<PAGE>   1


================================================================================
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                   ----------

                                    Form 10-K
(Mark One)
   |X|        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1997
                                       OR
   |_|      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

     For the Transition period from___________________to____________________


                          Commission file number 1-8787

                                   ----------

                       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 No.)

    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

Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of each exchange on
          Title of each class                            which registered
          -------------------                        ------------------------
Common Stock, Par Value $2.50 Per Share            New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act:

                               Title of each class
                               -------------------
                                      None

                                   ----------

      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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                               Yes |X|   No |_|

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

      The aggregate market value of the shares of all classes of voting stock of
the registrant held by non-affiliates of the registrant on January 31, 1998 was
approximately $55,311,490,000 computed upon the basis of the closing sales price
of the Common Stock on that date.

      As of January 31, 1998, there were outstanding 699,418,258 shares of
Common Stock, $2.50 par value, of the registrant.

                      Documents Incorporated by Reference:

      The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 20, 1998 is incorporated by reference in

Part III of this Form 10-K.

================================================================================

<PAGE>   2


PART I
================================================================================

ITEM 1. Business

American International Group, Inc. ("AIG"), a Delaware corporation, is a holding
company which through its subsidiaries is primarily engaged in a broad range of
insurance and insurance-related activities and financial services in the United
States and abroad. AIG's primary activities include both general and life
insurance operations. The principal insurance company subsidiaries are American
Home Assurance Company ("American Home"), National Union Fire Insurance Company
of Pittsburgh, Pa. ("National Union"), New Hampshire Insurance Company ("New
Hampshire"), Lexington Insurance Company ("Lexington"), American International
Underwriters Overseas, Ltd. ("AIUO"), American Life Insurance Company ("ALICO"),
American International Assurance Company, Limited ("AIA"), Nan Shan Life
Insurance Company, Ltd. ("Nan Shan"), The Philippine American Life and General 
Insurance Company ("PHILAM"), American International Reinsurance Company, Ltd. 
and United Guaranty Residential Insurance Company. For information on AIG's 
business segments, see Note 17 of Notes to Financial Statements.

      All per share information herein gives retroactive effect to all stock
dividends and stock splits. As of January 31, 1998, beneficial ownership of
approximately 16.2 percent, 3.5 percent and 2.4 percent of AIG's Common Stock,
$2.50 par value ("Common Stock"), was held by Starr International Company, Inc.
("SICO"), The Starr Foundation and C. V. Starr & Co., Inc. ("Starr"),
respectively.

      At December 31, 1997, AIG and its subsidiaries had approximately 40,000
employees.

      The following table shows the general development of the business of AIG
on a consolidated basis, the contributions made to AIG's consolidated revenues
and operating income and the assets held, in the periods indicated by its
general insurance, life insurance, financial services operations, equity in
income of minority-owned insurance companies and other realized capital losses.
(See also Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes 1 and 17 of Notes to Financial Statements.)


<TABLE>
<CAPTION>

(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                              1997             1996             1995             1994             1993
==============================================================================================================================
<S>                                          <C>              <C>              <C>              <C>              <C>          
General insurance operations:
   Gross premiums written                    $  18,742,055    $  18,319,132    $  17,895,120    $  16,392,409    $  14,901,255
   Net premiums written                         13,407,529       12,691,679       11,893,022       10,865,753       10,025,903
   Net premiums earned                          12,421,040       11,854,815       11,405,731       10,286,831        9,566,640
   Adjusted underwriting profit (a)                490,168          449,784          416,637          200,484           68,735
   Net investment income                         1,853,523        1,690,798        1,547,572        1,436,254        1,342,383
   Realized capital gains                          128,175           64,985           68,077           51,360           60,719
   Operating income                              2,471,866        2,205,567        2,032,286        1,688,098        1,471,837
   Identifiable assets                          62,386,262       58,791,735       56,223,416       51,556,410       47,161,017
- ------------------------------------------------------------------------------------------------------------------------------
   Loss ratio                                         75.3             75.9             75.9             77.8             79.2
   Expense ratio                                      20.9             20.6             20.7             20.5             20.3
- ------------------------------------------------------------------------------------------------------------------------------
   Combined ratio                                     96.2             96.5             96.6             98.3             99.5
==============================================================================================================================
Life insurance operations:
   Premium income                                9,925,639        8,978,246        8,038,150        6,724,321        5,746,046
   Net investment income                         2,896,469        2,675,881        2,264,905        1,748,428        1,499,714
   Realized capital gains                           21,186           34,798           32,703           86,706           54,576
   Operating income                              1,571,483        1,323,758        1,090,605          952,484          781,611
   Identifiable assets                          52,103,905       48,376,033       43,280,484       34,496,652       28,381,164
   Insurance in-force at end of year           436,573,123      421,983,133      376,097,107      333,378,811      257,162,102
Financial services operations:
   Commissions, transaction and other fees       3,273,478        2,555,477        2,204,090        1,783,239        1,529,079
   Operating income                                701,337          523,906          417,741          404,853          390,038
   Identifiable assets                          51,756,123       43,861,592       36,833,772       30,660,776       25,514,258
Equity in income of minority-owned
   insurance operations                            113,636           99,359           81,722           56,005           39,589
Other realized capital losses                      (30,846)         (11,792)         (28,946)         (51,213)          (8,197)
Revenues (b)                                    30,602,300       27,942,567       25,614,004       22,121,931       19,830,549
Total assets                                   163,970,687      148,431,002      134,136,398      114,346,117      101,014,848
==============================================================================================================================
</TABLE>


(a)   Adjusted underwriting profit is statutory underwriting income adjusted
      primarily for changes in deferral of acquisition costs. This adjustment is
      necessary to present the financial statements in accordance with generally
      accepted accounting principles.
(b)   Represents the sum of general net premiums earned, life premium income,
      net investment income, financial services commissions, transaction and
      other fees, equity in income of minority-owned insurance operations and
      realized capital gains (losses). In 1997, agency operations were
      insignificant and were presented as a component of general insurance.
      Agency operations for years prior to 1997 have been reclassified to
      conform to the 1997 presentation. 


                                                                               1

<PAGE>   3

      The following table shows identifiable assets, revenues and income derived
from operations in the United States and Canada and from operations in other
countries for the year ended December 31, 1997. (See also Note 17 of Notes to
Financial Statements.)


<TABLE>
<CAPTION>

(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
                                                                                                  Percent of Total
                                                                                              --------------------------
                                                              United States       Other       United States      Other
                                                  Total         and Canada      Countries       and Canada     Countries
========================================================================================================================
<S>                                          <C>              <C>              <C>                 <C>           <C>  
General insurance operations:
   Net premiums earned                       $  12,421,040    $   8,352,231    $ 4,068,809         67.2%         32.8%
   Adjusted underwriting profit (loss)             490,168           (7,188)       497,356           --            --
   Net investment income                         1,853,523        1,484,558        368,965         80.1          19.9
   Realized capital gains                          128,175           57,017         71,158         44.5          55.5
   Operating income                              2,471,866        1,534,387        937,479         62.1          37.9
   Identifiable assets                          62,386,262       48,409,832     13,976,430         77.6          22.4
Life insurance operations:                                                                                     
   Premium income                                9,925,639          553,203      9,372,436          5.6          94.4
   Net investment income                         2,896,469          838,931      2,057,538         29.0          71.0
   Realized capital gains (losses)                  21,186           (2,163)        23,349           --            --
   Operating income                              1,571,483          122,775      1,448,708          7.8          92.2
   Identifiable assets                          52,103,905       14,435,626     37,668,279         27.7          72.3
Financial services operations:                                                                                 
   Commissions, transaction and other fees       3,273,478        2,808,131        465,347         85.8          14.2
   Operating income                                701,337          424,846        276,491         60.6          39.4
   Identifiable assets                          51,756,123       45,451,790      6,304,333         87.8          12.2
Equity in income of minority-owned                                                                             
   insurance operations                            113,636           80,410         33,226         70.8          29.2
Other realized capital gains (losses)              (30,846)         (30,988)           142           --            --
Income before income taxes                       4,698,898        2,015,556      2,683,342         42.9          57.1
Revenues                                        30,602,300       14,141,330     16,460,970         46.2          53.8
Total Assets                                   163,970,687      105,757,551     58,213,136         64.5          35.5
========================================================================================================================
</TABLE>


General Insurance Operations

AIG's general insurance subsidiaries are multiple line companies writing
substantially all lines of property and casualty insurance. One or more of these
companies is licensed to write substantially all of these lines in all states of
the United States and in approximately 100 foreign countries.

      AIG's business derived from brokers in the United States and Canada is
conducted through its domestic brokerage group, consisting of American Home,
National Union, Lexington and certain other insurance company subsidiaries of
AIG. The primary casualty/risk management division of this group provides
insurance and risk management programs for large corporate customers. The AIG
Risk Finance division designs and implements creative risk financing
alternatives using the insurance and financial services capabilities of AIG.
Also included are the operations of New Hampshire and its subsidiaries, which
focus specifically on providing AIG products and services through brokers to
middle market companies, and regional insurance companies which service the
commercial middle market.

      The domestic brokerage division accepts business mainly from insurance
brokers, enabling selection of specialized markets and retention of underwriting
control. Any licensed broker is able to submit business to these companies
without the traditional agent-company contractual relationship, but such broker
usually has no authority to commit the companies to accept a risk.

      In addition to writing substantially all classes of business insurance,
including large commercial or industrial property insurance, excess liability,
inland marine, workers' compensation and excess and umbrella coverages, the
domestic brokerage division offers many specialized forms of insurance such as
directors and officers liability, difference-in-conditions, kidnap-ransom,
export credit and political risk, and various types of professional errors and
omissions coverages. Lexington writes surplus lines, those risks for which
conventional insurance companies do not readily provide insurance coverage,
either because of complexity or because the coverage does not lend itself to
conventional contracts.

      Audubon Insurance Company and its subsidiaries ("Audubon") conduct agency
marketing of personal and small commercial coverages in certain Southern and
Western States.

      AIG engages in mass marketing of personal lines coverages, primarily
private passenger auto, through American International Insurance Company and New
Hampshire Indemnity Company, Inc. as well as through a joint venture with 20th
Century Industries.

      The business of United Guaranty Corporation ("UGC") and its subsidiaries
is also included in the domestic operations of AIG. The principal business of
the UGC subsidiaries is the writing of residential mortgage loan insurance,
which is guaranty insurance on conventional first mortgage loans on
single-family dwellings and condominiums. Such insurance 


2

<PAGE>   4

protects lenders against loss if borrowers default. UGC subsidiaries also write
home equity and property improvement loan insurance on loans to finance
residential property improvements, alterations and repairs and for other
purposes not necessarily related to real estate. UGC had approximately $16
billion of mortgage guarantee risk in-force at December 31, 1997.

      AIG's foreign general insurance business is comprised primarily of risks
underwritten through American International Underwriters ("AIU"), a marketing
unit consisting of wholly owned agencies and insurance companies. It also
includes business written by foreign-based insurance subsidiaries of AIUO for
their own accounts. In general, the same types of policies and marketing
methods, with certain refinements for local laws, customs and needs, are used in
these foreign operations as have been described above in connection with the
domestic operations.

      During 1997, domestic general and foreign general insurance business
accounted for 67.4 percent and 32.6 percent, respectively, of AIG's net premiums
written.

      AIG's general insurance company subsidiaries worldwide operate primarily
by underwriting and accepting any size risk for their direct account and
securing reinsurance on that portion of the risk in excess of the limit which
they wish to retain. This operating policy differs from that of many insurance
companies which will underwrite only up to their net retention limit, thereby
requiring the broker or agent to secure commitments from other underwriters for
the remainder of the gross risk amount.

      The following table summarizes general insurance premiums written and
earned:


<TABLE>
<CAPTION>

(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,                         Written              Earned
================================================================================
<S>                                           <C>                  <C>          
1997
- --------------------------------------------------------------------------------
Gross premiums                                $ 18,742,055         $ 17,565,566
Ceded premiums                                  (5,334,526)          (5,144,526)
- --------------------------------------------------------------------------------
Net premiums                                  $ 13,407,529         $ 12,421,040
================================================================================
1996
- --------------------------------------------------------------------------------
Gross premiums                                $ 18,319,132         $ 17,579,868
Ceded premiums                                  (5,627,453)          (5,725,053)
- --------------------------------------------------------------------------------
Net premiums                                  $ 12,691,679         $ 11,854,815
================================================================================
1995
- --------------------------------------------------------------------------------
Gross premiums                                $ 17,895,120         $ 17,243,829
Ceded premiums                                  (6,002,098)          (5,838,098)
- --------------------------------------------------------------------------------
Net premiums                                  $ 11,893,022         $ 11,405,731
================================================================================
</TABLE>


      The utilization of reinsurance is closely monitored by an internal
reinsurance security committee, consisting of members of AIG's senior
management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 5 of Notes to Financial Statements.)

      AIG is well diversified both in terms of lines of business and geographic
locations. Of the general insurance lines of business, workers' compensation was
approximately 12 percent of AIG's net premiums written. This line is well
diversified geographically.

      The majority of AIG's insurance business is in the casualty classes, which
tend to involve longer periods of time for the reporting and settling of claims.
This may increase the risk and uncertainty with respect to AIG's loss reserve
development. (See also the Discussion and Analysis of Consolidated Net Losses
and Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)


                                                                               3

<PAGE>   5

      The following table is a summary of the general insurance operations,
including ratios, by major operating category for the year ended December 31,
1997. (See also Note 17(b) of Notes to Financial Statements.)


<TABLE>
<CAPTION>

(dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
                                                                      Ratio of          Ratio of                
                                                                     Losses and       Underwriting              
                                                                    Loss Expenses        Expenses               
                                          Net Premiums               Incurred to       Incurred to              
                                -------------------------------      Net Premiums      Net Premiums   Combined  
                                  Written              Earned           Earned           Written       Ratio
==============================================================================================================
<S>                             <C>                 <C>                   <C>              <C>          <C> 
Foreign                         $ 4,369,989         $ 4,068,809           56.6             31.2         87.8
Commercial casualty (a)           7,041,086           6,428,763           83.2             15.0         98.2
Commercial property                 485,621             408,437          101.1             12.3        113.4
Pools and associations (b)          358,275             369,294          136.3             26.1        162.4
Personal lines (c)                  811,742             790,448           80.6             16.9         97.5
Mortgage guaranty                   340,816             355,289           41.4             27.0         68.4
- --------------------------------------------------------------------------------------------------------------
Total                           $13,407,529         $12,421,040           75.3             20.9         96.2
==============================================================================================================
</TABLE>


(a)   Including workers' compensation and retrospectively rated risks.
(b)   Including involuntary pools.
(c)   Including mass marketing and specialty programs.

      Loss and expense ratios of AIG's consolidated general insurance operations
are set forth in the following table. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)


<TABLE>
<CAPTION>

(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
                                                               Ratio of         Ratio of                                          
                                                              Losses and      Underwriting                                        
                                                             Loss Expenses      Expenses                                          
                                      Net Premiums            Incurred to      Incurred to                               Industry 
                              ---------------------------     Net Premiums     Net Premiums  Combined    Underwriting    Combined 
Years Ended December 31,        Written         Earned           Earned           Written      Ratio         Margin       Ratio*
=================================================================================================================================
<S>                           <C>             <C>                 <C>               <C>         <C>            <C>         <C>  
1997                          $13,407,529     $12,421,040         75.3              20.9        96.2           3.8         103.6
1996                           12,691,679      11,854,815         75.9              20.6        96.5           3.5         106.3
1995                           11,893,022      11,405,731         75.9              20.7        96.6           3.4         106.7
1994                           10,865,753      10,286,831         77.8              20.5        98.3           1.7         108.9
1993                           10,025,903       9,566,640         79.2              20.3        99.5           0.5         107.9
=================================================================================================================================
</TABLE>


*     Source: Best's Aggregates & Averages (Stock insurance companies, after
      dividends to policyholders) and the ratio for 1997 reflects estimated
      results provided by Conning & Company.

      During 1997, of the direct general insurance premiums written (gross
premiums less return premiums and cancellations, excluding reinsurance assumed
and before deducting reinsurance ceded), 8.1 percent and 7.7 percent were
written in New York and California , respectively (no other state accounted for
more than 5 percent of such premiums).

      There was no significant adverse effect on AIG's general insurance results
of operations from the economic environments in any one state, country or
geographic region for the year ended December 31, 1997. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)

Discussion and Analysis of Consolidated Net Losses and Loss Expense Reserve
Development

The reserve for net losses and loss expenses is exclusive of applicable
reinsurance and represents the accumulation of estimates for reported losses
("case basis reserves") and provisions for losses incurred but not reported
("IBNR"). AIG does not discount its loss reserves other than for minor amounts
related to workers' compensation claims.

      Loss reserves established with respect to foreign business are set and
monitored in terms of the respective local or functional currency. Therefore, no
assumption is included for changes in currency rates. (See also Note 1(s) of
Notes to Financial Statements.) Losses and loss expenses are charged to income
as incurred.

      Management continually reviews the adequacy of established loss reserves
through the utilization of a number of analytical reserve development
techniques. Through the use of these techniques, management is able to monitor
the adequacy of its established reserves and determine appropriate assumptions
for inflation. Also, analysis of emerging specific development patterns, such as
case reserve redundancies or deficiencies and IBNR emergence, allows management
to currently determine any required adjustments. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)

      The "Analysis of Consolidated Net Losses and Loss Expense Reserve
Development", which follows, presents the development of net losses and loss
expense reserves for calendar years 1987 through 1997. The upper half of the
table shows the cumulative amounts paid during successive years related to the


4

<PAGE>   6

opening loss reserves. For example, with respect to the net losses and loss
expense reserve of $14,699.2 million as of December 31, 1990, by the end of 1997
(seven years later) $13,235.3 million had actually been paid in settlement of
these net loss reserves. In addition, as reflected in the lower section of the
table, the original reserve of $14,699.2 million was reestimated to be $16,160.8
million at December 31, 1997. This increase from the original estimate would
generally be a combination of a number of factors, including reserves being
settled for larger amounts than originally estimated. The original estimates
will also be increased or decreased as more information becomes known about the
individual claims and overall claim frequency and severity patterns. The
redundancy (deficiency) depicted in the table, for any particular calendar year,
shows the aggregate change in estimates over the period of years subsequent to
the calendar year reflected at the top of the respective column heading. For
example, the redundancy of $398.6 million at December 31, 1997 related to
December 31, 1996 net losses and loss expense reserves of $20,407.3 million
represents the cumulative amount by which reserves for 1996 and prior years have
developed redundantly during 1997.

      Over the past several years, AIG has significantly strengthened its net
loss and loss expense reserves with respect to asbestos and environmental
losses. This strengthening is the primary cause of the adverse development
reflected in certain calendar years in the net loss and loss expense reserves
shown in the following table.

Analysis of Consolidated Net Losses and
Loss Expense Reserve Development


<TABLE>
<CAPTION>

(in millions)
- --------------------------------------------------------------------------------------------------------------------------------
                                       1987       1988        1989        1990        1991        1992        1993        1994  
================================================================================================================================
<S>                               <C>        <C>         <C>         <C>         <C>         <C>         <C>         <C>        
Reserve for Net Losses and Loss
      Expenses, December 31,      $ 8,670.7  $11,086.1   $12,958.5   $14,699.2   $15,839.9   $16,756.8   $17,557.0   $18,418.9  
Paid (Cumulative) as of:
      One Year Later                2,619.2    3,266.9     3,940.3     4,315.2     4,747.8     4,882.7     5,146.3     4,775.0  
      Two Years Later               4,315.9    5,451.5     6,476.6     7,349.7     8,015.4     8,289.4     8,241.7     8,072.6  
      Three Years Later             5,496.6    6,904.5     8,350.8     9,561.0    10,436.2    10,433.1    10,403.5    10,333.1
      Four Years Later              6,207.5    7,966.2     9,721.3    11,223.5    11,814.8    11,718.1    12,095.1
      Five Years Later              6,757.2    8,792.1    10,764.8    12,111.6    12,611.4    12,930.5
      Six Years Later               7,246.1    9,449.6    11,284.8    12,614.9    13,472.0
      Seven Years Later             7,616.7    9,737.0    11,517.3    13,235.3
      Eight Years Later             7,771.9    9,813.0    11,952.7
      Nine Years Later              7,764.7   10,139.5
      Ten Years Later               8,040.3
Net Liability Reestimated as of:
      End of Year                   8,670.7   11,086.1    12,958.5    14,699.2    15,839.9    16,756.8    17,557.0    18,418.9  
      One Year Later                8,523.6   10,923.8    12,844.5    14,596.2    15,828.1    16,807.0    17,434.3    18,138.5  
      Two Years Later               8,492.4   10,856.9    12,843.9    14,595.4    15,902.9    16,603.4    17,479.1    18,268.9  
      Three Years Later             8,488.1   10,811.9    12,809.2    14,723.7    15,989.7    16,778.3    17,781.7    18,344.4
      Four Years Later              8,472.3   10,774.9    12,896.4    14,965.4    16,254.2    17,181.7    18,089.8
      Five Years Later              8,472.0   10,805.1    13,064.6    15,361.2    16,712.4    17,600.1
      Six Years Later               8,470.0   10,953.6    13,426.0    15,844.5    17,094.9
      Seven Years Later             8,577.4   11,301.5    13,930.7    16,160.8
      Eight Years Later             8,912.3   11,798.9    14,179.7
      Nine Years Later              9,391.1   12,024.9
      Ten Years Later               9,646.0
      Redundancy/(Deficiency)        (975.3)    (938.8)   (1,221.2)   (1,461.6)   (1,255.0)     (843.3)     (532.8)       74.5  
================================================================================================================================

<CAPTION>

(in millions)
- ------------------------------------------------------------------
                                        1995       1996       1997
==================================================================
<S>                                <C>        <C>        <C>      
Reserve for Net Losses and Loss
      Expenses, December 31,       $19,692.8  $20,407.3  $21,171.5
Paid (Cumulative) as of:
      One Year Later                 5,281.4    5,615.7
      Two Years Later                8,726.1
      Three Years Later           
      Four Years Later            
      Five Years Later            
      Six Years Later             
      Seven Years Later           
      Eight Years Later           
      Nine Years Later            
      Ten Years Later             
Net Liability Reestimated as of:
      End of Year                   19,692.8   20,407.3   21,171.5
      One Year Later                19,412.8   20,008.7
      Two Years Later               19,329.9
      Three Years Later           
      Four Years Later            
      Five Years Later            
      Six Years Later             
      Seven Years Later           
      Eight Years Later           
      Nine Years Later            
      Ten Years Later             
      Redundancy/(Deficiency)          362.9      398.6
==================================================================
</TABLE>



                                                                               5

<PAGE>   7

      The following table excludes for each calendar year the net loss and loss
expense reserves and the development thereof with respect to asbestos and
environmental claims. Thus, AIG's loss and loss expense reserves excluding
asbestos and environmental claims are developing adequately. (See also

Management's Discussion and Analysis of Financial Condition and Results of
Operations.)

Analysis of Consolidated Net Losses and Loss Expense
Reserve Development Excluding Asbestos and
Environmental Net Losses and Loss Expense Reserve
Development


<TABLE>
<CAPTION>

(in millions)
- ---------------------------------------------------------------------------------------------------------------------------
                                       1987      1988       1989        1990        1991        1992       1993       1994 
===========================================================================================================================
<S>                               <C>       <C>        <C>         <C>         <C>         <C>        <C>        <C>       
Reserve for Net Losses and Loss
   Expenses, Excluding Asbestos
   and Environmental Losses and
   Loss Expenses, December 31,    $ 8,630.6 $11,005.9  $12,838.3   $14,538.9   $15,639.5   $16,503.4  $17,248.7  $18,088.6 
Paid (Cumulative) as of:
   One Year Later                   2,619.2   3,266.9    3,940.3     4,259.7     4,690.8     4,766.1    5,060.9    4,699.6 
   Two Years Later                  4,315.9   5,451.5    6,422.0     7,237.4     7,842.0     8,087.9    8,081.5    7,890.5 
   Three Years Later                5,496.6   6,850.5    8,240.1     9,332.8    10,178.1    10,157.3   10,137.0   10,047.8
   Four Years Later                 6,155.7   7,856.9    9,495.6    10,911.6    11,482.9    11,336.9   11,726.0
   Five Years Later                 6,655.0   8,569.4   10,456.3    11,726.6    12,174.8    12,447.5
   Six Years Later                  7,032.7   9,145.1   10,904.3    12,125.9    12,934.5
   Seven Years Later                7,322.1   9,361.6   11,033.5    12,646.3
   Eight Years Later                7,407.3   9,338.8   11,370.0
   Nine Years Later                 7,306.3   9,569.5
   Ten Years Later                  7,489.2
Net Liability Reestimated as of:
   End of Year                      8,630.6  11,005.9   12,838.3    14,538.9    15,639.5    16,503.4   17,248.7   18,088.6 
   One Year Later                   8,443.4  10,803.6   12,684.2    14,340.7    15,518.4    16,382.3   17,019.2   17,556.0 
   Two Years Later                  8,372.2  10,696.6   12,590.9    14,231.6    15,422.4    16,072.6   16,812.6   17,355.2 
   Three Years Later                8,327.8  10,562.2   12,449.4    14,190.1    15,402.9    15,996.7   16,790.0   17,292.7
   Four Years Later                 8,227.0  10,419.9   12,367.5    14,326.7    15,416.9    16,081.1   16,959.7
   Five Years Later                 8,127.6  10,282.2   12,430.8    14,472.0    15,562.1    16,361.5
   Six Years Later                  7,961.4  10,325.8   12,544.1    14,648.3    15,807.8
   Seven Years Later                7,962.8  10,429.9   12,747.8    14,828.3
   Eight Years Later                8,056.3  10,635.4   12,861.2
   Nine Years Later                 8,254.5  10,727.7
   Ten Years Later                  8,377.6
   Redundancy/(Deficiency):           253.0     278.2      (22.9)     (289.4)     (168.3)      141.9      289.0      795.9 
===========================================================================================================================

<CAPTION>

(in millions)
- -----------------------------------------------------------------
                                       1995       1996       1997
=================================================================
<S>                               <C>        <C>        <C>      
Reserve for Net Losses and Loss
   Expenses, Excluding Asbestos
   and Environmental Losses and
   Loss Expenses, December 31,    $19,185.6  $19,664.4  $20,384.2
Paid (Cumulative) as of:
   One Year Later                   5,174.1    5,507.0
   Two Years Later                  8,515.2
   Three Years Later              
   Four Years Later               
   Five Years Later               
   Six Years Later                
   Seven Years Later              
   Eight Years Later              
   Nine Years Later               
   Ten Years Later                
Net Liability Reestimated as of:
   End of Year                     19,185.6   19,664.4   20,384.2
   One Year Later                  18,567.7   19,118.0
   Two Years Later                 18,347.1
   Three Years Later              
   Four Years Later               
   Five Years Later               
   Six Years Later                
   Seven Years Later              
   Eight Years Later              
   Nine Years Later               
   Ten Years Later                
   Redundancy/(Deficiency):           838.5      546.4
=================================================================
</TABLE>


Reconciliation of Net Reserve for Losses and
Loss Expenses


<TABLE>
<CAPTION>

(in millions)
- --------------------------------------------------------------------------------
                                                 1997         1996         1995
================================================================================
<S>                                         <C>          <C>          <C>      
Net reserve for losses and loss
   expenses at beginning of year            $20,407.3    $19,692.8    $18,418.9
- --------------------------------------------------------------------------------
Losses and loss expenses incurred:
   Current year                               9,732.6      9,272.4      8,935.4
   Prior years*                                (376.4)      (276.0)      (275.6)
- --------------------------------------------------------------------------------
                                              9,356.2      8,996.4      8,659.8
- --------------------------------------------------------------------------------
Losses and loss expenses paid:
   Current year                               2,976.3      3,000.5      2,610.9
   Prior years                                5,615.7      5,281.4      4,775.0
- --------------------------------------------------------------------------------
                                              8,592.0      8,281.9      7,385.9
- --------------------------------------------------------------------------------
Net reserve for losses and loss
   expenses at end of year                  $21,171.5     $20,407.3   $19,692.8
================================================================================
</TABLE>


*     Does not include the effects of foreign exchange adjustments which are
      reflected in the "Net Losses and Loss Expense Reserve Development" table.

      Approximately 45 percent of the net losses and loss expense reserves are
paid out within two years of the date incurred. The remaining net losses and
loss expense reserves, particularly those associated with the casualty lines of
business, may extend to 20 years or more.

      For further discussion regarding net reserves for losses and loss
expenses, see Management's Discussion and Analysis of Financial Condition and
Results of Operations.

      The reserve for losses and loss expenses as reported in AIG's Consolidated
Balance Sheet at December 31, 1997, differs from the total reserve reported in
the Annual Statements filed with state insurance departments and, where
appropriate, with foreign regulatory authorities. The differences at 
December 31, 1997 relate primarily to estimates for unrecoverable reinsurance 
and additional reserves relating to certain foreign operations. (See also 
Management's Discussion and Analysis of Financial Condition and Results of 
Operations.)

      The reserve for gross losses and loss expenses is prior to reinsurance and
represents the accumulation for reported losses and 


6

<PAGE>   8

IBNR. Management reviews the adequacy of established gross loss reserves in the
manner previously described for net loss reserves.

