<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

                                   FORM 10-Q

                 /X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                       OR

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

                For the Transition Period From ------ to ------


For Quarter Ended    September 30, 1994   Commission File Number      0-4652
                  -----------------------                         -------------

                      AMERICAN INTERNATIONAL GROUP, INC.
- -------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


               DELAWARE                                    13-2592361        
- ---------------------------------------            ----------------------------
   (State or other jurisdiction of                      (I.R.S. Employer
    incorporation or organization)                      Identification Number)


  70 Pine Street, New York, New York                          10270
- ----------------------------------------           ----------------------------
(Address of principal executive offices)                     (Zip Code)


Registrant's telephone number, including area code        (212) 770-7000       
                                                   ----------------------------


                                     NONE
- -------------------------------------------------------------------------------
             Former name, former address and former fiscal year,
                        if changed since last report.


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                 YES    X                          NO       
                      -----                            -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1994    316,064,101.
                                          -----------

<PAGE>   2

                       AMERICAN INTERNATIONAL GROUP, INC.
                           CONSOLIDATED BALANCE SHEET
                             (dollars in thousands)
                                  (unaudited)




<TABLE>
<CAPTION>
                                                                                         SEPTEMBER 30, 1994       DECEMBER 31, 1993
                                                                                         ------------------       -----------------
                                                                                          
<S>                                                                                       <C>                      <C>
ASSETS:                                                                                   
  Investments and cash:                                                                   
    Fixed maturities:                                                                     
      Bonds held to maturity, at amortized cost (market value: 1994-$13,110,000;          
        1993-$13,278,300)                                                                 $     12,715,086         $     12,193,701
      Bonds available for sale, at market value (cost: 1994-$20,569,400;                  
        1993-$16,599,600)                                                                       20,351,602               17,562,411
      Bonds trading securities, at market value (cost: 1994-$300,800; 1993-$307,900)               290,899                  310,834
      Preferred stocks, at amortized cost (market value: 1994-$206,200; 1993-$18,000)              208,645                   17,428
    Equity securities:                                                                    
      Common stocks (cost: 1994-$4,538,200; 1993-$3,720,000)                                     5,145,771                4,364,410
      Non-redeemable preferred stocks (cost: 1994-$91,300; 1993-$108,200)                          110,363                  123,837
    Mortgage loans on real estate, policy and collateral loans                                   4,811,462                3,576,516
    Financial services assets:                                                            
      Flight equipment primarily under operating leases, net of accumulated               
         depreciation (1994-$863,300; 1993-$599,800)                                            10,147,985                8,555,356
      Securities available for sale, at market value (cost: 1994-$3,499,200;              
        1993-$4,971,800)                                                                         3,500,151                4,991,105
      Trading securities, at market value                                                        2,565,939                2,516,166
      Spot commodities, at market value                                                          1,387,387                  764,215
      Net unrealized gain on interest rate and currency swaps, options and forward        
         transactions                                                                                    -                  640,120
      Unrealized gain on interest rate and currency swaps, options and forward            
         transactions                                                                            4,631,189                        -
      Trade receivables                                                                          3,106,977                1,328,391
      Securities purchased under agreements to resell, at contract value                         2,708,055                2,737,507
    Other invested assets                                                                        1,862,292                1,265,056
    Short-term investments, at cost which approximates market value                              3,094,635                5,072,893
    Cash                                                                                            89,443                  157,481
                                                                                          ----------------         ----------------
              Total investments and cash                                                        76,727,881               66,177,427
                                                                                          
  Investment income due and accrued                                                                866,031                  808,268
  Premiums and insurance balances receivable - net                                               9,139,835                8,364,096
  Reinsurance assets                                                                            16,497,964               15,883,788
  Deferred policy acquisition costs                                                              4,917,747                4,249,409
  Investments in partially-owned companies                                                         618,320                  571,680
  Real estate and other fixed assets, net of accumulated depreciation                     
        (1994-$1,077,800; 1993-$950,000)                                                         1,760,108                1,615,742
  Separate and variable accounts                                                                 2,444,660                1,914,815
  Other assets                                                                                   1,586,908                1,429,623
                                                                                          ----------------         ----------------
              Total assets                                                                $    114,559,454         $    101,014,848
                                                                                          ================         ================
                                                                                          
</TABLE>



See Accompanying Notes to Financial Statements.




                                      -1-

<PAGE>   3

                      AMERICAN INTERNATIONAL GROUP, INC.
                          CONSOLIDATED BALANCE SHEET
                            (dollars in thousands)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                                   SEPTEMBER 30, 1994       DECEMBER 31, 1993
                                                                                   ------------------       -----------------  
<S>                                                                              <C>                      <C>
LIABILITIES:                                                                     
  Reserve for losses and loss expenses                                           $     31,105,579         $     30,046,172
  Reserve for unearned premiums                                                         6,445,024                5,515,670
  Future policy benefits for life and accident                                   
    and health insurance contracts                                                     16,685,096               14,638,382
  Policyholders' contract deposits                                                      5,996,990                4,439,839
  Other policyholders' funds                                                            1,898,495                1,739,290
  Reserve for commissions, expenses and taxes                                           1,368,006                1,113,397
  Insurance balances payable                                                            1,649,115                1,458,383
  Funds held by companies under reinsurance treaties                                      370,915                  406,902
  Income taxes payable:                                                          
     Current                                                                              358,520                  358,219
     Deferred                                                                             218,701                  447,790
  Financial services liabilities:                                                
    Borrowings under obligations of guaranteed investment agreements                    5,342,755                6,735,579
    Securities sold under agreements to repurchase, at contract value                   2,188,185                2,299,563
    Trade payables                                                                      2,802,632                1,688,147
    Securities sold but not yet purchased, principally obligations of the        
      U.S. Government and Government agencies, at market value                          1,250,142                  696,454
    Spot commodities sold but not yet purchased, at market value                          483,642                  285,757
    Unrealized loss on interest rate and currency swaps, options and forward     
       transactions                                                                     3,703,655                        -
    Deposits due to banks and other depositors                                            465,580                  557,372
    Commercial paper                                                                    1,790,872                1,618,979
    Notes, bonds and loans payable                                                      6,973,303                5,021,941
  Commercial paper                                                                      1,446,449                1,529,906
  Notes, bonds, loans and mortgages payable                                               625,585                  782,660
  Separate and variable accounts                                                        2,444,660                1,914,815
  Other liabilities                                                                     2,545,745                2,295,436
                                                                                 ----------------         ----------------
                                                                                 
              Total liabilities                                                        98,159,646               85,590,653
                                                                                 ----------------         ----------------
                                                                                 
  Preferred shareholders' equity in subsidiary company                                    200,000                  200,000
                                                                                 
CAPITAL FUNDS:                                                                   
  Common stock, $2.50 par value; 500,000,000 shares                              
    authorized; shares issued 1994 - 337,390,984;                                
    1993 - 337,390,986                                                                    843,477                  843,477
  Additional paid-in capital                                                              568,359                  572,142
  Unrealized appreciation of investments, net of taxes                                    482,645                  922,646
  Cumulative translation adjustments, net of taxes                                       (290,377)                (348,186)
  Retained earnings                                                                    14,799,567               13,301,529
  Treasury stock, at cost; 1994 - 21,326,883;                                    
    1993 - 19,762,919 shares of common stock                                             (203,863)                 (67,413)
                                                                                 ----------------         ---------------- 
              Total capital funds                                                      16,199,808               15,224,195
                                                                                 ----------------         ----------------
              Total liabilities and capital funds                                $    114,559,454         $    101,014,848
                                                                                 ================         ================
                                                                                 
</TABLE>


See Accompanying Notes to Financial Statements.



                                      -2-



<PAGE>   4
                     AMERICAN INTERNATIONAL GROUP,  INC.
                       CONSOLIDATED STATEMENT OF INCOME
                   (in thousands, except per share amounts)
                                 (unaudited)





<TABLE>
<CAPTION>
                                                          NINE MONTHS ENDED SEPTEMBER 30,         THREE MONTHS ENDED SEPTEMBER 30,
                                                          -------------------------------         --------------------------------
                                                               1994                1993              1994                  1993
                                                               ----                ----              ----                  ----
<S>                                                     <C>                  <C>              <C>                   <C>
General insurance operations:                                                                 
                                                                                              
Net premiums written                                    $      8,321,504     $     7,681,131  $      2,820,609      $     2,602,081
Change in unearned premium reserve                              (649,653)           (623,383)         (182,162)            (148,369)
                                                               ---------           ---------         ---------            --------- 
Net premiums earned                                            7,671,851           7,057,748         2,638,447            2,453,712
Net investment income                                          1,062,547             992,353           356,653              333,330
Realized capital gains                                            55,587              53,646             7,099               12,810
                                                               ---------           ---------         ---------            ---------
                                                               8,789,985           8,103,747         3,002,199            2,799,852
                                                               ---------           ---------         ---------            ---------
Losses and loss expenses incurred                              6,025,791           5,618,860         2,025,533            1,944,341
Underwriting expenses                                          1,563,847           1,436,732           553,427              532,404
                                                               ---------           ---------         ---------            ---------
                                                               7,589,638           7,055,592         2,578,960            2,476,745
                                                               ---------           ---------         ---------            ---------
Operating income                                               1,200,347           1,048,155           423,239              323,107
                                                               ---------           ---------         ---------            ---------
Life insurance operations:                                                                                               
                                                                                                                         
Premium income                                                 4,849,759           4,146,739         1,678,104            1,450,518
Net investment income                                          1,272,354           1,093,884           437,099              377,021
Realized capital gains                                            62,701              39,099            29,982               11,498
                                                               ---------           ---------         ---------            ---------
                                                               6,184,814           5,279,722         2,145,185            1,839,037
                                                               ---------           ---------         ---------            ---------
Death and other benefits                                       1,939,849           1,695,221           696,781              619,560
Increase in future policy benefits                             2,204,626           1,865,377           726,612              606,334
Acquisition and insurance expenses                             1,354,905           1,155,505           476,743              421,306
                                                               ---------           ---------         ---------            ---------
                                                               5,499,380           4,716,103         1,900,136            1,647,200
                                                               ---------           ---------         ---------            ---------
Operating income                                                 685,434             563,619           245,049              191,837
                                                               ---------           ---------         ---------            ---------

Agency and service fee operating income                           42,496              47,945            13,326               15,672
                                                                                                                         
Financial services operating income                              314,490             284,496           100,347               98,691
                                                                                                                         
Equity in income of minority-owned insurance                                                                             
  operations                                                      38,381              28,784            16,360               10,698
                                                                                                                         
Other realized capital gains (losses)                            (41,513)             (4,990)          (21,826)               1,086
                                                                                                                         
Other income (deductions) - net                                  (72,219)            (57,262)          (28,182)             (20,854)
                                                               ---------           ---------         ---------            ---------
Income before income taxes and cumulative effect of                                                                      
  accounting changes                                           2,167,416           1,910,747           748,313              620,237
                                                               ---------           ---------         ---------            ---------
Income taxes (benefits) - Current                                648,854             703,736           222,492              161,354
                        - Deferred                               (79,277)           (200,910)          (16,706)               7,822
                                                               ---------           ---------         ---------            ---------
                                                                 569,577             502,826           205,786              169,176
                                                               ---------           ---------         ---------            ---------
                                                                                                                         
Income before cumulative effect of accounting changes          1,597,839           1,407,921           542,527              451,061
Cumulative effect of accounting changes, net of tax                                                                      
  Minority-owned insurance operations                                  -              20,695                 -                   - 
                                                               ---------           ---------         ---------            ---------
Net income                                              $      1,597,839     $     1,428,616  $        542,527      $       451,061
                                                               =========           =========         =========            ========= 
Earnings per common share :                                                                                              
                                                                                                                         
Income before cumulative effect of accounting changes   $           5.04     $          4.43  $           1.71      $          1.42
Cumulative effect of accounting changes, net of tax                                                                      
  Minority-owned insurance operations                                  -                0.07                 -                    -
                                                               ---------           ---------         ---------            ---------
Net income                                              $           5.04     $          4.50  $           1.71      $          1.42
                                                               =========           =========         =========            =========
Cash dividends per common share                         $          0.315     $          0.29  $          0.115      $          0.10
                                                               =========           =========         =========            =========
Average shares outstanding                                       316,822             317,419           316,368              317,438
                                                               ---------           ---------         ---------            ---------
                                                                                                                         
</TABLE>



See Accompanying Notes to Financial Statements.





