should be backed by a portfolio principally composed of fixed-rate investments that generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rate environment, the slope of the yield curve, the spread at which fixed-rate investments are priced over the yield curve, default rates and general economic conditions. Its portfolio strategy is constructed with a view to achieve adequate risk-adjusted returns consistent with its investment objectives of effective asset-liability matching, liquidity and safety. The Company’s Fixed-Rate Products incorporate incentives, surrender charges and/or other restrictions in order to encourage persistency. Approximately 77% of the Company’s reserves for Fixed-Rate Products had surrender penalties or other restrictions at September 30, 2005.

As part of its asset-liability matching discipline, the Company conducts detailed computer simulations that model its fixed-rate assets and liabilities under commonly used interest rate scenarios. With the results of these computer simulations, the Company can measure the potential gain or loss in fair value of its interest-rate sensitive instruments and seek to protect its economic value and achieve a predictable spread between what it earns on its invested assets and what it pays on its liabilities by designing its Fixed-Rate Products and conducting its investment operations to closely match the duration and cash flows of the fixed-rate assets to that of its fixed-rate liabilities. The fixed-rate assets in the Company’s asset-liability modeling include: cash and short-term investments; bonds, notes and redeemable preferred stocks; mortgage loans; policy loans; and investments in limited partnerships that invest primarily in fixed-rate securities. At September 30, 2005, these assets had an aggregate fair value of $5.91 billion with an option-adjusted duration of 3.3 years. The Company’s fixed-rate liabilities include Fixed Options, as well as universal life insurance, fixed annuity and GIC contracts. At September 30, 2005, these liabilities had an aggregate fair value (determined by discounting future contractual cash flows by related market rates of interest) of $4.91 billion with an option-adjusted duration of 3.8 years. The Company’s potential exposure due to a relative 10% increase in prevailing interest rates from its September 30, 2005 levels is a loss of approximately $3.9 million, representing a decrease in fair value of its fixed-rate assets that is not offset by a decrease in fair value of its fixed-rate liabilities. Because the Company actively manages its assets and liabilities and has strategies in place to minimize its exposure to loss as interest rate changes occur, it expects that actual losses would be less than the estimated potential loss.

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

A significant portion of the Company’s fixed annuity contracts and Fixed Options has reached or is near the minimum contractual guaranteed rate (generally 3%). Continued declines in interest rates could cause the spread between the yield on the portfolio and the interest rate credited to policyholders to deteriorate.

The Company has had the ability, limited by minimum interest rate guarantees, to respond to the generally declining interest rate environment in the last five years by lowering crediting rates in response to lower investment returns. See the earlier discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on the calculation of investment yield and net investment spread used by the Company’s management as a key component in evaluating the profitability of its annuity business. The trends experienced during 2005 and 2004 in the Company’s yield on average invested assets and rate of interest

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


	Nine Months
	Ended
	September 30,			Years Ended December, 31
	2005			2004			2003			2002

Average 10-year U.S. Treasury bond rate:		4.21	%		4.26	%		4.01	%		4.61	%
AIG SunAmerica Life Assurance Company:
Average yield on Bond Portfolio		5.55			5.66			5.75			6.23
Rate paid on average interest-bearing liabilities		3.71			3.71			3.71			3.93

Since the Company’s investing strategy is to hold fixed-rate assets for long-term investment, the Company’s average yield tends to trail movements in the average U.S. treasury yield. For further discussion on average yield on the bond portfolio and the rate paid on average interest-bearing liabilities, see discussion on “Investment Spread.”

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

The Company seeks to provide liquidity by investing in MBS. MBS are generally investment-grade securities collateralized by large pools of mortgage loans. MBS generally pay principal and interest monthly. The amount of principal and interest payments may fluctuate as a result of prepayments of the underlying mortgage loans.

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

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

The carrying values of investments that are determined to have declines in value that are other than temporary are reduced to net realizable value and, in the case of bonds, no further accruals of interest are made. The

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

DEFAULTED INVESTMENTS, comprising all investments that are in default as to the payment of principal or interest, had a fair value of $18.0 million of bonds at September 30, 2005, and constituted approximately 0.3% of total invested assets. At December 31, 2004, defaulted investments totaled $40.1 million of bonds, which constituted approximately 0.6% of total invested assets.

SOURCES OF LIQUIDITY are readily available to the Company in the form of the Company’s existing portfolio of cash and short-term investments, reverse repurchase agreement capacity on invested assets and, if required, proceeds from invested asset sales. The Company’s liquidity is primarily derived from operating cash flows from annuity operations. At September 30, 2005, approximately $2.67 billion of the Bond Portfolio had an aggregate unrealized gain of $101.1 million, while approximately $2.15 billion of the Bond Portfolio had an aggregate unrealized loss of $40.2 million. In addition, the Company’s investment portfolio currently provides approximately $43.8 million of monthly cash flow from scheduled principal and interest payments. Historically, cash flows from operations and from the sale of the Company’s annuity products have been more than sufficient in amount to satisfy the Company’s liquidity needs.