      The "Analysis of Consolidated Gross Losses and Loss Expense Reserve
Development", which follows, presents the development of gross losses and loss
expense reserves for calendar years 1992 through 1997. As with the net losses
and loss expense reserve development, the deficiencies of $1.54 billion and
$973.5 million for 1992 and 1993, and redundancies of $610.7 million, $649.2
million and $653.0 million for 1994, 1995 and 1996, respectively, are relatively
insignificant both in terms of an aggregate amount and as a percentage of the
initial reserve balance.

Analysis of Consolidated Gross Losses and
Loss Expense Reserve Development


<TABLE>
<CAPTION>

(in millions)
- -------------------------------------------------------------------------------------------
                              1992        1993        1994       1995       1996       1997
===========================================================================================
<S>                      <C>         <C>         <C>        <C>        <C>        <C>      
Gross losses and
  loss expenses,
  December 31,           $28,156.8   $30,046.2   $31,435.4  $33,046.7  $33,429.8  $33,400.1
Paid (cumulative)
  as of:           
  One Year Later           7,280.9     8,807.1     7,640.0    8,392.1    9,199.2
  Two Years Later         13,006.0    13,278.7    13,035.8   15,496.1
  Three Years Later       16,432.3    17,311.4    17,539.5
  Four Years Later        18,550.0    20,803.0
  Five Years Later        21,321.7
Gross Liability
  Reestimated         
  as of:
  End of Year             28,156.8    30,046.2    31,435.4   33,046.7   33,429.8   33,400.1
  One Year Later          28,253.4    29,865.9    30,758.9   32,371.7   32,776.8
  Two Years Later         27,824.8    29,536.5    30,960.0   32,397.5
  Three Years Later       27,726.8    30,362.0    30,824.7
  Four Years Later        28,625.0    31,019.7
  Five Years Later        29,700.7
Redundancy/(Deficiency)   (1,543.9)     (973.5)      610.7      649.2      653.0
===========================================================================================
</TABLE>


Life Insurance Operations

AIG's life insurance subsidiaries offer a wide range of traditional insurance
and financial and investment products. One or more of these subsidiaries is
licensed to write life insurance in all states in the United States and in over
70 foreign countries. Traditional products consist of individual and group life,
annuity, and accident and health policies. Financial and investment products
consist of single premium annuity, variable annuities, guaranteed investment
contracts, universal life and pensions. (See also Management's Discussion and
Analysis of Financial Condition and Results of Operations.)

      In the United States, AIG has four domestic life subsidiaries: American
International Life Assurance Company of New York, AIG Life Insurance Company,
Delaware American Life Insurance Company, and Pacific Union Assurance Company.
These companies utilize multiple distribution channels including brokerage and
career and general agents to offer primarily life insurance, financial and
investment products and specialty forms of accident and health coverage for
individuals and groups, including employee benefit plans. The domestic life
business comprised 5.6 percent of total life premium income in 1997.

      Life insurance operations in foreign countries comprised 94.4 percent of
life premium income and 92.2 percent of operating income in 1997. AIG operates
overseas principally through four subsidiary companies, ALICO, AIA , Nan Shan
and PHILAM. Although ALICO is incorporated in Delaware, all of its business is
written outside of the United States. ALICO has operations either directly or
through subsidiaries in approximately 50 countries located in Europe, Africa,
Latin America, the Caribbean, the Middle East, and the Far East, with Japan
being the largest territory. AIA operates primarily in Hong Kong, Singapore,
Malaysia and Thailand. Nan Shan operates in Taiwan while PHILAM operates in the
Philippines. There was no significant adverse effect on AIG's life insurance
results of operations from economic environments in any one state, country or
geographic region for the year ended December 31, 1997. (See also Management's
Discussion and Analysis of Financial Condition and Results of Operations.)

      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 sold in Japan.

      In addition to the above, AIG also has subsidiary operations in
Switzerland (American Security Life Insurance Company, Ltd.), Puerto Rico (AIG
Life Insurance Company of Puerto Rico) and conducts life insurance business
through AIUO subsidiary companies in certain countries in Central and South
America.

      The foreign life companies have approximately 115,000 career agents and
sell their products largely to indigenous persons in local currencies. In
addition to the agency outlets, these companies also distribute their products
through direct marketing channels, such as mass marketing, and through brokers
and other distribution outlets such as financial institutions.


                                                                               7

<PAGE>   9

      The following table summarizes the life insurance operating results for
the year ended December 31, 1997. (See also Management's Discussion and Analysis
of Financial Condition and Results of Operations.)


<TABLE>
<CAPTION>

(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Average
                                                           Net                                Direct             Termination Rate
                                        Premium        Investment        Operating           Insurance           ----------------
                                        Income           Income          Income(a)           In-Force            Lapse     Other
====================================================================================================================================
<S>                                   <C>              <C>               <C>               <C>                     <C>       <C> 
Individual:
 Life                                 $7,543,752       $2,023,008        $1,016,859        $328,203,146(b)         7.1%      1.7%
 Annuity                                 144,030          465,373            73,039                    (c)
 Accident and health                   1,225,932           98,208           344,664                    (c)
Group:
 Life                                    433,100           28,358            55,635         108,369,977            6.9%      7.2%
 Pension                                  99,217          267,127            30,374                    (c)
 Accident and health                     479,608           24,744            40,075                    (c)
Realized capital gains                        --               --            21,186                    (c)
Consolidation adjustments                     --          (10,349)          (10,349)                   (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                 $9,925,639       $2,896,469        $1,571,483        $436,573,123                      
====================================================================================================================================
</TABLE>


(a)   Including income related to investment type products.
(b)   Including $231.4 billion of whole life insurance and endowments.
(c)   Not applicable.

Insurance Investment Operations

A significant portion of AIG's general and life operating revenues are derived
from AIG's insurance investment operations. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes 1, 2, 8
and 17 of Notes to Financial Statements.)

      The following table is a summary of the composition of AIG's insurance
invested assets by insurance segment, including investment income due and
accrued and real estate, at December 31, 1997:


<TABLE>
<CAPTION>

(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Percent Distribution
                                                                                                Percent     --------------------
                                                General           Life             Total        of Total    Domestic    Foreign
====================================================================================================================================
<S>                                           <C>              <C>              <C>               <C>         <C>         <C>  
Fixed maturities:
  Available for sale, at market value(a)      $11,326,246      $27,340,210      $38,666,456       53.0%       37.8%       62.2%
  Held to maturity, at amortized cost(b)       12,769,646               --       12,769,646       17.5       100.0          --
Equity securities, at market value(c)           3,314,603        1,815,849        5,130,452        7.0        43.5        56.5
Mortgage loans on real estate, policy
  and collateral loans                             50,297        6,147,606        6,197,903        8.5        39.0        61.0
Short-term investments, including
  time deposits, and cash                         616,683        2,409,353        3,026,036        4.2        33.1        66.9
Real estate                                       401,995          979,543        1,381,538        1.9        16.8        83.2
Investment income due and accrued                 528,164          817,348        1,345,512        1.9        39.7        60.3
Other invested assets                           2,836,450        1,537,060        4,373,510        6.0        76.7        23.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                         $31,844,084      $41,046,969      $72,891,053      100.0%       51.0%       49.0%
====================================================================================================================================
</TABLE>


(a)   Includes $718,548 of bonds trading securities, at market value.
(b)   Includes $239,331 of preferred stocks, at amortized cost.
(c)   Includes $111,609 of preferred stocks, at market value.

      The following table summarizes the investment results of the general
insurance operations. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)


<TABLE>
<CAPTION>

(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                               Annual Average Cash and Invested Assets
                             -------------------------------------------
                                 Cash
                              (including                                        Net                                      Realized
                              short-term       Invested                      Investment          Rate of Return on        Capital
Years Ended December 31,     investments)      Assets(a)         Total        Income(b)           Invested Assets          Gains
====================================================================================================================================
<S>                           <C>             <C>             <C>             <C>               <C>           <C>        <C>     
1997                          $  611,023      $29,704,089     $30,315,112     $1,853,523        6.1% (c)      6.2% (d)   $128,175
1996                             630,031       27,047,770      27,677,801      1,690,798        6.1 (c)       6.3 (d)      64,985
1995                             825,200       24,417,024      25,242,224      1,547,572        6.1 (c)       6.3 (d)      68,077
1994                           1,441,800       21,837,304      23,279,104      1,436,254        6.2 (c)       6.6 (d)      51,360
1993                           1,824,622       19,734,571      21,559,193      1,342,383        6.2 (c)       6.8 (d)      60,719
====================================================================================================================================
</TABLE>


(a)   Including investment income due and accrued and real estate.
(b)   Net investment income is after deduction of investment expenses and
      excludes realized capital gains.
(c)   Net investment income divided by the annual average sum of cash and
      invested assets.
(d)   Net investment income divided by the annual average invested assets.


8

<PAGE>   10

      The following table summarizes the investment results of the life
insurance operations. (See also Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 8 of Notes to Financial
Statements.)


<TABLE>
<CAPTION>

(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------
                              Annual Average Cash and Invested Assets
                             -----------------------------------------
                                 Cash
                              (including                                      Net                           Realized
                              short-term     Invested                      Investment   Rate of Return on   Capital
Years Ended December 31,     investments)    Assets(a)         Total        Income(b)    Invested Assets     Gains
=====================================================================================================================
<S>                           <C>           <C>             <C>            <C>           <C>      <C>       <C>    
1997                          $1,705,707    $38,063,713     $39,769,420    $2,896,469    7.3%(c)  7.6%(d)   $21,186
1996                           1,116,938     35,563,517      36,680,455     2,675,881    7.3(c)   7.5(d)     34,798
1995                           1,222,375     29,557,181      30,779,556     2,264,905    7.4(c)   7.7(d)     32,703
1994                           2,045,747     22,317,914      24,363,661     1,748,428    7.2(c)   7.8(d)     86,706
1993                           2,697,282     17,286,171      19,983,453     1,499,714    7.5(c)   8.7(d)     54,576
=====================================================================================================================
</TABLE>


(a)   Including investment income due and accrued and real estate.
(b)   Net investment income is after deduction of investment expenses and
      excludes realized capital gains.
(c)   Net investment income divided by the annual average sum of cash and
      invested assets.
(d)   Net investment income divided by the annual average invested assets.

AIG's worldwide insurance investment policy places primary emphasis on
investments in high quality, fixed income securities in all of its portfolios
and, to a lesser extent, investments in marketable common stocks in order to
preserve policyholders' surplus and generate net investment income. The ability
to implement this policy is somewhat limited in certain territories as there may
be a lack of qualified long term investments or investment restrictions may be
imposed by the local regulatory authorities. (See also Management's Discussion
and Analysis of Financial Condition and Results of Operations.)

Financial Services Operations

AIG operations which contribute to financial services income include primarily
A.I. Credit Corp. ("AICCO"), AIG Financial Products Corp. and its subsidiary
companies ("AIGFP"), AIG Trading Group Inc. and its subsidiaries ("AIGTG"),
International Lease Finance Corporation ("ILFC") and UeberseeBank AG. AICCO's
business is principally in premium financing. AIGFP structures financial
transactions, including long-dated interest rate and currency swaps and
structures borrowings through notes, bonds and guaranteed investment agreements.
AIGTG engages in various commodities trading, foreign exchange trading and
market making activities. ILFC is engaged primarily in the acquisition of new
and used commercial jet aircraft and the leasing and remarketing of such
aircraft to airlines around the world. UeberseeBank AG operates as a Swiss bank.
Other financial services operations are AIG Global Investment Group, Inc. whose
operations manage the investment portfolios of various AIG subsidiaries, as 
well as third-party assets, and are responsible for product design and 
origination, marketing and distribution of third-party asset management 
products, including retail mutual funds, direct investment, and real estate 
investment, management and development. (See also Management's Discussion and 
Analysis of Financial Condition and Results of Operations and Notes 1, 9 and 11 
of Notes to Financial Statements.)

      The following table is a summary of the composition of AIG's financial
services invested assets and liabilities at December 31, 1997. (See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 of Notes to Financial Statements.)


<TABLE>
<CAPTION>

(in thousands)
================================================================================
<S>                                                                  <C>        
Financial services invested assets:
  Flight equipment primarily under operating leases, 
   net of accumulated depreciation                                   $14,438,074
  Securities available for sale, at market value                       9,145,317
  Trading securities, at market value                                  3,974,561
  Spot commodities, at market value                                      459,517
  Unrealized gain on interest rate and currency      
   swaps, options and forward transactions                             7,422,290
  Trading assets                                                       6,715,486
  Securities purchased under agreements to resell,   
   at contract value                                                   4,551,191
  Other, including short-term investments                              2,192,691
- --------------------------------------------------------------------------------
Total financial services invested assets                             $48,899,127
================================================================================
Financial services liabilities:
  Borrowings under obligations of guaranteed
   investment agreements                                             $ 8,000,326
  Securities sold under agreements to repurchase,                   
   at contract value                                                   2,706,310
  Trading liabilities                                                  5,366,421
  Securities and spot commodities sold but                          
   not yet purchased, at market value                                  5,171,680
  Unrealized loss on interest rate and currency                     
   swaps, options and forward transactions                             5,979,571
  Deposits due to banks and other depositors                             972,423
  Commercial paper                                                     2,208,167
  Notes, bonds and loans payable                                      12,608,891
- --------------------------------------------------------------------------------
Total financial services liabilities                                 $43,013,789
================================================================================
</TABLE>



                                                                               9

<PAGE>   11

      The following table is a summary of the revenues and operating income of
AIG's principal financial services operations for the year ended December 31, 
1997. (See also Management's Discussion and Analysis of Financial Condition and 
Results of Operations and Note 1 of Notes to Financial Statements.)


<TABLE>
<CAPTION>
                                                                     Operating
(in thousands)                                       Revenues          Income
================================================================================
<S>                                                  <C>             <C>       
  ILFC                                               $1,856,763      $  382,431
  AIGFP*                                                452,052         240,970
  AIGTG*                                                561,784         126,536
================================================================================
</TABLE>


* Represents net trading revenues.

Other Operations

Small AIG subsidiaries provide insurance-related services such as adjusting
claims and marketing specialized products. AIG has several other relatively
minor subsidiaries which carry on various businesses. American International
Technology Enterprises, Inc. provides information technology and processing
services to businesses worldwide. Mt. Mansfield Company, Inc. owns and operates
the ski slopes, lifts, school and an inn located at Stowe, Vermont.

Additional Investments

On January 29, 1998, AIG purchased the 76.1 percent interest in SELIC Holdings,
Ltd. which it previously did not own. As of March 15, 1998, AIG holds a 48.9
percent interest in Transatlantic Holdings, Inc., a reinsurance holding company,
and a 19.9 percent interest in Richmond Insurance Company, Ltd., a reinsurer.
(See also Note 1(n) of Notes to Financial Statements.) AIG holds a 24.4 percent
interest in IPC Holdings, Ltd., a reinsurance holding company. Another
significant investment includes a minority position in 20th Century Industries.

Locations of Certain Assets

As of December 31, 1997, approximately 36 percent of the consolidated assets of
AIG were located in foreign countries (other than Canada), including $929.6
million of cash and securities on deposit with foreign regulatory authorities.
Foreign operations and assets held abroad may be adversely affected by political
developments in foreign countries, including such possibilities as tax changes,
nationalization and changes in regula tory policy, as well as by consequence of
hostilities and unrest. The risks of such occurrences and their overall effect
upon AIG vary from country to country and cannot easily be predicted. If
expropriation or nationalization does occur, AIG's policy is to take all
appropriate measures to seek recovery of such assets. Certain of the countries
in which AIG's business is conducted have currency restrictions which generally
cause a delay in a company's ability to repatriate assets and profits. (See also
Notes 1, 2 and 17 of Notes to Financial Statements.)

Insurance Regulation and Competition

Certain states require registration and periodic reporting by insurance
companies which are licensed in such states and are controlled by other
corporations. Applicable legislation typically requires periodic disclosure
concerning the corporation which controls the registered insurer and the other
companies in the holding company system and prior approval of intercorporate
transfers of assets (including in some instances payment of dividends by the
insurance subsidiary) within the holding company system. AIG's subsidiaries are
registered under such legislation in those states which have such requirements.
(See also Note 10 of Notes to Financial Statements.)

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

      Risk Based Capital (RBC) is designed to measure the adequacy of an
insurer's statutory surplus in relation to the risks inherent in its business.
Thus, inadequately capitalized general and life insurance companies may be
identified.

      The RBC formula develops a risk adjusted target level of adjusted
statutory capital by applying certain factors to various asset, premium and
reserve items. Higher factors are applied to more risky items and lower factors
are applied to less risky items. Thus, the target level of statutory surplus
varies not only as a result of the insurer's size, but also on the risk profile
of the insurer's operations.

      The RBC Model Law provides for four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to actually placing the insurer under regulatory
control.

      The statutory surplus of each of AIG's domestic general and life insurance
subsidiaries exceeded their RBC standards by considerable margins as of December
31, 1997.


10

<PAGE>   12

      To the extent that any of AIG's insurance entities would fall below
prescribed levels of surplus, it would be AIG's intention to infuse necessary
capital to support that entity.

      A substantial portion of AIG's general insurance business and a majority
of its life insurance business is carried on in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.
Licenses issued by foreign authorities to AIG subsidiaries are subject to
modification or revocation by such authorities, and AIU or other AIG
subsidiaries could be prevented from conducting business in certain of the
jurisdictions where they currently operate. In the past, AIU has been allowed to
modify its operations to conform with new licensing requirements in most
jurisdictions.

      In addition to licensing requirements, AIG's foreign operations are also
regulated in various jurisdictions with respect to currency, policy language and
terms, amount and type of security deposits, amount and type of reserves, amount
and type of local investment and the share of profits to be returned to
policyholders on participating policies. Some foreign countries regulate rates
in various types of policies. Certain countries have established reinsurance
institutions, wholly or partially owned by the state, to which admitted insurers
are obligated to cede a portion of their business on terms which do not always
allow foreign insurers, including AIG, full compensation. In some countries,
regulations governing constitution of technical reserves and remittance balances
may hinder remittance of profits and repatriation of assets.

      The insurance industry is highly competitive. Within the United States,
AIG's general insurance subsidiaries compete with approximately 3,000 other
stock companies, specialty insurance organizations, mutual companies and other
underwriting organizations. AIG's life insurance companies compete in the United
States with some 1,700 life insurance companies and other participants in
related financial service fields. Overseas, AIG subsidiaries compete for
business with foreign insurance operations of the larger U.S. insurers and local
companies in particular areas in which they are active.

      AIG's financial services subsidiaries, particularly AIGTG and AIGFP,
operate in a highly competitive environment, both domestically and overseas.
Principal sources of competition are banks, investment banks and other non-bank
financial institutions.


I
TEM 2. Properties

AIG and its subsidiaries operate from approximately 350 offices in the United
States, 5 offices in Canada and numerous offices in other foreign countries. The
offices in Springfield, Illinois; Houston, Texas; Atlanta, Georgia; Baton Rouge,
Louisiana; Wilmington, Delaware; Hato Rey, Puerto Rico; San Diego, California;
Greensboro, North Carolina; Livingston, New Jersey; 70 Pine Street, 72 Wall
Street and 175 Water Street in New York City; and offices in approximately 30
foreign countries including Bermuda, Chile, Hong Kong, the Philippines, Japan, 
England, Singapore, Switzerland, Taiwan and Thailand are located in buildings 
owned by AIG and its subsidiaries. The remainder of the office space utilized 
by AIG subsidiaries is leased.


ITEM 3. Legal Proceedings

AIG and its subsidiaries, in common with the insurance industry in general, are
subject to litigation, including claims for punitive damages, in the normal
course of their business. AIG does not believe that such litigation will have a
material adverse effect on its financial condition, future operating results or
liquidity. (See also the Discussion and Analysis of Consolidated Net Losses and
Loss Expense Reserve Development and Management's Discussion and Analysis of
Financial Condition and Results of Operations.)


ITEM 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth
quarter of 1997.


                                                                              11

<PAGE>   13

Directors and Executive Officers of the Registrant

Set forth below is certain information concerning the directors and executive
officers of AIG. All directors are elected at the annual meeting of
shareholders. All officers serve at the pleasure of the Board of Directors, but
subject to the foregoing, are elected for terms of one year expiring in May of
each year.


<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                                       Served as
                                                                                                                     Director or
                                                                                                                         Officer
Name                          Title                                                                            Age         Since
=================================================================================================================================
<S>                           <C>                                                                              <C>          <C>
M. Bernard Aidinoff*          Director                                                                         69           1984
Lloyd M. Bentsen              Director                                                                         77           1995
Pei-yuan Chia                 Director                                                                         59           1996
Marshall A. Cohen             Director                                                                         62           1992
Barber B. Conable, Jr.        Director                                                                         75           1991
Martin S. Feldstein           Director                                                                         58           1987
Leslie L. Gonda               Director                                                                         78           1990
Evan G. Greenberg*            Director, President and Chief Operating Officer                                  43           1995
M. R. Greenberg*              Director, Chairman and Chief Executive Officer                                   72           1967
Carla A. Hills                Director                                                                         64           1993
Frank J. Hoenemeyer*          Director                                                                         78           1985
Edward E. Matthews*           Director and Vice Chairman-Investments and Financial Services                    66           1973
Dean P. Phypers               Director                                                                         69           1979
Howard I. Smith               Director, Executive Vice President, Chief Financial Officer and Comptroller      53           1984
Thomas R. Tizzio*             Director and Senior Vice Chairman-General Insurance                              60           1982
Edmund S. W. Tse              Director and Vice Chairman-Life Insurance                                        60           1991
Frank G. Wisner               Director and Vice Chairman-External Affairs                                      59           1997
Edwin E. Manton               Senior Advisor                                                                   89           1967
John J. Roberts               Senior Advisor                                                                   75           1967
Ernest E. Stempel             Senior Advisor                                                                   81           1967
Robert M. Sandler             Executive Vice President, Senior Casualty Actuary and Senior Claims Officer      55           1980
Lawrence W. English           Senior Vice President-Administration                                             56           1985
Axel I. Freudmann             Senior Vice President-Human Resources                                            51           1986
Win J. Neuger                 Senior Vice President and Chief Investment Officer                               48           1995
Martin J. Sullivan            Senior Vice President-Foreign General Insurance                                  43           1997
Florence A. Davis             Vice President and General Counsel                                               43           1995
William N. Dooley             Vice President and Treasurer                                                     44           1992
Robert E. Lewis               Vice President and Chief Credit Officer                                          47           1993
Frank Petralito II            Vice President and Director of Taxes                                             61           1978
Kathleen E. Shannon           Vice President and Secretary                                                     48           1986
John T. Wooster, Jr.          Vice President-Communications                                                    58           1989
=================================================================================================================================
</TABLE>


* Member of Executive Committee.

      Except as hereinafter noted, each of the directors who is also an
executive officer of AIG and each of the other executive officers has, for more
than five years, occupied an executive position with AIG or companies that are
now its subsidiaries, or with Starr. Evan G. Greenberg is the son of M.R.
Greenberg. There are no other arrangements or understandings between any
director or officer and any other person pursuant to which the director or
officer was elected to such position. Ms. Davis was a Principal in the legal
department and Worldwide Director of Compliance at Morgan Stanley &Co.
Incorporated prior to joining AIG in April, 1995. Mr. Lewis was Assistant
General Manager for North America, Chief Credit Officer, and senior executive
responsible for risk and exposure management of ING Bank in New York, the bank
division of Internationale Nederlanden Group, from 1988 until joining AIG in
October, 1993. Mr. Neuger was Managing Director, Global Investment
Management-Equity at Bankers Trust Company prior to joining AIG in February,
1995. Mr. Wisner served as a career foreign service officer with the United
States Department of State from 1961 through July, 1997, with his last position
being Ambassador to India.


12

<PAGE>   14


PART II
================================================================================

ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
Matters

(a) The table below shows the high and low closing sales prices per share of
AIG's common stock, as reported on the New York Stock Exchange Composite Tape,
for each quarter of 1997 and 1996, as adjusted for the common stock split in the
form of a 50 percent common stock dividend paid July 25, 1997. All prices are as
reported by the National Quotation Bureau, Incorporated.


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
                                             1997                   1996
                                     -------------------      ----------------
                                       High       Low          High     Low
================================================================================
<S>                                  <C>        <C>           <C>      <C>  
First Quarter                         85 5/16   71 11/16      68 1/2   59 9/16
Second Quarter                       100 3/16   76            65 3/4   58 3/4
Third Quarter                        106 1/2    94 3/8        67 1/4   60 1/16
Fourth Quarter                       111 15/16  98            76 3/4   67 11/16
================================================================================
</TABLE>


      (b) In 1997, AIG paid a quarterly dividend of 6.7 cents in March and June
and 7.5 cents in September and December for a total cash payment of 28.4 cents
per share of common stock. In 1996, AIG paid a quarterly dividend of 5.7 cents
in March and June and 6.7 cents in September and December for a total cash
payment of 24.8 cents per share of common stock. These amounts reflect the
adjustment for a common stock split in the form of a 50 percent common stock
dividend paid July 25, 1997. Subject to the dividend preference of any of AIG's
serial preferred stock which may be outstanding, the holders of shares of common
stock are entitled to receive such dividends as may be declared by the Board of
Directors from funds legally available therefor.

      See Note 10(b) of Notes to Financial Statements for a discussion of
certain restrictions on the payment of dividends to AIG by some of its insurance
subsidiaries.

      (c) The approximate number of holders of Common Stock as of January 31,
1998, based upon the number of record holders, was 20,700.


                                                                              13

<PAGE>   15


ITEM 6. Selected Financial Data
American INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA

The following Selected Consolidated Financial Data is presented in accordance
with generally accepted accounting principles. This data should be read in
conjunction with the financial statements and accompanying notes included
elsewhere herein.


<TABLE>
<CAPTION>

(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                       1997            1996            1995            1994            1993
====================================================================================================================================
<S>                                                   <C>             <C>             <C>             <C>             <C>          
Revenues (a)                                          $  30,602,300   $  27,942,567   $  25,614,004   $  22,121,931   $  19,830,549
General insurance:
 Net premiums written                                    13,407,529      12,691,679      11,893,022      10,865,753      10,025,903
 Net premiums earned                                     12,421,040      11,854,815      11,405,731      10,286,831       9,566,640
 Adjusted underwriting profit                               490,168         449,784         416,637         200,484          68,735
 Net investment income                                    1,853,523       1,690,798       1,547,572       1,436,254       1,342,383
 Realized capital gains                                     128,175          64,985          68,077          51,360          60,719
 Operating income                                         2,471,866       2,205,567       2,032,286       1,688,098       1,471,837
Life insurance:
 Premium income                                           9,925,639       8,978,246       8,038,150       6,724,321       5,746,046
 Net investment income                                    2,896,469       2,675,881       2,264,905       1,748,428       1,499,714
 Realized capital gains                                      21,186          34,798          32,703          86,706          54,576
 Operating income                                         1,571,483       1,323,758       1,090,605         952,484         781,611
Financial services operating income                         701,337         523,906         417,741         404,853         390,038
Equity in income of minority-owned insurance
 operations                                                 113,636          99,359          81,722          56,005          39,589
Other realized capital losses                               (30,846)        (11,792)        (28,946)        (51,213)         (8,197)
Income before income taxes and cumulative
 effect of accounting changes                             4,698,898       4,013,222       3,465,883       2,951,979       2,601,081
Income taxes                                              1,366,563       1,115,965         955,500         776,464         683,003
Income before cumulative effect of accounting changes     3,332,335       2,897,257       2,510,383       2,175,515       1,918,078
Cumulative effect of accounting changes, net of tax:
Minority-owned insurance operations                              --              --              --              --          20,695
Net income                                                3,332,335       2,897,257       2,510,383       2,175,515       1,938,773
Earnings per common share (b):
 Income before cumulative effect of
  accounting changes                                           4.75            4.10            3.53            3.05            2.68
 Cumulative effect of accounting changes, net of tax:
   Minority-owned insurance operations                           --              --              --              --             .03
 Basic                                                         4.75            4.10            3.53            3.05            2.71
Diluted                                                        4.73            4.08            3.52            3.05            2.70
Cash dividends per common share                                 .28             .25             .21             .19             .17
Total assets                                            163,970,687     148,431,002     134,136,398     114,346,117     101,014,848
Long-term debt (c)                                       17,813,908      17,506,359      14,452,851      12,613,907      10,955,963
Capital funds (shareholders' equity)                     24,001,127      22,044,224      19,827,103      16,421,661      15,224,195
====================================================================================================================================
</TABLE>


(a)   Represents the sum of general net premiums earned, life premium income,
      net investment income, financial services commissions, transaction and
      other fees, equity in income of minority-owned insurance operations and
      realized capital gains (losses). In 1997, agency operations were
      insignificant and were presented as a component of general insurance.
      Agency operations for years prior to 1997 have been reclassified to
      conform to the 1997 presentation. (See also tables under Item 1,
      "Business".)
(b)   Per share amounts for all periods presented reflect the adoption of the
      Statement of Financial Accounting Standards No. 128 "Earnings per Share."
(c)   Including commercial paper and excluding that portion of long-term debt
      maturing in less than one year.