                                      -3-




<PAGE>   5

                       AMERICAN INTERNATIONAL GROUP, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                                                NINE MONTHS ENDED SEPT 30,    
                                                                                         -------------------------------------
                                                                                                1994                   1993
<S>                                                                                      <C>                    <C>
Cash Flows From Operating Activities:                                                    
                                                                                         
  Net Income                                                                              $  1,597,839             $ 1,428,616
                                                                                          ------------             -----------
                                                                                         
  Adjustments to reconcile net income to net cash provided by operation activities:      
      Non-cash revenues, expenses, gains and losses included in income:                  
      Change in:                                                                         
       General and life insurance reserves                                                   4,035,475               4,071,776
       Premiums and insurance balances receivable and payable-net                             (585,007)               (600,870)
       Reinsurance assets                                                                     (614,176)               (515,752)
       Deferred policy acquisition costs                                                      (668,338)               (561,465)
       Investment income due and accrued                                                       (57,763)                (19,955)
       Funds held under reinsurance treaties                                                   (35,987)                 47,658
       Other policyholders' funds                                                              159,205                 229,979
       Current and deferred income taxes - net                                                 (78,976)                 81,674
       Reserve for commissions, expenses and taxes                                             254,609                 236,396
       Other assets and liabilities - net                                                       93,871                (126,505)
       Trade receivables and payables - net                                                   (664,101)              1,570,502
       Trading securities, at market value                                                     (49,773)               (634,399)
       Spot commodities, at market value                                                      (623,172)               (268,238)
       Net unrealized gain on interest rate                                              
        and currency swaps, options, and forward transactions                                 (287,414)                421,853
       Securities purchased under agreements to resell                                          29,452               2,161,993
       Securities sold under agreements to repurchase                                         (111,378)             (1,174,746)
       Securities sold but not yet purchased                                                   553,688                 280,191
       Spot commodities sold but not yet purchased, at market value                            197,885              (1,298,155)
     Realized capital gains                                                                    (76,776)                (87,755)
     Equity in income of partially-owned companies                                       
      and other invested assets                                                                (60,628)                (44,823)
     Depreciation expenses, principally flight equipment                                       418,331                 341,736
     Cumulative effect of accounting changes                                                      -                    (20,695)
     Change in cumulative translation adjustments                                               70,573                  81,424
     Other - net                                                                               502,033                 (59,581)
                                                                                          ------------             ----------- 
     Total Adjustments                                                                       2,401,633               4,112,243
                                                                                          ------------             -----------
Net cash provided by operating activities                                                    3,999,472               5,540,859
                                                                                          ------------             -----------
                                                                                         
Cash Flows From Investing Activities:                                                    
                                                                                         
     Cost of fixed maturities, at amortized cost sold                                             -                  1,023,917
     Cost of fixed maturities, at amortized cost matured or redeemed                           451,611               1,586,341
     Cost of bonds, at market sold                                                           6,004,055               3,996,312
     Cost of bonds, at market matured or redeemed                                            1,145,938                 402,063
     Cost of equity securities sold                                                          1,935,316               1,360,222
     Realized capital gains                                                                     76,776                  87,755
     Purchases of fixed maturities                                                         (11,185,332)             (9,008,075)
     Purchases of equity securities                                                         (2,728,734)             (1,949,175)
     Mortgage, policy and collateral loans granted                                          (1,867,120)               (793,622)
     Repayments of mortgage, policy and collateral loans                                       534,190                 469,363
     Sales or maturities of securities held for investment                                        -                  1,290,414
     Sales or maturities of securities available for sale                                    4,394,516                   -
     Purchases of securities held for investment                                                  -                 (2,026,196)
     Purchases of securities available for sale                                             (2,903,288)                  -
     Sales of flight equipment                                                                 166,068                 164,003
     Purchases of flight equipment                                                          (2,020,742)             (1,936,948)
     Net additions to real estate and other fixed assets                                      (300,653)               (269,547)
     Sales or distributions of other invested assets                                           171,481                 198,477
     Investments in other invested assets                                                     (511,144)               (325,972)
     Change in short-term investments                                                          911,806                 (94,726)
     Investments in partially-owned companies                                                  (52,095)                (99,274)
                                                                                          ------------             ----------- 
Net cash used in investing activities                                                       (5,777,351)             (5,924,668)
                                                                                          ------------             ----------- 
                                                                                         
Cash Flows From Financing Activities:                                                    
                                                                                         
     Change in policyholders' contract deposits                                              1,557,151                 (84,435)
     Change in deposits due to banks and other depositors                                      (91,792)               (729,436)
     Change in commercial paper                                                                 88,436                (288,757)
     Proceeds from notes, bonds, loans and mortgages payable                                 3,469,316               2,136,162
     Repayments on notes, bonds, loans and mortgages payable                                (1,680,413)               (630,510)
     Proceeds from guaranteed investment agreements                                          2,331,808               2,355,304
     Maturities of guaranteed investment agreements                                         (3,724,632)             (2,120,549)
     Proceeds from common stock issued                                                          10,360                   9,868
     Cash dividends to shareholders                                                            (99,801)                (92,080)
     Acquisition of treasury stock                                                            (150,592)                (13,018)
     Redemption of preferred stock                                                                -                   (150,000)
     Other - net                                                                                  -                        (38)
                                                                                          ------------             ----------- 
Net cash provided by financing activities                                                    1,709,841                 392,511
                                                                                          ------------             -----------
                                                                                         
Change in cash                                                                                 (68,038)                  8,702
Cash at beginning of period                                                                    157,481                 136,628
                                                                                          ------------             -----------
Cash at end of period                                                                     $     89,443             $   145,330
                                                                                          ============             ===========
                                                                                         
</TABLE>

See accompanying Notes to Financial Statements.


                                      -4-



<PAGE>   6
                       AMERICAN INTERNATIONAL GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1994

(a)      These statements are unaudited.  In the opinion of management, all
adjustments consisting of normal recurring accruals have been made for a fair
presentation of the results shown.

(b)      Earnings per share of American International Group, Inc. (AIG) are
based on the weighted average number of common shares outstanding during the
period.  The effect of potentially dilutive securities is not significant.

(c)      Supplemental cash flow information for the nine month period ended
September 30, 1994 and 1993 is as follows:

                                                        (in thousands)
                                                  1994                    1993
                                                  ----                    -----
  Income taxes paid                        $    627,900               $  387,000
  Interest paid                            $    729,200               $  695,000

(d)      In March 1992, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts"
(Interpretation), which is effective for fiscal years beginning after December
15, 1993.  The Interpretation requires that unrealized gains and losses on
swaps, forwards, options and similar contracts be recognized as assets and
liabilities.  Previously, AIG's policy was to record such unrealized gains and
losses on a net basis in the consolidated balance sheet.  The Interpretation
allows the netting of such unrealized gains and losses with the same
counterparty when they are included under a master netting arrangement with the
counterparty and the contracts are reported at market value.

         Although there was no effect on AIG's operating income upon the
adoption of the Interpretation, AIG now presents certain of its financial
services assets and liabilities, primarily unrealized gain (loss) on interest
rate and currency swaps, options and forward transactions, on a gross basis.
Thus, both consolidated assets and liabilities have increased.  The effect of
presenting these assets and liabilities on a gross basis on AIG's consolidated
balance sheet was not significant.  Prior years' balance sheets were not
reclassified.

         In November of 1992, FASB issued Statement of Financial Accounting
Standards No. 112 "Employers' Accounting for Post-employment Benefits" (FASB
112).  FASB 112 established accounting standards for employers who provide
benefits to former or inactive employees after employment but before
retirement.  FASB 112 was effective January 1, 1994 and had no significant
effect on AIG's results of operations or financial condition.

(e)      For further information, refer to the Form 10-K filing of AIG for the
year ended December 31, 1993.


                                      -5-

<PAGE>   7
                       AMERICAN INTERNATIONAL GROUP, INC.
 
              MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS


Operational Review

General Insurance Operations

         In AIG's general insurance operations, net premiums written and net
premiums earned were $8.32 billion and $7.67 billion, respectively, in the
first nine months of 1994. These were increases of 8.3 percent and 8.7 percent,
respectively, over the same period of 1993.

         The growth in net premiums written in 1994 over 1993 resulted from a
combination of several factors.  Although AIG continued to achieve general
price increases in domestic commercial property and some specialty casualty
markets, the primary reasons for growth were price and volume increases
overseas. AIG continues to be disciplined in its underwriting approach,
especially in the domestic primary casualty market, and does not seek net
premium growth where rates do not adequately reflect the assessment of
exposures.

         Net premiums written are initially deferred and earned based upon the
terms of the underlying policies.  The net unearned premium reserve constitutes
the deferred earnings which are generally earned ratably over the policy
period. Thus, the net unearned premium reserve is not fully recognized as net
premiums earned until the end of the policy period.

         Adjusted underwriting profit or loss (operating income less net
investment income and realized capital gains) represents statutory underwriting
profit or loss adjusted primarily for changes in deferred acquisition costs.
The adjusted underwriting profit in the first nine months of 1994 was $82.2
million compared to an adjusted underwriting profit of $2.2 million recorded in
the same period of 1993.


         The statutory general insurance ratios for the first nine months were
as follows:

- ------------------------------------------------------------------
                                       1994               1993
- ------------------------------------------------------------------
Loss Ratio                            78.54              79.61
Expense Ratio                         20.42              20.40    
- ------------------------------------------------------------------
Combined Ratio                        98.96             100.01    
- ------------------------------------------------------------------




                                       6

<PAGE>   8
         As a result of the Northridge earthquake which struck the Los Angeles
area of California in January, 1994, the gross and net incurred losses were
impacted approximately $150 million and $55 million, respectively.  Although
there were severe winter storms during the first quarter of 1994, AIG
recognized these as losses in the ordinary course of business, not as
catastrophes.  The gross and net catastrophe losses recorded during the first
nine months of 1993 approximated $120 million and $65 million, respectively.
There were no catastrophes during the third quarter of 1994 and $47.3 million
in catastrophe net losses in the same period of 1993.

         If the catastrophes were excluded from the losses incurred in each
nine month period, the pro forma statutory general insurance ratios would be as
follows:


- ------------------------------------------------------------------
                                       1994               1993   
- ------------------------------------------------------------------
Loss Ratio                            77.83              78.73
Expense Ratio                         20.42              20.40   
- ------------------------------------------------------------------
Combined Ratio                        98.25              99.13   
- ------------------------------------------------------------------

         The maintenance of the proforma statutory combined ratio in both
periods at a level below 100 is a result of AIG's emphasis on maintaining its
underwriting discipline within the continued overall competitiveness of the
domestic market environment as well as AIG's expense control.