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

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

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

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

GUARANTEES AND OTHER COMMITMENTS

The Company has six agreements outstanding in which it has provided liquidity support for certain short-term securities of municipalities and non-profit organizations by agreeing to purchase such securities in the event there is no other buyer in the short-term marketplace. In return the Company receives a fee. In addition, pursuant to these agreements the Company guarantees the payment of these securities upon redemption. The maximum liability under these guarantees at September 30, 2005 is $185.5 million. The expiration dates of these commitments are as follows: $26.4 million in 2005 and $159.1 million in 2006. Related to each of these agreements are participation agreements, under which the Parent will share in $58.6 million of these liabilities in exchange for a proportionate percentage of the fees received under these agreements.

At September 30, 2005, the Company held reserves for GICs with maturity dates as follows: $87.2 million in 2005 and $29.7 million in 2024.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2003, the American Institute of Certified Public Accountants (“AICPA”) issued SOP 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). This statement was effective as of January 1, 2004, and requires the Company to recognize a liability for GMDB and certain living benefits related to its variable annuity contracts, account for enhanced crediting rates or bonus payments to contract holders and modifies certain disclosures and financial statement presentations for these products. In addition, SOP 03-1 addresses the presentation and reporting of separate accounts and the capitalization and amortization of certain other expenses. The Company reported for the first quarter of 2004 a one-time cumulative accounting charge of $62.6 million ($96.3 million pre-tax) to reflect the liability and the related impact on DAC as of January 1, 2004.

In September 2005, the AICPA issued SOP 05-1,”Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). This statement 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 Statement of Financial Accounting Standards No. 97. SOP 05-1 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. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company is evaluating the provisions of SOP 05-1. Based on current practices, management believes the adoption of SOP 05-1 will not have a material impact on the consolidated financial position, results of operations or cash flows of the Company.

REGULATION

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

Risk-based capital (“RBC”) standards are designed to measure the adequacy of an insurer’s statutory capital and surplus in relation to the risks inherent in its business. The standards are intended to help identify inadequately capitalized companies and require specific regulatory actions in the event an insurer’s RBC is deficient. The RBC formula develops a risk-adjusted target level of adjusted statutory capital and surplus by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only as a result of the insurer’s size, but also on the risk profile of the insurer’s operations. The RBC Model Law provides four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The risk based adjusted capital of the Company as of September 30, 2005 exceeded the RBC requirements that would require state regulatory action.

New RBC requirements for variable annuities have been adopted by the NAIC. The new requirements differ from traditional RBC approach in that they are based on company models and statistical methods, rather than factors, to determine target regulatory capital. These new RBC requirements, which are subject to a regulatory minimum, will be phased in over three years beginning with the year ended December 31, 2005.

The federal government does not directly regulate the business of insurance, however, the Company, its subsidiaries and its products are governed by federal agencies, including the Securities and Exchange Commission

(“SEC”), the Internal Revenue Service and the self-regulatory organization, National Association of Securities Dealers, Inc. (“NASD”). Federal legislation and administrative policies in several areas, including financial services regulation, pension regulation and federal taxation, can significantly and adversely affect the life insurance industry. The federal government has from time to time considered legislation relating to the deferral of taxation on the accretion of value within certain annuities and life insurance products, changes in the Employee Retirement Income Security Act regulations, the alteration of the federal income tax structure and the availability of Section 401(k) and individual retirement accounts. Although the ultimate effect of any such changes, if implemented, is uncertain, both the persistency of our existing products and our ability to sell products may be materially impacted in the future.

Recently there has been a significant increase in federal and state regulatory activity relating to financial services companies, particularly mutual fund companies and life insurers issuing variable annuity products. These inquiries have focused on a number of issues including, among other items, after-hours trading, short-term trading (sometimes referred to as market timing), suitability, revenue sharing arrangements and greater transparency regarding compensation arrangements. There are several rule proposals pending at the SEC, the NASD and on a federal level, which, if passed, could have an impact on the business of the Company and/or its subsidiaries.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The quantitative and qualitative disclosures about market risk are contained in the Asset-Liability Matching section of Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 31 to 32 herein.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Senior Vice President and Chief Financial Officer (collectively the “Certifying Officers”) to allow timely decisions regarding required disclosure. As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management, with the participation of the Certifying Officers, have evaluated the effectiveness of the Company’s disclosure controls and procedures. Based upon that evaluation, the Certifying Officers concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the periods specified by the SEC.