14

<PAGE>   16

Management's Discussion and Analysis of
Financial Condition and Results of Operations

                             American International Group, Inc. and Subsidiaries


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Operational Review

General Insurance Operations

General insurance operations for the twelve month periods ending December 31,
1997, 1996 and 1995 were as follows:


<TABLE>
<CAPTION>

(in thousands)
- -------------------------------------------------------------------------------------------
                                                          1997           1996          1995
===========================================================================================
<S>                                               <C>             <C>           <C>        
Net premiums written:
Domestic                                          $  9,037,540    $ 8,366,832   $ 7,690,207
Foreign                                              4,369,989      4,324,847     4,202,815
- -------------------------------------------------------------------------------------------
Total                                             $ 13,407,529    $12,691,679   $11,893,022
===========================================================================================
Net premiums earned:
Domestic                                          $  8,352,231    $ 7,821,605   $ 7,322,531
Foreign                                              4,068,809      4,033,210     4,083,200
- -------------------------------------------------------------------------------------------
Total                                             $ 12,421,040    $11,854,815   $11,405,731
===========================================================================================
Adjusted underwriting profit (loss):
Domestic                                          $     (7,188)   $    51,819   $   111,606
Foreign                                                497,356        397,965       305,031
- -------------------------------------------------------------------------------------------
Total                                             $    490,168    $   449,784   $   416,637
===========================================================================================
Net investment income:
Domestic                                          $  1,484,558    $ 1,351,563   $ 1,241,994
Foreign                                                368,965        339,235       305,578
- -------------------------------------------------------------------------------------------
Total                                             $  1,853,523    $ 1,690,798   $ 1,547,572
===========================================================================================
Operating income before realized capital gains:
Domestic                                          $  1,477,370    $ 1,403,382   $ 1,353,600
Foreign                                                866,321        737,200       610,609
- -------------------------------------------------------------------------------------------
Total                                                2,343,691      2,140,582     1,964,209
Realized capital gains                                 128,175         64,985        68,077
- -------------------------------------------------------------------------------------------
Operating income                                  $  2,471,866    $ 2,205,567   $ 2,032,286
===========================================================================================
</TABLE>


      In AIG's general insurance operations, 1997 net premiums written and net
premiums earned increased 5.6 percent and 4.8 percent, respectively, from those
of 1996. In 1996, net premiums written increased 6.7 percent and net premiums
earned increased 3.9 percent when compared to 1995.

      The growth in net premiums written in 1997 and 1996 resulted from a
combination of several factors. Domestically, AIG continued to achieve volume
growth in some specialty markets, mortgage guaranty insurance and in personal
lines. Foreign general insurance operations produced 32.6 percent of the general
insurance net premiums written in 1997, 34.1 percent in 1996 and 35.3 percent in
1995.

      In comparing the foreign exchange rates used to translate the results of
AIG's foreign general operations during 1997 to those foreign exchange rates
used to translate AIG's foreign general results during 1996, the U.S. dollar
strengthened in value in relation to most major foreign currencies in which AIG
transacts business. Accordingly, when foreign net premiums written were
translated into U.S. dollars for the purposes of the preparation of the
consolidated financial statements, total general insurance net premiums written
were approximately 2.0 percentage points less than they would have been if
translated utilizing those exchange rates which prevailed during 1996. (See also
the discussion under "Capital Resources" herein.)

      Net premiums written are initially deferred and earned based upon the
terms of the underlying policies. The net unearned premium reserve constitutes
deferred revenues 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.

      The statutory general insurance ratios were as follows:


<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------
                                            1997            1996            1995
================================================================================
<S>                                       <C>             <C>              <C>  
Domestic:
Loss Ratio                                 84.44           85.21           85.11
Expense Ratio                              15.90           14.79           14.17
- --------------------------------------------------------------------------------
Combined Ratio                            100.34          100.00           99.28
================================================================================
Foreign:
Loss Ratio                                 56.61           57.82           59.46
Expense Ratio                              31.16           31.77           32.49
- --------------------------------------------------------------------------------
Combined Ratio                             87.77           89.59           91.95
================================================================================
Consolidated:
Loss Ratio                                 75.33           75.89           75.93
Expense Ratio                              20.87           20.58           20.65
- --------------------------------------------------------------------------------
Combined Ratio                             96.20           96.47           96.58
================================================================================
</TABLE>


      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 profits were $490.2 million in 1997, $449.8 million in 1996 and
$416.6 million in 1995. (See also Notes 4 and 17 of Notes to Financial
Statements.)

      AIG's results reflect the net impact of incurred losses from catastrophes
approximating $16 million in 1997, $78 million in 1996 and $100 million in 1995.
AIG's gross incurred losses from catastrophes approximated $22 million in 1997,
$240 million in 1996 and $190 million in 1995. The Kobe Japan earthquake which
struck in early 1995 resulted in gross and net incurred losses to AIG of
approximately $73 million and $30 million, respectively. If these catastrophes
were excluded from the losses incurred in each period, the pro forma
consolidated statutory general insurance ratios would be as follows:


<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------
                                            1997            1996            1995
================================================================================
<S>                                        <C>             <C>             <C>  
Loss Ratio                                 75.20           75.23           75.05
Expense Ratio                              20.87           20.58           20.65
- --------------------------------------------------------------------------------
Combined Ratio                             96.07           95.81           95.70
================================================================================
</TABLE>


      AIG's ability to maintain its combined ratio below 100 is primarily
attributable to the profitability of AIG's foreign general insurance operations
and AIG's emphasis on maintaining its disciplined underwriting, especially in
the domestic specialty markets. In addition, AIG does not seek net premium
growth where rates do not adequately reflect its assessment of exposures.


                                                                              15

<PAGE>   17

Management's Discussion and Analysis of
Financial Condition and Results of Operations  (CONTINUED)

      General insurance net investment income in 1997 increased 9.6 percent when
compared to 1996. In 1996, net investment income increased 9.3 percent over
1995. The growth in net investment income in each of the three years 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. (See also
the discussion under "Liquidity" herein and Note 8 of Notes to Financial
Statements.)

      General insurance realized capital gains were $128.2 million in 1997,
$65.0 million in 1996 and $68.1 million in 1995. 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 fixed
maturities as well as redemptions of fixed maturities.

      General insurance operating income in 1997 increased 12.1 percent when
compared to 1996. The 1996 results reflect an increase of 8.5 percent from 1995.
The contribution of general insurance operating income to income before income
taxes was 52.6 percent in 1997 compared to 55.0 percent in 1996 and 58.6 percent
in 1995.

      AIG is a major purchaser of reinsurance for its general insurance
operations. AIG is cognizant of the need to exercise 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 that AIG desires. These reinsurance arrangements do not
relieve AIG from its direct obligations to its insureds.

      AIG's general reinsurance assets amounted to $15.98 billion and resulted
from AIG's reinsurance arrangements. Thus, a credit exposure existed at December
31, 1997 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 manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers 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 on an individual
reinsurer basis. At December 31, 1997, approximately 50 percent of the general
reinsurance assets were from unauthorized reinsurers. In order to obtain
statutory recognition, nearly all of these balances were collateralized. The
remaining 50 percent of the general reinsurance assets were from authorized
reinsurers and over 94 percent of such 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 and unauthorized pertain to regulatory
categories, not creditworthiness.

      AIG maintains an allowance for estimated unrecoverable reinsurance and has
been largely successful in its previous recovery efforts. At December 31, 1997,
AIG had allowances for unrecoverable reinsurance approximating $120 million. At
that date, and prior to this allowance, AIG had no significant reinsurance
recoverables from any individual reinsurer which is financially troubled (e.g.,
liquidated, insolvent, in receivership or otherwise subject to formal or
informal regulatory restriction).

      AIG's Reinsurance Security Department conducts ongoing detailed
assessments of the reinsurance markets and current and potential reinsurers both
foreign and domestic. Such assessments include, but are not limited to,
identifying if a reinsurer is appropriately licensed, and has sufficient
financial capacity, and the local economic environment in which a foreign
reinsurer operates. This department also reviews the nature of the risks ceded
and the need for collateral. In addition, AIG's Credit Risk Committee reviews
the credit limits for and concentrations with any one reinsurer.

      AIG enters into certain intercompany reinsurance transactions for 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 December 31, 1997, the consolidated general reinsurance assets of
$15.98 billion include reinsurance recoverables for paid losses and loss
expenses of $2.02 billion and $12.23 billion with respect to the ceded reserve
for losses and loss expenses, including ceded losses incurred but not reported
(IBNR) (ceded reserves). The ceded reserves represent the accumulation of
estimates of ultimate ceded losses including provisions for ceded IBNR and loss
expenses. The methods used to determine such estimates and to establish the
resulting ceded reserves are continually reviewed and updated. Any adjustments
therefrom are reflected in income currently. It is AIG's belief that the ceded
reserves at December 31, 1997 were representative of the ultimate losses
recoverable. In the future, as the ceded reserves continue to develop to
ultimate amounts, the ultimate loss recoverable may be greater or less than the
reserves currently ceded.

      At December 31, 1997, general insurance reserves for losses and loss
expenses (loss reserves) amounted to $33.40 billion, a decrease of $29.6 million
or 0.1 percent from the prior year end, and represent the accumulation of
estimates of ultimate losses, including IBNR, and loss expenses and minor
amounts of discounting related to certain workers' compensation claims. General
insurance net loss reserves increased $764.2 million or 3.7 percent to $21.2
billion and represent loss reserves reduced by reinsurance recoverable, net of
an allowance for unrecoverable reinsurance. 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


16

<PAGE>   18

                             American International Group, Inc. and Subsidiaries

general insurance net loss reserves are adequate to cover all general insurance
net losses and loss expenses as at December 31, 1997. In the future, if the
general insurance net loss reserves develop deficiently, such deficiency would
have an adverse impact on such 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. For the majority of
long tail casualty lines, net loss trend factors approximated seven percent.
Loss trend factors reflect many items including changes in claims handling,
exposure and policy forms and current and future estimates of monetary 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 vary slightly,
depending on the particular class and nature of the business involved. 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 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 claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter referred to
collectively as environmental claims) and indemnity claims asserting injuries
from asbestos. The vast majority of these asbestos and environmental claims
emanate from policies written in 1984 and prior years. AIG has established a
specialized claims unit which investigates and adjusts all such asbestos and
environmental claims. Commencing in 1985, standard policies contained an
absolute exclusion for pollution related damage. However, AIG currently
underwrites pollution impairment liability insurance on a claims made basis and
excluded such claims from the analyses included herein.

      Estimation of asbestos and environmental claims loss reserves is a
difficult process. These asbestos and 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 asbestos and environmental claims are the
inconsistent court resolutions and judicial interpretations which broaden the
intent of the policies and scope of coverage. The current caselaw can be
characterized as still evolving and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposure for
cleanup costs of hazardous waste dump sites involves issues such as allocation
of responsibility among potentially responsible parties and the government's
refusal to release parties. The cleanup cost exposure may significantly change
if the Congressional reauthorization of Superfund dramatically changes, 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 asbestos and environmental claims with the same degree of
reliability as is the case for other types of claims. Such development will be
affected 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. Although the estimated
liabilities for these claims are subject to a significantly greater margin of
error than for other claims, the reserves carried for these claims at December
31, 1997 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 1984 and prior 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 majority of AIG's exposures for asbestos and 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.


                                                                              17

<PAGE>   19

Management's Discussion and Analysis of 
Financial Condition and Results of Operations (CONTINUED) 

      A summary of reserve activity, including estimates for applicable IBNR,
relating to asbestos and environmental claims separately and combined at
December 31, 1997, 1996 and 1995 was as follows:


<TABLE>
<CAPTION>

(in millions)
- ----------------------------------------------------------------------------------------------------------------------------
                                                                    1997                  1996                  1995
                                                            --------------------  --------------------  --------------------
                                                              Gross        Net      Gross        Net      Gross        Net
- ----------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>         <C>       <C>         <C>       <C>         <C>     
Asbestos:
Reserve for losses and loss expenses at beginning of year   $  875.9    $  172.3  $  744.8    $  127.9  $  686.0    $  130.2
Losses and loss expenses incurred                              238.4        68.3     392.5       102.7     197.7        20.5
Losses and loss expenses paid                                 (272.2)      (45.5)   (261.4)      (58.3)   (138.9)      (22.8)
- ----------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year         $  842.1    $  195.1  $  875.9)   $  172.3  $  744.8    $  127.9
- ----------------------------------------------------------------------------------------------------------------------------
Environmental:
Reserve for losses and loss expenses at beginning of year   $1,427.4    $  570.6  $1,197.9    $  379.3  $  728.1    $  200.1
Losses and loss expenses incurred                              223.1        85.0     379.6       240.3     684.9       231.7
Losses and loss expenses paid                                 (183.4)      (63.4)   (150.1)      (49.0)   (215.1)      (52.5)
- ----------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year         $1,467.1    $  592.2  $1,427.4    $  570.6  $1,197.9    $  379.3
- ----------------------------------------------------------------------------------------------------------------------------
Combined:
Reserve for losses and loss expenses at beginning of year   $2,303.3    $  742.9  $1,942.7    $  507.2  $1,414.1    $  330.3
Losses and loss expenses incurred                              461.5       153.3     772.1       343.0     882.6       252.2
Losses and loss expenses paid                                 (455.6)     (108.9)   (411.5)     (107.3)   (354.0)      (75.3)
- ----------------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year         $2,309.2    $  787.3  $2,303.3    $  742.9  $1,942.7    $  507.2
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>


      The gross and net IBNR included in the aforementioned reserve for losses
and loss expenses at December 31, 1997, 1996 and 1995 were estimated as follows:


<TABLE>
<CAPTION>
(in thousands)
- -------------------------------------------------------------------------------------------------------------
                                          1997                         1996                      1995
                                 ----------------------       -----------------------    --------------------
                                    Gross         Net           Gross           Net       Gross        Net
=============================================================================================================
<S>                              <C>           <C>            <C>            <C>         <C>         <C>     
Combined                         $1,004,000    $393,900       $1,070,000     $436,500    $665,000    $218,000
=============================================================================================================
</TABLE>



18

<PAGE>   20

                             American International Group, Inc. and Subsidiaries

      A summary of asbestos and environmental claims count activity for the
years ended December 31, 1997, 1996 and 1995 was as follows:


<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
                                                      1997                                    1996                 
                                     ------------------------------------     -----------------------------------  
                                     Asbestos   Environmental    Combined     Asbestos   Environmental   Combined  
===================================================================================================================
<S>                                     <C>            <C>         <C>           <C>            <C>        <C>     
Claims at beginning of year             5,668          17,395      23,063        5,244          17,858     23,102  
Claims during year:
  Opened                                1,073           3,624       4,697        1,083           3,836      4,919  
  Settled                                (169)           (644)       (813)        (117)           (466)      (583) 
  Dismissed or otherwise resolved        (422)         (2,953)     (3,375)        (542)         (3,833)    (4,375) 
- -------------------------------------------------------------------------------------------------------------------
Claims at end of year                   6,150          17,422      23,572        5,668          17,395     23,063  
===================================================================================================================

<CAPTION>
- -------------------------------------------------------------------------
                                                     1995
                                       ----------------------------------
                                       Asbestos  Environmental   Combined
=========================================================================
<S>                                      <C>            <C>        <C>   
Claims at beginning of year              5,947          16,223     22,170
Claims during year:
  Opened                                 1,026           5,045      6,071
  Settled                                  (93)           (663)      (756)
  Dismissed or otherwise resolved       (1,636)         (2,747)    (4,383)
- -------------------------------------------------------------------------
Claims at end of year                    5,244          17,858     23,102
=========================================================================
</TABLE>


      The average cost per claim settled, dismissed or otherwise resolved for
the years ended December 31, 1997, 1996 and 1995 was as follows:



<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
                                      1997                         1996                          1995
                            -----------------------       ----------------------        ----------------------
                              Gross           Net           Gross          Net           Gross           Net
==============================================================================================================
<S>                         <C>             <C>           <C>            <C>            <C>            <C>    
Asbestos                    $460,600        $77,000       $396,700       $88,500        $80,300        $13,200
Environmental                 51,000         17,600         34,900        11,400         63,100         15,400
Combined                     108,800         26,000         83,000        21,600         68,900         14,700
==============================================================================================================
</TABLE>


      An insurance rating agency has developed a survival ratio to measure the
number of years it would take a company to exhaust both its asbestos and
environmental reserves for losses and loss expenses based on that company's
current level of asbestos and environmental claims payments. The higher the
ratio, the more years the reserves for losses and loss expenses cover these
claims payments. These ratios are computed based on the ending reserves for
losses and loss expenses over the respective claims settlements during the
fiscal year. Such payments include indemnity payments and legal and loss
adjustment payments. It should be noted, however, that this is an extremely
simplistic approach to measuring asbestos and environmental reserve levels. Many
factors, such as aggressive settlement procedures, mix of business and level of
coverage provided, have significant impact on the amount of asbestos and
environmental losses and loss expense reserves, ultimate payments thereof and
the resultant ratio.

      The developed survival ratios include both involuntary and voluntary
indemnity payments. Involuntary payments include court judgments, court orders,
covered claims with no coverage defenses, state mandated cleanup costs, claims
where AIG's coverage defenses are minimal, and settlements made less than six
months before the first trial setting. Also, AIG considers all legal and loss
adjustment payments as involuntary.

      AIG believes voluntary indemnity payments should be excluded from the
survival ratio. The special asbestos and environmental claims unit actively
manages AIG's asbestos and environmental claims and proactively pursues early
settlement of environmental claims for all known and unknown sites. As a result,
AIG reduces its exposure to future environmental loss contingencies.

      AIG's survival ratios for involuntary asbestos and environmental claims,
separately and combined, were based upon a three year average payment. These
ratios for the years ended December 31, 1997, 1996 and 1995 were as follows:


<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
                                                   1997                         1996                          1995
                                        ------------------------       ----------------------      ------------------------     
                                           Gross            Net          Gross           Net          Gross            Net
===========================================================================================================================
<S>                                         <C>            <C>            <C>           <C>            <C>            <C>
Involuntary survival ratios:
  Asbestos                                   3.8            4.6            5.1           4.6            5.5            4.2
  Environmental                             14.6           18.0           16.2          18.8           15.6           12.4
  Combined                                   7.7           11.2            9.4          11.5            9.7            8.8
===========================================================================================================================
</TABLE>



                                                                              19

<PAGE>   21

Management's Discussion and Analysis of
Financial Condition and Results of Operations  (CONTINUED)

      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 1997, 1996 and 1995
were $15.4 million, $18.8 million and $23.5 million, respectively.

      AIG is also 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. (See also Note 17 of Notes to Financial Statements.)

Life Insurance Operations

Life insurance operations for the twelve month periods ending December 31, 1997,
1996 and 1995 were as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                            1997            1996            1995
================================================================================
<S>                                 <C>             <C>             <C>         
Premium income:
  Domestic                          $    553,203    $    535,579    $    463,533
  Foreign                              9,372,436       8,442,667       7,574,617
- --------------------------------------------------------------------------------
Total                               $  9,925,639    $  8,978,246    $  8,038,150
================================================================================
Net investment income:
  Domestic                          $    838,931    $    930,350    $    846,345
  Foreign                              2,057,538       1,745,531       1,418,560
- --------------------------------------------------------------------------------
Total                               $  2,896,469    $  2,675,881    $  2,264,905
================================================================================
Operating income before
  realized capital gains:
  Domestic                          $    124,938    $    100,487    $     59,014
  Foreign                              1,425,359       1,188,473         998,888
- --------------------------------------------------------------------------------
Total                                  1,550,297       1,288,960       1,057,902
Realized capital gains                    21,186          34,798          32,703
- --------------------------------------------------------------------------------
Operating income                    $  1,571,483    $  1,323,758    $  1,090,605
================================================================================
Life insurance in-force:
  Domestic                          $ 59,516,720    $ 60,419,342    $ 54,272,118
  Foreign                            377,056,403     361,563,791     321,824,989
- --------------------------------------------------------------------------------
Total                               $436,573,123    $421,983,133    $376,097,107
================================================================================
</TABLE>


      AIG's life insurance operations, demonstrating the strength of its
franchise, continued to show growth primarily as a result of overseas
operations, particularly in Asia. AIG's life premium income in 1997 represented
a 10.6 percent increase from the prior year. This compares with an increase of
11.7 percent in 1996 over 1995. Foreign life operations produced 94.4 percent,
94.0 percent and 94.2 percent of the life premium income in 1997, 1996 and 1995,
respectively. (See also Notes 1, 4 and 6 of Notes to Financial Statements.)

      As previously discussed, the U.S. dollar strengthened in value in relation
to most major foreign currencies in which AIG transacts business. Accordingly,
when foreign life premium income was translated into U.S. dollars for purposes
of the preparation of the consolidated financial statements, total life premium
income was approximately 6.5 percentage points less than it would have been if
translated utilizing exchange rates prevailing in 1996. (See also the discussion
under "Capital Resources" herein.)

      Life insurance net investment income increased 8.2 percent in 1997
compared to an increase of 18.1 percent in 1996. The slowing of the growth rate
was impacted by the redemption of policy loans with respect to some large
corporate owned life insurance policies (COLI) beginning in 1996 and continuing
into 1997. Such redemptions had an insignificant impact on operating income,
financial condition and liquidity. The growth in net investment income in 1997
and 1996 was primarily attributable to foreign new cash flow for investment. The
new cash flow was generated from life insurance operations and included the
compounding of previously earned and reinvested net investment income. (See also
the discussion under "Liquidity" herein.)

      The traditional life products, such as whole and term life and endowments,
were the major contributors to the growth in foreign premium income and
investment income, particularly in Asia, and continue to be the primary source
of growth in the life segment. A mixture of traditional, accident and health and
financial products are being sold in Japan.

      Life insurance realized capital gains were $21.2 million in 1997, $34.8
million in 1996 and $32.7 million in 1995. 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 as well
as redemptions of fixed maturities.

      Life insurance operating income in 1997 increased 18.7 percent to $1.57
billion compared to an increase of 21.4 percent in 1996. Excluding realized
capital gains from life insurance operating income, the percent increases would
be 20.3 percent and 21.8 percent in 1997 and 1996, respectively. The
contribution of life insurance operating income to income before income taxes
amounted to 33.4 percent in 1997 compared to 33.0 percent in 1996 and 31.5
percent in 1995.

      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.


20

<PAGE>   22

                             American International Group, Inc. and Subsidiaries

      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 one million dollars
of coverage by using yearly renewable term reinsurance. The life insurance
operations have not entered into assumption reinsurance transactions or surplus
relief transactions during the three year period ended December 31, 1997. (See
also Note 5 of Notes to Financial Statements.)

      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 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 assess whether there is a liquidity excess or
deficit. 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. (See also the discussion under "Liquidity" herein.)

      The asset-liability relationship is appropriately managed in AIG's foreign
operations, as it has been throughout AIG's history, 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. At December 31, 1997, the average duration
of the investment portfolio in Japan was 5.7 years, while the related policy
liabilities were estimated to be 13.7 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 shortfall through its
international financial network. Domestically, active monitoring assures
appropriate asset-liability matching as there are investments available to match
the duration and the required yield. (See also the discussion under "Liquidity"
herein.)

      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.

Financial Services Operations

Financial services operations for the twelve month periods ending December 31,
1997, 1996 and 1995 were as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                             1997           1996           1995
================================================================================
<S>                                   <C>            <C>            <C>        
Revenues:
International Lease Finance Corp.     $ 1,856,763    $ 1,560,228    $ 1,378,353
AIG Financial Products Corp.*             452,052        369,194        289,020
AIG Trading Group Inc.*                   561,784        288,551        317,207
Other                                     402,879        337,504        219,510
- --------------------------------------------------------------------------------
Total                                 $ 3,273,478    $ 2,555,477    $ 2,204,090
================================================================================
Operating income:
International Lease Finance Corp.     $   382,431    $   306,853    $   263,790
AIG Financial Products Corp.              240,970        189,157        140,245
AIG Trading Group Inc.                    126,536         80,156         68,765
Other, including intercompany
  adjustments                             (48,600)       (52,260)       (55,059)
- --------------------------------------------------------------------------------
Total                                 $   701,337    $   523,906    $   417,741
================================================================================
</TABLE>

* Represents net trading revenues.

      Financial services operating income increased 33.9 percent in 1997 over
1996. This compares with an increase of 25.4 percent in 1996 over 1995.

      Financial services operating income represented 14.9 percent of AIG's
income before income taxes in 1997. This compares to 13.1 percent and 12.1
percent in 1996 and 1995, respectively.

      International Lease Finance Corporation (ILFC) generates its revenues
primarily from leasing new and used commercial jet aircraft to domestic and
foreign airlines. Revenues also result from the remarketing of commercial jets
for its own account, for airlines and for financial institutions. Revenues in
1997 increased 19.0 percent from 1996 compared to a 13.2 percent increase during
1996 from 1995. The revenue growth in each year resulted primarily from the
growth both in the size and relative cost of the fleet and the increase in the
number of aircraft sold. Approximately 20 percent of ILFC's operating lease
revenues are derived from U.S. and Canadian airlines. During 1997, operating
income increased 24.6 percent from 1996 and 16.3 percent during 1996 from 1995.
The composite borrowing rates at December 31, 1997, 1996 and 1995 were 6.44
percent, 6.23 percent and 6.47 percent, respectively. (See also the discussions
under "Capital Resources" and "Liquidity" herein.)

      ILFC is exposed to loss through non-performance of aircraft lessees,
through owning aircraft which it would be unable to sell or re-lease at
acceptable rates at lease expiration and through committing to purchase aircraft
which it would be unable to lease. ILFC manages its lessee non-performance
exposure through credit reviews and security deposit requirements. At December
31, 1997, there were 297 aircraft subject to operating leases. Two other
aircraft were committed for sale. (See also the discussions under "Capital
Resources" and "Liquidity" herein.)


                                                                              21

<PAGE>   23

Management's Discussion and Analysis of
Financial Condition and Results of Operations  (CONTINUED)

      AIG Financial Products Corp. and its subsidiaries (AIGFP) participate in
the derivatives dealer market conducting, primarily as principal, an interest
rate, currency, equity and credit derivative products business. AIGFP also
enters into structured transactions including long-dated forward foreign
exchange contracts, option transactions, liquidity facilities and investment
agreements and invests in a diversified portfolio of securities. AIGFP derives
substantially all its revenues from proprietary positions entered in connection
with counterparty transactions rather than from speculative transactions.
Revenues in 1997 increased 22.4 percent from 1996 compared to a 27.7 percent
increase during 1996 from 1995. During 1997, operating income increased 27.4
percent from 1996 and increased 34.9 percent during 1996 from 1995. As AIGFP is
a transaction-oriented operation, current and past revenues and operating
results may not provide a basis for predicting future performance. (See also the
discussions under "Capital Resources," "Liquidity" and "Derivatives" herein.)

      AIG Trading Group Inc. and its subsidiaries (AIGTG) derive a substantial
portion of their revenues from market making and trading activities, as
principals, in foreign exchange, interest rates and precious and base metals.
Revenues in 1997 increased 94.7 percent from 1996 compared to a 9.0 percent
decrease during 1996 from 1995. During 1997, operating income increased 57.9
percent from 1996 and 16.6 percent during 1996 from 1995. A substantial portion
of AIGTG's improvement during 1997 over 1996 was currency trading activity in
volatile foreign exchange markets. As AIGTG is a transaction-oriented operation,
current and past revenues and operating results may not provide a basis for
predicting future performance. (See also the discussions under "Capital
Resources," "Liquidity" and "Derivatives" herein.)

      In December 1997, AIGTG sold its energy operations. The sale of these
operations will not have a significant impact on AIG's results of operations.

Other Operations

In 1997, AIG's equity in income of minority-owned insurance operations was
$113.6 million compared to $99.4 million in 1996 and $81.7 million in 1995. In
1997, the equity interest in insurance companies represented 2.4 percent of
income before income taxes compared to 2.5 percent in 1996 and 2.4 percent in
1995.

      Other realized capital losses amounted to $30.8 million, $11.8 million and
$28.9 million in 1997, 1996 and 1995, respectively.

      Minority interest represents minority shareholders' equity in income of
certain consolidated subsidiaries. In 1997, minority interest amounted to $31.9
million. In 1996 and 1995, minority interest amounted to $43.2 million and $36.3
million, respectively.

      Other income (deductions)-net includes AIG's equity in certain minor
majority-owned subsidiaries and certain partially-owned 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 1997, net deductions amounted to $96.7 million. In 1996 and
1995, net deductions amounted to $84.4 million and $91.2 million, respectively.

      Income before income taxes amounted to $4.70 billion in 1997, $4.01
billion in 1996 and $3.47 billion in 1995.

      In 1997, AIG recorded a provision for income taxes of $1.37 billion
compared to the provisions of $1.12 billion and $955.5 million in 1996 and 1995,
respectively. These provisions represent effective tax rates of 29.1 percent in
1997, 27.8 percent in 1996 and 27.6 percent in 1995. (See Note 3 of Notes to
Financial Statements.)

      Net income amounted to $3.33 billion in 1997, $2.90 billion in 1996 and
$2.51 billion in 1995. The increases in net income over the three year period
resulted from those factors described above.