         AIG's operations are negatively impacted under guarantee fund
assessment laws which exist in most states.  As a result of operating in a
state which has guarantee fund assessment laws, a solvent insurance company may
be assessed for certain obligations arising from the insolvencies of other
insurance companies which operated in that state.  AIG generally records these
assessments upon notice.  Additionally, certain states permit at least a
portion of the assessed amount to be used as a credit against a company's
future premium tax liabilities.  Therefore, the ultimate net assessment cannot
reasonably be estimated.  The guarantee fund assessments net of credits for the
first nine months of 1994 and 1993 were insignificant.  Also, AIG is required
to participate in various involuntary pools (principally workers' compensation
business) which provide insurance coverage for those not able to obtain such
coverage in the voluntary markets.  This participation is also recorded upon
notification, as these amounts cannot reasonably be estimated.

         AIG is a major purchaser of reinsurance for its general insurance
operations.  AIG is cognizant of the need to exercise





                                       7

<PAGE>   9
good judgment in the selection and approval of both domestic and foreign
companies participating in its reinsurance programs.  AIG insures risks in over
100 countries and its reinsurance programs must be coordinated in order to
provide AIG the level of reinsurance protection which AIG desires.  These
reinsurance arrangements do not relieve AIG from its direct obligation to
its insureds.       

         AIG's general reinsurance assets amounted to $16.16 billion and
resulted from its reinsurance arrangements.  Thus, a credit exposure existed at
September 30, 1994 with respect to reinsurance recoverable to the extent that
any reinsurer may not be able to reimburse AIG under the terms of these
reinsurance arrangements.  AIG protects itself under related reinsurance
agreements by transacting with reinsurers that are financially sound and when
necessary AIG holds substantial collateral in the form of funds, securities
and/or irrevocable letters of credit.  This collateral can be drawn on for
amounts that remain unpaid beyond specified time periods.  The application of
this collateral against balances due or any changes to the amount of collateral
are based on the development of losses recoverable on an individual reinsurer
basis.  Approximately 50 percent of reinsurance recoverable is from
unauthorized reinsurers.  In order to obtain statutory recognition, nearly all
of these balances are collateralized.  The remaining 50 percent of the
reinsurance recoverable is from authorized reinsurers and approximately 80
percent of these balances are from reinsurers rated A- (excellent) or better,
as rated by A.M. Best.  This rating is a measure of financial strength.  The
terms authorized/unauthorized pertain to regulatory catagories not
credit-worthiness.  Additionally, AIG maintains a provision for estimated
unrecoverable reinsurance and has been largely successful in its prior
recovery efforts.                                                

         AIG enters into certain intercompany reinsurance transactions for both
its general and life operations.  AIG enters these transactions as a sound and
prudent business practice in order to maintain underwriting control and spread
insurance risk among various legal entities.  These reinsurance agreements have
been approved by the appropriate regulatory  authorities.   All material
intercompany transactions have been eliminated in consolidation.

         At September 30, 1994, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $31.11 billion, an increase of $1.06
billion or 3.5 percent over the prior year end.  General insurance net loss
reserves represent the accumulation of estimates of ultimate losses, including
provisions for losses incurred but not reported (IBNR), and loss expenses,
reduced by reinsurance recoverable net of an allowance for unrecoverable
reinsurance and minor amounts of discounting related to certain workers'
compensation claims.  Since December 31, 1993, the





                                       8

<PAGE>   10
net loss reserves have increased $618.0 million or 3.5 percent to $18.17
billion.  The methods used to determine such estimates and to establish the
resulting reserves are continually reviewed and updated.  Any adjustments
resulting therefrom are reflected in operating income currently.  It is
management's belief that the general insurance net loss reserves are adequate
to cover all general insurance net losses and loss expenses as at September 30,
1994.  In the future, if the general insurance net loss reserves develop
deficiently, such deficiency could have an adverse impact on  AIG's future
results of operations.

         In a very broad sense, the general loss reserves can be categorized
into two distinct groups: one group being long tail casualty lines of business;
the other being short tail lines of business consisting principally of property
lines and including certain classes of casualty lines.

         Estimation of ultimate net losses and loss expenses (net losses) for
long tail casualty lines of business is a complex process and depends on a
number of factors, including the line and volume of the business involved.  In
the more recent accident years of long tail casualty lines there is limited
statistical credibility in reported net losses.  That is, a relatively low
proportion of net losses would be reported claims and expenses and an even
smaller proportion would be net losses paid.  A relatively high proportion of
net losses would therefore be IBNR.

         A variety of actuarial methods and assumptions are normally employed
to estimate net losses for long tail casualty lines.  These methods ordinarily
involve the use of loss trend factors intended to reflect the estimated annual
growth in loss costs from one accident year to the next.  Loss trend factors
reflect many items including changes in claims handling, exposure and policy
forms and current and future estimates of inflation and social inflation.
Thus, many factors are implicitly considered in estimating the year to year
growth in loss costs.  Therefore, AIG's carried net long tail loss reserves are
judgmentally set as well as tested for reasonableness using the most
appropriate loss trend factors for each class of business.  In the evaluation
of AIG's net loss reserves, loss trend factors have ranged from 7 percent to 22
percent of average loss costs, depending on the particular class and nature of
the business involved.  For the majority of long tail casualty lines, net loss
trend factors approximating 10 percent were employed.  These factors are
periodically reviewed and subsequently adjusted, as appropriate, to reflect
emerging trends which are based upon past loss experience.

         Estimation of net losses for short tail business is less complex than
for long tail casualty lines.  Loss cost trends for many property lines can
generally be assumed to be similar to the





                                       9

<PAGE>   11
growth in exposure of such lines.  For example, if the fire insurance coverage
remained proportional to the actual value of the property, the growth in
property's exposure to fire loss can be approximated by the amount of insurance
purchased.

         For other property and short tail casualty lines, the loss trend is
implicitly assumed to grow at the rate that reported net losses grow from one
year to the next.  The concerns noted above for longer tail casualty lines with
respect to the limited statistical credibility of reported net losses generally
do not apply to shorter tail lines.

         AIG continues to receive indemnity claims asserting injuries from
toxic waste, hazardous substances, asbestos and other environmental pollutants
and alleged damages to cover the cleanup costs of hazardous waste dump sites
(environmental claims).  The vast majority of these environmental claims
emanate from policies written in 1984 and prior years.  Commencing in 1985,
standard policies contained an absolute exclusion for pollution related damage.
AIG has established a special environmental claims unit which investigates and
adjusts all such claims.

         Estimation of environmental claims loss reserves is a difficult
process.  These environmental claims cannot be estimated by conventional
reserving techniques as previously described.  Quantitative techniques
frequently have to be supplemented by subjective considerations including
managerial judgment.  Significant factors which affect the trends which
influence the development of environmental claims are the inconsistent court
resolutions, the broadening of the intent of the policies and scope of coverage
and the increasing number of new claims.  The case law that has emerged can be
characterized as still being in its infancy and the likelihood of any firm
direction in the near future is very small.  Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves coverage issues such as
allocation of responsibility among potential responsible parties and the
government's refusal to release parties.  The cleanup cost exposure may
significantly change if the Congressional reauthorization of Superfund in 1995
is dramatically changed thereby reducing or increasing litigation and cleanup
costs.

         In the interim, AIG and other industry members have and will continue
to litigate the broadening judicial interpretation of the policy coverage and
the liability issues.  At the current time, it is not possible to determine the
future development of environmental claims.  Such development will be impacted
by the extent to which courts continue to expand the intent of the policies and
the scope of the coverage as they have in the past, as well as by changes in
Superfund and waste dump site coverage issues.  Additional liabilities could
emerge for amounts in excess





                                       10

<PAGE>   12
of the current reserves held. Although this emergence cannot now be reasonably
estimated, it could have a material adverse impact on AIG's future operating
results. The reserves carried for these claims as at September 30, 1994 are
believed to be adequate as these reserves are based on the known facts and
current law.  Furthermore, as AIG's net exposure retained relative to the gross
exposure written was lower in those years, the potential impact of these claims
is much smaller on the net loss reserves than on the gross loss reserves.  (See
the previous discussion on reinsurance collectibility herein.)

         The gross and net IBNR included in the reserve for losses and loss
expenses at September 30, 1994 for environmental claims approximated $270
million and $100 million, respectively; for 1993 the amounts approximated $240
million and $83 million, respectively.  Most of the claims included in the
following table relate to policies written in 1984 and prior years.

         A summary of reserve activity, including estimates for applicable
IBNR, relating to environmental claims for the nine months ended September 30,
1994 and 1993 was as follows:



<TABLE>
<CAPTION>
 (in millions)
========================================================================================================================
                                                                1994                                 1993
                                                      ------------------------------------------------------------------ 
                                                       Gross              Net              Gross               Net
 <S>                                                  <C>               <C>               <C>                 <C>
 Reserve for losses and loss                          
   expense at beginning of year                       $1,478.5          $386.3            $1,221.1            $318.0
 Losses and loss expenses incurred                       231.1           111.8               283.6             105.2
                                                      
 Losses and loss expenses paid                          (259.1)          (97.6)             (229.5)            (71.1)
- -----------------------------------------------------------------------------------------------------------------------
 Reserve for losses and loss                          
   expenses at end of period                          $1,450.5          $400.5            $1,275.2            $352.1
=======================================================================================================================
</TABLE>



         The majority of AIG's exposures for environmental claims are excess
casualty coverages, not primary coverages.  Thus, the litigation costs are
treated in the same manner as indemnity reserves.  That is, litigation expenses
are included within the limits of the liability AIG incurs.  Individual
significant claim liabilities, where future litigation costs are reasonably
determinable, are established on a case basis.





                                       11

<PAGE>   13
         A summary of claims count activity relating to environmental claims
for the nine months ended September 30, 1994 and 1993 was as follows:



<TABLE>
<CAPTION>
========================================================================================================================

                                                           1994                       1993
                                                   --------------------------------------------------------------------- 
 <S>                                                     <C>                       <C>
 Claims at beginning
 of year:                                                23,163                     20,473
 Claims during year:
  Opened                                                  4,428                      5,012
  Settled                                                 ( 504)                    (  457)
  Dismissed or otherwise
   resolved                                              (3,408)                    (2,339)
- -----------------------------------------------------------------------------------------------------------------------
 Claims at end of period                                 23,679                     22,689
========================================================================================================================
</TABLE>



         The estimated average cost per claim settled, dismissed or otherwise
resolved for nine months ending September 30, 1994 and 1993 was as follows:




<TABLE>
<CAPTION>
========================================================================================================================
                                                     1994                                 1993
                                       --------------------------------------------------------------------------------- 
 <S>                                               <C>                                  <C>
 Gross reserve for losses and loss expenses        $66,200                              $82,100

 Net reserve for losses and loss expenses          $25,000                              $25,400
========================================================================================================================
</TABLE>


         AIG actively manages its environmental claims.  During 1994, a
significant portion of claims dismissed or otherwise resolved were closed as a
result of successful litigation.

         General insurance net investment income in the first nine months of
1994 was $1.06 billion, an increase of 7.1 percent from the same period of
1993.  The growth in net investment income was primarily attributable to new
cash flow for investment.  The new cash flow was generated from net general
insurance operating cash flow and included the compounding of previously earned
and reinvested net investment income.

         General insurance realized capital gains were $55.6 million in the
first nine months of 1994 and $53.6 million for the same period of 1993.  These
realized gains resulted from the ongoing management of the general insurance
investment portfolios within the overall objectives of the general insurance
operations and arose primarily from the disposition of equity securities, and
available for sale and trading fixed maturities as well as redemptions of fixed
maturities.