There was no change in the Company’s internal control over financial reporting that occurred during the third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

A purported class action captioned Nitika Mehta, as Trustee of the N.D. Mehta Living Trust vs. AIG SunAmerica Life Assurance Company, Case 04L0199, was filed on April 5, 2004 in the Circuit Court, Twentieth Judicial District in St. Clair County, Illinois. The action has been transferred to and is currently pending in the United States District Court for the District of Maryland, Case No. 04-md-15863, as part of a Multi-District Litigation proceeding. The lawsuit alleges certain improprieties in conjunction with alleged market timing activities. The probability of any particular outcome cannot be reasonably estimated at this time.

On May 26, 2005, the New York Attorney General and the New York Superintendent of Insurance filed a civil complaint against American International Group, Inc. (“AIG”) as well as its former Chairman and Chief Executive Officer and former Vice Chairman and Chief Financial Officer, in the Supreme Court of the State of New York. The complaint asserts claims under New York’s Martin Act and Insurance Law, among others, and makes allegations concerning certain transactions entered into by AIG and certain of its subsidiaries. Although none of the Company or its subsidiaries are named in the complaint, nor does the complaint seek any remedies against them, due to a provision in the law governing investment companies, if the lawsuit results in an injunction being entered against AIG, then the Company, AIG SunAmerica Asset Management Corp. and AIG SunAmerica Capital Services, Inc. will need to obtain permission from the Securities and Exchange Commission (“SEC”) to continue to service its variable annuity and asset management operations. While the SEC has granted this type of relief to others in the past in similar circumstances, there is no assurance that this permission would be granted. Accordingly, no assurance can be given that any further changes in circumstances for AIG will not impact the Company.

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

The Company had no unregistered sales of equity securities.

Item 3. Defaults Upon Senior Securities

The Company had no defaults upon senior securities.

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

No matters were submitted by the Company during the quarter ending September 30, 2005 to a vote of its security holder through the solicitation of proxies or otherwise.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

See accompanying Exhibit Index.


	Page
	Number(s)
Part I — Financial Information

Item 1. Financial Statements

Consolidated Balance Sheet (Unaudited) — September 30, 2005 and December 31, 2004		2-3

Consolidated Statement of Income and Comprehensive Income (Unaudited) — Three Months and Nine Months Ended September 30, 2005 and 2004		4-5

Consolidated Statement of Cash Flows (Unaudited) — Nine Months Ended September 30, 2005 and 2004		6-7

Notes to Consolidated Financial Statements (Unaudited)		8-14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15-35

Item 3. Quantitative and Qualitative Disclosures About Market Risk		36

Item 4. Controls and Procedures		36

Part II — Other Information

Item 1. Legal Proceedings		37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3. Defaults Upon Senior Securities		37

Item 4. Submission of Matters to a Vote of Security Holders		37

Item 5. Other Information		37

Item 6. Exhibits		37

Exhibit 31.1
Exhibit 31.2
Exhibit 32


	Three Months						Nine Months
	2005			2004			2005			2004

				(in thousands)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

Net unrealized gains (losses) on debt and equity securities available for sale identified in the current period, less related amortization of deferred acquisition costs and other deferred expenses	$	(43,145	)	$	50,076		$	(48,920	)	$	(24,292	)

Less reclassification adjustment for net realized (gains) losses included in net income		(2,358	)		12,988			(17,361	)		19,386

Net unrealized losses on foreign currency		(477	)		—			(1,360	)		—

Income tax benefit (expense)		16,094			(22,073	)		23,675			1,716


OTHER COMPREHENSIVE INCOME (LOSS)		(29,886	)		40,991			(43,966	)		(3,190	)


COMPREHENSIVE INCOME	$	18,088		$	84,074		$	98,298		$	46,800


		AIG SUNAMERICA LIFE ASSURANCE COMPANY Registrant

Date: November 8, 2005		/s/ N. SCOTT GILLIS

		N. Scott Gillis
		Senior Vice President,
		Chief Financial Officer and Director

Date: November 8, 2005		/s/ STEWART POLAKOV

		Stewart Polakov
		Senior Vice President and Controller
		(Principal Accounting Officer)

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

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

32		Section 1350 Certifications

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		[Omitted pursuant to SEC Release No. 33-8238];

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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1.		I have reviewed this Quarterly Report on Form 10-Q of AIG SunAmerica Life Assurance Company;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


/s/ N. SCOTT GILLIS
N. Scott Gillis
Senior Vice President
Chief Financial Officer

	1.		The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

	2.		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


				/s/ JAY S. WINTROB

				Jay S. Wintrob
				Chief Executive Officer

				/s/ N. SCOTT GILLIS

				N. Scott Gillis
				Senior Vice President and
				Chief Financial Officer