22

<PAGE>   24

                             American International Group, Inc. and Subsidiaries

Capital Resources

At December 31, 1997, AIG had total capital funds of $24.00 billion and total
borrowings of $25.26 billion. At that date, $22.28 billion of such borrowings
were either not guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs) or matched notes and bonds payable.

      Total borrowings and borrowings not guaranteed or matched at December 31,
1997 and 1996 were as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
December 31,                                               1997             1996
================================================================================
<S>                                                 <C>              <C>        
GIAs -- AIGFP                                       $ 8,000,326      $ 5,723,228
- --------------------------------------------------------------------------------
Commercial Paper:
  Funding                                               307,997        1,018,510
  ILFC (a)                                            2,208,167        2,739,388
  AICCO                                                 833,647          740,078
  Universal Finance Company (UFC) (a)                    25,096               --
- --------------------------------------------------------------------------------
  Total                                               3,374,907        4,497,976
- --------------------------------------------------------------------------------
Medium Term Notes:
  ILFC (a)                                            2,896,865        2,551,485
  AIG                                                   248,225          140,000
- --------------------------------------------------------------------------------
  Total                                               3,145,090        2,691,485
- --------------------------------------------------------------------------------
Notes and Bonds Payable:
  ILFC (a)                                            3,950,000        3,500,000
  AIGFP                                               4,858,706        5,243,042
  AIGTG                                                      --           10,442
  AIG: Lire bonds                                       159,067          159,067
       Zero coupon notes                                 91,179           81,761
- --------------------------------------------------------------------------------
  Total                                               9,058,952        8,994,312
- --------------------------------------------------------------------------------
Loans and Mortgages Payable:
  ILFC (a) (b)                                          903,320        1,007,836
  SPC Credit Limited (SPC) (a)                          538,988          398,837
  AIG                                                   239,062          206,840
- --------------------------------------------------------------------------------
  Total                                               1,681,370        1,613,513
- --------------------------------------------------------------------------------
Total Borrowings                                     25,260,645       23,520,514
- --------------------------------------------------------------------------------
Borrowings not guaranteed by AIG                     10,522,436       10,197,546
Matched GIA borrowings                                8,000,326        5,723,228
Matched notes and
  bonds payable -- AIGFP                              3,754,420        4,576,900
- --------------------------------------------------------------------------------
                                                     22,277,182       20,497,674
- --------------------------------------------------------------------------------
Remaining borrowings of AIG                         $ 2,983,463      $ 3,022,840
================================================================================
</TABLE>

(a)   AIG does not guarantee or support these borrowings.
(b)   Primarily capital lease obligations.

See also Note 9 of Notes to Financial Statements.

      During 1997, AIGFP decreased the aggregate principal amount outstanding of
its notes and bonds payable to $4.86 billion, a net decrease of $384.3 million
and increased its net GIA borrowings by $2.28 billion. AIGFP uses the proceeds
from the issuance of notes and bonds to invest in a segregated portfolio of
securities available for sale, although these funds may be temporarily invested
in securities purchased under agreements to resell. Funds received from GIA
borrowings are invested in a diversified portfolio of securities and derivative
transactions. (See also the discussions under "Operational Review", "Liquidity"
and "Derivatives" herein and Notes 1, 8, 9 and 11 of Notes to Financial
Statements.)

      AIG Funding, Inc. (Funding), through the issuance of commercial paper,
fulfills the short-term cash requirements of AIG and its non-insurance
subsidiaries. Funding intends to continue to meet AIG's funding requirements
through the issuance of commercial paper guaranteed by AIG. This issuance of
Funding's commercial paper is subject to the approval of AIG's Board of
Directors. ILFC, A.I. Credit Corp. (AICCO) and UFC, a consumer finance
subsidiary in Taiwan, issue commercial paper for the funding of their own
operations. AIG does not guarantee AICCO's, ILFC's or UFC's commercial paper.
However, AIG has entered into an agreement in support of AICCO's commercial
paper. From time to time, AIGFP may issue commercial paper, which AIG
guarantees, to fund its operations. At December 31, 1997, AIGFP had no
commercial paper outstanding. (See also the discussion under "Derivatives"
herein and Note 9 of Notes to Financial Statements.)

      AIG and Funding have entered into two syndicated revolving credit
facilities (the Facilities) aggregating $1 billion. The Facilities consist of a
$500 million 364 day revolving credit facility and a $500 million five year
revolving credit facility. The Facilities can be used for general corporate
purposes and also provide backup for AIG's commercial paper programs
administered by Funding. There are currently no borrowings outstanding under
either of the Facilities, nor were any borrowings outstanding as of December 31,
1997.

      At December 31, 1997, ILFC had increased the aggregate principal amount
outstanding of its medium term and term notes to $6.85 billion, a net increase
of $795.4 million, and recorded a net decline in its capital lease obligations
of $92.6 million and a net decrease in its commercial paper of $531.2 million.
At December 31, 1997, ILFC had $610 million in aggregate principal amount of
debt securities registered for issuance from time to time. In February 1998,
ILFC reduced this registered amount to $230 million through the sale of debt
securities amounting to $380 million aggregate principal amount. Also, in
February 1998, ILFC registered $2.29 billion in aggregate principal amount of
debt securities for issuance from time to time. At that time, the aggregate
principal amount of registered debt available for issuance was $2.52 billion.
The proceeds of ILFC's debt financing are primarily used to purchase flight
equipment, including progress payments during the construction phase. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. (See also the discussions
under "Operational Review" and "Liquidity" herein.)

      During 1997, AIG issued $108.2 million principal amount of Medium Term
Notes, Series E, including $100 million principal amount of 2 1/4% Cash
Exchangeable Equity-Linked Notes Due July 30, 2004. These notes accrue interest
at the rate of 2.25 percent and the total return on these notes is linked to the
appreciation in market value of AIG's common stock. The notes may be redeemed,
at the option of AIG, as a whole but not in part, at any time on or after July
30, 2000. In conjunction with the issuance of these notes, AIG entered into a
series of swap transactions which effectively converted its interest expense to
a fixed 


                                                                              23

<PAGE>   25

Management's Discussion and Analysis of
Financial Condition and Results of Operations  (CONTINUED)

rate of 5.87 percent and transferred the equity appreciation exposure to a third
party. The proceeds of these notes were used for general corporate purposes.

      No notes previously issued by AIG matured during 1997. At December 31,
1997 AIG had $538.8 million in aggregate principal amount of debt securities
registered for issuance from time to time.

      AIG's capital funds increased $1.96 billion during 1997. Unrealized
appreciation of investments, net of taxes decreased $28.1 million. During 1997,
the cumulative translation adjustment loss, net of taxes, increased $684.8
million. The changes from year to year with respect to the unrealized
appreciation of investments, net of taxes and the cumulative translation
adjustment loss, net of taxes were primarily impacted by the economic situation
in Japan and Southeast Asia and the general strength of the U.S. dollar against
most currencies in which AIG conducts operations. (See also the discussion under
"Operational Review" and "Liquidity" herein.) Retained earnings increased $2.50
billion, resulting from net income less dividends.

      During 1997, AIG repurchased 5.7 million shares of its common stock in the
open market at a cost of $502.0 million. Shares repurchased prior to July 25,
1997, have been adjusted for the three for two stock split in the form of a 50
percent common stock dividend. AIG intends to continue to buy its common shares
in the open market to satisfy its obligations under various employee benefit
plans and, depending on market conditions, for other corporate purposes.

      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 December 31, 1997, there
were no significant statutory or regulatory issues which would impair AIG's
financial condition, results of operations or liquidity. To AIG's knowledge, no
AIG company is on any regulatory or similar "watch list". (See also the
discussion under "Liquidity" herein and Note 10 of Notes to Financial
Statements.)

      The National Association of Insurance Commissioners (NAIC) has developed
Risk-Based Capital (RBC) requirements. RBC relates an individual insurance
company's statutory surplus to the risk inherent in its overall operations. At
December 31, 1997, the adjusted capital of each of AIG's domestic general
companies and of each of AIG's domestic life companies exceeded each of their
RBC standards by considerable margins.

      A substantial portion of AIG's general insurance business and a majority
of its life insurance business are conducted in foreign countries. The degree of
regulation and supervision in foreign jurisdictions varies from minimal in some
to stringent in others. Generally, AIG, as well as the underwriting companies
operating in such jurisdictions, must satisfy local regulatory requirements.

Liquidity

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

      At December 31, 1997, AIG's consolidated invested assets included
approximately $3.42 billion of cash and short-term investments. Consolidated net
cash provided from operating activities in 1997 amounted to approximately $3.04
billion.

      Sources of funds considered in meeting the objectives of AIG's financial
services' operations include guaranteed investment agreements, issuance of long
and short-term debt, maturities and sales of securities available for sale,
securities sold under repurchase agreements, trading liabilities, securities and
spot commodities sold but not yet purchased, issuance of equity, and cash
provided from such operations. AIG's strong capital position is integral to
managing this liquidity, as it enables AIG to raise funds in diverse markets
worldwide. (See also the discussions under "Capital Resources" herein.)

      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.

      The liquidity of the combined insurance operations is derived both
domestically and abroad. The combined insurance operating cash flow is derived
from two sources, underwriting operations and investment operations. In the
aggregate, AIG's insurance operations generated over $6 billion in pre-tax cash
flow during 1997. Cash flow includes periodic premium collections, including
policyholders' contract deposits, paid loss recoveries less reinsurance
premiums, losses, benefits, acquisition and operating expenses. 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 investment operations generated approximately $4.7 billion in
investment income cash flow during 1997. Investment income cash flow is
primarily derived from interest and dividends received and includes realized
capital gains.

      The combined insurance pre-tax operating cash flow coupled with the cash
and short-term investments of $3.0 billion provided the insurance operations
with a significant amount of liquidity during 1997. This liquidity is available
to purchase high quality and diversified fixed income securities and to a lesser
extent marketable equity securities and to provide mortgage loans on real
estate, policy loans and collateral loans. This liquidity coupled with proceeds
of over $16 billion from the maturities, sales and redemptions of fixed income
securities and from the sale of equity securities was used to purchase nearly
$19 billion of fixed income securities and marketable equity securities during
1997.


24

<PAGE>   26

                             American International Group, Inc. and Subsidiaries

      The following table is a summary of AIG's invested assets by significant
segment, including investment income due and accrued and real estate, at
December 31, 1997 and 1996:


<TABLE>
<CAPTION>
(dollars in thousands)
- --------------------------------------------------------------------------------
                          December 31, 1997                December 31, 1996
                      ------------------------        -------------------------
                          Invested    Percent             Invested    Percent
                            Assets   of Total               Assets   of Total
================================================================================
<S>                   <C>                <C>          <C>                <C>  
General insurance     $ 31,844,084       26.0%        $ 28,786,140       26.5%
Life insurance          41,046,969       33.5           38,491,870       35.4
Financial services      48,899,127       39.9           40,938,871       37.7
Other                      661,701        0.6              401,248        0.4
- --------------------------------------------------------------------------------
Total                 $122,451,881      100.0%        $108,618,129      100.0%
================================================================================
</TABLE>


Insurance Invested Assets

The following tables summarize the composition of AIG's insurance invested
assets by insurance segment, including investment income due and accrued and
real estate, at December 31, 1997 and 1996:


<TABLE>
<CAPTION>
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Percent Distribution
                                                                                                      Percent  --------------------
December 31, 1997                                               General          Life         Total  of Total   Domestic   Foreign
====================================================================================================================================
<S>                                                         <C>           <C>           <C>              <C>       <C>        <C>  
Fixed Maturities:
  Available for sale, at market value (a)                   $11,326,246   $27,340,210   $38,666,456      53.0%      37.8%     62.2%
  Held to maturity, at amortized cost (b)                    12,769,646            --    12,769,646      17.5      100.0        --
Equity securities, at market value (c)                        3,314,603     1,815,849     5,130,452       7.0       43.5      56.5
Mortgage loans on real estate, policy and collateral loans       50,297     6,147,606     6,197,903       8.5       39.0      61.0
Short-term investments, including time deposits, and cash       616,683     2,409,353     3,026,036       4.2       33.1      66.9
Real estate                                                     401,995       979,543     1,381,538       1.9       16.8      83.2
Investment income due and accrued                               528,164       817,348     1,345,512       1.9       39.7      60.3
Other invested assets                                         2,836,450     1,537,060     4,373,510       6.0       76.7      23.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                                       $31,844,084   $41,046,969   $72,891,053     100.0%      51.0%     49.0%
====================================================================================================================================
</TABLE>

(a)   Includes $718,548 of bonds trading securities, at market value.
(b)   Includes $239,331 of preferred stock, at amortized cost.
(c)   Includes $111,609 of preferred stock, at market value.


<TABLE>
<CAPTION>
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Percent Distribution
                                                                                                      Percent  --------------------
December 31, 1996                                               General          Life         Total  of Total   Domestic   Foreign
====================================================================================================================================
<S>                                                         <C>           <C>           <C>              <C>       <C>        <C>  
Fixed Maturities:
  Available for sale, at market value (a)                   $ 9,713,937   $26,058,027   $35,771,964      53.2%      34.6%     65.4%
  Held to maturity, at amortized cost (b)                    12,736,225            --    12,736,225      18.9      100.0        --
Equity securities, at market value (c)                        3,265,756     2,608,309     5,874,065       8.7       33.9      66.1
Mortgage loans on real estate, policy and collateral loans       50,578     6,224,878     6,275,456       9.3       43.1      56.9
Short-term investments, including                                                                                            
  time deposits, and cash                                       605,363     1,002,060     1,607,423       2.4       19.3      80.7
Real estate                                                     409,808       843,933     1,253,741       1.9       18.2      81.8
Investment income due and accrued                               493,338       697,891     1,191,229       1.8       44.4      55.6
Other invested assets                                         1,511,135     1,056,772     2,567,907       3.8       51.6      48.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                                       $28,786,140   $38,491,870   $67,278,010     100.0%      47.9%     52.1%
====================================================================================================================================
</TABLE>

(a)   Includes $364,069 of bonds trading securities, at market value.
(b)   Includes $477,247 of preferred stock, at amortized cost.
(c)   Includes $46,732 of preferred stock, at market value.

      Generally, insurance regulations restrict the types of assets in which an
insurance company may invest.

      With respect to fixed maturities, AIG's general strategy is to invest in
high quality securities while maintaining diversification to avoid significant
exposure to issuer, industry and/or country concentrations. With respect to
general insurance, AIG's strategy is to invest in longer duration fixed
maturities to maximize the yields at the date of purchase. With respect to life
insurance, AIG's strategy is to produce cash flows required to meet maturing
insurance liabilities (See also the discussion under "Operational Review: Life
Insurance Operations" herein.)

      The fixed maturity available for sale portfolio is subject to decline in
fair value as interest rates rise. Such declines in fair value are presented as
a component of capital funds in unrealized appreciation of investments, net of
taxes.


                                                                              25

<PAGE>   27

Management's Discussion and Analysis of
Financial Condition and Results of Operations  (CONTINUED)

      The fixed maturities held to maturity portfolio is exposed to adverse
interest rate fluctuations. However, AIG has the ability and intent to hold such
securities to maturity. Therefore, there would be no detrimental impact to AIG's
results of operations or financial condition as a result of such fluctuations.

      At December 31, 1997, approximately 53.2 percent of the fixed maturities
investments were domestic securities. Approximately 41 percent of such domestic
securities were rated AAA. Approximately eight percent were below investment
grade or not 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. Similar
credit quality rating services are not available in all overseas locations.
AIG annually reviews the credit quality of the foreign portfolio nonrated fixed
income investments, including mortgages. At December 31, 1997, approximately 28
percent of the foreign fixed income investments were either rated AAA or, on the
basis of AIG's internal analysis, were equivalent from a credit standpoint to
securities so rated. Approximately 10 percent were below investment grade or not
rated at that date.

      At December 31, 1997, approximately five percent of the fixed maturities
portfolio was Collateralized Mortgage Obligations (CMOs), including minor
amounts with respect to Commercial Mortgage Backed Securities. All of the CMOs
were investment grade and approximately 59 percent of the CMOs were backed by
various U.S. government agencies. 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. There were no interest only or
principal only CMOs at December 31, 1997.

      Any fixed income security may be subject to downgrade for a variety of
reasons subsequent to any balance sheet date. There have been no significant
downgrades as of March 1, 1998.

      AIG invests in equities for reasons including diversifying its overall
exposure to interest rate risk. Equity securities are subject to declines in
fair value. Such declines in fair value are presented as components of capital
funds in unrealized appreciation of investments, net of taxes.

      Mortgage loans on real estate, policy and collateral loans comprised 8.5
percent of AIG's insurance invested assets at December 31, 1997. AIG's insurance
operations' holdings of real estate mortgages amounted to $2.51 billion of which
36.1 percent was domestic. At December 31, 1997, no domestic mortgages and only
a nominal amount of foreign mortgages were in default. It is AIG's practice to
maintain a maximum loan to value ratio of 75 percent at loan origination. At
December 31, 1997, AIG's insurance holdings of collateral loans amounted to
$1.02 billion, all of which were foreign. It is AIG's strategy to enter into
mortgage and collateral loans as an adjunct primarily to life insurance fixed
maturity investments. AIG's policy loans decreased from $3.00 billion at
December 31, 1996 to $2.67 billion at December 31, 1997. Nearly all of this
decrease relates to the redemption of COLI products.

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

      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.

      Other invested assets were primarily comprised of both foreign and
domestic private placements, limited partnerships and outside managed funds.

      When permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from adverse movements in
foreign currency exchange rates, interest rates and equity prices, AIG and its
insurance subsidiaries may enter into derivative transactions as end users. To
date, such activities have not been significant. (See also the discussion under
"Derivatives" herein.)

      In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist 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.

      AIG's insurance operations are exposed to market risk. Market risk is the
risk of loss of fair value resulting from adverse fluctuations in interest and
foreign currency exchange rates and equity prices.

      Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk (VaR). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates the
volatility and correlation of each of these rates and prices to calculate the
maximum loss that could occur over a defined period of time given a certain
probability.

      AIG believes that statistical models alone do not provide a reliable
method of monitoring and controlling market risk. While VaR models are
relatively sophisticated, the quantitative market risk information generated is
limited by the assumptions and parameters established in creating the related
models. Therefore, such models are tools and do not substitute for the
experience or judgment of senior management.

      AIG has performed a VaR analysis to estimate the maximum potential loss of
fair value for each of AIG's insurance segments and for each market risk within
each insurance segment. In this analysis, financial instrument assets include
the domestic and foreign invested assets excluding real estate and investment
income due and accrued. Financial instrument liabilities include reserve for
losses and loss expenses, reserve for unearned premiums, future policy benefits
for life and accident and health insurance contracts and policyholders' funds.


26

<PAGE>   28

                             American International Group, Inc. and Subsidiaries

      Due to the nature of each insurance segment, AIG manages the general and
life insurance operations separately. As a result, AIG manages separately the
invested assets of each. Accordingly, the VaR analysis was separately performed
for the general and the life insurance operations.

      AIG calculated the VaR with respect to the net fair value of each of AIG's
insurance segments as of December 31, 1997. This calculation used the
variance-covariance (delta-normal) methodology. The calculation also used daily
historical interest and foreign currency exchange rates and equity prices in the
two years ending December 31, 1997. The VaR model estimated the volatility of
each of these rates and equity prices and the correlation among them. For
interest rates, each country's yield curve was constructed using eleven separate
points on this curve to model possible curve movements. Inter-country
correlations were also used. The redemption experience of municipal and
corporate fixed maturities and mortgage securities was taken into account as
well as the use of financial modeling. Thus, the VaR measured the sensitivity of
the asset and the liability portfolios to each of the aforementioned market risk
exposures. Each sensitivity was estimated separately to capture the market
exposures within each insurance segment. These sensitivities were then applied
to a data base which contained both historical ranges of movements in all market
factors and the correlations among them. The results were aggregated to provide
a single amount that depicts the maximum potential loss in fair value at a
confidence level of 95 percent for a time period of one month. At December 31,
1997 the VaR of AIG's insurance segments was approximately $520 million for
general insurance and $799 million for life insurance.

      The following table presents the VaR of each component of market risk for
each of AIG's insurance segments as of December 31, 1997:


<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
Market Risk                                 General Insurance     Life Insurance
================================================================================
<S>                                                  <C>                <C>     
Interest rate                                        $  235.6           $  779.3
Currency                                                 25.9               84.9
Equity                                                  354.5              120.1
================================================================================
</TABLE>


      VaR with respect to combined operations cannot be derived by aggregating
the individual risk or segment amounts presented herein.

Financial Services Invested Assets

The following table is a summary of the composition of AIG's financial services
invested assets at December 31, 1997 and 1996. (See also the discussions under
"Operational Review: Financial Services Operations", "Capital Resources" and
"Derivatives" herein.)


<TABLE>
<CAPTION>
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                         1997                         1996
                                                                             --------------------------   --------------------------
                                                                                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                                            $14,438,074          29.5%   $13,808,660          33.7%
Unrealized gain on interest rate and currency swaps,
  options and forward transactions                                             7,422,290          15.2      6,906,012          16.9
Securities available for sale, at market value                                 9,145,317          18.7      9,785,909          23.9
Trading securities, at market value                                            3,974,561           8.1      2,357,812           5.7
Securities purchased under agreements to resell, at contract value             4,551,191           9.3      1,642,591           4.0
Trading assets                                                                 6,715,486          13.8      3,793,433           9.3
Spot commodities, at market value                                                459,517           0.9        204,705           0.5
Other, including short-term investments                                        2,192,691           4.5      2,439,749           6.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                                                        $48,899,127         100.0%   $40,938,871         100.0%
====================================================================================================================================
</TABLE>


      As previously discussed, the cash used for the purchase of flight
equipment is derived primarily from the proceeds of ILFC's debt financings. The
primary sources for the repayment of this debt and the interest expense thereon
are the cash flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. During 1997, ILFC acquired
flight equipment costing $3.44 billion.

      At December 31, 1997, ILFC had committed to purchase or had secured
positions for 328 aircraft deliverable from 1998 through 2006 at an estimated
aggregate purchase price of $17.7 billion. As of March 9, 1998, ILFC has entered
into leases, letters of intent to lease or is in various stages of negotiation
for all of the aircraft to be delivered in 1998 and 84 of 268 aircraft to be
delivered subsequent to 1998. ILFC will be required to find customers for any
aircraft presently on order and any aircraft to be ordered, and it must arrange
financing for portions of the purchase price of such equipment. In a rising
interest rate environment, ILFC negotiates higher lease rates on any new
contracts. ILFC has been successful to date both in placing its new aircraft on
lease or under sales contract and obtaining adequate financing.

      AIGFP's derivative transactions are carried at market value or at
estimated fair value when market prices are not readily available. AIGFP reduces
its economic risk exposure through similarly valued offsetting transactions
including swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent assessments of the present
value of expected future cash flows. These transactions are exposed to liquidity
risk if AIGFP were to sell or close out the transactions prior to maturity. AIG
believes that the impact of 


                                                                              27

<PAGE>   29

Management's Discussion and Analysis of
Financial Condition and Results of Operations  (CONTINUED)

any such limited liquidity would not be significant to AIG's financial condition
or its overall liquidity. (See also the discussion under "Operational Review:
Financial Services Operations" and "Derivatives" herein.)

      Securities available for sale, at market value and securities purchased
under agreements to resell are purchased with the proceeds of AIGFP's GIA
financings and other long and short term borrowings. The proceeds from the
disposal of securities available for sale and securities purchased under
agreements to resell have been used to fund the maturing GIAs or other AIGFP
financing. (See also the discussion under "Capital Resources" herein.)

      Securities available for sale is mainly a portfolio of debt securities,
where the individual securities have varying degrees of credit risk. At December
31, 1997, the average credit rating of this portfolio was AA or the equivalent
thereto as determined through rating agencies or internal review. AIGFP has also
entered into credit derivative transactions to hedge its credit risk associated
with $444.0 million of these securities. There were no securities deemed below
investment grade at December 31, 1997. There have been no significant downgrades
through March 1, 1998. Securities purchased under agreements to resell are
treated as collateralized transactions. AIGFP takes possession of or obtains a
security interest in securities purchased under agreements to resell. AIGFP
further minimizes its credit risk by monitoring counterparty credit exposure
and, when AIGFP deems necessary, it requires additional collateral to be
deposited. Trading securities, at market value are marked to market daily and
are held to meet the short-term risk management objectives of AIGFP.

      AIGTG conducts, as principal, market making and trading activities in
foreign exchange, interest rates and precious and base metals. AIGTG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.
AIGTG uses derivatives to manage the economic exposure of its various trading
positions and transactions from adverse movements of interest rates, foreign
currency exchange rates and commodity prices. AIGTG supports its trading
activities largely through trading liabilities, unrealized losses on swaps,
short-term borrowings, securities sold under agreements to repurchase and
securities and commodities sold but not yet purchased. (See also the discussions
under "Capital Resources" and "Derivatives" herein.)

      The gross unrealized gains and gross unrealized losses of AIGFP and AIGTG
included in the financial services assets and liabilities at December 31, 1997
were as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                              Gross        Gross
                                                         Unrealized   Unrealized
                                                              Gains       Losses
================================================================================
<S>                                                      <C>          <C>       
Securities available for sale, at market value (a)       $  292,274   $  292,201
Unrealized gain/loss on
  interest rate and currency
  swaps, options and forward
  transactions (b) (c)                                    7,422,290    5,979,571
Trading assets                                            8,429,103    5,114,498
Spot commodities, at market value                                --       59,712
Trading liabilities                                              --    4,323,000
Securities and spot commodities sold but
  not yet purchased, at market value                        344,783           --
================================================================================
</TABLE>

(a)   See also Note 8 (e) of Notes to Financial Statements.
(b)   These amounts are also presented as the respective balance sheet amounts.
(c)   At December 31, 1997, AIGTG's replacement values with respect to interest
      rate and currency swaps were $610.4 million.

      AIGFP's 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.
At December 31, 1997, the unrealized gains and losses remaining after the
benefit of the offsets were $6.6 million and $6.5 million, respectively.

      Trading securities, at market value, and securities and spot commodities
sold but not yet purchased, 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
and AIGTG.

      The senior management of AIG defines the policies and establishes general
operating parameters for AIGFP and AIGTG. AIG's senior management has
established various oversight committees to review the various financial market,
operational and credit issues of AIGFP and AIGTG. The senior managements of
AIGFP and AIGTG report the results of their respective operations to and review
future strategies with AIG's senior management.

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

      Market risk arises principally from the uncertainty that future earnings
are exposed to potential changes in volatility, interest rates, foreign currency
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. Credit risk exposure is
separately managed. (See the discussion on the management of credit risk below).

      AIG's Market Risk Management Department provides detailed independent
review of AIG's market exposures, particularly those market exposures of AIGFP
and AIGTG. This 


28

<PAGE>   30

                             American International Group, Inc. and Subsidiaries

department determines whether AIG's market risks, as well as those market risks
of individual subsidiaries, are within the parameters established by AIG's
senior management. Well established market risk management techniques such as
sensitivity analysis are used. Additionally, this department verifies that
specific market risks of each of certain subsidiaries are managed and hedged by
that subsidiary.

      AIGFP is exposed to market risk due to changes in the level and volatility
of interest rates and the shape and slope of the yield curve. AIGFP hedges its
exposure to interest rate risk by entering into transactions such as interest
rate swaps and options and purchasing U.S. and foreign government obligations.

      AIGFP is exposed to market risk due to changes in and volatility of
foreign currency exchange rates. AIGFP hedges its foreign currency exchange risk
primarily through the use of currency swaps, options, forwards and futures.

      AIGFP is exposed to market risk due to changes in the level and volatility
of equity prices which affect the value of securities or instruments that derive
their value from a particular stock, a basket of stocks or a stock index. AIGFP
reduces the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity swaps and options and
purchasing U.S. and foreign government obligations.

      AIGFP does not seek to manage the market risk of each of its transactions
through an individual offsetting transaction. Rather, AIGFP takes a portfolio
approach to the management of its market risk exposure. AIGFP values its
portfolio at market value or estimated fair value when market values are not
readily available. These valuations represent an assessment of the present
values of expected future cash flows of AIGFP's transactions and may include
reserves for such risks as are deemed appropriate by AIGFP's and AIG's
management. AIGFP evaluates the portfolio's discounted cash flows with reference
to current market conditions, maturities within the portfolio and other relevant
factors. Based upon this evaluation, AIGFP determines what, if any, offsetting
transactions are necessary to reduce the market risk exposure of the portfolio.

      The aforementioned estimated fair values are based upon the use of
valuation models. These models utilize, among other things, current interest,
foreign exchange and volatility rates. These valuation models are integrated
into the evaluation of the portfolio, as described above, in order to provide
timely information for the market risk management of the portfolio.

      Additionally, depending upon the changes in interest rates and other
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 major business
centers overseas 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. Therefore, offsetting adjustments can be 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 derivatives portfolio. 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. AIGFP's management may change
these measures to reflect their judgment and 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. AIG utilizes an
outside consultant to provide the managements of AIG and AIGFP with comfort that
the system produces representative values.

      All of AIGTG's market risk sensitive instruments are entered into for
trading purposes. The fair values of AIGTG's financial instruments are exposed
to market risk as a result of adverse market changes in interest rates, foreign
currency exchange rates, commodity prices and adverse changes in the liquidity
of the markets in which AIGTG trades.