                                       12

<PAGE>   14
         General insurance operating income in the first nine months of 1994
was $1.20 billion, an increase of 14.5 percent when compared to $1.05 billion
in the same period of 1993.  Excluding the impact of both years' catastrophes,
operating results would have increased 13.0 percent in 1994. The contribution
of general insurance operating income to income before income taxes and the
cumulative effect of accounting changes was 55.4 percent in the first nine
months of 1994 compared to 54.9 percent in the same period of 1993. The
increase in the contribution percentage was a result of the effects of the
aforementioned catastrophe losses in 1993.


Life Insurance Operations

         AIG's life insurance operations continued to show growth as a result
of overseas operations, particularly in Asia.  AIG's life premium income of
$4.85 billion for the first nine months of 1994 represented a 17.0 percent
increase from the same period of the prior year.  The foreign ordinary life
products were the major contributor to premium growth.  In 1994, foreign life
operations produced 94.3 percent of the life premium income and 95.7 percent of
the life insurance operating income  as compared to 95.3 percent of life
premium income and 95.1 percent of life insurance operating income for the same
period of 1993.

         Traditional life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially in Southeast
Asia, while a mixture of traditional, accident and health and financial
products are being sold in Japan.

         The risks associated with the traditional life and accident and health
products are underwriting risk and investment risk.  The risk associated with
the financial and investment contract products is investment risk.

         Underwriting risk represents the exposure to loss resulting from the
actual policy experience adversely emerging in comparison to the assumptions
made in the product pricing associated with mortality, morbidity, termination
and expenses.  AIG's life companies limit their maximum underwriting exposure
on traditional life insurance of a single life to approximately $1 million of
coverage by using yearly renewable term reinsurance.  The life insurance
operations have not entered into assumption reinsurance transactions or surplus
relief transactions either in 1993 or 1994.

         The investment risk represents the exposure to loss resulting from the
cash flows from the invested assets, primarily long-term fixed rate
investments, being less than the cash flows required to





                                       13

<PAGE>   15
meet the obligations of the expected policy and contract liabilities and the
necessary return on investments.

         To minimize its exposure to investment risk, AIG tests the cash flows
from the invested assets and the policy and contract liabilities using various
interest rate scenarios to determine if a liquidity excess or deficit is
perceived to exist.  If a rebalancing of the invested assets to the policy and
contract claims became necessary and did not occur, a demand could be placed
upon liquidity.

         The asset-liability relationship is appropriately managed in AIG's
foreign operations, even though certain territories lack qualified long-term
investments or there are investment restrictions imposed by the local
regulatory authorities.  For example, in Japan and several Southeast Asia
territories, the duration of the investments is often for a shorter period than
the effective maturity of such policy liabilities.  Therefore, there is a risk
that the reinvestment of the proceeds at the maturity of the investments may be
at a yield below that of the interest required for the accretion of the policy
liabilities.  In Japan, the average duration of the investment portfolio
approximates 5 years, while the related policy liabilities are estimated to be
7 years.  To maintain an adequate yield to match the interest required over the
duration of the liabilities, constant management focus is required to reinvest
the proceeds of the maturing securities without sacrificing investment quality.
To the extent permitted under local regulation, AIG may invest in qualified
longer-term securities outside Japan to achieve a closer matching in both
duration and the required yield.  AIG is able to manage any asset-liability
duration difference through maintenance of sufficient global liquidity and to
support any operational short-fall through its international financial network.
Domestically, the asset-liability matching process is appropriately functioning
as there are investments available to match the duration and the required
yield.

         AIG uses asset-liability matching as a management tool to determine
the composition of the invested assets and marketing strategies.  As a part of
these strategies, AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest rate or other
economic changes.

         Life insurance net investment income increased 16.3 percent to $1.27
billion in the first nine months of 1994 compared to $1.09 billion in the same
period of 1993.  The growth in net investment income was primarily attributable
to new cash flow for investment.  The new cash flow was generated from net life
insurance operating





                                       14

<PAGE>   16
cash flow and included the compounding of previously earned and reinvested net
investment income.

         Life insurance realized capital gains were $62.7 million and $39.1
million in the first nine months of 1994 and 1993, respectively.  These
realized gains resulted from the ongoing management of the life insurance
investment portfolios within the overall objectives of the life insurance
operations and arose primarily from  the disposition of equity securities and
available for sale fixed maturities and redemptions of fixed maturities.

         Life insurance operating income in the first nine months of 1994
increased 21.6 percent to $685.4 million compared to $563.6 million in the same
period of 1993.  Excluding realized capital gains from life insurance operating
income, the increase in 1994 over 1993 would be 18.7 percent.  The contribution
of life insurance operating income to income before income taxes and the
cumulative effect of accounting changes amounted to 31.6 percent in 1994
compared to 29.5 percent in 1993.  The increase in the contribution percentage
was a result of both the growth in life premium income and net investment
income as well as higher realized capital gains.


Agency and Service Fee Operations

         Agency and service fee operating income in the first nine months of
1994 decreased 11.4 percent to $42.5 million compared to $47.9 million in the
same period of 1993.  Although the growth in domestic risk management services
continues, revenues from AIG's aviation insurance management operations has
declined slightly.  Agency and service fee operating income contributed 2.0
percent to AIG's income before income taxes and the cumulative effect of
accounting changes in 1994 compared to 2.5 percent in 1993.


Financial Services Operations

         Financial services operating income amounted to $314.5 million in the
first nine months of 1994, an increase of 10.5 percent.  This compared to
$284.5 million in the same period of 1993.  The financial services operating
income in 1994 increased over that of 1993 primarily as a result of an increase
in the operating income of International Lease Finance Corporation (ILFC). ILFC
primarily engages in the acquisition of new and used commercial jet aircraft
and the leasing and sale of such aircraft to airlines around the world. ILFC
derives a substantial portion of its revenues from its leasing operations and
is also engaged in the remarketing of





                                       15

<PAGE>   17
commercial jets to and for airlines and financial institutions. (See also the
discussions under "Capital Resources" and "Liquidity" herein.)

         ILFC is exposed to loss through non-performance of aircraft lessees
and through owning and committing to purchase aircraft which it would be unable
to lease or re-lease or sell (at sufficient amounts) at lease expiration.  ILFC
manages its lessee non-performance exposure through credit reviews and security
deposit requirements.  At September 30, 1994, only 2 of 253 aircraft owned were
not leased.  Currently, 86.8 percent of the fleet is leased to foreign
carriers. In 1994, ILFC has leased all aircraft for which it has taken delivery
and the remaining aircraft for which ILFC will take delivery in 1994 have been
placed. 

         AIG Trading Group Inc. and its subsidiaries (AIGTG) experienced a
decline in operating income compared to the first nine months of 1993.  AIGTG,
acting as principal, derives a substantial portion of its revenues from
market making and trading activities in foreign exchange, interest rate,
precious and base metals, petroleum and natural gas.  (See also the
discussion under "Liquidity" herein.)

         AIG Financial Products Corp. and its subsidiaries (AIGFP) operating
income decreased modestly as compared to the first nine months of 1993.  AIGFP
derives substantially all its revenues from proprietary positions entered in
connection with customer transactions.  AIGFP conducts, as principal, an
interest rate, currency and equity derivative products business and enters into
long-dated swaps, foreign exchange forwards, options, synthetic securities and
guaranteed investment agreement transactions.  AIGFP's operations are
transaction oriented.  As such, current and past performance do not provide a
trend for future performance. (See also the discussions under "Capital
Resources" and "Liquidity" herein.)


         Through AIGFP and AIGTG, AIG participates as a dealer in the
derivatives market.  In these derivative operations, AIG acts primarily as a
principal, structuring transactions to satisfy the risk management needs of its
clients.  AIG structures transactions which allow its clients to manage their
risk exposures to interest and exchange rate changes, to prices of securities
and to certain commodities and financial or commodity indices. As a result of
these transactions, AIG, in its financial services operations, is also an
end-user of derivatives in adjusting its asset and liability risk profiles.
All significant derivatives activities are conducted through AIGFP and AIGTG.
AIG's other subsidiaries,





                                       16

<PAGE>   18
including its insurance subsidiaries, are not dealers nor are they significant
end users of derivatives.

         AIG actively manages the risk exposure to limit the potential for loss
while maximizing the rewards afforded by these business opportunities.  In
doing so, AIG must manage a variety of risks including credit risk, market
risk, liquidity risk and legal risk.

         Derivatives are financial transactions among two or more parties whose
payments are based on or "derived" from the performance of some agreed upon
benchmark.   Derivatives payments may be based on interest and exchange rate
changes, prices of certain securities and  certain commodities and financial or
commodity indices. Derivatives include swaps, options, forwards, futures and
related instruments.

         In 1993, the Group of Thirty, an international, private business
advisory organization, published a set of risk management recommendations for
derivatives.  These recommendations provide a measure of sound practices for
the industry as well as a comprehensive overview of derivatives that is
intended to promote an understanding of such instruments.  The recommendations
cover valuation and market risk management; credit risk measurement and
management; contract enforceability; systems, operations, and controls; and
accounting and disclosure.  AIG supports the Group of Thirty recommendations as
a framework in the management of AIG's derivatives operations.

         The most commonly used swaps are interest rate swaps and currency
swaps.  An interest rate swap is a contract between two parties to exchange
interest rate payments (typically a fixed interest rate versus a variable
interest rate) calculated on a specified principal or notional amount for a
specified period of time. The notional amount is not exchanged.  A currency
swap is similar but the notional amounts are different currencies which are
typically exchanged at the commencement and termination of the swap based upon
negotiated exchange rates.

         An option contract provides the option purchaser with the right but
not the obligation to buy or sell the underlying instrument at a set price
during a period of time or at a specified date.  The option writer is obligated
to sell or buy the underlying item if the option purchaser chooses to exercise
his right.  The writer receives a nonrefundable fee or premium from the option
purchaser.

         A forward or future contract is a legal contract between two parties
to purchase or sell a specified quantity of a commodity, government security,
currency, financial index or other instrument, at a specified price on a
specified future date.  A futures





                                       17

<PAGE>   19
contract is traded on an exchange, while a forward contract is executed
over-the-counter.

         Derivatives are generally either negotiated over-the-counter contracts
or standardized contracts executed on an exchange.  Standardized
exchange-traded derivatives include futures and options.  Negotiated
over-the-counter derivatives include forwards, swaps and options.
Over-the-counter derivatives are generally not traded like securities.
However, in the normal course of business, with the agreement of the original
counterparty, these contracts may be terminated or assigned to another
counterparty.

         Derivatives are used by AIG's customers such as corporations,
financial institutions, multinational organizations, sovereign entities,
government agencies and municipalities to manage the financial risks associated
with their activities.  For example, a future, forward or option contract can
be used to protect the customers' assets and liabilities against price
fluctuations; a swap can be used to change fixed interest rate payments into
floating interest rate payments.

         The notional amounts used to express the extent of AIG's involvement
in derivatives transactions do not represent a quantification of the market or
credit risks of the positions and are not necessarily recorded on the balance
sheet. Except for certain contracts such as currency swaps and foreign exchange
forwards, notional amounts are generally not paid or received.  Rather,
notional amounts represent amounts used to calculate cash flows to be
exchanged.  The timing and the amount of cash receipts and payments relating to
derivatives are determined by contractual agreements.