      AIGTG's approach to managing 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 expects to reduce.

      AIGTG's 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 and/or through on-line computer systems. In addition, these positions
are reviewed by AIGTG's management. Reports which present each trading books
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 reliable current market prices, such as published
prices or third party quotes, to value its derivatives. Where such prices are
not available, AIGTG uses an internal methodology which includes interpolation
or extrapolation from verifiable prices nearest to the dates of the
transactions. The methodology may reflect interest and exchange rates, commodity
prices, volatility rates and other relevant factors.

      A significant portion of AIGTG's business is transacted in liquid markets.
Certain of 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.

      AIGFP and AIGTG are both exposed to the risk of loss of fair value.
Sensitivity analysis is the statistical technique utilized to measure this
exposure. Such analysis is performed and 


                                                                              29

<PAGE>   31

Management's Discussion and Analysis of
Financial Condition and Results of Operations  (CONTINUED)

presented separately for AIGFP and AIGTG as AIG manages these operations
separately.

      AIGFPand AIGTG used the sensitivity analysis model to measure the
potential loss in fair value of market risk sensitive instruments of each of
their respective portfolios. This potential loss in fair value results from
selected hypothetical changes in interest and foreign currency exchange rates,
equity prices and/or other market rates or prices over time.

      The portfolios for which this analysis was performed included market risk
sensitive transactions entered into by AIGFP and AIGTG. This includes over the
counter and exchange traded investments, derivative transactions, borrowings and
hedged securities and commodities. As the market risk with respect to securities
available for sale, at market is substantially hedged, segregation of market
sensitive instruments into trading and other than hedging was not done.

      In each of these models, the market risks of AIGFP and AIGTG have been
classified as changes in the level of either interest rates, foreign currency
exchange rates, equity prices or commodity prices and the respective volatility
of each. For each risk, four sensitivities were calculated under four scenarios
with respect to the fair values of the portfolios at December 31, 1997. The four
scenarios consisted of uniformly increasing or decreasing the relevant market
rates or prices by 10 percent; and uniformly increasing or decreasing the
relevant market volatility by 10 percent. For a given risk, the sensitivity
presented herein was the largest potential loss in fair value assuming trade
settlement under the most adverse of the four scenarios that could result in one
day.

      Not all market risk exposures that are managed by AIGFP and AIGTG are
quantified by this analysis. In almost all currencies, changes in the slope and
shape of the yield curve or changes in the relative value between certain types
of financial instruments or between the same type of instruments in different
currencies could affect the results of this analysis. Additionally, the
following quantitative information does not take into account anticipated
management reaction to breaches of counterparty credit limitations caused by the
shocks within a given risk category. The actual results could differ from the
results of this analysis because market movements could be different from the
scenarios that were considered or because the composition of the portfolio could
change substantially with time. AIGFP is also exposed to uncertainty on the
amount of dividends paid or the cost of borrowing certain equities.

      The following table presents the one day exposure to the potential loss in
fair value of each component of AIGFP's market risk as of December 31, 1997
under the most adverse scenario as mentioned above:


<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
Market Risk
================================================================================
<S>                                                                      <C>    
Interest rate                                                            $  11.4
Currency                                                                    30.0
Equity                                                                       5.9
================================================================================
</TABLE>


      The following table presents the one day exposure to potential loss in
fair value of each component of AIGTG's market risk as of December 31, 1997 
under the most adverse scenario as discussed above:


<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
Market Risk
================================================================================
<S>                                                                      <C>    
Interest rate                                                            $   6.2
Currency                                                                    23.3
Commodity                                                                    1.3
================================================================================
</TABLE>


Derivatives

Derivatives are financial arrangements among two or more parties whose returns
are linked to or "derived" from some underlying equity, debt, commodity or other
asset, liability, or index. Derivatives payments may be based on interest rates
and exchange rates and/or prices of certain securities, certain commodities, or
financial or commodity indices. The more significant types of derivative
arrangements in which AIG transacts are swaps, forwards, futures, options and
related instruments.

      The most commonly used swaps are interest rate 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 notional principal 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.

      A futures or forward contract is a legal contract between two parties to
purchase or sell at a specified future date a specified quantity of a commodity,
security, currency, financial index or other instrument, at a specified price. A
futures contract is traded on an exchange, while a forward contract is executed
over the counter.

      Over the counter derivatives are not transacted in an exchange traded
environment. The futures exchanges maintain considerable financial requirements
and surveillance to ensure the integrity of exchange traded futures and options.

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

      Derivatives are generally either negotiated over the counter contracts or
standardized contracts executed on an exchange. Standardized exchange traded
derivatives include futures and options which can be readily bought or sold over
recognized security or commodity exchanges and settled daily through such
clearing houses. Negotiated over the counter derivatives include forwards, swaps
and options. Over the counter derivatives are generally not traded like exchange


30

<PAGE>   32

                             American International Group, Inc. and Subsidiaries

traded securities. However, in the normal course of business, with the agreement
of the original counterparty, these contracts may be terminated early or
assigned to another counterparty.

      All significant derivatives activities are conducted through AIGFP and
AIGTG permitting AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG structures
agreements which generally allow its counterparties to enter into transactions
with respect to changes in interest and exchange rates, securities' prices and
certain commodities and financial or commodity indices. Generally, derivatives
are used by AIG's customers such as corporations, financial institutions,
multinational organizations, sovereign entities, government agencies and
municipalities. For example, a futures, forward or option contract can be used
to protect the customers' assets or liabilities against price fluctuations.

      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. Credit risk exists for a derivative
contract when that contract has an estimated positive fair value. 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 and 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 other factors, including the industry and
country of the counterparty. Transactions which fall outside these
pre-established guidelines require the approval of the AIG Credit Risk
Committee. It is also AIG's policy to establish reserves for potential credit
impairment when necessary.

      AIGFP and AIGTG determine the credit quality of each of their
counterparties taking into account credit ratings assigned by 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 credit triggers and credit derivatives and margin
agreements.

      A significant majority of AIGFP's transactions are contracted and
documented under ISDA Master Agreements that provide for legally enforceable
set-off and close out netting of exposures in the event of default. Under such
agreements, in connection with the early termination of a transaction, AIGFP is
permitted to set-off its receivables from a counterparty against AIGFP's
payables to that same counterparty arising out of all included transactions.
Excluding regulated exchange transactions, AIGTG, whenever possible, enters into
netting agreements with its counterparties which are similar in effect to those
discussed above.

      The following tables provide the notional and contractual amounts of
AIGFP's and AIGTG's derivatives transactions at December 31, 1997.

      The notional amounts used to express the extent of AIGFP's and AIGTG's
involvement in swap transactions represent a standard of measurement of the
volume of AIGFP's and AIGTG's swaps business. Notional amount is not a
quantification of market risk or credit risk and it may not necessarily be
recorded on the balance sheet. Notional amounts represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received,
except for certain contracts such as currency swaps.

      The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.

      The net replacement value most closely represents the net credit risk to
AIGFP or the maximum amount exposed to potential loss after the application of
the aforementioned strategies, ISDA Master Agreements and collateral held.


                                                                              31

<PAGE>   33

Management's Discussion and Analysis of
Financial Condition and Results of Operations  (CONTINUED)

      The following table presents AIGFP's derivatives portfolio by maturity and
type of derivative at December 31, 1997 and December 31, 1996:


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                       Remaining Life
                                                   -----------------------------------------------------
                                                            One    Two Through   Six Through   After Ten         Total         Total
                                                           Year     Five Years     Ten Years       Years          1997          1996
====================================================================================================================================
<S>                                                <C>            <C>            <C>         <C>          <C>           <C>         
Interest rate, currency and equity/commodity 
  swaps and swaptions:
Notional amount:
  Interest rate swaps                              $ 57,623,000   $ 85,484,000   $47,420,000 $ 9,964,000  $200,491,000  $165,771,800
  Currency swaps                                      8,575,000     28,686,000    12,527,000   4,960,000    54,748,000    39,182,900
  Swaptions and equity swaps                            857,000      4,734,000     4,129,000   1,497,000    11,217,000     5,721,300
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                              $ 67,055,000   $118,904,000   $64,076,000 $16,421,000  $266,456,000  $210,676,000
====================================================================================================================================
Futures and forward contracts:
Exchange traded futures contracts contractual 
  amount                                           $  4,411,000             --            --          --  $  4,411,000  $  6,867,300
====================================================================================================================================
Over the counter forward contracts contractual 
  amount                                           $ 13,271,000             --            --          --  $ 13,271,000  $  5,952,200
====================================================================================================================================
</TABLE>


      AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1997 and
December 31, 1996, the counterparty credit quality by derivative product with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                  Net Replacement Value
                                                            ---------------------------------
                                                             Swaps and            Futures and                  Total           Total
                                                             Swaptions      Forward Contracts                   1997            1996
====================================================================================================================================
<S>                                                         <C>                       <C>                 <C>             <C>       
Counterparty credit quality:
  AAA                                                       $2,326,502                $    --             $2,326,502      $1,732,315
  AA                                                         2,273,532                 37,572              2,311,104       2,021,878
  A                                                          1,153,007                 12,403              1,165,410       1,461,063
  BBB                                                          608,448                     47                608,495       1,150,420
Below investment grade                                         289,563                     --                289,563          26,293
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                                       $6,651,052                $50,022             $6,701,074      $6,391,969
====================================================================================================================================
</TABLE>


      At December 31, 1997 and December 31, 1996, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                  Net Replacement Value
                                                            ---------------------------------
                                                             Swaps and            Futures and                  Total           Total
                                                             Swaptions      Forward Contracts                   1997            1996
====================================================================================================================================
<S>                                                         <C>                       <C>                 <C>             <C>       
Non-U.S. banks                                              $2,213,366                $49,939             $2,263,305      $2,330,481
Insured municipalities                                         757,514                     --                757,514         656,373
U.S. industrials                                               513,958                     83                514,041         894,942
Governmental                                                   677,230                     --                677,230         894,284
Non-U.S. financial service companies                            64,787                     --                 64,787          34,383
Non-U.S. industrials                                         1,034,792                     --              1,034,792         497,839
Special purpose                                                163,109                     --                163,109         121,137
U.S. banks                                                     584,915                     --                584,915         251,641
U.S. financial service companies                               433,710                     --                433,710         534,965
Supranationals                                                 207,671                     --                207,671         175,924
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                                       $6,651,052                $50,022             $6,701,074      $6,391,969
====================================================================================================================================
</TABLE>



32

<PAGE>   34

                             American International Group, Inc. and Subsidiaries

      The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at December 31, 1997 and December 31, 1996. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the December 31,
1997 balances based upon the expected timing of the future cash flows.

      The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
1997 and December 31, 1996. These values do not represent the credit risk to
AIGTG.

      Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss.

      The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1997 and December 31, 1996:


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                        Remaining Life
                                                     --------------------------------------------------
                                                              One   Two Through  Six Through  After Ten         Total         Total
                                                             Year    Five Years    Ten Years      Years          1997          1996
====================================================================================================================================
<S>                                                  <C>            <C>           <C>          <C>       <C>           <C>         
Contractual amount of futures, forwards 
  and options:
  Exchange traded futures and options                $ 21,613,406   $ 2,931,347   $   34,545   $     --  $ 24,579,298  $ 17,004,692
====================================================================================================================================
  Forwards                                           $253,917,460   $12,347,787   $1,694,038   $     --  $267,959,285  $216,775,766
====================================================================================================================================
  Over the counter purchased options                 $ 39,756,245   $17,466,110   $2,932,703   $849,059  $ 61,004,117  $ 27,377,217
====================================================================================================================================
  Over the counter sold options (a)                  $ 48,398,996   $ 9,595,654   $  964,050   $134,771  $ 59,093,471  $ 31,049,529
====================================================================================================================================
Notional amount:
  Interest rate swaps and forward rate agreements    $ 60,017,945   $14,798,198   $2,376,472   $310,035  $ 77,502,650  $ 66,306,480
  Currency swaps                                          628,542     5,134,893      725,898         --     6,489,333     5,853,194
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                                $ 60,646,487   $19,933,091   $3,102,370   $310,035  $ 83,991,983  $ 72,159,674
====================================================================================================================================
Credit exposure:
  Futures, forwards and purchased options contracts 
    and interest rate and currency swaps:
      Gross replacement value                        $  9,330,966   $ 1,364,417   $  308,435   $ 15,899  $ 11,019,717   $ 7,489,766
      Master netting arrangements                      (5,277,129)     (442,284)     (70,963)    (7,935)   (5,798,311)   (3,872,291)
      Collateral                                         (135,303)      (73,991)     (15,384)        --      (224,678)     (149,347)
- ------------------------------------------------------------------------------------------------------------------------------------
Net replacement value (b)                            $  3,918,534   $   848,142   $  222,088    $ 7,964  $  4,996,728   $ 3,468,128
====================================================================================================================================
</TABLE>

(a)   Sold options obligate AIGTG to buy or sell the underlying item if the
      option purchaser chooses to exercise. The amounts do not represent credit
      exposure.
(b)   The net replacement values with respect to exchange traded futures and
      options, forward contracts and purchased over the counter options are
      presented as a component of trading assets in the accompanying balance
      sheet. The net replacement values with respect to interest rate and
      currency swaps are presented as a component of unrealized gain on interest
      rate and currency swaps, options and forward transactions in the
      accompanying balance sheet.


                                                                              33

<PAGE>   35

Management's Discussion and Analysis of
Financial Condition and Results of Operations  (CONTINUED)

      AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1997 and
December 31, 1996, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio was as follows:


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             Net Replacement Value
                                                                                                          --------------------------
                                                                                                                1997            1996
====================================================================================================================================
<S>                                                                                                       <C>             <C>       
Counterparty credit quality:
  AAA                                                                                                     $  752,741      $  447,236
  AA                                                                                                       2,503,289       1,075,713
  A                                                                                                        1,023,650       1,133,332
  BBB                                                                                                        342,695         518,485
  Below investment grade                                                                                      98,425         115,810
  Not externally rated, including exchange traded futures and options*                                       275,928         177,552
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                                                                                     $4,996,728      $3,468,128
====================================================================================================================================
Counterparty breakdown by industry:
  Non-U.S. banks                                                                                          $2,685,998      $1,269,399
  U.S. industrials                                                                                           163,484         761,634
  Governmental                                                                                               135,269         121,278
  Non-U.S. financial service companies                                                                       260,412         186,476
  Non-U.S. industrials                                                                                       167,835         192,669
  U.S. banks                                                                                                 560,388         309,154
  U.S. financial service companies                                                                           747,414         449,966
  Exchanges*                                                                                                 275,928         177,552
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                                                                                     $4,996,728      $3,468,128
====================================================================================================================================
</TABLE>

*     Exchange traded futures and options are not deemed to have significant
      credit exposure as the exchanges guarantee that every contract will be
      properly settled on a daily basis.

      Generally, AIG manages and operates its businesses in the currencies of
the local operating environment. Thus, exchange gains or losses occur when AIG's
foreign currency net investment is affected by changes in the foreign exchange
rates relative to the U.S. dollar from one reporting period to the next.

      As an end user, AIG and its subsidiaries, including its insurance
subsidiaries, use derivatives to aid in managing AIG's foreign exchange
translation exposure. Derivatives may also be used to minimize certain exposures
with respect to AIG's debt financing and insurance operations; to date, such
activities have not been significant.

      AIG, through its Foreign Exchange Operating Committee, evaluates each of
its worldwide consolidated foreign currency net asset or liability positions and
manages AIG's translation exposure to adverse movement in currency exchange
rates. AIG may use forward exchange contracts and purchase options where the
cost of such is reasonable and markets are liquid to reduce these exchange
translation exposures. The exchange gain or loss with respect to these hedging
instruments is recorded on an accrual basis as a component of the cumulative
translation adjustment account in capital funds.

      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.

Accounting Standards

In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (FASB 125).
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This statement
provides consistent standards for distinguishing transfer of financial assets
that are sales from transfers that are secured borrowings. FASB 125 was
effective January 1, 1997.

      In December 1996, FASB issued Statement of Financial Accounting Standards
No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" (FASB 127). FASB 127 delays the implementation of certain provisions of
FASB 125 for one year. AIG has adopted all requirements of FASB 125 herein.

      In February 1997, FASB issued Statement of Financial Accounting Standards
No. 128 "Earnings per Share" (FASB 128). This statement simplifies the existing
computational guidelines, revises the disclosure requirements and increases
earnings per share comparability on an international basis.

      AIG has adopted all requirements of FASB 128 herein and all prior period
information has been restated.


34

<PAGE>   36

                             American International Group, Inc. and Subsidiaries

      In February 1997, the Securities and Exchange Commission (SEC) issued
Financial Reporting Release No. 48 "Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments"(FRR No. 48).

      FRR No. 48 amends rules and forms for registrants and requires
clarification and expansion of existing disclosures for derivative financial
instruments, other financial instruments and derivative commodity instruments,
as defined therein. The amendments require enhanced disclosure with respect to
these derivative instruments in the footnotes to the financial statements.
Additionally, the amendments expand existing disclosure requirements to include
quantitative and qualitative discussions with respect to market risk inherent in
market risk sensitive instruments such as equity and fixed maturity securities,
as well as these derivative instruments. These amendments are designed to
provide additional information about market risk sensitive instruments which
investors can use to better understand and evaluate market risk exposures of
registrants, including AIG. FRR No. 48 has been adopted herein.

      In June 1997, FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" (FASB 130) and Statement of Financial
Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information" (FASB 131).

      FASB 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. FASB 130 is
effective for AIG as of January 1, 1998. FASB 130 will have no impact on AIG's
results of operations, financial condition or liquidity.

      FASB 131 establishes standards for the way AIG is required to disclose
certain information about its operating segments in its annual financial
statements and certain selected information in its interim financial statements.
FASB 131 establishes, where practicable, standards with respect to geographic
areas, among other things. Certain descriptive information is also required.
FASB 131 is effective for the year ended December 31, 1998.

Recent Developments

AIG is subject to the Year 2000 computer program issue. That is, certain of
AIG's computer systems, software products or other business systems may not
accept, input, store, or output dates in the years 1999, 2000 and thereafter
without error or interruption. If such a deficiency is not corrected, it is
possible that some applications could fail or create erroneous results by or at
the year 2000.

      AIG has already reviewed and identified its business systems, including
computer programs that are subject to such Year 2000 risk. Accordingly, AIG
commenced the remediation of such systems and such remediation and testing
thereof is anticipated to be complete in advance of the year 2000. The costs of
such remediation are expensed as incurred and are not material to AIG's results
of operations, financial condition or liquidity.

      AIG has also initiated formal communications to those non-AIG entities
which have significant transactions with AIG to coordinate the Year 2000
conversions.

      On January 1, 1999, certain of the member nations of the European Economic
and Monetary Union (EMU) will adopt a common currency, the Euro. Once the
national currencies are phased out, the Euro will be the sole legal tender of
each of these nations. During the transition period, commerce of these nations
will be transacted in the Euro or in the currently existing national currency.

      AIG has identified the significant issues and will be prepared with
respect to the phase in of and ultimate redenomination to the Euro. Any costs
associated with the adoption of the Euro are expensed as incurred and are not
material to AIG's results of operations, financial condition or liquidity.

      In January 1998, AIG purchased the 76.1 percent of the outstanding shares
of SELIC Holdings, Ltd. (SELIC) which AIG did not own. Prior to the purchase of
these shares, SELIC's operations were accounted for on an equity basis and
presented as a component of equity in income of minority-owned insurance
operations. Subsequent to the acquisition, SELIC will be consolidated as a
component of general insurance operations.


                                                                              35

<PAGE>   37


ITEM 8. Financial Statements and Supplementary Data

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
                                                              Page
- --------------------------------------------------------------------------------
<S>                                                            <C>
   Report of Independent Accountants                           37
   Consolidated Balance Sheet at
      December 31, 1997 and 1996                               38
   Consolidated Statement of Income for the
      years ended December 31, 1997, 1996
      and 1995                                                 40
   Consolidated Statement of Capital Funds
      for the years ended December 31, 1997,
      1996 and 1995                                            41
   Consolidated Statement of Cash Flows for
      the years ended December 31, 1997,
      1996 and 1995                                            42
   Notes to Financial Statements                               44

</TABLE>



<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
                                                              Page
- --------------------------------------------------------------------------------
<S>                                                             <C>
Schedules:
    I--Summary of Investments--Other Than
           Investments in Related
           Parties as of
           December 31, 1997                                  S-1
    II--Condensed Financial Information of
           Registrant as of December 31, 1997
           and 1996 and for the years ended
           December 31, 1997, 1996 and 1995                   S-2
    III--Supplementary Insurance Information as
           of December 31, 1997, 1996 and
           1995 and for the years then ended                  S-4
    IV--Reinsurance as of December 31, 1997,
           1996 and 1995 and for the years
           then ended                                         S-5
</TABLE>



36

<PAGE>   38


Report of Independent Accountants

The Board of Directors and Shareholders
American International Group, Inc.:

We have audited the consolidated financial statements and the financial
statement schedules of American International Group, Inc. and subsidiaries
listed in the index on page 36 of this Form 10-K. These financial statements
and financial statement schedules are the responsibility of the  Company's
management. Our responsibility is to express an opinion on these  financial
statements and financial statement schedules based on our audits.

      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
International Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.



                                                        COOPERS & LYBRAND L.L.P.
                                                        
                                                        New York, New York
                                                        February 10, 1998.



                                                                              37

<PAGE>   39

Consolidated Balance Sheet   American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,                                                                                                  1997              1996
====================================================================================================================================
<S>                                                                                                   <C>               <C>         
Assets:
  Investments and cash:
    Fixed maturities:
      Bonds available for sale, at market value (amortized cost: 1997-$36,568,360;
        1996-$34,243,127)                                                                             $ 38,077,792      $ 35,524,932
      Bonds held to maturity, at amortized cost (market value: 1997-$13,365,703;
        1996-$12,865,357)                                                                               12,530,315        12,258,978
      Bonds trading securities, at market value (cost: 1997-$699,614; 1996-$357,023)                       718,548           364,069
      Preferred stocks, at amortized cost (market value: 1997-$530,705; 1996-$591,091)                     239,331           477,247
    Equity securities:
      Common stocks (cost: 1997-$4,625,433; 1996-$4,993,799)                                             5,209,274         5,989,572
      Non-redeemable preferred stocks (cost: 1997-$138,412; 1996-$64,705)                                  138,745            76,068
    Mortgage loans on real estate, policy and collateral loans-net                                       7,919,764         7,876,820
    Financial services assets:
      Flight equipment primarily under operating leases, net of accumulated depreciation
        (1997-$1,657,313; 1996-$1,465,031)                                                              14,438,074        13,808,660
      Securities available for sale, at market value (cost: 1997-$9,145,244;
        1996-$9,775,705)                                                                                 9,145,317         9,785,909
      Trading securities, at market value                                                                3,974,561         2,357,812
      Spot commodities, at market value                                                                    459,517           204,705
      Unrealized gain on interest rate and currency swaps, options and forward transactions              7,422,290         6,906,012
      Trading assets                                                                                     6,715,486         3,793,433
      Securities purchased under agreements to resell, at contract value                                 4,551,191         1,642,591
    Other invested assets                                                                                4,681,423         2,915,302
    Short-term investments, at cost (approximates market value)                                          3,332,542         2,008,123
    Cash                                                                                                    86,917            58,740
- ------------------------------------------------------------------------------------------------------------------------------------
      Total investments and cash                                                                       119,641,087       106,048,973

  Investment income due and accrued                                                                      1,368,404         1,198,348
  Premiums and insurance balances receivable-net                                                        10,282,987         9,617,061
  Reinsurance assets                                                                                    16,110,521        16,526,566
  Deferred policy acquisition costs                                                                      6,592,506         6,471,357
  Investments in partially-owned companies                                                               1,121,173           951,352
  Real estate and other fixed assets, net of accumulated depreciation
    (1997-$1,512,617; 1996-$1,390,225)                                                                   2,342,187         2,122,762
  Separate and variable accounts                                                                         3,993,971         3,271,716
  Other assets                                                                                           2,517,851         2,222,867
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets                                                                                          $163,970,687      $148,431,002
====================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.


38

<PAGE>   40

Consolidated Balance Sheet  (CONTINUED)  

                             American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in thousands, except share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,                                                                                             1997                  1996
====================================================================================================================================
<S>                                                                                              <C>                   <C>         
Liabilities:
  Reserve for losses and loss expenses                                                           $ 33,400,160          $ 33,429,807
  Reserve for unearned premiums                                                                     8,739,006             7,598,928
  Future policy benefits for life and accident and health insurance contracts                      24,502,005            24,002,860
  Policyholders' contract deposits                                                                 10,323,112             9,803,409
  Other policyholders' funds                                                                        2,352,514             2,219,907
  Reserve for commissions, expenses and taxes                                                       1,739,945             1,511,122
  Insurance balances payable                                                                        1,702,578             1,832,649
  Funds held by companies under reinsurance treaties                                                  336,585               383,306
  Income taxes payable:
    Current                                                                                           585,375               201,978
    Deferred                                                                                          470,706               586,703
  Financial services liabilities:
    Borrowings under obligations of guaranteed investment agreements                                8,000,326             5,723,228
    Securities sold under agreements to repurchase, at contract value                               2,706,310             3,039,423
    Trading liabilities                                                                             5,366,421             3,313,508
    Securities and spot commodities sold but not yet purchased, at market value                     5,171,680             1,568,542
    Unrealized loss on interest rate and currency swaps, options and forward transactions           5,979,571             5,414,433
    Deposits due to banks and other depositors                                                        972,423             1,206,374
    Commercial paper                                                                                2,208,167             2,739,388
    Notes, bonds and loans payable                                                                 12,608,891            12,312,805
  Commercial paper                                                                                  1,166,740             1,758,588
  Notes, bonds, loans and mortgages payable                                                         1,276,521               986,505
  Separate and variable accounts                                                                    3,993,971             3,271,716
  Other liabilities                                                                                 5,966,553             3,081,599
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                                 139,569,560           125,986,778
- ------------------------------------------------------------------------------------------------------------------------------------

Preferred shareholders' equity in subsidiary company                                                  400,000               400,000
- ------------------------------------------------------------------------------------------------------------------------------------

Capital funds:
  Common stock, $2.50 par value; 1,000,000,000 shares authorized; shares issued
    1997-759,121,505; 1996-506,084,172                                                              1,897,804             1,265,210
  Additional paid-in capital                                                                          105,689               127,415
  Unrealized appreciation of investments, net of taxes                                              1,350,182             1,378,318
  Cumulative translation adjustments, net of taxes                                                 (1,178,041)             (493,218)
  Retained earnings                                                                                22,920,991            20,420,881
  Treasury stock; 1997-59,603,224; 1996-36,643,026 shares of common stock
    (including 41,726,541 and 27,817,986 shares, respectively, held by subsidiaries)               (1,095,498)             (654,382)
- ------------------------------------------------------------------------------------------------------------------------------------
Total capital funds                                                                                24,001,127            22,044,224
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and capital funds                                                              $163,970,687          $148,431,002
====================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.


                                                                              39

<PAGE>   41

Consolidated Statement of Income  

                             American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                   1997              1996              1995
====================================================================================================================================
<S>                                                                                 <C>               <C>               <C>         
General insurance operations:
  Net premiums written                                                              $13,407,529       $12,691,679       $11,893,022
  Change in unearned premium reserve                                                   (986,489)         (836,864)         (487,291)
- ------------------------------------------------------------------------------------------------------------------------------------
  Net premiums earned                                                                12,421,040        11,854,815        11,405,731
  Net investment income                                                               1,853,523         1,690,798         1,547,572
  Realized capital gains                                                                128,175            64,985            68,077
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                     14,402,738        13,610,598        13,021,380
- ------------------------------------------------------------------------------------------------------------------------------------
  Losses incurred                                                                     7,801,358         7,278,815         7,071,238
  Loss expenses incurred                                                              1,554,861         1,717,616         1,588,597
  Underwriting expenses (principally policy acquisition costs)                        2,574,653         2,408,600         2,329,259
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                     11,930,872        11,405,031        10,989,094
- ------------------------------------------------------------------------------------------------------------------------------------
  Operating income                                                                    2,471,866         2,205,567         2,032,286
- ------------------------------------------------------------------------------------------------------------------------------------
Life insurance operations:
  Premium income                                                                      9,925,639         8,978,246         8,038,150
  Net investment income                                                               2,896,469         2,675,881         2,264,905
  Realized capital gains                                                                 21,186            34,798            32,703
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                     12,843,294        11,688,925        10,335,758
- ------------------------------------------------------------------------------------------------------------------------------------
  Death and other benefits                                                            4,052,180         3,733,523         3,348,058
  Increase in future policy benefits                                                  4,759,018         4,370,055         3,739,976
  Acquisition and insurance expenses                                                  2,460,613         2,261,589         2,157,119
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                     11,271,811        10,365,167         9,245,153
- ------------------------------------------------------------------------------------------------------------------------------------
  Operating income                                                                    1,571,483         1,323,758         1,090,605
- ------------------------------------------------------------------------------------------------------------------------------------
Financial services operating income                                                     701,337           523,906           417,741
- ------------------------------------------------------------------------------------------------------------------------------------
Equity in income of minority-owned insurance operations                                 113,636            99,359            81,722
- ------------------------------------------------------------------------------------------------------------------------------------
Other realized capital losses                                                           (30,846)          (11,792)          (28,946)
- ------------------------------------------------------------------------------------------------------------------------------------
Minority interest                                                                       (31,926)          (43,226)          (36,317)
- ------------------------------------------------------------------------------------------------------------------------------------
Other income (deductions)-net                                                           (96,652)          (84,350)          (91,208)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes                                                            4,698,898         4,013,222         3,465,883
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefits):
  Current                                                                             1,273,439         1,070,868         1,025,774
  Deferred                                                                               93,124            45,097           (70,274)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                      1,366,563         1,115,965           955,500
- ------------------------------------------------------------------------------------------------------------------------------------
Net income                                                                          $ 3,332,335       $ 2,897,257       $ 2,510,383 
====================================================================================================================================
Earnings per common share:
  Basic                                                                                   $4.75             $4.10             $3.53
  Diluted                                                                                  4.73              4.08              3.52
====================================================================================================================================
Average shares outstanding:
  Basic                                                                                 701,930           706,568           711,033
  Diluted                                                                               704,984           709,316           713,512
====================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.