         The senior management of AIG approves the policies and establishes
general operating parameters for AIGFP and AIGTG.  AIG's senior management and
Board of Directors have established various oversight committees to review the
various financial market, operational and credit issues of AIGFP and AIGTG.
AIG's senior management has established limits which can only be exceeded with
express permission.  The senior managements of AIGFP and AIGTG report monthly
the results of their respective operations to AIG's senior management and Board
of Directors and review with them future strategies.

         Market risk principally arises from the uncertainty that future
earnings are exposed to potential changes in volatility, interest rates,
foreign exchange rates, and equity and commodity prices.  AIG generally
controls its exposure to market risk by taking offsetting positions.  AIG's
philosophy with respect to its financial services operations is to minimize or
set limits for open or uncovered positions that are to be carried. Although
market risk





                                       18

<PAGE>   20
may be minimized, credit risk remains an exposure which is separately managed.
(See the discussion on the management of credit risk below).

         AIGFP does not seek to manage the market risk of each of its
individual transactions through an individual offsetting transaction.  Rather,
AIGFP takes a portfolio approach to the management of its market risk.  AIGFP
values its portfolio through the use of an integrated valuation and hedging
computer system.  This system uses reliable current market data where available
or uses various valuation techniques when such market data is not available.
This system reflects AIGFP's evaluation of current market conditions,
maturities within the portfolio and uses current interest rates, volatility and
other relevant factors associated with the type of derivative, and applies
these to the present value of the cash flow structure of the overall portfolio.
The system analyzes these discounted cash flow structures or representative
financial instruments and suggests for management's decision what, if any,
offsetting instruments would be appropriate to purchase or sell.

         Additionally, depending upon the nature of interest rates and market
movements during the day, the system will produce reports for management's
consideration for intra-day offsetting positions.  Overnight, the system
generates reports which recommend the types of offsets management should
consider for the following day.  Additionally, AIGFP operates in certain
overseas locations and is essentially open for business 24 hours a day.  Thus,
the market exposure and offset strategies are monitored, reviewed and
coordinated around the clock.  Offsetting adjustments are made as and when
necessary from any AIGFP office in the world.

         As part of its monitoring and controlling of its exposure to market
risk, AIGFP applies various testing techniques which reflect potential market
movements.  These techniques vary by currency and are regularly changed to
reflect factors affecting the derivative portfolios. In addition to the daily
monitoring, AIGFP's senior management and local risk managers conduct a weekly
review of the derivatives portfolio and existing hedges.  This review includes
an examination of the portfolio's risk measures, such as aggregate option
sensitivity to movements in market variables.  These measures are changed as
appropriate in order to reflect AIGFP's evaluation of the dynamics of the
markets.  This management group will also determine whether additional or
alternative action is required in order to manage the portfolio.

         The aforementioned valuation models and conditions are examined by
AIGFP's management and changed, as appropriate, to reflect management's
judgments. Both AIG and AIGFP employ outside





                                       19

<PAGE>   21
consultants to provide the managements of AIG and AIGFP with comfort that the
system produces representative values.

         AIGTG's approach to protect itself from market risk is to establish an
appropriate offsetting position to a particular transaction or group of
transactions depending upon the extent of market risk AIGTG wishes to retain.

         AIGTG senior management has established positions and stop-loss limits
for each line of business.  AIGTG's traders are required to maintain positions
within these limits.  These positions are monitored during the day either
manually or through on-line computer systems.  In addition, these positions are
reviewed by AIGTG management.  Reports which present each trading book's
position and the prior day's profit and loss are reviewed by traders, head
traders and AIGTG's senior management.  Based upon these and other reports,
AIGTG's senior management may determine to adjust AIGTG's risk profile.

         AIGTG attempts to secure current market prices which it believes to be
reliable such as published prices or third party quotes, to value its
derivatives.  Where such prices are not available, AIGTG uses an internal
methodology which is based upon interpolation or extrapolation from verifiable
prices nearest to the dates of the transactions.  The methodology may reflect
interest and exchange rates, volatility and other relevant factors.

         A significant portion of AIGTG's business is transacted in liquid
markets.  AIGTG's derivative product exposures are evaluated using simulation
techniques which consider such factors as changes in currency and commodity
prices, interest rates, volatility levels and the effect of time.  Though not
indicative of the future, past volatile market scenarios have represented
profit opportunities for AIGTG.

         Credit risk exists at a particular point in time when a derivative has
a positive fair value. Also, a counterparty may default on any obligation to
AIG, including a derivative contract. Credit risk is a consequence of extending
credit and/or carrying trading and investment positions.  To help manage this
risk, the credit departments of AIGFP and AIGTG operate within the guidelines
of the AIG Credit Risk Committee which sets credit policy, credit limits for
counterparties and provides limits for derivative transactions with
counterparties having different credit ratings.  In addition to credit ratings,
this committee takes into account the industry and country of the counterparty.
Transactions which fall outside these pre-established guidelines require the
approval of the AIG Credit Risk Committee. This policy includes the
establishment of reserves for potential credit impairments.





                                       20

<PAGE>   22
         AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by nationally
recognized statistical rating organizations. If it is determined that a
counterparty requires credit enhancement, then one or more enhancement
techniques will be used.  Examples of such enhancement techniques include
letters of credit, guarantees, collateral and margin agreements.

         The significant majority of AIGFP's transactions are contracted and
documented under master netting agreements that provide for set- off and close
out netting in the event of default.  Additionally, AIGFP is currently
negotiating with its principal foreign exchange counterparties to implement
cross-netting between swap transactions and foreign exchange transactions to
further reduce credit risk.

         Excluding regulated exchange transactions, AIGTG, whenever possible,
enters into netting agreements with its counterparties which are similar in
effect to those discussed above.

           Management of AIG's liquidity profile is designed to ensure that
even under adverse conditions AIG is able to raise funds at the most economical
cost to fund maturing liabilities and capital and liquidity requirements of its
subsidiaries.  Sources of funds considered in meeting these objectives include
guaranteed investment agreements, issuance of long and short-term debt,
maturities and sales of securities available for sale, securities sold under
repurchase agreements, trade payables, securities and spot commodities sold,
not yet purchased, issuance of equity, and cash provided from operations.
AIG's strong capital position is integral to managing liquidity, as it enables
AIG to raise funds in diverse markets worldwide. (See also the discussions
under "Capital Resources" and "Liquidity" herein.)

         Legal risk arises from the uncertainty of the enforceability, through
legal or judicial processes, of the obligations of AIG's clients and
counterparties, including contractual provisions intended to reduce credit
exposure by providing for the netting of mutual obligations.  (See also the
discussion on master netting agreements above.)  AIG seeks to eliminate or
minimize such uncertainty through continuous consultation with internal and
external legal advisors, both domestically and abroad, in order to understand
the nature of legal risk, to improve documentation and to strengthen
transaction structure.





                                       21

<PAGE>   23
         Financial services operating income represented 14.5 percent of AIG's
income before income taxes and the cumulative effect of accounting changes in
the first nine months of 1994, which compares to 14.9 percent in the same
period of 1993. This slight decline is a result of the relative growth in life
operating income.


Other Operations

         In the first nine months of 1994, AIG's equity in income of
minority-owned insurance operations was $38.4 million compared to $28.8 million
in the same period of 1993. The equity interest in insurance companies
represented 1.8 percent of income before income taxes and the cumulative effect
of accounting changes in 1994, compared to 1.5 percent in 1993.

         Other realized capital losses amounted to $41.5 million and $5.0
million in 1994 and 1993, respectively.

         Other income (deductions)-net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned companies, minority
interest in certain consolidated companies, realized foreign exchange
transaction gains and losses in substantially all currencies and unrealized
gains and losses in hyperinflationary currencies, as well as the income and
expenses of the parent holding company and other miscellaneous income and
expenses.  In the first nine months of 1994, net deductions amounted to $72.2
million.  In the same period of 1993, net deductions amounted to $57.3 million.
Included in each of these amounts were $18.7 million and $14.2 million in 1994
and 1993, respectively, resulting from the recognition of minority interests
and $4.2 million and $5.2 million in 1994 and 1993, respectively, due to net
foreign exchange effects as described above.

         Income before income taxes and the cumulative effect of accounting
changes amounted to $2.17 billion in the first nine months of 1994 and $1.91
billion in the same period of 1993.

         In the first nine months of 1994, AIG recorded a provision for income
taxes of $569.6 million compared to the provision of $502.8 million in the same
period of 1993.  These provisions represent effective tax rates of 26.3 percent
in each of the respective periods. Income before the cumulative effect of
accounting changes amounted to $1.60 billion in the first nine months of 1994
and $1.41 billion in the same period of 1993.  The increase in net income
resulted from those factors described above.

         At January 1, 1993, AIG's equity in income of minority-owned insurance
operations was positively impacted by the cumulative effect of accounting
changes on such operations from the adoption





                                       22

<PAGE>   24
of Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes"  which was partially offset by the adoption of Statement of Financial
Accounting Standards No. 106 "Employer's Accounting for Post-Retirement
Benefits Other than Pension Plans".  AIG's equity in the cumulative effect of
such accounting changes was a net benefit of $20.7 million.

         Net income amounted to $1.60 billion in the first nine months of 1994
and $1.43 billion in the same period of 1993.  The increase in net income in
1994 over that of 1993 resulted from those factors described above.


Capital Resources

At September 30, 1994, AIG had total capital funds of $16.20 billion and total
borrowings of $16.18 billion.





                                       23

<PAGE>   25
         Total borrowings at September 30, 1994 and December 31, 1993 were as
follows:



<TABLE>
<CAPTION>
  (in thousands)
- --------------------------------------------------------------------------------------------------------------
                                                           September 30,                         December 31,
                                                                    1994                                 1993
==============================================================================================================
 <S>                                                         <C>                                  <C>
 Borrowings under Obligations of
    Guaranteed Investment
 Agreements

    AIGFP                                                    $ 5,342,800                           $6,735,600
- --------------------------------------------------------------------------------------------------------------
 Commercial Paper:
   AIG Funding, Inc.                                             700,900                              891,700

   ILFC*                                                       1,788,000                            1,442,400

   AICCO                                                         745,500                              638,200

   AIGFP                                                           2,900                              176,600
- --------------------------------------------------------------------------------------------------------------
   Total                                                       3,237,300                            3,148,900
- --------------------------------------------------------------------------------------------------------------
 Medium Term Notes:

   ILFC*                                                       1,857,400                            1,753,700

   AIG                                                           155,000                              295,000
- --------------------------------------------------------------------------------------------------------------
   Total                                                       2,012,400                            2,048,700
- --------------------------------------------------------------------------------------------------------------
   Notes and Bonds Payable:

   ILFC*                                                       3,000,000                            2,550,000

   AIGFP                                                         781,800                              521,400

   AIG: Lire bonds                                               159,100                              159,100

           Zero coupon notes                                      64,100                               59,100
- --------------------------------------------------------------------------------------------------------------
   Total                                                       4,005,000                            3,289,600
- --------------------------------------------------------------------------------------------------------------
 Loans and Mortgages Payable                                   1,581,500                              466,300

 ($1,334,100 and $196,900 were not
 guaranteed by AIG in 1994 and 1993.)
- --------------------------------------------------------------------------------------------------------------
 Total Borrowings                                             16,179,000                           15,689,100
- --------------------------------------------------------------------------------------------------------------
 Borrowings not guaranteed by AIG                              7,979,500                            5,943,000

 Matched GIA borrowings                                        5,342,800                            6,735,600
- --------------------------------------------------------------------------------------------------------------
                                                              13,322,300                           12,678,600
- --------------------------------------------------------------------------------------------------------------
 Remaining borrowings of AIG                                 $ 2,856,700                          $ 3,010,500
==============================================================================================================
</TABLE>


* AIG does not guarantee or support these borrowings.





                                       24

<PAGE>   26
         Guaranteed investments agreements (GIAs) serve as the source of
proceeds for AIGFP's investments in a diversified portfolio of securities and
derivative transactions thereon.  (See also the discussions under "Operational
Review" and "Liquidity" herein.)

         AIG Funding, Inc. intends to continue to meet AIG's funding
requirements through the issuance of commercial paper guaranteed by AIG.  This
issuance of commercial paper is subject to the approval of AIG's Board of
Directors.  ILFC, A.I. Credit Corp. (AICCO) and AIGFP issue commercial paper
for the funding of their own operations.  AIG does not guarantee AICCO's or
ILFC's commercial paper.  However, AIG has entered into an agreement in support
of AICCO's commercial paper.  AIG guarantees AIGFP's commercial paper.

         ILFC increased the aggregate principal amount outstanding of its
medium term and term notes to $4.9 billion during the first nine months of
1994, a net increase of $553.8 million. ILFC primarily uses the proceeds of its
borrowings to acquire new and used commercial jet aircraft to lease and/or
remarket to airlines around the world.  At September 30, 1994, ILFC had
approximately $2 billion in aggregate principal amount of debt securities
registered for issuance from time to time.  (See also the discussions under
"Operational Review" and "Liquidity" herein.)

         During the first nine months of 1994, AIG did not issue any new medium
term notes and $140.0 million of previously issued notes matured.  At September
30, 1994, AIG had $247.0 million in aggregate principal amount of debt
securities registered for issuance from time to time.

         AIG's capital funds have increased $975.6 million in the first nine
months of 1994.  Unrealized appreciation of investments, net of taxes,
decreased $440.0 million, primarily resulting from the rise in domestic
interest rates and their effects on the market values of bonds worldwide. As a
result of adopting Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments on Debt and Equity Securities", unrealized
appreciation of investments, net of taxes, is now subject to increased
volatility resulting from the changes in the market value of bonds available
for sale.  The cumulative translation adjustment loss, net of taxes, decreased
$57.8 million as a result of the general weakness of the U.S. dollar against
most major currencies.  Retained earnings increased $1.50 billion, resulting
from net income less dividends.

         During the first nine months of 1994, AIG repurchased 1.76 million
shares of its common stock in the open market at a cost of $150.0 million.





                                       25

<PAGE>   27
         Payments of dividends to AIG by its insurance subsidiaries are subject
to certain restrictions imposed by statutory authorities.  AIG has in the past
reinvested most of its unrestricted earnings in its operations and believes
such continued reinvestment in the future will be adequate to meet any
foreseeable capital needs.  However, AIG may choose from time to time to raise
additional funds through the issuance of additional securities.  At September
30, 1994 there were no significant statutory or regulatory issues which would
impair AIG's financial condition, results of operations or liquidity. (See also
the discussion under "Liquidity" herein.)


Liquidity

         At September 30, 1994, AIG's consolidated invested assets included
$3.18 billion of cash and short-term investments.  Consolidated net cash
provided from operating activities in the first nine months of 1994 amounted to
$4.00 billion.

         Management believes that AIG's liquid assets, its net cash provided by
operations, and access to the capital markets will enable it to meet any
foreseeable cash requirements.

         AIG's liquidity is primarily derived from the operating cash flows of
its general and life insurance operations.

         The liquidity of the combined insurance operations is derived both
domestically and abroad.  The combined insurance pretax operating cash flow is
derived from two sources, underwriting operations and investment operations.
In the aggregate, AIG's insurance operations generated approximately $5.6
billion in pretax operating cash flow during the first nine months of 1994.
The underwriting cash flow approximated $3.3 billion in the first nine months
of 1994.  Underwriting cash flow represents periodic premium collections,
including policyholders' contracts deposits, as well as paid loss recoveries
less reinsurance premiums, losses, benefits, and acquisition and operating
expenses paid.  Generally, there is a time lag from when premiums are collected
and, when as a result of the occurrence of events specified in the policy, the
losses and benefits are paid.  AIG's insurance operations generated
approximately $2.3 billion in investment income cash flow during this period of
1994.  Investment income cash flow is primarily derived from interest and
dividends received and includes realized capital gains.

         The combined insurance pretax cash flow coupled with its cash and
short-term investments of $2.75 billion provided the insurance operations with
a significant amount of liquidity.  This liquidity is available to purchase
high quality and diversified fixed income securities and to a lesser extent
marketable equity securities and





                                       26

<PAGE>   28
to provide mortgage loans on real estate, policy and collateral and guaranteed
loans.  With this liquidity coupled with proceeds of approximately $9.2 billion
from the maturities, sales and redemptions of fixed income securities and from
the sales of marketable equity securities, AIG purchased approximately $14.0
billion of fixed income securities and marketable equity securities.
Additionally, over $1.6 billion were disbursed for mortgage loans on real
estate, policy and collateral loans.  Approximately $900 million of this amount
was in connection with new policy loans issued as a result of domestic life
insurance operations associated with corporate owned life insurance products.

         The following table is a summary of AIG's invested assets by
significant segment, including investment income due and accrued and real
estate, at September 30, 1994 and December 31, 1993:



<TABLE>
<CAPTION>
  (dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
                                                    September 30, 1994                 December 31, 1993

                                              Invested           Percent          Invested            Percent
                                                Assets          of Total            Assets           of Total
==============================================================================================================
 <S>                                     <C>                      <C>         <C>                      <C>
 General insurance                         $23,308,000             29.6%      $ 22,573,800              33.2%

 Life insurance                             25,425,300             32.3%        22,037,300              32.4%

 Financial services*                        29,573,000             37.5%        22,957,300              33.7%

 Other                                         495,600              0.6%           464,100               0.7%
- --------------------------------------------------------------------------------------------------------------
 Total                                    $ 78,801,900            100.0%      $ 68,032,500             100.0%

==============================================================================================================
</TABLE>


* See also the discussion under "Accounting Standards: 
  Standards adopted in 1994" herein.


                                       27

<PAGE>   29
         The following tables are summaries of the composition of AIG's
insurance invested assets by insurance segment, including investment income due
and accrued and real estate, at September 30, 1994 and December 31, 1993:


  (dollars in thousands)


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------

                                                                               Percent    Percent Distribution

 September 30, 1994                   General           Life         Total     of Total    Domestic    Foreign
==============================================================================================================
 <S>                              <C>            <C>           <C>               <C>        <C>        <C>
 Bonds available for sale,
                                                                                                       
  at market value*                 $4,616,200    $15,936,800   $20,553,000        42.2%      33.5%     66.5%

 Bonds held to maturity,                                                                                    
                                                                                                          
  at amortized cost                12,715,100            ---    12,715,100        26.1%     100.0%        --

 Common stocks                      2,909,900      2,061,300     4,971,200        10.2%      28.7%     71.3%

 Mortgage loans on real estate,

  policy and collateral loans          41,500      3,960,000     4,001,500         8.2%      40.9%     59.1%
 
 Short-term investments,          

   including time deposits, 

   and cash                         1,204,600      1,546,400     2,751,000         5.6%      25.1%     74.9%

 Real estate                          348,600        627,800       976,400         2.0%      18.8%     81.2%

 Investment income due and                                                                                  

  accrued                             414,100        439,100       853,200         1.8%      55.0%     45.0%

 Other invested assets              1,058,000        853,900     1,911,900         3.9%      55.9%     44.1%
- --------------------------------------------------------------------------------------------------------------

 Total                            $23,308,000    $25,425,300   $48,733,300       100.0%      51.4%     48.6%
==============================================================================================================
</TABLE>
 

  * Includes Bonds trading securities, at market value.





                                       28

<PAGE>   30


<TABLE>
<CAPTION>

  (dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
                                                                               Percent    Percent Distribution

 December 31, 1993                   General           Life         Total     of Total      Domestic   Foreign
==============================================================================================================
 <S>                             <C>            <C>           <C>               <C>           <C>       <C>
 Bonds available for sale,

  at market value*               $ 4,387,800    $13,387,800   $17,775,600        39.9%         39.0%    61.0%

 Bonds held to maturity,

  at amortized cost               12,193,700            ---    12,193,700        27.3%        100.0%      --

 Common stocks                     2,761,800      1,527,200     4,289,000         9.6%         36.1%    63.9%

 Mortgage loans on real

  estate,  policy and 

  collateral loans                    96,300      2,678,200     2,774,500         6.2%         24.6%    75.4%
      
 Short-term investments,

  including time deposits, 

  and cash                         1,820,500      2,878,600     4,699,100        10.6%         23.1%    76.9%

 Real estate                         284,300        572,000       856,300         1.9%         16.2%    83.8%

 Investment income due and                                                                                   
                                     
  accrued                            429,700        363,900       793,600         1.8%         54.0%    46.0%

 Other invested assets               599,700        629,600     1,229,300         2.7%         53.2%    46.8%
- --------------------------------------------------------------------------------------------------------------
 Total                           $22,573,800    $22,037,300   $44,611,100       100.0%         53.0%    47.0%
==============================================================================================================
</TABLE>
                                                                        

 * Includes Bonds trading securities, at market value.

         With respect to bonds, AIG's strategy is to invest in high quality
securities while maintaining diversification to avoid significant exposure to
issuer, industry and/or country concentrations.

         Approximately 59 percent of the fixed maturity investments are
domestic securities.  Approximately 41 percent of such domestic securities were
rated AAA and approximately three percent were below investment grade or
non-rated.

         A significant portion of the foreign insurance fixed income portfolio
is rated by Moody's, Standard & Poor's (S&P) or similar foreign services.
However, credit quality rating services similar to the aforementioned rating
agencies are not available in all overseas locations.  Thus, AIG annually
reviews the credit quality of the nonrated fixed income investments, including
mortgages, in its foreign portfolio.  AIG applies a scale similar to that of
Moody's and S&P to the rating of these securities.  Coupling the ratings of
this internal review with those of the independent agencies indicates that
approximately 49 percent of the foreign





                                       29

<PAGE>   31
fixed income investments were rated AAA and approximately one percent were
deemed below investment grade at December 31, 1993.  AIG believes that there
has been no significant change in these ratings through September 30, 1994.

         Although AIG's fixed income insurance portfolios contain minor amounts
of securities below investment grade, potentially any fixed income security is
subject to downgrade for a variety of reasons subsequent to any balance sheet
date.

         At September 30, 1994 approximately 6 percent of the fixed maturities
portfolio are Collateralized Mortgage Obligations (CMOs). All the CMOs are
investment grade and approximately 86 percent of the CMOs are backed by various
U.S. government agencies.  Thus, credit risk is minimal.

         There are no interest only or principal only CMOs.  CMOs are exposed
to interest rate risk as the duration and ultimate realized yield would be
affected by the accelerated prepayments of the underlying mortgages.

         When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from currency risk and
interest rate risk, AIG and its insurance subsidiaries consider entering into
derivative transactions as end users.  To date, such activities have been
insignificant.

         Short-term investments represent amounts invested in various internal
and external money market funds, time deposits and cash.

         Mortgage loans on real estate, policy, collateral and guaranteed loans
comprised 8.2 percent of AIG's insurance invested assets at September 30, 1994.
AIG's insurance holdings of real estate mortgages amounted to $1.58 billion of
which 34.1 percent was domestic.  At September 30, 1994, no domestic mortgages
and only a nominal amount of foreign mortgages were in default.  At September
30, 1994, AIG's insurance holdings of collateral loans amounted to $518.1
million, all of which were foreign.  It is AIG's practice to require a maximum
loan to value ratio of 75 percent at loan origination.