40

<PAGE>   42

Consolidated Statement of Capital Funds

                             American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                   1997              1996              1995
====================================================================================================================================
<S>                                                                                 <C>               <C>                 <C>      
Common stock:
  Balance at beginning of year                                                      $ 1,265,210       $ 1,265,210         $ 843,477
    Stock split effected as dividend                                                    632,594                --           421,733
- ------------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                              1,897,804         1,265,210         1,265,210
- ------------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
  Balance at beginning of year                                                          127,415           131,828           565,410
    Excess of cost over proceeds of common stock issued
      under stock option and stock purchase plans                                       (29,659)          (15,439)          (15,097)
    Stock split effected as dividend                                                         --                --          (421,733)
    Other                                                                                 7,933            11,026             3,248
- ------------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                                105,689           127,415           131,828
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of investments, net of taxes:
  Balance at beginning of year                                                        1,378,318         1,395,064           184,556
    Changes during year                                                                (116,981)            8,872         1,809,365
    Deferred income tax benefit (expense) on changes                                     88,845           (25,618)         (598,857)
- ------------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                              1,350,182         1,378,318         1,395,064
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustments, net of taxes:
  Balance at beginning of year                                                         (493,218)         (456,072)         (288,074)
    Changes during year                                                                (753,808)          (66,993)         (156,523)
    Applicable income tax benefit (expense) on changes                                   68,985            29,847           (11,475)
- ------------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                             (1,178,041)         (493,218)         (456,072)
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings:
  Balance at beginning of year                                                       20,420,881        17,697,739        15,340,928
    Net income                                                                        3,332,335         2,897,257         2,510,383
    Stock dividends to shareholders                                                    (632,594)               --                --
    Cash dividends to shareholders:
      Common ($.28, $.25 and $.21 per share, respectively)                             (199,631)         (174,115)         (153,572)
- ------------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                             22,920,991        20,420,881        17,697,739
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock, at cost:
  Balance at beginning of year                                                         (654,382)         (206,666)         (224,636)
    Cost of shares acquired during year                                                (507,707)         (493,872)          (17,646)
    Issued under stock option and stock purchase plans                                   66,227            38,452            35,616
    Other                                                                                   364             7,704                --
- ------------------------------------------------------------------------------------------------------------------------------------
  Balance at end of year                                                             (1,095,498)         (654,382)         (206,666)
- ------------------------------------------------------------------------------------------------------------------------------------
Total capital funds at end of year                                                  $24,001,127       $22,044,224       $19,827,103
====================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.


                                                                              41

<PAGE>   43

Consolidated Statement of Cash Flows

                             American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                   1997              1996              1995
====================================================================================================================================
<S>                                                                                 <C>              <C>               <C>         
Summary:
  Net cash provided by operating activities                                         $ 3,034,988      $  9,574,907      $  6,693,625
  Net cash used in investing activities                                              (4,855,533)      (14,455,657)      (11,218,986)
  Net cash provided by financing activities                                           1,848,722         4,851,119         4,537,495
- ------------------------------------------------------------------------------------------------------------------------------------
  Change in cash                                                                         28,177           (29,631)           12,134
  Cash at beginning of year                                                              58,740            88,371            76,237
- ------------------------------------------------------------------------------------------------------------------------------------
  Cash at end of year                                                               $    86,917      $     58,740      $     88,371
====================================================================================================================================

Cash flows from operating activities:
  Net income                                                                        $ 3,332,335      $  2,897,257      $  2,510,383
- ------------------------------------------------------------------------------------------------------------------------------------
  Adjustments to reconcile net income to net cash provided by operating
    activities:
      Non-cash revenues, expenses, gains and losses included in income: 
      Change in:
        General and life insurance reserves                                           1,767,124         4,130,962         5,182,203
        Premiums and insurance balances receivable and payable-net                     (795,997)         (260,630)         (184,120)
        Reinsurance assets                                                              416,045           351,589          (588,548)
        Deferred policy acquisition costs                                              (121,149)         (703,784)         (635,328)
        Investment income due and accrued                                              (170,056)           14,600          (284,997)
        Funds held under reinsurance treaties                                           (46,721)           38,614           (38,161)
        Other policyholders' funds                                                      132,607           127,742           140,807
        Current and deferred income taxes-net                                           476,521           (78,038)         (165,730)
        Reserve for commissions, expenses and taxes                                     228,823           253,876           (61,937)
        Other assets and liabilities-net                                                467,683          (394,168)          511,489
        Trading assets and liabilities-net                                             (869,140)          (56,439)           97,985
        Trading securities, at market value                                          (1,616,749)          283,624          (157,799)
        Spot commodities, at market value                                              (254,812)          178,669           533,459
        Net unrealized gain on interest rate and currency swaps,
          options and forward transactions                                               48,860          (130,914)         (369,372)
        Securities purchased under agreements to resell                              (2,908,600)          379,465          (812,653)
        Securities sold under agreements to repurchase                                 (333,113)        1,659,551            37,808
        Securities and spot commodities sold but not yet
          purchased, at market value                                                  3,603,138           364,156           642,399
      Realized capital gains                                                           (118,515)          (87,992)          (71,834)
      Equity in income of partially-owned companies and other invested assets          (157,408)         (152,946)         (119,116)
      Depreciation expenses, principally flight equipment                               872,905           805,581           734,560
      Change in cumulative translation adjustments                                     (753,807)          (66,993)         (156,523)
      Other-net                                                                        (164,986)           21,125           (51,350)
- ------------------------------------------------------------------------------------------------------------------------------------
      Total adjustments                                                                (297,347)        6,677,650         4,183,242
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                           $ 3,034,988      $  9,574,907      $  6,693,625
====================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.


42

<PAGE>   44

Consolidated Statement of Cash Flows  (CONTINUED)

                             American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                   1997              1996              1995
====================================================================================================================================
<S>                                                                                <C>               <C>               <C>         
Cash flows from investing activities:
    Cost of fixed maturities, at amortized cost matured or redeemed                $  1,225,643      $  1,626,925      $  1,111,864
    Cost of bonds, at market sold                                                     9,308,031         9,514,381         7,633,674
    Cost of bonds, at market matured or redeemed                                      3,775,047         2,480,629         2,695,319
    Cost of equity securities sold                                                    2,261,655         2,758,264         2,517,697
    Realized capital gains                                                              118,515            87,992            71,834
    Purchases of fixed maturities                                                   (16,921,756)      (19,511,037)      (16,947,508)
    Purchases of equity securities                                                   (1,915,806)       (3,218,375)       (2,588,994)
    Mortgage, policy and collateral loans granted                                    (2,242,980)       (3,276,378)       (3,488,856)
    Repayments of mortgage, policy and collateral loans                               2,200,035         3,260,090           902,378
    Sales of securities available for sale                                            4,310,088         2,061,776         1,896,109
    Maturities of securities available for sale                                       3,232,530         1,603,215         1,183,742
    Purchases of securities available for sale                                       (6,915,594)       (9,530,755)       (3,210,125)
    Sales of flight equipment                                                         2,230,586         1,362,632         1,158,151
    Purchases of flight equipment                                                    (3,435,274)       (3,254,344)       (3,279,356)
    Net additions to real estate and other fixed assets                                (517,056)         (581,221)         (340,563)
    Sales or distributions of other invested assets                                   1,274,229         1,197,620           294,855
    Investments in other invested assets                                             (1,478,658)       (1,262,910)         (970,580)
    Change in short-term investments                                                 (1,324,419)          264,405           194,925
    Investments in partially-owned companies                                            (40,349)          (38,566)          (53,552)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                              $ (4,855,533)     $(14,455,657)     $(11,218,986)
====================================================================================================================================
Cash flows from financing activities:
    Change in policyholders' contract deposits                                     $  1,014,703      $    222,426      $  3,093,557
    Change in deposits due to banks and other depositors                               (233,951)          248,933           301,468
    Change in commercial paper                                                       (1,123,069)        1,331,341          (622,924)
    Proceeds from notes, bonds, loans and mortgages payable                           7,604,295         6,150,471         6,115,546
    Repayments on notes, bonds, loans and mortgages payable                          (7,015,646)       (2,775,482)       (4,290,938)
    Liquidation of zero coupon notes payable                                            (12,235)               --                --
    Proceeds from guaranteed investment agreements                                    4,930,022         3,583,158         2,940,563
    Maturities of guaranteed investment agreements                                   (2,652,924)       (3,283,485)       (3,052,326)
    Proceeds from subsidiary company preferred stock issued                                  --              (131)          197,144
    Proceeds from common stock issued                                                    36,568            23,013            20,519
    Cash dividends to shareholders                                                     (199,631)         (174,115)         (153,572)
    Acquisition of treasury stock                                                      (507,707)         (493,872)          (17,646)
    Other-net                                                                             8,297            18,862             6,104
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                          $  1,848,722      $  4,851,119      $  4,537,495
====================================================================================================================================
Supplementary information:
Taxes paid                                                                         $    807,800      $  1,068,500      $  1,065,700
====================================================================================================================================
Interest paid                                                                      $  1,733,900      $  1,594,700      $  1,318,700
====================================================================================================================================
</TABLE>


See Accompanying Notes to Financial Statements.


                                                                              43

<PAGE>   45

Notes to Financial Statements

1. Summary of Significant Accounting Policies

(a) Principles of Consolidation: The consolidated financial statements include
the accounts of American International Group, Inc. and all significant
subsidiaries (AIG). Some of AIG's foreign subsidiaries report on a fiscal year
ending November 30. All material intercompany accounts and transactions have
been eliminated.

      (b) Basis of Presentation: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Certain accounts have been reclassified in the 1996 and 1995 financial
statements to conform to their 1997 presentation.

      General Insurance Operations: AIG's general insurance subsidiaries are
multiple line companies writing substantially all lines of property and casualty
insurance. One or more of these companies is licensed to write substantially all
of these lines in all states of the United States and in more than 100 foreign
countries. Premiums are earned primarily on a pro rata basis over the term of
the related coverage. The reserve for unearned premiums represents the portion
of premiums written relating to the unexpired terms of coverage.

      Acquisition costs are deferred and amortized over the period in which the
related premiums written are earned. Investment income is not anticipated in the
deferral of acquisition costs. (See Note 4.)

      Losses and loss expenses are charged to income as incurred. The reserve
for losses and loss expenses represents the accumulation of estimates for
reported losses and includes provisions for losses incurred but not reported.
The methods of determining such estimates and establishing resulting reserves,
including amounts relating to reserves for estimated unrecoverable reinsurance,
are continually reviewed and updated. Adjustments resulting therefrom are
reflected in income currently. AIG does not discount its loss reserves, other
than for minor amounts related to certain workers' compensation claims. (See
Note 6.)

      Life Insurance Operations: AIG's life insurance subsidiaries offer a wide
range of traditional insurance and financial and investment products. One or
more of these subsidiaries is licensed to write life insurance in all states of
the United States and in over 70 foreign countries. Traditional products consist
of individual and group life, annuity, and accident and health policies.
Financial and investment products consist of single premium annuity, variable
annuities, guaranteed investment contracts and universal life. Premiums for
traditional life insurance products are generally recognized as revenues over
the premium paying period of the related policies. Benefits and expenses are
provided against such revenues to recognize profits over the estimated life of
the policies. Revenues for universal life and investment-type products consist
of policy charges for the cost of insurance, administration, and surrenders
during the period. Expenses include interest credited to policy account balances
and benefit payments made in excess of policy account balances. Investment
income reflects certain minor amounts of realized capital gains where the gains
are deemed to be an inherent element in pricing certain life products in some
foreign countries.

      Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the policy.
Deferred policy acquisition costs and policy initiation costs related to
universal life and investment-type products are amortized in relation to
expected gross profits over the life of the policies. (See Note 4.)

      The liabilities for future policy benefits and policyholders' contract
deposits are established using assumptions described in Note 6.

      Financial Services Operations: AIG participates in the derivatives dealer
market conducting, primarily as principal, an interest rate, currency, equity
and credit derivative products business. AIG also enters into structured
transactions including long-dated forward foreign exchange contracts, option
transactions, liquidity facilities and investment agreements and invests in a
diversified portfolio of securities.

      AIG engages in market making and trading activities, as principal, in
foreign exchange, interest rates and precious and base metals. AIG owns
inventories in the commodities in which it trades and may reduce the exposure to
market risk through the use of swaps, forwards, futures and option contracts.

      AIG, as lessor, leases flight equipment principally under operating
leases. Accordingly, income is reported over the life of the lease as rentals
become receivable under the provisions of the lease or, in the case of leases
with varying payments, under the straight-line method over the noncancelable
term of the lease. In certain cases, leases provide for additional amounts
contingent on usage. AIG is also a remarketer of flight equipment for its own
account and for airlines and financial institutions. AIG's revenues from such
operations consist of net gains on sales of flight equipment and commissions.

      (c) Investments in Fixed Maturities and Equity Securities: Bonds and
preferred stocks held to maturity, both of which are principally owned by the
insurance subsidiaries, are carried at amortized cost where AIG has the ability
and positive intent to hold these securities until maturity. Where AIG may not
have the positive intent to hold these securities until maturity, those bonds
are considered to be available for sale and carried at current market values.
Interest income with respect to fixed maturity securities is accrued currently.

      Included in the bonds available for sale are collateralized mortgage
obligations (CMOs). Premiums and discounts arising from the purchase of CMOs are
treated as yield adjustments over their estimated life. Bond trading securities
are carried at current market values, as it is AIG's intention to sell these
securities in the near term. Common and non-redeemable 


44

<PAGE>   46

                             American International Group, Inc. and Subsidiaries

1. Summary of Significant Accounting Policies (continued)

preferred stocks are carried at current market values. Dividend income is
generally recognized when payable.

      Unrealized gains and losses from investments in equity securities and
fixed maturities available for sale are reflected in capital funds currently,
net of any related deferred income taxes. Unrealized gains and losses from
investments in trading securities are reflected in income currently.

      Realized capital gains and losses are determined principally by specific
identification. Where declines in values of securities below cost or amortized
cost are considered to be other than temporary, a charge is reflected in income
for the difference between amortized cost and estimated net realizable value.

      (d) Mortgage Loans on Real Estate, Policy and Collateral Loans--net:
Mortgage loans on real estate, policy loans and collateral loans are carried at
unpaid principal balances. Interest income on such loans is accrued currently.

      Impairment of mortgage loans on real estate and collateral loans is
generally measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate subject to the fair value of
underlying collateral. Interest income on such loans is recognized as cash is
received.

      (e) Flight Equipment: Flight equipment is stated at cost. Major additions
and modifications are capitalized. Normal maintenance and repairs, airframe and
engine overhauls and compliance with return conditions of flight equipment on
lease are provided by and paid for by the lessee. Under the provisions of most
leases for certain airframe and engine overhauls, the lessee is reimbursed for
costs incurred up to but not exceeding contingent rentals paid to AIG by the
lessee. AIG provides a charge to income for such reimbursements based upon the
expected reimbursements during the life of the lease. Depreciation and
amortization are computed on the straight-line basis to a residual value of
approximately 15 percent over the estimated useful lives of the related assets
but not exceeding 25 years. This caption also includes deposits for aircraft to
be purchased.

      At the time the assets are retired or disposed of, the cost and associated
accumulated depreciation and amortization are removed from the related accounts
and the difference, net of proceeds, is recorded as a gain or loss.

      (f) Securities Available for Sale, at market value: These securities are
held to meet long term investment objectives and are accounted for as available
for sale, carried at current market values and recorded on a trade date basis.
Unrealized gains and losses from valuing these securities and any related hedges
are reflected in capital funds currently, net of any related deferred income
taxes. When the underlying security is sold, the realized loss or gain resulting
from the hedging derivative transaction is recognized in income in that same
period as the realized gain or loss of the hedged security.

      (g) Trading Securities, at market value: Trading securities are held to
meet short term investment objectives, including hedging securities. These
securities are recorded on a trade date basis and carried at current market
values. Unrealized gains and losses are reflected in income currently.

      (h) Spot Commodities, at market value: Spot commodities are carried at
current market values and are recorded on a settlement date basis. The exposure
to market risk may be reduced through the use of forwards, futures and option
contracts. Unrealized gains and losses of both commodities and any derivative
transactions are reflected in income currently.

      (i) Unrealized Gain and Unrealized Loss on Interest Rate and Currency
Swaps, Options and Forward Transactions: Swaps, options and forward transactions
are accounted for as contractual commitments recorded on a trade date basis and
are carried at current market values or estimated fair values when market values
are not available. Unrealized gains and losses are reflected in income
currently. Estimated fair values are based on the use of valuation models that
utilize, among other things, current interest, foreign exchange and volatility
rates. These valuations represent an assessment of the present values of
expected future cash flows of these transactions and may include reserves for
market risk as deemed appropriate. The portfolio's discounted cash flows are
evaluated with reference to current market conditions, maturities within the
portfolio and other relevant factors. Based upon this evaluation, it is
determined what offsetting transactions, if any, are necessary to reduce the
market risk of the portfolio. AIG manages its market risk with a variety of
transactions, including swaps, trading securities, futures contracts and other
transactions as appropriate. Because of the limited liquidity of some of these
instruments, the recorded values of these transactions may be different than the
values that might be realized if AIG were to sell or close out the transactions
prior to maturity. AIG believes that such differences are not significant to the
results of operations, financial condition or liquidity.

      (j) Trading Assets and Trading Liabilities: Trading assets and trading
liabilities include option premiums paid and received and receivables from and
payables to counterparties which relate to unrealized gains and losses on
futures, forwards and options and balances due from and due to clearing brokers
and exchanges.

      Futures, forwards and options purchased and written are accounted for as
contractual commitments on a trade date basis and are carried at fair values.
Unrealized gains and losses are reflected in income currently. The fair values
of futures contracts are based on closing exchange quotations. Commodity forward
transactions are carried at fair values derived from dealer quotations and
underlying commodity exchange quotations. For long dated forward transactions,
where there are no dealer or exchange quotations, fair values are derived using
internally developed valuation methodologies based on available market
information. Options are carried at fair values based on 


                                                                              45

<PAGE>   47

Notes to Financial Statements (CONTINUED)

1. Summary of Significant Accounting Policies (continued)

the use of valuation models that utilize, among other things, current interest
or commodity rates and foreign exchange and volatility rates, as applicable.

      (k) Securities Purchased (Sold) Under Agreements to Resell (Repurchase),
at contract value: Purchases of securities under agreements to resell and sales
of securities under agreements to repurchase are accounted for as collateralized
transactions and are recorded at their contracted resale or repurchase amounts,
plus accrued interest. Generally, it is AIG's policy to take possession of or
obtain a security interest in securities purchased under agreements to resell.

      AIG minimizes the credit risk that counterparties to transactions might be
unable to fulfill their contractual obligations by monitoring customer credit
exposure and collateral value and generally requiring additional collateral to
be deposited with AIG when deemed necessary.

      (l) Other Invested Assets: Other invested assets consist primarily of
investments by AIG's insurance operations in joint ventures and partnerships and
other investments not classified elsewhere herein. The joint ventures and
partnerships are carried at equity or cost depending on the nature of the
invested asset and the ownership percentage thereof. Other investments are
carried at cost or market values depending upon the nature of the underlying
assets. Unrealized gains and losses from the revaluation of those investments
carried at market values are reflected in capital funds, net of any related
deferred income taxes.

      (m) Reinsurance Assets: Reinsurance assets include the balances due from
both reinsurance and insurance companies under the terms of AIG's reinsurance
arrangements for paid and unpaid losses and loss expenses, ceded unearned
premiums and ceded future policy benefits for life and accident and health
insurance contracts and benefits paid and unpaid. It also includes funds held
under reinsurance treaties.

      (n) Investments in Partially-Owned Companies: The equity method of
accounting is used for AIG's investment in companies in which AIG's ownership
interest approximates twenty but is not greater than fifty percent
(minority-owned companies). Equity in income of minority-owned insurance
operations is presented separately in the consolidated statement of income.
Equity in realized capital gains of such companies is included in other realized
capital gains (losses). Equity in net income of other unconsolidated companies
is principally included in other income (deductions)-net. At December 31, 1997,
AIG's significant investments in partially-owned companies included its 49.0
percent interest in Transatlantic Holdings, Inc. (Transatlantic), which derives
approximately 14 percent of its assumed reinsurance from AIG subsidiaries; its
19.9 percent interest in Richmond Insurance Company; its 23.9 percent interest
in SELIC Holdings, Ltd; and its 24.4 percent interest in IPC Holdings, Ltd. This
balance sheet caption also includes investments in less significant
partially-owned companies and in certain minor majority-owned subsidiaries. At
December 31, 1997, the market value of AIG's investment in Transatlantic
exceeded its carrying value by approximately $519.5 million. The amount of
dividends received from unconsolidated subsidiaries owned less than 50 percent
were $29,978,000, $13,431,000 and $6,515,000 in 1997, 1996 and 1995
respectively. The undistributed earnings of unconsolidated subsidiaries owned
less than 50 percent was $563,592,000 as of December 31, 1997.

      In January 1998, AIG purchased the 76.1 percent of the outstanding shares
of SELIC Holdings, Ltd. (SELIC) which AIG did not own. Prior to the purchase of
these shares, SELIC's operations were accounted for on an equity basis and
presented as a component of equity in income of minority-owned insurance
operations. Subsequent to the acquisition, SELIC will be consolidated as a
component of general insurance operations.

      (o) Real Estate and Other Fixed Assets: The costs of buildings and
furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 40 years for buildings and 10
years for furniture and equipment). Expenditures for maintenance and repairs are
charged to income as incurred; expenditures for betterments are capitalized and
depreciated.

      (p) Separate and Variable Accounts: Separate and variable accounts
represent funds for which investment income and investment gains and losses
accrue directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of each
account are legally segregated and are not subject to claims which arise out of
any other business of AIG.

      (q) Securities and Spot Commodities Sold but not yet Purchased, at market
value: Securities and spot commodities sold but not yet purchased represent
sales of securities and spot commodities not owned at the time of sale.
Securities are recorded on a trade date basis and are carried at current market
values. Spot commodities are carried at current market values based upon current
commodity prices. Unrealized gains and losses are reflected in income currently.

      (r) Preferred Shareholders' Equity in Subsidiary Company: Preferred
shareholders' equity in subsidiary company relates to outstanding market auction
preferred stock of International Lease Finance Corporation (ILFC), a wholly
owned subsidiary of AIG. Dividends on such preferred stock are accounted for as
interest expense and included as minority interest in the consolidated statement
of income.

      (s) Translation of Foreign Currencies: Financial statement accounts
expressed in foreign currencies are translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" (FASB 52). Under FASB 52, functional currency assets and
liabilities are translated into U.S. dollars generally using current rates of
exchange and the related translation adjustments are recorded as a separate
component of capital funds net of any related taxes. Functional currencies are
generally the currencies of the local operating environment. Income statement
accounts expressed in 


46

<PAGE>   48

                             American International Group, Inc. and Subsidiaries

1. Summary of Significant Accounting Policies (continued)

functional currencies are translated using average exchange rates. The
adjustments resulting from translation of financial statements of foreign
entities operating in highly inflationary economies are recorded in income.
Exchange gains and losses resulting from foreign currency transactions are also
recorded in income currently. The exchange gain or loss with respect to
utilization of foreign exchange hedging instruments is recorded as a component
of capital funds.

      (t) Income Taxes: Deferred federal and foreign income taxes are provided
for temporary differences for the expected future tax consequences of events
that have been recognized in AIG's financial statements or tax returns.

      (u) Earnings Per Share: Basic earnings per common share are based on the
weighted average number of common shares outstanding, retroactively adjusted to
reflect all stock dividends and stock splits. Diluted earnings per share are
based on those shares used in basic earnings per share plus shares that would
have been outstanding assuming issuance of common shares for all dilutive
potential common shares outstanding, retroactively adjusted to reflect all stock
dividends and stock splits.

      The computation of earnings per share for December 31, 1997, 1996 and 1995
was as follows:


<TABLE>
<CAPTION>
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Years Ended December 31,                       1997          1996          1995
================================================================================
<S>                                      <C>           <C>           <C>       
Numerator:
Net income applicable
  to common stock                        $3,332,335    $2,897,257    $2,510,383
================================================================================
Denominator:
Average outstanding shares used
  in the computation of per share
  earnings:
    Common stock issued                     759,124       759,126       759,128
    Common stock in treasury                (57,194)      (52,558)      (48,095)
- --------------------------------------------------------------------------------
Average outstanding shares-basic            701,930       706,568       711,033
================================================================================
  Stock options (treasury stock method)       3,025         2,716         2,452
  Stock purchase plan                            29            32            27
- --------------------------------------------------------------------------------
Average outstanding shares-diluted          704,984       709,316       713,512
================================================================================
Earnings per share:
Basic                                         $4.75         $4.10         $3.53
Diluted                                        4.73          4.08          3.52
================================================================================
</TABLE>


      (v) Accounting Standards: In June 1996, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (FASB 125). This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. This statement provides consistent standards for distinguishing
transfer of financial assets that are sales from transfers that are secured
borrowings. FASB 125 was effective January 1, 1997.

      In December 1996, FASB issued Statement of Financial Accounting Standards
No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" (FASB 127). FASB 127 delays the implementation of certain provisions of
FASB 125 for one year. AIG has adopted all requirements of FASB 125 herein.

      In February 1997, FASB issued Statement of Financial Accounting Standards
No. 128 "Earnings per Share" (FASB 128). This statement simplifies the existing
computational guidelines, revises the disclosure requirements and increases
earnings per share comparability on an international basis.

      AIG has adopted all requirements of FASB 128 herein and all prior period
information has been restated.

      In February 1997, the Securities and Exchange Commission (SEC) issued
Financial Reporting Release No. 48 "Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments" (FRR No. 48).

      FRR No. 48 amends rules and forms for registrants and requires
clarification and expansion of existing disclosures for derivative financial
instruments, other financial instruments and derivative commodity instruments,
as defined therein. The amendments require enhanced disclosure with respect to
these derivative instruments in the footnotes to the financial statements.
Additionally, the amendments expand existing disclosure requirements to include
quantitative and qualitative discussions with respect to market risk inherent in
market risk sensitive instruments such as equity and fixed maturity securities,
as well as these derivative instruments. These amendments are designed to
provide additional information about market risk sensitive instruments which
investors can use to better understand and evaluate market risk exposures of
registrants, including AIG. FRR No. 48 has been adopted herein.

      In June 1997, FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" (FASB 130) and Statement of Financial
Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information" (FASB 131).

      FASB 130 establishes standards for reporting comprehensive income and its
components in a full set of general purpose financial statements. FASB 130 is
effective for AIG as of January 1, 1998. FASB 130 will have no impact on AIG's
results of operations, financial condition or liquidity.

      FASB 131 establishes standards for the way AIG is required to disclose
information about its operating segments in its annual financial statements and
selected information in its interim financial statements. FASB 131 establishes,
where practicable, standards with respect to geographic areas, among other


                                                                              47

<PAGE>   49

Notes to Financial Statements (CONTINUED)

1. Summary of Significant Accounting Policies (continued)

things. Certain descriptive information is also required. FASB 131 is effective
for the year ended December 31, 1998.

2. Foreign Operations

Certain subsidiaries operate solely outside of the United States. Their assets
and liabilities are located principally in the countries where the insurance
risks are written and/or investment and non-insurance related operations are
located. In addition, certain of AIG's domestic subsidiaries have branch and/or
subsidiary operations and substantial assets and liabilities in foreign
countries. Certain countries have restrictions on the conversions of funds which
generally cause a delay in the outward remittance of such funds. Approximately
36 percent and 38 percent of consolidated assets at December 31, 1997 and 1996,
respectively, and 54 percent of revenues for each of the years ended December
31, 1997, 1996 and 1995, respectively, were located in or derived from foreign
countries (other than Canada). (See Note 17.)

3. Federal Income Taxes

(a) AIG and its domestic subsidiaries file a consolidated U.S. Federal income
tax return. Revenue Agent's Reports assessing additional taxes for the years
1987, 1988, 1989 and 1990 have been issued and Letters of Protest contesting the
assessments have been filed with the Internal Revenue Service. It is
management's belief that there are substantial arguments in support of the
positions taken by AIG in its Letters of Protest. Management also believes that
the final result of these examinations will be immaterial to the financial
statements.

      Foreign income not expected to be taxed in the United States has arisen
because AIG's foreign subsidiaries were generally not subject to U.S. income
taxes on income earned prior to January 1, 1987. Such income would become
subject to U.S. income taxes at current tax rates if remitted to the United
States or if other events occur which would make these amounts currently
taxable. The cumulative amount of translated undistributed earnings of AIG's
foreign subsidiaries currently not subject to U.S. income taxes was
approximately $2.9 billion at December 31, 1997. Management presently has not
subjected and has no intention of subjecting these accumulated earnings to
material U.S. income taxes and no provision has been made in the accompanying
financial statements for such taxes.

      (b) The U.S. Federal income tax rate is 35 percent for 1997, 1996 and
1995. Actual tax expense on income differs from the "expected" amount computed
by applying the Federal income tax rate because of the following:


<TABLE>
<CAPTION>
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                     1997                       1996                         1995
                                                  -------------------------  --------------------------  ---------------------------
                                                                   Percent                     Percent                      Percent
                                                                of pre-tax                  of pre-tax                   of pre-tax
                                                      Amount        income         Amount       income         Amount        income
====================================================================================================================================
<S>                                               <C>                 <C>    <C>                  <C>    <C>                   <C>  
"Expected" tax expense                            $1,644,614          35.0%  $1,404,627           35.0%  $1,213,059            35.0%
Adjustments:
  Tax exempt interest                               (286,824)         (6.1)    (278,545)          (6.9)    (274,090)           (7.9)
  Dividends received deduction                       (14,812)         (0.3)     (23,790)          (0.6)     (18,583)           (0.5)
  State income taxes                                  30,668           0.7       46,925            1.2       48,579             1.4
  Foreign income not expected to be
    taxed in the U.S., less foreign 
    income taxes                                     (21,602)         (0.5)      (6,619)          (0.2)      (5,010)           (0.1)
  Other                                               14,519           0.3      (26,633)          (0.7)      (8,455)           (0.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Actual tax expense                                $1,366,563          29.1%  $1,115,965           27.8%  $  955,500            27.6%
====================================================================================================================================
Foreign and domestic components of 
  actual tax expense:
  Foreign:
    Current                                       $  316,738                 $  391,791                  $  341,998
    Deferred                                          74,952                     (1,333)                     45,685
  Domestic*:
    Current                                          956,701                    679,077                     683,776
    Deferred                                          18,172                     46,430                    (115,959)
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                             $1,366,563                 $1,115,965                  $  955,500
====================================================================================================================================
</TABLE>

*     Including U.S. tax on foreign income.


48

<PAGE>   50

                             American International Group, Inc. and Subsidiaries

3. Federal Income Taxes (continued)

(c) The components of the net deferred tax liability as of December 31, 1997 and
December 31, 1996 were as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                             1997           1996
================================================================================
<S>                                                    <C>            <C>       
Deferred tax assets:
  Loss reserve discount                                $1,234,502     $1,236,858
  Unearned premium reserve reduction                      322,332        312,819
  Accruals not currently deductible                       505,376        385,892
  Adjustment to life policy reserves                      650,032        638,702
  Cumulative translation adjustment                       115,926         50,152
  Other                                                    17,665          9,122
- --------------------------------------------------------------------------------
                                                        2,845,833      2,633,545
- --------------------------------------------------------------------------------
Deferred tax liabilities:
  Deferred policy acquisition costs                     1,386,970      1,338,501
  Financial service products
    mark to market differential                           144,229        153,265
  Depreciation of flight equipment                        942,861        819,375
  Acquisition net asset basis adjustments                 118,839        175,698
  Unrealized appreciation of investments                  592,860        681,705
  Other                                                   130,780         51,704
- --------------------------------------------------------------------------------
                                                        3,316,539      3,220,248
- --------------------------------------------------------------------------------
Net deferred tax liability                             $  470,706     $  586,703
================================================================================
</TABLE>


4. Deferred Policy Acquisition Costs

The following reflects the policy acquisition costs deferred for amortization
against future income and the related amortization charged to income for general
and life insurance operations, excluding certain amounts deferred and amortized
in the same period:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,                       1997          1996          1995
================================================================================
<S>                                      <C>           <C>           <C>       
General insurance operations:
  Balance at beginning of year           $1,415,849    $1,289,788    $1,179,494
- --------------------------------------------------------------------------------
  Acquisition costs deferred
    Commissions                             592,193       591,708       570,180
    Other                                   845,169       714,491       648,154
- --------------------------------------------------------------------------------
                                          1,437,362     1,306,199     1,218,334
- --------------------------------------------------------------------------------
  Amortization charged to income
    Commissions                             552,493       557,092       590,415
    Other                                   663,507       623,046       517,625
- --------------------------------------------------------------------------------
                                          1,216,000     1,180,138     1,108,040
- --------------------------------------------------------------------------------
  Balance at end of year                 $1,637,211    $1,415,849    $1,289,788
================================================================================
Life insurance operations:
  Balance at beginning of year           $5,055,508    $4,477,785    $3,952,751
- --------------------------------------------------------------------------------
  Acquisition costs deferred
    Commissions                             930,930       941,491       819,596
    Other                                   402,323       400,319       387,438
- --------------------------------------------------------------------------------
                                          1,333,253     1,341,810     1,207,034
- --------------------------------------------------------------------------------
  Amortization charged to income
    Commissions                             411,416       426,569       426,456
    Other                                   220,047       201,145       194,031
- --------------------------------------------------------------------------------
                                            631,463       627,714       620,487
- --------------------------------------------------------------------------------
  Decrease due to foreign exchange         (802,003)     (136,373)      (61,513)
- --------------------------------------------------------------------------------
  Balance at end of year                 $4,955,295    $5,055,508    $4,477,785
================================================================================
Total deferred policy acquisition costs  $6,592,506    $6,471,357    $5,767,573
================================================================================
</TABLE>


5. Reinsurance

In the ordinary course of business, AIG's general and life insurance companies
cede reinsurance to other insurance companies in order to provide greater
diversification of AIG's business and limit the potential for losses arising
from large risks.

      General reinsurance is effected under reinsurance treaties and by
negotiation on individual risks. Certain of these reinsurance arrangements
consist of excess of loss contracts which protect AIG against losses over
stipulated amounts. Amounts recoverable from general reinsurers are estimated in
a manner consistent with the claims liabilities associated with the reinsurance
and presented as a component of reinsurance assets.

      AIG life companies limit exposure to loss on any single life. For ordinary
insurance, AIG retains a maximum of approximately one million dollars of
coverage per individual life. There are smaller retentions for other lines of
business. Life reinsurance is effected principally under yearly renewable term
treaties. Amounts recoverable from life reinsurers are estimated in a manner
consistent with the assumptions used for the underlying policy benefits and are
presented as a component of reinsurance assets.

      General insurance premiums written and earned were comprised of the
following:


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------
Years Ended December 31,                   Written         Earned
==================================================================
<S>                                    <C>            <C>        
1997
Gross premiums                         $18,742,055    $17,565,566
Ceded premiums                          (5,334,526)    (5,144,526)
- ------------------------------------------------------------------
Net premiums                           $13,407,529    $12,421,040
==================================================================
1996
Gross premiums                         $18,319,132    $17,579,868
Ceded premiums                          (5,627,453)    (5,725,053)
- ------------------------------------------------------------------
Net premiums                           $12,691,679    $11,854,815
==================================================================
1995
Gross premiums                         $17,895,120    $17,243,829
Ceded premiums                          (6,002,098)    (5,838,098)
- ------------------------------------------------------------------
Net premiums                           $11,893,022    $11,405,731
==================================================================
</TABLE>


      In the normal course of their operations, certain AIG subsidiaries are
provided reinsurance coverages from AIG's minority-
owned reinsurance companies. During 1997, 1996 and 1995, the premiums written
which were ceded to Transatlantic amounted to $182,000,000, $232,000,000 and
$189,000,000, respectively.

      For the years ended December 31, 1997, 1996 and 1995, reinsurance
recoveries, which reduced loss and loss expenses incurred, amounted to $4.59
billion, $5.07 billion and $5.14 billion, respectively.


                                                                              49

<PAGE>   51

Notes to Financial Statements (CONTINUED)

5. Reinsurance (continued)

      Life insurance net premium income was comprised of the following:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,               1997              1996              1995
================================================================================
<S>                            <C>               <C>               <C>         
Gross premium income           $ 10,211,778      $  9,239,388      $  8,245,422
Ceded premiums                     (286,139)         (261,142)         (207,272)
- --------------------------------------------------------------------------------
Net premium income             $  9,925,639      $  8,978,246      $  8,038,150
================================================================================
</TABLE>


      Life insurance recoveries, which reduced death and other benefits,
approximated $136.5 million, $113.5 million and $111.4 million, respectively,
for the years ended December 31, 1997, 1996 and 1995.

      AIG's reinsurance arrangements do not relieve AIG from its direct
obligation to its insureds. Thus, a credit exposure exists with respect to both
general and life reinsurance ceded to the extent that any reinsurer is unable to
meet the obligations assumed under the reinsurance agreements. AIG holds
substantial collateral as security under related reinsurance agreements in the
form of funds, securities and/or letters of credit. A provision has been
recorded for estimated unrecoverable reinsurance. AIG has been largely
successful in prior recovery efforts.

      AIG evaluates the financial condition of its reinsurers through an
internal reinsurance security committee consisting of members of AIG's senior
management. No single reinsurer is a material reinsurer to AIG nor is AIG's
business substantially dependent upon any reinsurance contract.

      Life insurance ceded to other insurance companies was as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,                    1997            1996            1995
================================================================================
<S>                                  <C>             <C>             <C>        
Life insurance in-force              $50,924,412     $44,691,358     $37,148,984
================================================================================
</TABLE>


      Life insurance assumed represented 0.3 percent of gross life insurance
in-force at December 31, 1997, 0.2 percent for 1996 and 0.1 percent for 1995,
and life insurance premium income assumed represented 0.1 percent of gross
premium income for each of the periods ended December 31, 1997, 1996 and 1995.

      Supplemental information for gross loss and benefit reserves net of ceded
reinsurance at December 31, 1997 and 1996 follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                             As          Net of
                                                       Reported     Reinsurance
================================================================================
<S>                                                <C>             <C>          
December 31, 1997
Reserve for losses and loss expenses               $(33,400,160)   $(21,171,460)
Future policy benefits for life and accident
  and health insurance contracts                    (24,502,005)    (24,374,505)
Premiums and insurance balances
  receivable-net                                     10,282,987      12,306,351
Funds held under reinsurance treaties                        --          80,857
Reserve for unearned premiums                        (8,739,006)     (7,088,906)
Reinsurance assets                                   16,110,521              --
================================================================================
December 31, 1996
Reserve for losses and loss expenses               $(33,429,807)   $(20,407,307)
Future policy benefits for life and accident
  and health insurance contracts                    (24,002,860)    (23,858,860)
Premiums and insurance balances
  receivable-net                                      9,617,061      11,442,791
Funds held under reinsurance treaties                        --          74,236
Reserve for unearned premiums                        (7,598,928)     (6,138,828)
Reinsurance assets                                   16,526,566              --
================================================================================
</TABLE>


6. Reserve for Losses and Loss Expenses and Future Life Policy Benefits and
   Policyholders' Contract Deposits

(a) The following analysis provides a reconciliation of the activity in the
reserve for losses and loss expenses:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,                     1997           1996           1995
================================================================================
<S>                                  <C>            <C>            <C>         
At beginning of year:
  Reserve for losses and
    loss expenses                    $ 33,429,800   $ 33,046,700   $ 31,435,400
  Reinsurance recoverable             (13,022,500)   (13,353,900)   (13,016,500)
- --------------------------------------------------------------------------------
                                       20,407,300     19,692,800     18,418,900
- --------------------------------------------------------------------------------
Losses and loss expenses incurred:
  Current year                          9,732,600      9,272,400      8,935,400
  Prior year                             (376,400)      (276,000)      (275,600)
- --------------------------------------------------------------------------------
Total                                   9,356,200      8,996,400      8,659,800
================================================================================
Losses and loss expenses paid:
  Current year                          2,976,300      3,000,500      2,610,900
  Prior year                            5,615,700      5,281,400      4,775,000
- --------------------------------------------------------------------------------
Total                                   8,592,000      8,281,900      7,385,900
================================================================================
At end of year:
  Net reserve for losses and
    loss expenses                      21,171,500     20,407,300     19,692,800
  Reinsurance recoverable              12,228,700     13,022,500     13,353,900
- --------------------------------------------------------------------------------
Total                                $ 33,400,200   $ 33,429,800   $ 33,046,700
================================================================================
</TABLE>



50

<PAGE>   52

                             American International Group, Inc. and Subsidiaries

6. Reserve for Losses and Loss Expenses and Future Life Policy Benefits and
   Policyholders' Contract Deposits (continued)

      (b) The analysis of the future policy benefits and policyholders' contract
deposits liabilities as at December 31, 1997 and 1996 follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                             1997          1996
================================================================================
<S>                                                   <C>           <C>        
Future policy benefits:
  Long duration contracts                             $23,917,835   $23,382,945
  Short duration contracts                                584,170       619,915
- --------------------------------------------------------------------------------
Total                                                 $24,502,005   $24,002,860
================================================================================
Policyholders' contract deposits:
  Annuities                                           $ 4,758,872   $ 4,138,141
  Guaranteed investments contracts (GICs)               2,676,447     2,329,558
  Corporate-owned life insurance                        1,967,060     2,323,788
  Universal life                                          540,352       480,720
  Other investment contracts                              380,381       531,202
- --------------------------------------------------------------------------------
Total                                                 $10,323,112   $ 9,803,409
================================================================================
</TABLE>


      (c) Long duration contract liabilities included in future policy benefits,
as presented in the table above, result from traditional life products. Short
duration contract liabilities are primarily accident and health products. The
liability for future life policy benefits has been established based upon the
following assumptions:

      (i) Interest rates (exclusive of immediate/terminal funding annuities),
which vary by territory, year of issuance and products, range from 2.5 percent
to 12.0 percent within the first 20 years. Interest rates on immediate/terminal
funding annuities are at a maximum of 12.2 percent and grade to not greater than
7.5 percent.

      (ii) Mortality and surrender rates are based upon actual experience by
geographical area modified to allow for variations in policy form. The weighted
average lapse rate, including surrenders, for individual and group life
approximated 7.1 percent.

      (iii) The portions of current and prior net income and of current
unrealized appreciation of investments that can inure to the benefit of AIG are
restricted in some cases by the insurance contracts and by the local insurance
regulations of the countries in which the policies are in force.

      (iv) Participating life business represented approximately 30 percent of
the gross insurance in-force at December 31, 1997 and 49 percent of gross
premium income in 1997. The amount of dividends to be paid is determined
annually by the Boards of Directors. Anticipated dividends are considered as a
planned contractual benefit in computing the value of future policy benefits and
are provided ratably over the premium-paying period of the contracts.

      (d) The liability for policyholders' contract deposits has been
established based on the following assumptions:

      (i) Interest rates credited on deferred annuities vary by year of issuance
and range from 3.0 percent to 8.0 percent. Credited interest rate guarantees are
generally for a period of one year. Withdrawal charges generally range from 3.0
percent to 10.0 percent grading to zero over a period of 5 to 10 years.

      (ii) Domestically, GICs have market value withdrawal provisions for any
funds withdrawn other than benefit responsive payments. Interest rates credited
generally range from 4.7 percent to 8.1 percent and maturities range from 3 to
20 years. Overseas, primarily in the United Kingdom, GIC type contracts are
credited at rates ranging from 5.0 percent to 6.6 percent with guarantees
generally being one year. Contracts in other foreign locations have interest
rates, maturities and withdrawal charges based upon local economic and
regulatory conditions.

      (iii) Interest rates on corporate-owned life insurance business are
guaranteed at 4.0 percent and the weighted average rate credited in 1997 was 7.7
percent.

      (iv) The universal life funds have credited interest rates of 4.5 percent
to 7.5 percent and guarantees ranging from 3.5 percent to 5.5 percent depending
on the year of issue. Additionally, universal life funds are subject to
surrender charges that amount to 11.0 percent of the fund balance grading to
zero over a period not longer than 20 years.

      (e) Experience adjustments, relating to future policy benefits and
policyholders' contract deposits, vary according to the type of contract and the
territory in which the policy is in force. In general terms, investments,
mortality and morbidity results may be passed through by experience credits or
as an adjustment to the premium mechanism, subject to local regulatory guidance.

7. Statutory Financial Data

Statutory surplus and net income for general insurance and life insurance
operations as reported to regulatory authorities were as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,                  1997             1996             1995
================================================================================
<S>                                <C>              <C>              <C>        
Statutory surplus:
  General insurance                $14,071,326      $12,311,358      $11,142,956
  Life insurance                     5,535,236        5,541,910        4,788,833
Statutory net income*:
  General insurance                  2,041,050        1,727,286        1,499,345
  Life insurance                     1,099,632          851,382          681,189
================================================================================
</TABLE>

*     Includes net realized capital gains and losses.

      AIG's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with GAAP vary between domestic and foreign jurisdictions. The principal
differences are that statutory financial statements do not reflect deferred
policy acquisition costs and deferred income taxes, all bonds are carried at
amortized cost and reinsurance assets and liabilities are presented net of
reinsurance. AIG's use of permitted statutory accounting practices does not have
a significant impact on statutory surplus.


                                                                              51

<PAGE>   53

Notes to Financial Statements (CONTINUED)

8. Investment Information

(a) Statutory Deposits: Cash and securities with carrying values of $3.86
billion and $3.94 billion were deposited by AIG's subsidiaries under
requirements of regulatory authorities as of December 31, 1997 and 1996,
respectively.

      (b) Net Investment Income: An analysis of the net investment income from
the general and life insurance operations follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,                        1997          1996          1995
================================================================================
<S>                                       <C>           <C>           <C>       
General insurance:
  Fixed maturities                        $1,489,997    $1,391,674    $1,323,321
  Equity securities                           55,150        75,265        53,059
  Short-term investments                      39,885        40,444        46,378
  Other (net of interest
    expense on funds held)                   336,729       253,032       199,563
- --------------------------------------------------------------------------------
  Total investment income                  1,921,761     1,760,415     1,622,321
  Investment expenses                         68,238        69,617        74,749
- --------------------------------------------------------------------------------
Net investment income                     $1,853,523    $1,690,798    $1,547,572
================================================================================
Life insurance:
  Fixed maturities                        $2,031,157    $1,773,211    $1,517,990
  Equity securities                           63,608        86,850        70,794
  Short-term investments                      70,421        62,268        67,218
  Interest on mortgage, policy
    and collateral loans                     538,947       678,476       605,251
  Other                                      309,456       193,614       105,119
- --------------------------------------------------------------------------------
  Total investment income                  3,013,589     2,794,419     2,366,372
  Investment expenses                        117,120       118,538       101,467
- --------------------------------------------------------------------------------
Net investment income                     $2,896,469    $2,675,881    $2,264,905
================================================================================
</TABLE>


      (c) Investment Gains and Losses: The realized capital gains (losses) and
increase (decrease) in unrealized appreciation of investments for 1997, 1996 and
1995 were as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
Years Ended December 31,                     1997           1996           1995
================================================================================
<S>                                   <C>            <C>            <C>        
Realized capital gains (losses)
  on investments:
    Fixed maturities (a)              $    85,763    $   (32,600)   $    54,293
    Equity securities                     125,431        156,839         69,639
    Other                                 (92,679)       (36,248)       (52,098)
- --------------------------------------------------------------------------------
Realized capital gains                $   118,515    $    87,991    $    71,834
================================================================================
Increase (decrease) in unrealized
  appreciation of investments:
    Fixed maturities                  $   227,627    $  (227,491)   $ 1,905,315
    Equity securities                    (422,962)       266,648        335,006
    Other (b)                              78,354        (30,285)      (430,956)
- --------------------------------------------------------------------------------
Increase (decrease) in unrealized
  appreciation                        $  (116,981)   $     8,872    $ 1,809,365
================================================================================
</TABLE>

(a)   The realized gains (losses) resulted from the sale of available for sale
      fixed maturities.
(b)   Includes $157.5 million decrease, $51.2 million increase and $480.9
      million increase in unrealized appreciation attributable to participating
      policyholders at December 31, 1997, 1996 and 1995, respectively.

      The gross gains and gross losses realized on the disposition of available
for sale securities for 1997, 1996 and 1995 follow:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                              Gross        Gross
                                                           Realized     Realized
                                                              Gains       Losses
================================================================================
<S>                                                        <C>          <C>     
1997
Bonds                                                      $ 78,549     $ 72,290
Common stocks                                               535,657      413,135
Preferred stocks                                              3,267          358
Financial services securities available for sale              6,223        1,761
- --------------------------------------------------------------------------------
Total                                                      $623,696     $487,544
================================================================================
1996
Bonds                                                      $ 55,031     $ 80,337
Common stocks                                               353,865      200,837
Preferred stocks                                              4,304          493
Financial services securities available for sale              6,668          932
- --------------------------------------------------------------------------------
Total                                                      $419,868     $282,599
================================================================================
1995
Bonds                                                      $ 60,205     $ 42,633
Common stocks                                               276,036      215,162
Preferred stocks                                             10,189        1,510
Financial services securities available for sale              8,244          799
- --------------------------------------------------------------------------------
Total                                                      $354,674     $260,104
================================================================================
</TABLE>


      (d) Market Value of Fixed Maturities and Unrealized Appreciation of
Investments: At December 31, 1997 and 1996, the balance of the unrealized
appreciation of investments in equity securities (before applicable taxes)
included gross gains of approximately $1,847,900,000 and $1,683,000,000 and
gross losses of approximately $1,263,700,000 and $675,800,000, respectively.

      The deferred tax payable related to the net unrealized appreciation of
investments was $592,860,000 at December 31, 1997 and $681,705,000 at December
31, 1996.


52

<PAGE>   54

                             American International Group, Inc. and Subsidiaries

8. Investment Information (continued)

      The amortized cost and estimated market value of investments in fixed
maturities carried at amortized cost at December 31, 1997 and 1996 were as
follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                               Gross         Gross     Estimated
                             Amortized    Unrealized    Unrealized        Market
                                  Cost         Gains        Losses         Value
================================================================================
<S>                        <C>           <C>           <C>           <C>        
1997
Fixed maturities held to
  maturity:
  Bonds:
   U.S. Government (a)     $     8,644   $       867   $         4   $     9,507
   States (b)               12,521,540       835,821         1,332    13,356,029
   Foreign governments             131            36            --           167
   All other corporate              --            --            --            --
- --------------------------------------------------------------------------------
Total bonds                 12,530,315       836,724         1,336    13,365,703
Preferred stocks               239,331       291,618           244       530,705
- --------------------------------------------------------------------------------
Total fixed maturities     $12,769,646   $ 1,128,342   $     1,580   $13,896,408
================================================================================
1996
Fixed maturities held to
  maturity:
  Bonds:
   U.S. Government (a)     $     5,500   $       368   $        57   $     5,811
   States (b)               12,251,042       613,340         7,279    12,857,103
   Foreign governments             937             2            --           939
   All other corporate           1,499             5            --         1,504
- --------------------------------------------------------------------------------
Total bonds                 12,258,978       613,715         7,336    12,865,357
Preferred stocks               477,247       114,088           244       591,091
- --------------------------------------------------------------------------------
Total fixed maturities     $12,736,225   $   727,803   $     7,580   $13,456,448
================================================================================
</TABLE>

(a)   Including U.S. Government agencies and authorities.
(b)   Including municipalities and political subdivisions.

      The amortized cost and estimated market value of bonds available for sale
and carried at market value at December 31, 1997 and 1996 were as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------

                                                  Gross       Gross    Estimated
                                 Amortized   Unrealized  Unrealized       Market
                                      Cost        Gains      Losses        Value
================================================================================
<S>                            <C>          <C>          <C>         <C>        
1997
Fixed maturities available 
  for sale:
  Bonds:
   U.S. Government (a)         $ 1,253,526  $   117,215  $      546  $ 1,370,195
   States (b)                    5,870,181      332,673       2,157    6,200,697
   Foreign governments           8,311,342      373,808     104,534    8,580,616
   All other corporate          21,133,311      904,520     111,547   21,926,284
- --------------------------------------------------------------------------------
Total bonds                    $36,568,360  $ 1,728,216  $  218,784  $38,077,792
================================================================================
1996
Fixed maturities available
  for sale:
  Bonds:
   U.S. Government(a)          $ 1,520,202  $    74,112  $   24,023  $ 1,570,291
   States(b)                     5,430,777      216,421      13,046    5,634,152
   Foreign governments           8,487,838      402,373       4,722    8,885,489
   All other corporate          18,804,310      681,513      50,823   19,435,000
- --------------------------------------------------------------------------------
Total bonds                    $34,243,127  $ 1,374,419  $   92,614  $35,524,932
================================================================================
</TABLE>

(a)   Including U.S. Government agencies and authorities.
(b)   Including municipalities and political subdivisions.

      The amortized cost and estimated market values of fixed maturities held to
maturity and fixed maturities available for sale at December 31, 1997, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties.


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                                       Estimated
                                                       Amortized          Market
                                                            Cost           Value
================================================================================
<S>                                                  <C>             <C>        
Fixed maturities held to maturity:
Due in one year or less                              $   944,201     $   990,751
Due after one year through five years                  1,487,542       1,739,065
Due after five years through ten years                 2,506,819       2,805,494
Due after ten years                                    7,831,084       8,361,098
- --------------------------------------------------------------------------------
Total held to maturity                               $12,769,646     $13,896,408
================================================================================
Fixed maturities available for sale:
Due in one year or less                              $ 2,926,040     $ 2,970,054
Due after one year through five years                 12,618,805      13,179,692
Due after five years through ten years                12,278,298      12,851,431
Due after ten years                                    8,745,217       9,076,615
- --------------------------------------------------------------------------------
Total available for sale                             $36,568,360     $38,077,792
================================================================================
</TABLE>


      (e) Securities Available for Sale: AIGFP follows a policy of minimizing
interest rate, equity and currency risks associated with securities available
for sale by entering into swap or other transactions. In addition, to reduce its
credit risk, AIGFP has entered into credit derivative transactions with respect
to $444.0 million of securities available for sale. At December 31, 1997, the
cumulative increase in carrying value of the securities available for sale and
related hedges as a result of marking to market such securities net of hedging
transactions was $73,000.


                                                                              53

<PAGE>   55

Notes to Financial Statements (CONTINUED)

8. Investment Information (continued)

      The amortized cost, related hedges and estimated market value of
securities available for sale and carried at market value at December 31, 1997
and 1996 were as follows:


<TABLE>
<CAPTION>
(in thousands)
- -------------------------------------------------------------------------------------------------------
                                                                               Unrealized
                                                                                    Gains
                                                        Gross        Gross (Losses) - net     Estimated
                                       Amortized   Unrealized   Unrealized     on Hedging        Market
                                            Cost        Gains       Losses   Transactions         Value
=======================================================================================================
<S>                                   <C>          <C>          <C>            <C>           <C>       
1997
Securities available for sale:
    Corporate and bank debt           $5,202,798   $   45,144   $   36,881     $  (10,314)   $5,200,747
    Foreign government obligations       337,592        1,577       29,603         28,814       338,380
    Asset-backed and collateralized    2,343,883       34,314       15,622        (17,663)    2,344,912
    Preferred stocks                     675,221           84        1,496          1,715       675,524
    U.S. Government obligations          585,750       11,679           --        (11,675)      585,754
- -------------------------------------------------------------------------------------------------------
Total                                 $9,145,244   $   92,798   $   83,602     $   (9,123)   $9,145,317
=======================================================================================================
1996                                                                          
Securities available for sale:                                                
    Corporate and bank debt           $4,800,081   $   69,294   $   20,140     $  (45,385)   $4,803,850
    Foreign government obligations     2,252,477      159,484       64,710        (88,683)    2,258,568
    Asset-backed and collateralized    1,666,894       54,754        4,043        (50,268)    1,667,337
    Preferred stocks                     553,050        2,947        2,719            (30)      553,248
    U.S. Government obligations          503,203        1,877        2,865            691       502,906
- -------------------------------------------------------------------------------------------------------
Total                                 $9,775,705   $  288,356   $   94,477     $ (183,675)   $9,785,909
=======================================================================================================
</TABLE>

                                                                              
      The amortized cost and estimated market values of securities available for
sale at December 31, 1997, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because certain borrowers have
the right to call or prepay certain obligations with or without call or
prepayment penalties.


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                                       Estimated
                                                       Amortized          Market
                                                            Cost           Value
================================================================================
<S>                                                   <C>             <C>       
Securities available for sale:
Due in one year or less                               $2,237,014      $2,237,403
Due after one year through five years                  2,769,777       2,769,920
Due after five years through ten years                 1,062,662       1,060,973
Due after ten years                                      731,908         732,109
Asset-backed and collateralized                        2,343,883       2,344,912
- --------------------------------------------------------------------------------
Total available for sale                              $9,145,244      $9,145,317
================================================================================
</TABLE>


      No securities available for sale were below investment grade at December
31, 1997.