         AIG's real estate investment properties are primarily occupied by
AIG's various operations.  The current market value of these properties
considerably exceeds their carrying value.

         There exist in certain jurisdictions significant regulatory and/or
foreign governmental barriers which may not permit the immediate free flow of
funds between insurance subsidiaries or from the insurance subsidiaries to AIG
parent.  These barriers generally cause only minor delays in the outward
remittance of the funds.





                                       30

<PAGE>   32
         The following table is a summary of the composition of AIG's financial
services invested assets, including real estate, at September 30, 1994 and
December 31, 1993:



<TABLE>
<CAPTION>
 (dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
                                                    September 30, 1994             December 31, 1993
                                                    ------------------             -----------------

                                                    Invested        Percent        Invested        Percent
                                                      Assets       of Total          Assets       of Total
==============================================================================================================
 <S>                                            <C>                  <C>        <C>                 <C>
 Flight equipment primarily under

  operating leases, net of accumulated 

  depreciation                                  $ 10,148,000          34.3%     $ 8,555,400          37.3%

 Unrealized gain on interest rate and

  currency swaps, options and forward                                                                     
                                                   
  transactions *                                   4,631,200          15.7%              --             --

 Securities available for sale, at market 
                                                            
   value                                           3,500,200          11.8%       4,991,100          21.7%

 Trade receivables                                 3,107,000          10.5%       1,328,400           5.8%

 Securities purchased under agreements

   to resell, at contract value                    2,708,100           9.2%       2,737,500          11.9%

 Trading securities, at market value               2,565,900           8.7%       2,516,200          11.0%

 Spot commodities, at market value                 1,387,400           4.7%         764,200           3.3%

 Net unrealized gain on interest rate and

  currency  swaps, options and forward                                                                    
                                                          
  transactions                                            --             --         640,100           2.8%

 Other, including short-term investments           1,525,200           5.1%       1,424,400           6.2%
- --------------------------------------------------------------------------------------------------------------
 Total                                           $29,573,000         100.0%     $22,957,300         100.0%
==============================================================================================================

</TABLE>

  * See also the discussion under "Accounting Standards:  Standards adopted in
1994" herein.

         As previously discussed, cash used for the purchase of flight
equipment is derived primarily from the proceeds of ILFC's debt financing.  The
primary sources for the repayment of this debt and the interest expense thereon
are the lease receipts received and proceeds from the sale of flight equipment.
During 1994, ILFC increased its net financing $1.34 billion for the acquisition
of flight equipment costing $2.02 billion.

         The gross unrealized gains and unrealized losses of AIGFP and AIGTG
included in the financial services assets as at September 30, 1994 were as
follows:





                                       31

<PAGE>   33

<TABLE>
<CAPTION>
  (in thousands)
- --------------------------------------------------------------------------------------------------------------
                                       Gross                       Gross                     Balance
                                    Unrealized                  Unrealized                    Sheet
                                       Gains                      Losses                      Amount
==============================================================================================================
 <S>                                 <C>                         <C>                        <C>
 Securities available for
  sale, at market value              $ 230,500                   $ 229,500                  $3,500,200

 Trade receivables                   2,343,000                      20,512                   3,107,000

 Trading securities,
  at market value                        --                         --                       2,565,900


 Spot commodities, at
  market value                          267,400                    145,900                   1,387,400

 Unrealized gain/loss
  on interest rate and
  currency swaps,
  options and forward
  transactions *                      4,631,200                  3,703,700                      --
==============================================================================================================
</TABLE>



* See also the discussion under "Accounting Standards: Standards adopted in
1994" herein.

         Trading securities, at market value, are marked to market daily with
the unrealized gain or loss being recognized in income at that time.  These
securities are held to meet the short term risk management objectives of AIGFP.

         The interest rate risk on securities available for sale, at market, is
managed by taking offsetting positions on a security by security basis, thereby
offsetting a significant portion of the unrealized appreciation or
depreciation.  The unrealized gains and losses remaining after benefit of the
offsets were $6.3 million and $5.3 million.

         Securities available for sale and securities purchased under
agreements to resell are primarily purchased with the proceeds of AIGFP's GIA
financing.  The securities purchased involve varying degrees of credit risk.
The average credit rating of AIGFP's securities available for sale at September
30, 1994 was AA.  Securities purchased under agreements to resell are treated
as collateralized transactions.  AIGFP generally takes possession of securities
purchased under agreements to resell.  AIGFP further minimizes its credit risk
by monitoring customer credit exposure and requiring additional collateral to
be deposited when deemed necessary.





                                       32

<PAGE>   34
         AIGFP, as principal, enters into interest rate, currency, equity and
commodity swaps and forward commitments.  The average credit rating of AIGFP's
counterparties as a whole, as measured by AIGFP, was AA- at September 30, 1994.
As previously described, AIGFP carries its derivatives at fair value.  To the
extent there are reliable current market data, these derivatives are valued
accordingly.  Where such market data are not available, AIGFP uses internal
valuation models.   The recorded fair values of these derivative products may
be different than the values that might be realized if AIGFP were to sell or
close out the transactions because of limited liquidity for these instruments.
(See also the discussions under "Operational Review: Financial Services" and
"Accounting Standards: Standards Adopted in 1994" herein.)

         AIGTG acts as principal in certain foreign exchange, precious and base
metals, petroleum and petroleum products and natural gas trading activities.
AIGTG owns and may maintain substantially hedged inventories in the commodities
in which it trades.  AIGTG supports its trading and market making activities
largely through trade payables, securities sold under agreements to repurchase
and spot commodities sold but not yet purchased.  Thus, AIGTG's liquidity is
provided through its high volume and rapid turnover activities in market making
and hedging.  AIGTG uses derivatives to hedge various trading positions and
transactions from adverse movements in interest rates, exchange rates and
commodity prices. (See also the discussion under "Operational Review: Financial
Services" herein.)


Recent Developments

         In 1989, the National Association of Insurance Commissioners (NAIC)
adopted the "NAIC Solvency Policing Agenda for 1990".  Included in this agenda
was the development of Risk-Based  Capital (RBC) requirements.  RBC relates an
individual insurance company's statutory surplus to the risk inherent in its
overall operations.  AIG believes that the development of RBC standards is a
positive step for the insurance industry but further believes the standards in
their present form may lead to an inefficient deployment of industry capital.
As experience is gained with the application of RBC standards, it is likely
that adjustments to the formula will be made.

         RBC standards for property and casualty insurers have been finalized
and are effective with the 1994 statutory financial statements to be filed in
1995.  Applying these RBC standards to AIG's domestic general operations at
December 31, 1993 and September 30, 1994 reveals that the capital of each of
the domestic general insurance companies exceeded the RBC requirements.
Additionally, no AIG company is on any regulatory or similar "watch list".





                                       33

<PAGE>   35
         Standards for the life RBC formula and a model act have been approved
by regulators and were effective with the 1993 statutory financial statements.
At December 31, 1993, the adjusted capital of each of AIG's four domestic life
companies exceeded the levels of their RBC capital by multiples approximating
from two to more than four. There has been no significant change in the RBC
capital of each of these companies through September 30, 1994.

         In 1992, domestic life insurance companies were required for
regulatory purposes to adopt two investment reserves, the Asset Valuation
Reserve (AVR) and the Interest Maintenance Reserve (IMR).  The AVR is formula
based and applies to all invested assets which are subject to either credit or
market risk.  The IMR defers realized capital gains and losses on the sale of
fixed maturities and mortgage loans.  The realized gains and losses are
subsequently amortized into investment income over the original term of the
disposed assets.  The impact of these reserves on the separately reported
statutory income of certain domestic life companies may be significant in 1994.
However, there was no impact on AIG's GAAP consolidated life insurance
operating income presented herein.

         In July 1994, AIG acquired $200 million of 8 percent convertible
preferred stock of Alexander & Alexander Services Inc. (A&A), an independent
insurance brokerage operation.  The preferred stock is convertible into common
stock of A&A at $17 per share. Both the convertible preferred stock and the
common stock are non-voting in the hands of AIG. AIG may elect in the future to
exchange its non-voting common stock for up to 9.9 percent of A&A's voting
common stock.  The dividend will be paid in-kind for the first two years; and,
at A&A's option, for an additional three years.

         In October 1994, AIG signed a definitive agreement with 20th Century
Industries, (20th Century) under which AIG will invest $200 million in a new
issue of 9 percent cumulative convertible preferred stock of 20th Century.
Dividends on the preferred stock will be paid in cash or in kind for the first
three years at 20th Century's option, and in cash thereafter.  Additionally, 
under the definitive agreement, AIG will invest $16 million in warrants for 16 
million common shares of 20th Century at a per share exercise price of $13.50.  
20th Century has also granted to AIG, at a per share exercise price of $11.33, 
an option to purchase up to 15 percent of 20th Century's common stock under
certain conditions.  AIG and 20th Century will enter a strategic alliance to 
extend the direct marketing of personal automobile insurance into certain
western states.




                                       34

<PAGE>   36
         This transaction is subject to the approval of the 20th Century 
shareholders.

         On October 31, 1994, ILFC filed a registration statement with respect
to 1,000 shares of money market auction preferred stock in two series with a 
liquidation preference of $100,000 per share.  The proceeds of this offering 
will be used to repay maturing commercial paper.

         ILFC currently has six model 757 and three model MD83 aircraft
and one spare engine on lease to Aeromexico.  At September 30, 1994, the
aggregate net book value of these nine aircraft and one spare engine was $356
million.  In September 1994, Aeromexico ceased making lease payments on these
and its other leased aircraft due to its financial difficulties.  The aggregate
monthly rentals due with respect to the nine aircraft and the engine leased to
Aeromexico is approximately $2.7 million.  ILFC has obtained court orders which
would allow ILFC to repossess any of the aircraft if they are flown into
certain airports in the United States.  However, ILFC understands that these
aircraft have been diverted for use only on Mexican domestic flights.  Under
the terms of its leases, ILFC has the right to and has applied deposits from
Aeromexico to the payment of rent.  Through October 31, 1994, the amounts of
unpaid rents were less than the amount of deposits from Aeromexico held by
ILFC.  Commencing in November 1994, no additional rents will be accrued on these
aircraft and engine until a resolution of this matter has been reached.

         ILFC is currently negotiating with Aeromexico to resolve this matter. 
No agreement has yet been reached.  Management does not believe that this
matter will have a material adverse effect on AIG's results of operations,
liquidity or financial condition.

Accounting Standards

Standards adopted in 1994:

         In March 1992, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 39 "Offsetting of Amounts Related to Certain Contracts"
(Interpretation), which is effective for fiscal years beginning after December
15, 1993.  The Interpretation requires that unrealized gains and losses on
swaps, forwards, options and similar contracts be recognized as assets and
liabilities.  Previously, AIG's policy was to record such unrealized gains and
losses on a net basis in the consolidated balance sheet.  The Interpretation
allows the netting of such unrealized gains and losses with the same
counterparty when they are included under a master netting arrangement with the
counterparty and the contracts are reported at market or fair value.

         Although there was no effect on AIG's operating income upon the
adoption of the Interpretation, AIG adopted this Interpretation effective
January 1, 1994 and now presents certain of its financial services assets and
liabilities, primarily unrealized gain (loss) on interest rate and currency
swaps, options and forward transactions, on a gross basis. Thus, both
consolidated assets and liabilities have increased.  The effect of presenting
these assets and liabilities on a gross basis on AIG's consolidated balance
sheet was not significant.  The prior years' balance sheet was not
reclassified.





                                       35

<PAGE>   37
         In November of 1992, FASB issued Statement of Financial Accounting
Standards No. 112 "Employers' Accounting for Post-employment Benefits" (FASB
112).  FASB 112 established accounting standards for employers who provide
benefits to former or inactive employees after employment but before
retirement.  FASB 112 was adopted by AIG effective January 1, 1994 and had no
significant effect on AIG's results of operations, financial condition or
liquidity.


Standards to be adopted in the future:

         In May 1993, FASB issued Statement of Financial Accounting Standards
No. 114 "Accounting by Creditors for Impairment of a Loan"  (FASB 114).  FASB
114 addresses the accounting by all creditors for impairment of certain loans.
The impaired loans are to be measured at the present value of all expected
future cash flows.  The present value may be determined by discounting the
expected future cash flows at the loan's effective rate or valued at the loan's
observable market price or valued at the fair value of the collateral if the
loan is collateral dependent.  This methodology is not expected to produce a
material effect on AIG's results of operations, financial condition or
liquidity.  FASB 114 will be effective for the 1995 financial statements.  AIG
does not anticipate adoption prior to the effective date.

         In October 1994, FASB issued Statement of Financial Accounting
Standards No. 118 "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures" (FASB 118).  FASB 118 amends FASB 114 to allow a
creditor to use existing methods to recognize interest income on an impaired
loan.  FASB 118 also amends certain disclosure requirements of FASB 114.  This
statement is effective at the same time as FASB 114.

         In October 1994, FASB issued Statement of Financial Accounting
Standards No. 119 "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" (FASB 119).  FASB 119 requires disclosure about
derivative financial instruments and amends FASB Statement No. 105 "Disclosure
of Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk" (FASB 105) and FASB
Statement No. 107 "Disclosure about Fair Value of Financial Instruments".

         FASB 119 requires disclosure about the amounts, nature and terms of
derivatives that are not subject to FASB 105.  Also, FASB 119 requires
disclosure about financial instruments held or issued for trading purposes and
purposes other than trading.  This statement is effective for year end 1994.





                                       36

<PAGE>   38
P
ART II - OTHER INFORMATION



ITEM #6 - EXHIBITS AND REPORTS ON FORM 8-K

         (a)     Exhibits
                 See accompanying Exhibit Index.

         (b)     There were no reports on Form 8-K filed for the nine months 
                 ended September 30, 1994.



                                  SIGNATURES

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



                                      AMERICAN INTERNATIONAL GROUP, INC.
                                      ----------------------------------
                                                 (Registrant)




                                           s/s Howard I. Smith                  
                                      ----------------------------------
                                               Howard I. Smith               
                                      Senior Vice President - Comptroller  
                                           (Chief Accounting Officer)           




Dated:  November 11, 1994





                                       37

<PAGE>   39

                                 EXHIBIT INDEX




<TABLE>
<CAPTION>
Exhibit
Number                              Description                                Location
- -------                             -----------                                --------
                                                                               
  <S>            <C>                                                           <C>
   2             Plan of acquisition, reorganization, arrangement,             
                   liquidation or succession........................           None
                                                                               
   4             Instruments defining the rights of security                   Not required
                   holders, including indentures....................             to be filed.
                                                                               
  10             Material contracts................................            None
                                                                               
  11             Statement re computation of per share earnings....            Filed herewith.
                                                                               
  12             Statement re computation of ratios................            Filed herewith.
                                                                               
  15             Letter re unaudited interim financial information..           None
                                                                               
  18             Letter re change in accounting principles..........           None
                                                                               
  19             Report furnished to security holders...............           None
                                                                               
  22             Published report regarding matters submitted to               
                   vote of security holders.........................           None
                                                                               
  23             Consents of experts and counsel....................           None
                                                                               
  24             Power of attorney..................................           None
                                                                               
  27             Financial Data Schedule............................           Provided herewith.
                                                                               
  99             Additional exhibits................................           None
                                                                               
</TABLE>





                                                                            38





<PAGE>   1

                                                                      Exhibit 11



                     AMERICAN INTERNATIONAL GROUP,  INC.
                      COMPUTATION OF EARNINGS PER SHARE
                   (in thousands, except per share amounts)






<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED SEPTEMBER 30,     THREE MONTHS ENDED SEPTEMBER 30,
                                                               -------------------------------      ------------------------------- 

                                                                      1994               1993                1994           1993
                                                                      ----               ----                ----           ----
<S>                                                             <C>                <C>                    <C>              <C>
Average outstanding shares used in the computation
   of per share earnings:

         Common stock (a)                                             337,391            337,393           337,391         337,392
                                                                                                                      
         Common stock in treasury (a)                                 (20,569)           (19,974)          (21,023)        (19,954)
                                                                -------------       ------------       -----------      ----------
                                                                                                                      
                                                                      316,822            317,419           316,368         317,438
                                                                =============       ============       ===========      ==========
                                                                                                                      
Income before cumulative effect of accounting changes           $   1,597,839      $   1,406,878       $   542,527         451,061
Cumulative effect of accounting changes: (b)                                                                          
    Minority-owned insurance operations                                     -             20,695                 -               -
                                                                -------------       ------------       -----------      ----------
Net income (applicable to common stock) (c)                     $   1,597,839      $   1,427,573       $   542,527      $  451,061
                                                                =============       ============       ===========      ==========
                                                                                                                        
Earnings per common share:                                                                                              
Income before cumulative effect of accounting changes           $        5.04      $        4.43       $      1.71      $     1.42
Cumulative effect of accounting changes:                                                                                
    Minority-owned insurance operations                                     -               0.07                 -               -
                                                                -------------       ------------       -----------       ---------
Net income                                                      $        5.04      $        4.50       $      1.71      $     1.42
                                                                =============       ============       ===========      ==========
</TABLE>



(a)  The effects of all other common stock equivalents are not significant.

(b)  Represents a net benefit for the cumulative effect of the adoption of
     accounting pronouncements related to postretirement benefits (FASB 106)
     and income taxes (FASB 109) by minority-owned insurance operations in
     1993.

(c)  After deduction of preferred
 stock dividends of $1,043,000 and $0 for the
     first nine months and third quarter of 1993, respectively.





                                      -39-



<PAGE>   1
                                                                      Exhibit 12



                      AMERICAN INTERNATIONAL GROUP,  INC.
               COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
                         (in thousands, except ratios)






<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED SEPTEMBER 30,       THREE MONTHS ENDED SEPTEMBER 30,
                                                           -------------------------------       ---------------------------------
                                                               1994                1993                 1994                1993
                                                               ----                ----                 ----                ----
<S>                                                    <C>                  <C>                 <C>                  <C>
Income before income taxes and cumulative effect of                                         
  accounting changes                                   $     2,167,416      $    1,910,747      $       748,313      $      620,237
Less - Equity income of less than 50% owned persons             32,153              34,024               11,423              12,425
Add - Dividends from less than 50% owned persons                 3,701               3,465                  958                 716
                                                         -------------        ------------        -------------        ------------
                                                             2,138,964           1,880,188              737,848             608,528
Add -                                                                                       
  Fixed charges                                              1,044,165             931,419              339,209             236,227
Less -                                                                                      
  Capitalized interest                                          33,293              31,538               11,021               9,807
                                                         -------------        ------------        -------------        ------------
Income before income taxes, cumulative effect of                                            
  accounting changes and fixed charges                 $     3,149,836      $    2,780,069      $     1,066,036      $      834,948
                                                         =============        ============        =============        ============
Fixed charges:                                                                              
  Interest costs                                       $       994,041      $      872,487      $       322,501      $      216,583
  One-third rental expenses *                                   50,124              58,932               16,708              19,644
                                                         -------------        ------------        -------------        ------------
      Total fixed charges                              $     1,044,165      $      931,419      $       339,209      $      236,227
                                                         =============        ============        =============        ============
Ratio of earnings to fixed charges                                3.02                2.98                 3.14                3.53
                                                                                                
</TABLE>


*  The proportion deemed representative of the interest factor.



The ratio shown is significantly affected as a result of the inclusion of the
fixed charges and operating results of AIG Financial Products Corp. and its
subsidiaries (AIGFP). AIGFP structures borrowings
 through guaranteed investment
agreements and engages in other complex financial transactions, including
interest rate and currency swaps. In the course of its business, AIGFP enters
into borrowings that are primarily used to purchase assets that yield rates
greater than the rates on the borrowings with the intent of earning a profit on
the spread and to finance the acquisition of securities utilized to hedge
certain transactions.  The pro forma ratios of earnings to fixed charges, which
exclude the effects of the operating results of AIGFP, are 5.17 and 5.15 for
the third quarter and 5.45 and 5.55 for the first nine months of 1994 and 1993,
respectively. As AIGFP will continue to be a subsidiary, AIG expects that these
ratios will continue to be lower than they would be if the fixed charges and
operating results of AIGFP were not included therein.





                                      -40-








<TABLE> <S> <C>



<ARTICLE> 7
<LEGEND>
                                                                    Exhibit 27

                      AMERICAN INTERNATIONAL GROUP, INC.
                           Financial Data Schedule
                 For the nine months ended September 30, 1994
                   (in thousands, except per share amounts)
</LEGEND>
<MULTIPLIER> 1

<CURRENCY>USD
       
<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1994
<PERIOD-START>                             JUL-01-1994
<PERIOD-END>                               SEP-30-1994
<EXCHANGE-RATE>                                      1
<DEBT-HELD-FOR-SALE>                        20,351,602
<DEBT-CARRYING-VALUE>                       12,715,086
<DEBT-MARKET-VALUE>                         13,110,000
<EQUITIES>                                   5,256,134
<MORTGAGE>                                   1,610,125
<REAL-ESTATE>                                1,208,016
<TOTAL-INVEST>                              76,638,438
<CASH>                                          89,443
<RECOVER-REINSURE>                          16,497,964
<DEFERRED-ACQUISITION>                       4,917,747
<TOTAL-ASSETS>                             114,559,454
<POLICY-LOSSES>                             47,790,675
<UNEARNED-PREMIUMS>                          6,445,024
<POLICY-OTHER>                                       0
<POLICY-HOLDER-FUNDS>                        7,895,485
<NOTES-PAYABLE>                             10,836,209
<COMMON>                                       843,477
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<OTHER-SE>                                  15,356,331
<TOTAL-LIABILITY-AND-EQUITY>               114,559,454
<PREMIUMS>                                  12,521,610
<INVESTMENT-INCOME>                          2,334,901
<INVESTMENT-GAINS>                              76,775
<OTHER-INCOME>                                (72,219)
<BENEFITS>                                  10,170,266
<UNDERWRITING-AMORTIZATION>                  1,065,344
<UNDERWRITING-OTHER>                         1,853,408
<INCOME-PRETAX>                              2,167,416
<INCOME-TAX>                                   569,577
<INCOME-CONTINUING>                          1,597,839
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 1,597,839
<EPS-PRIMARY>                                     5.04
<EPS-DILUTED>                                     5.04
<RESERVE-OPEN>                              17,557,000
<PROVISION-CURRENT>                          6,025,800
<PROVISION-PRIOR>
                                    0
<PAYMENTS-CURRENT>                           1,514,200
<PAYMENTS-PRIOR>                             3,893,700
<RESERVE-CLOSE>                             18,174,900
<CUMULATIVE-DEFICIENCY>                              0
        

</TABLE>