      (f) CMOs: At December 31, 1997, CMOs, held by AIG's life companies, were
presented as a component of bonds available for sale, at market value. All of
the CMOs were investment grade and approximately 59 percent of the CMOs were
backed by various U.S. government agencies. The remaining 41 percent were
corporate issuances.

      At December 31, 1997 and 1996, the market value of the CMO portfolio was
$2.58 billion and $2.24 billion, respectively; the amortized cost was
approximately $2.47 billion in 1997 and $2.18 billion in 1996. AIG's CMO
portfolio is readily marketable. There were no derivative (high risk) CMO
securities contained in this portfolio at December 31, 1997 and 1996.

      The distribution of the CMOs at December 31, 1997 and 1996 was as follows:


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
                                                            1997           1996
================================================================================
<S>                                                      <C>                 <C>
GNMA                                                     20%                 25%
FHLMC                                                    19                  23
FNMA                                                     16                  20
VA                                                        4                   4
Other                                                    41                  28
- --------------------------------------------------------------------------------
                                                        100%                100%
================================================================================
</TABLE>


      At December 31, 1997, the gross weighted average coupon of this portfolio
was 7.5 percent. The gross weighted average life of this portfolio was 5.8
years.

      (g) Fixed Maturities Below Investment Grade: At December 31, 1997, fixed
maturities held by AIG that were below investment grade or not rated totaled
$4.32 billion.

      (h) At December 31, 1997, non-income producing invested assets were
insignificant.


54

<PAGE>   56

                             American International Group, Inc. and Subsidiaries

9. Debt Outstanding

At December 31, 1997, AIG's debt outstanding of $25.26 billion, shown below,
included borrowings of $22.28 billion which were either not guaranteed by AIG or
were matched borrowings under obligations of guaranteed investment agreements
(GIAs) or matched notes and bonds payable.


<TABLE>
<CAPTION>
(in thousands)
================================================================================
<S>                                                                  <C>        
Borrowings under Obligations of
  GIAs -- AIGFP                                                      $ 8,000,326
- --------------------------------------------------------------------------------
Commercial Paper:
  AIG Funding Inc. (Funding)                                             307,997
  ILFC (a)                                                             2,208,167
  A.I. Credit Corp. (AICCO)                                              833,647
  Universal Finance Company (UFC) (a)                                     25,096
- --------------------------------------------------------------------------------
  Total                                                                3,374,907
- --------------------------------------------------------------------------------
Medium Term Notes:
  ILFC (a)                                                             2,896,865
  AIG                                                                    248,225
- --------------------------------------------------------------------------------
  Total                                                                3,145,090
- --------------------------------------------------------------------------------
Notes and Bonds Payable:
  ILFC (a)                                                             3,950,000
  AIGFP                                                                4,858,706
  AIG: Lire bonds                                                        159,067
       Zero coupon notes                                                  91,179
- --------------------------------------------------------------------------------
  Total                                                                9,058,952
- --------------------------------------------------------------------------------
Loans and Mortgages Payable:
  ILFC (a) (b)                                                           903,320
  SPC Credit Limited (a)                                                 538,988
  AIG                                                                    239,062
- --------------------------------------------------------------------------------
  Total                                                                1,681,370
- --------------------------------------------------------------------------------
Total Borrowings                                                      25,260,645
- --------------------------------------------------------------------------------
Borrowings not guaranteed by AIG                                      10,522,436
Matched GIA borrowings                                                 8,000,326
Matched notes and bonds payable -- AIGFP                               3,754,420
- --------------------------------------------------------------------------------
                                                                      22,277,182
- --------------------------------------------------------------------------------
Remaining borrowings of AIG                                          $ 2,983,463
================================================================================
</TABLE>


(a)   AIG does not guarantee or support these borrowings.
(b)   Capital lease obligations.

      (a) Commercial Paper: At December 31, 1997, the commercial paper issued
and outstanding was as follows:


<TABLE>
<CAPTION>
(dollars in thousands)
- --------------------------------------------------------------------------------
                                                            Weighted  
                            Net                              Average    Weighted
                           Book  Unamortized         Face   Interest     Average
                          Value     Discount       Amount       Rate    Maturity
================================================================================
<S>                  <C>          <C>          <C>              <C>      <C>    
Funding              $  307,997   $    1,061   $  309,058       5.86%    22 days
ILFC                  2,208,167       17,434    2,225,601       5.88     66 days
AICCO                   833,647        1,637      835,284       5.74     14 days
UFC*                     25,096          883       25,979       7.90    176 days
- --------------------------------------------------------------------------------
Total                $3,374,907   $   21,015   $3,395,922         --          --
================================================================================
</TABLE>


* Issued in Taiwan N.T. dollars at prevailing local interest rates.

      Commercial paper issued by Funding is guaranteed by AIG. AIG has entered
into an agreement in support of AICCO's commercial paper. AIG does not guarantee
ILFC's or UFC's commercial paper.

      (b) Borrowings under Obligations of Guaranteed Investment Agreements:
Borrowings under obligations of guaranteed investment agreements, which are
guaranteed by AIG, are recorded at the amount outstanding under each contract.
Obligations may be called at various times prior to maturity at the option of
the counterparty. Interest rates on these borrowings are primarily fixed and
range up to 9.8 percent.

      Payments due under these investment agreements in each of the next five
years ending December 31, and the periods thereafter based on the earliest call
dates, were as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                   <C>       
1998                                                                  $4,022,565
1999                                                                     881,114
2000                                                                     229,157
2001                                                                      55,776
2002                                                                      52,752
Remaining years after 2002                                             2,758,962
- --------------------------------------------------------------------------------
Total                                                                 $8,000,326
================================================================================
</TABLE>


      At December 31, 1997, the market value of securities pledged as collateral
with respect to these obligations approximated $757.9 million.

      Funds received from GIA borrowings are invested in a diversified portfolio
of securities and derivative transactions.

      (c) Medium Term Notes Payable:

      (i) Medium Term Notes Payable Issued by AIG: AIG's Medium Term Notes are
unsecured obligations which normally may not be redeemed by AIG prior to
maturity and bear interest at either fixed rates set by AIG at issuance or
variable rates determined by reference to an interest rate or other formula.

      An analysis of the Medium Term Notes for the year ended December 31, 1997
was as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
Medium Term
Note Series:                                           B           E       Total
================================================================================
<S>                                              <C>        <C>        <C>      
Balance December 31, 1996                        $40,000    $100,000   $ 140,000
Issued during year                                    --     108,225     108,225
- --------------------------------------------------------------------------------
Balance December 31, 1997                        $40,000    $208,225    $248,225
================================================================================
</TABLE>

                                 
      The interest rates on this debt range from 2.25 percent to 8.12 percent.
To the extent deemed appropriate, AIG may enter into swap transactions to reduce
its effective borrowing rates with respect to these notes.

      During 1997, AIG issued $100 million principal amount of equity-linked
Medium Term Notes due July 30, 2004. These notes accrue interest at the rate of
2.25 percent and the total return on these notes is linked to the appreciation
in market value of AIG's common stock. The notes may be redeemed, at the option
of AIG, as a whole but not in part, at any time on or after July 30, 2000. In
conjunction with the issuance of these notes, AIG entered into a series of swap
transactions 


                                                                              55

<PAGE>   57

Notes to Financial Statements  (CONTINUED)

9. Debt Outstanding (continued)

which effectively converted its interest expense to a fixed rate of 5.87 percent
and transferred the equity appreciation exposure to a third party.

      At December 31, 1997, the maturity schedule for AIG's outstanding Medium
Term Notes was as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                     <C>     
1998                                                                    $ 40,000
1999                                                                     108,225
Remaining years after 2002                                               100,000
- --------------------------------------------------------------------------------
Total                                                                   $248,225
================================================================================
</TABLE>


      At December 31, 1997, AIG had $538.8 million principal amount of Term
Notes registered and available for issuance from time to time.

      (ii) Medium Term Notes Payable Issued by ILFC: ILFC's Medium Term Notes
are unsecured obligations which may not be redeemed by ILFC prior to maturity
and bear interest at fixed rates set by ILFC at issuance.

      As of December 31, 1997, notes in aggregate principal amount of $2.90
billion were outstanding with maturity dates from 1998 to 2005 at interest rates
ranging from 5.05 percent to 9.88 percent. These notes provide for a single
principal payment at the maturity of each note.

      At December 31, 1997, the maturity schedule for ILFC's outstanding Medium
Term Notes was as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                   <C>       
1998                                                                  $  768,115
1999                                                                     673,250
2000                                                                     967,500
2001                                                                     266,000
2002                                                                     116,000
Remaining years after 2002                                               106,000
- --------------------------------------------------------------------------------
Total                                                                 $2,896,865
================================================================================
</TABLE>


      (d) Notes and Bonds Payable:

      (i) Zero Coupon Notes: On October 1, 1984, AIG issued Eurodollar zero
coupon notes in the aggregate principal amount at stated maturity of $750
million. The notes were offered at 12 percent of principal amount at stated
maturity, bear no interest and are due August 15, 2004. The net proceeds to AIG
from the issuance were $85.6 million. The notes are redeemable at any time in
whole or in part at the option of AIG at 100 percent of their principal amount
at stated maturity. The notes are also redeemable at the option of AIG or bearer
notes may be redeemed at the option of the holder in the event of certain
changes involving taxation in the United States at prices ranging from 47.39
percent currently, to 89.88 percent after August 15, 2003, of the principal
amount at stated maturity together with accrued amortization of original issue
discount from the preceding August 15. During 1997 and 1996, no notes were
repurchased. At December 31, 1997, the notes outstanding had a face value of
$189.2 million, an unamortized discount of $98.0 million and a net book value of
$91.2 million. The amortization of the original issue discount was recorded as
interest expense.

      (ii) Italian Lire Bonds: In December, 1991, AIG issued unsecured bonds
denominated in Italian Lire. The principal amount of 200 billion Italian Lire
Bonds matures December 4, 2001 and accrues interest at a rate of 11.7 percent
which is paid annually. These bonds are not redeemable prior to maturity, except
in the event of certain changes involving taxation in the United States or the
imposition of certain certification, identification or reporting requirements.

      Simultaneous with the issuance of this debt, AIG entered into a swap
transaction which effectively converted AIG's net interest expense to a U.S.
dollar liability of approximately 7.9 percent, which requires the payment of
proceeds at maturity of approximately $159 million in exchange for 200 billion
Italian Lire and interest thereon.

      (iii) Term Notes Issued by ILFC: ILFC has issued unsecured obligations
which may not be redeemed prior to maturity.

      As of December 31, 1997, notes in aggregate principal amount of $3.95
billion were outstanding with maturity dates from 1998 to 2004 and interest
rates ranging from 5.50 percent to 8.88 percent. Term notes in the aggregate
principal amount of $500 million are at floating interest rates and the
remainder are at fixed rates. These notes provide for a single principal payment
at maturity.

      At December 31, 1997, the maturity schedule for ILFC's Term Notes was as
follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                                       Principal
                                                                          Amount
================================================================================
<S>                                                                   <C>       
1998                                                                  $  950,000
1999                                                                   1,150,000
2000                                                                     900,000
2001                                                                     650,000
2002                                                                     200,000
Remaining years after 2002                                               100,000
- --------------------------------------------------------------------------------
Total                                                                 $3,950,000
================================================================================
</TABLE>


      AIG does not guarantee any of the debt obligations of ILFC.


56

<PAGE>   58

                             American International Group, Inc. and Subsidiaries

9. Debt Outstanding (continued)

      (iv) Notes and Bonds Payable Issued by AIGFP: At December 31, 1997,
AIGFP's bonds outstanding, the proceeds of which are invested in a segregated
portfolio of securities available for sale, were as follows:


<TABLE>
<CAPTION>
(dollars in thousands)
- --------------------------------------------------------------------------------
    Year of                                      Interest           U.S. Dollar
Issue   Maturity     Currency                       Rate         Carrying Value
================================================================================
<S>         <C>      <C>                            <C>              <C>       
1993        1999     French franc                   4.60%            $  514,800
1995        2000     Great Britain pound            5.88                384,900
1995        1998     Italian lire                   7.76                122,600
1996        2001     Great Britain pound            6.09                387,100
1996        1998     Italian lire                   6.60                326,700
1996        1998     New Zealand dollar             8.51                354,200
1997        2002     US dollar                      5.16                150,000
1997        1999     Irish punt                     6.20                158,200
1997        2020     US dollar                      8.75                356,200
1997        2000     Irish punt                     6.19                294,400
1997        2000     Irish punt                     5.96                147,600
1997        2002     New Zealand dollar             8.52                125,300
1997        1998     New Zealand dollar             9.43                117,100
1997        1998     Danish kroner                  3.46                 64,000
1997        2000     Great Britain pound            6.25                 84,300
1997        1998     Great Britain pound            6.23                 82,400
1997        2020     US dollar                      8.75                 90,000
1997        2020     US dollar                      8.75                 77,500
1997        2000     French franc                   3.68                 50,200
- --------------------------------------------------------------------------------
Total                                                                $3,887,500
================================================================================
</TABLE>


      AIGFP has also issued various credit linked notes maturing from 1998
through 2000. These notes have been issued to hedge certain credit risks in
AIGFP's portfolio of securities available for sale. The notes are primarily U.S.
dollar denominated and have U.S. dollar interest rates ranging from 5.3 percent
to 7.0 percent. AIGFP's payment obligations under these notes would be reduced
or eliminated upon the occurrence of a payment default or a bankruptcy event
with respect to certain third party credit that is being hedged. At December 31,
1997, these notes had a U.S. dollar carrying value of $503.4 million. No
obligations under these notes were reduced or eliminated during 1997.

      AIGFP is also obligated under various notes maturing from 1998 through
2026. The majority of these notes are denominated in U.S. dollars and bear
interest at various interest rates. At December 31, 1997, these notes had a U.S.
dollar carrying value of $467.9 million.

      AIG guarantees all of AIGFP's debt.

      (e) Loans and Mortgages Payable: Loans and mortgages payable at December
31, 1997, consisted of the following:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                     ILFC          SPC          AIG        Total
================================================================================
<S>                            <C>          <C>          <C>          <C>       
Uncollateralized
  loans payable                $       --   $  538,988   $  138,198   $  677,186
Collateralized loans and
  mortgages payable               903,320           --      100,864    1,004,184
- --------------------------------------------------------------------------------
Total                          $  903,320   $  538,988   $  239,062   $1,681,370
================================================================================
</TABLE>


      At December 31, 1997, ILFC's capital lease obligations were $903.3
million. Fixed interest rates with respect to these obligations range from 6.18
percent to 6.89 percent; variable rates are referenced to LIBOR. These
obligations mature through 2005. The flight equipment associated with the
capital lease obligations had a net book value of $1.15 billion.

      (f) Revolving Credit Facilities: AIG and Funding have entered into two
syndicated revolving credit facilities (the Facilities) aggregating $1 billion.
The Facilities consist of a $500 million 364 day revolving credit facility and a
$500 million five year revolving credit facility. The Facilities can be used for
general corporate purposes and also provide backup for AIG's commercial paper
programs administered by Funding. There are currently no borrowings outstanding
under either of the Facilities, nor were any borrowings outstanding as of
December 31, 1997.

      (g) Interest Expense for All Indebtedness: Total interest expense for all
indebtedness, net of capitalized interest, aggregated $1,704,083,000 in 1997,
$1,491,318,000 in 1996 and $1,361,140,000 in 1995. Dividends on the preferred
stock of ILFC are accounted for as interest expense and included as minority
interest in the consolidated statement of income. The dividends for December 31,
1997, 1996 and 1995 were $16,348,000, $16,599,000 and $13,096,000, respectively.

10. Capital Funds

(a) At December 31, 1997, there were 6,000,000 shares of AIG's $5 par value
serial preferred stock authorized, issuable in series.

      (b) AIG parent depends on its subsidiaries for cash flow in the form of
loans, advances and dividends. AIG's insurance subsidiaries are subject to
regulatory restrictions on the amount of dividends which can be remitted to AIG
parent. These restrictions vary by state. For example, unless permitted by the
New York Superintendent of Insurance, general insurance companies domiciled in
New York may not pay dividends to shareholders which in any twelve month period
exceed the lesser of 10 percent of the company's statutory policyholders'
surplus or 100 percent of its "adjusted net investment income", as defined.
Generally, less severe restrictions applicable to both general and life
insurance companies exist in most of the other states in which AIG's insurance
subsidiaries are domiciled. Certain foreign jurisdictions have restrictions
which generally cause only a temporary delay in the remittance of dividends.
There are also various local restrictions limiting cash loans and advances to
AIG by its subsidiaries. Largely as a


                                                                              57

<PAGE>   59

Notes to Financial Statements  (CONTINUED)

10. Capital Funds (continued)

result of the restrictions, approximately 64 percent of consolidated capital
funds were restricted from immediate transfer to AIG parent at December 31,
1997.

      (c) The common stock activity for the three years ended December 31, 1997
was as follows:


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
                                            1997            1996           1995
================================================================================
<S>                                  <C>             <C>            <C>        
Shares outstanding at
  beginning of year                  469,441,146     474,184,226    315,840,626
Acquired during year                  (4,657,254)     (5,384,672)      (236,443)
Issued under stock option
  and purchase plans                     986,289         540,768        517,844
Issued in connection with
  acquisition                              4,391         100,824             --
Stock split effected
  as stock dividend                  253,037,334              --    168,693,199
Other*                               (19,293,625)             --    (10,631,000)
- --------------------------------------------------------------------------------
Shares outstanding at end of year    699,518,281     469,441,146    474,184,226
================================================================================
</TABLE>


* Shares issued to AIG and subsidiaries as part of stock split effected as stock
  dividend.

      Common stock increased and retained earnings decreased $632.6 million as a
result of a common stock split in the form of a 50 percent common stock dividend
paid July 25, 1997.

      Common stock increased and additional paid-in capital decreased $421.7
million as a result of a common stock split in the form of a 50 percent common
stock dividend paid July 28, 1995.

11. Commitments and Contingent Liabilities

In the normal course of business, various commitments and contingent liabilities
are entered into by AIG and certain of its subsidiaries. In addition, AIG
guarantees various obligations of certain subsidiaries.

      (a) Commitments to extend credit are agreements to lend subject to certain
conditions. These commitments generally have fixed expiration dates or
termination clauses and typically require payment of a fee. At December 31, 1997
and 1996, these commitments, made principally by AIG Capital Corp., approximated
$92,400,000 and $95,200,000, respectively. AIG uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. AIG evaluates each counterparty's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
AIG upon extension of credit, is based on management's credit evaluation of the
counterparty.

      (b) AIG and certain of its subsidiaries become parties to financial
instruments with market risk resulting from both dealer and end user activities
and to reduce currency, interest rate, equity and commodity exposures. To the
extent those instruments are carried at their estimated fair value, the elements
of currency, interest rate, equity and commodity risks are reflected in the
consolidated balance sheet. In addition, these instruments involve, to varying
degrees, elements of credit risk not explicitly recognized in the consolidated
balance sheet. Collateral is required, at the discretion of AIG, on certain
transactions based on the creditworthiness of the counterparty.

      (c) AIGFP becomes a party to off-balance sheet financial instruments in
the normal course of its business and to reduce its currency, interest rate and
equity exposures. Interest rate, currency and equity risks related to such
instruments are reflected in the consolidated financial statements to the extent
these instruments are carried at a market or a fair value, whichever is
appropriate. Because of limited liquidity of certain of these instruments, the
recorded estimated fair values of such instruments may be different than the
values that might be realized if AIGFP were to sell or close out the
transactions prior to maturity.

      AIGFP, as principal and for its own account, enters into interest rate,
currency and equity swaps, swaptions and forward commitments. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
AIGFP typically becomes a principal in the exchange of interest payments between
the parties and, therefore, may be exposed to loss, if counterparties default.
Currency and equity swaps are similar to interest rate swaps, but may involve
the exchange of principal amounts at the beginning and end of the transaction.
At December 31, 1997, the notional principal amount of the sum of the swap pays
and receives approximated $266.46 billion, primarily related to interest rate
swaps of approximately $200.49 billion.

      The following tables provide the contractual and notional amounts of
AIGFP's, AIGTG's and ILFC's derivatives transactions at December 31, 1997.

      The notional amounts used to express the extent of AIGFP's, AIGTG's and
ILFC's involvement in swap transactions represent a standard of measurement of
the volume of AIGFP's, AIGTG's and ILFC's swaps business. Notional amount is not
a quantification of market risk or credit risk and it may not necessarily be
recorded on the balance sheet. Notional amounts represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received,
except for certain contracts such as currency swaps.

      The timing and the amount of cash flows relating to AIGFP's and AIGTG's
foreign exchange forwards and exchange traded futures and options contracts are
determined by each of the respective contractual agreements.


58

<PAGE>   60

                             American International Group, Inc. and Subsidiaries

11. Commitments and Contingent Liabilities (continued)

      The following table presents AIGFP's swaps and swaptions portfolio by
maturity and type of derivative at December 31, 1997 and December 31, 1996:


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                         Remaining Life
                                               ---------------------------------------------------------
                                                        One    Two Through    Six Through      After Ten         Total         Total
                                                       Year     Five Years      Ten Years          Years          1997          1996
====================================================================================================================================
<S>                                            <C>            <C>            <C>            <C>           <C>           <C>         
Interest rate, currency and equity/commodity
  swaps and swaptions:
Notional amount:
  Interest rate swaps                          $ 57,623,000   $ 85,484,000   $ 47,420,000   $  9,964,000  $200,491,000  $165,771,800
  Currency swaps                                  8,575,000     28,686,000     12,527,000      4,960,000    54,748,000    39,182,900
  Swaptions and equity swaps                        857,000      4,734,000      4,129,000      1,497,000    11,217,000     5,721,300
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                          $ 67,055,000   $118,904,000   $ 64,076,000   $ 16,421,000  $266,456,000  $210,676,000
====================================================================================================================================
</TABLE>


      Futures and forward contracts are contracts for delivery of foreign
currencies or financial indices in which the seller/purchaser agrees to
make/take delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise as a result of movements in current market
prices from contracted prices and the potential inability of counterparties to
meet their obligations under the contracts. At December 31, 1997, the
contractual amount of AIGFP's futures and forward contracts approximated $17.7
billion.

      The following table presents AIGFP's futures and forward contracts
portfolio by maturity and type of derivative at December 31, 1997 and December
31, 1996:


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                         Remaining Life
                                               ---------------------------------------------------------
                                                        One    Two Through    Six Through      After Ten         Total         Total
                                                       Year     Five Years      Ten Years          Years          1997          1996
====================================================================================================================================
<S>                                            <C>            <C>            <C>            <C>           <C>           <C>         
Futures and forward contracts:
Exchange traded futures contracts 
  contractual amount                           $  4,411,000             --             --             --  $  4,411,000  $  6,867,300
====================================================================================================================================
Over the counter forward contracts
  contractual amount                           $ 13,271,000             --             --             --  $ 13,271,000  $  5,952,200
====================================================================================================================================
</TABLE>


      These instruments involve, to varying degrees, elements of credit risk not
explicitly recognized in the consolidated financial statements. AIGFP utilizes
various credit enhancements, including collateral, credit triggers and credit
derivatives to reduce the credit exposure relating to these off-balance sheet
financial instruments. AIGFP requires credit enhancements in connection with
specific transactions based on, among other things, the creditworthiness of the
counterparties and the transaction's size and maturity. In addition, AIGFP's
derivative transactions are generally documented under ISDA Master Agreements.
Such agreements provide for legally enforceable set-off and close out netting of
exposures to specific counterparties. Under such agreements, in connection with
an early termination of a transaction, AIGFP is permitted to set off its
receivables from a counterparty against its payables to the same counterparty
arising out of all included transactions. As a result, the net replacement value
represents the net sum of estimated positive fair values after the application
of such strategies, agreements and collateral held. The net replacement value
most closely represents the net credit risk to AIGFP or the maximum amount
exposed to potential loss. The net replacement value of all interest rate,
currency, and equity swaps, swaptions and forward commitments at December 31,
1997, approximated $6.65 billion. The net replacement value for futures and
forward contracts at December 31, 1997, approximated $50.0 million.

      AIGFP independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGFP's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The average credit rating of AIGFP's counterparties as a whole (as
measured by AIGFP) is equivalent to AA. The maximum potential loss will increase
or decrease during the life of the derivative commitments as a function of
maturity and market conditions.


                                                                              59

<PAGE>   61

Notes to Financial Statements  (CONTINUED)

11. Commitments and Contingent Liabilities (continued)

      AIGFP determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1997 and
December 31, 1996, the counterparty credit quality by derivative product with
respect to the net replacement value of AIGFP's derivatives portfolio was as
follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------------
                                   Net Replacement Value
                                ----------------------------
                                Swaps and        Futures and        Total        Total
                                Swaptions  Forward Contracts         1997         1996
======================================================================================
<S>                            <C>                <C>          <C>          <C>       
Counterparty credit quality:
  AAA                          $2,326,502         $       --   $2,326,502   $1,732,315
  AA                            2,273,532             37,572    2,311,104    2,021,878
  A                             1,153,007             12,403    1,165,410    1,461,063
  BBB                             608,448                 47      608,495    1,150,420
  Below investment grade          289,563                 --      289,563       26,293
- --------------------------------------------------------------------------------------
Total                          $6,651,052         $   50,022   $6,701,074   $6,391,969
======================================================================================
</TABLE>

                                                 
      At December 31, 1997 and December 31, 1996, the counterparty breakdown by
industry with respect to the net replacement value of AIGFP's derivatives
portfolio was as follows:


<TABLE>
<CAPTION>
(in thousands)
- ----------------------------------------------------------------------------------------------
                                           Net Replacement Value
                                        ----------------------------
                                        Swaps and        Futures and        Total        Total
                                        Swaptions  Forward Contracts         1997         1996
==============================================================================================
<S>                                    <C>               <C>          <C>          <C>       
Non-U.S. banks                         $2,213,366         $   49,939   $2,263,305   $2,330,481
Insured municipalities                    757,514                 --      757,514      656,373
U.S. industrials                          513,958                 83      514,041      894,942
Governmental                              677,230                 --      677,230      894,284
Non-U.S. financial service companies       64,787                 --       64,787       34,383
Non-U.S. industrials                    1,034,792                 --    1,034,792      497,839
Special purpose                           163,109                 --      163,109      121,137
U.S. banks                                584,915                 --      584,915      251,641
U.S. financial service companies          433,710                 --      433,710      534,965
Supranationals                            207,671                 --      207,671      175,924
- ----------------------------------------------------------------------------------------------
Total                                  $6,651,052         $   50,022   $6,701,074   $6,391,969
==============================================================================================
</TABLE>


      AIGFP has entered into commitments to provide liquidity for certain
tax-exempt variable rate demand notes issued by municipal entities. The
agreements allow the holders, in certain circumstances, to tender the notes to
the issuer at par value. In the event a remarketing agent of an issuer is unable
to resell such tendered notes, AIGFP would be obligated to purchase the notes at
par value. With respect to certain notes that have been issued, AIGFP has
fulfilled its liquidity commitments by arranging bank liquidity facilities.
These banks agree to purchase the notes that AIGFP is otherwise obligated to
purchase in connection with a failed remarketing. It is the intention of AIGFP
to arrange similar liquidity with respect to the $205.0 million aggregate amount
of notes that are expected to be issued through 1999.

      Securities sold, but not yet purchased represent obligations of AIGFP to
deliver specified securities at their contracted prices, and thereby create a
liability to repurchase the securities in the market at prevailing prices.

      AIGFP monitors and controls its risk exposure on a daily basis through
financial, credit and legal reporting systems and, accordingly, believes that it
has in place effective procedures for evaluating and limiting the credit and
market risks to which it is subject. Management is not aware of any potential
counterparty defaults.

      The net trading revenues for the twelve months ended December 31, 1997,
1996 and 1995 from AIGFP's operations were $452.1 million, $369.2 million and
$289.0 million, respectively.

      (d) AIG Trading Group Inc. and its subsidiaries (AIGTG) becomes a party to
off-balance sheet financial instruments in the normal course of its business and
to reduce its currency, interest rate and commodity exposures.

      The following tables provide the contractual and notional amounts of
AIGTG's derivatives portfolio at December 31, 1997 and December 31, 1996. In
addition, the estimated positive fair values associated with the derivatives
portfolio are also provided and include a maturity profile for the December 31,
1997 balances based upon the expected timing of the future cash flows.

      Futures and forward contracts are contracts for delivery of foreign
currencies, commodities or financial indices in which the seller/purchaser
agrees to make/take delivery at a specified future 


60

<PAGE>   62

                             American International Group, Inc. and Subsidiaries

11. Commitments and Contingent Liabilities (continued)

date of a specified instrument, at a specified price or yield. Risks arise as a
result of movements in current market prices from contracted prices and the
potential inability of counterparties to meet their obligations under the
contracts. Options are contracts that allow the holder of the option to purchase
or sell the underlying commodity, currency or index at a specified price and
within, or at, a specified period of time. Risks arise as a result of movements
in current market prices from contracted prices, and the potential inability of
the counterparties to meet their obligations under the contracts. As a writer of
options, AIGTG generally receives an option premium and then manages the risk of
any unfavorable change in the value of the underlying commodity, currency or
index. At December 31, 1997, the contractual amount of AIGTG's futures, forward
and option contracts approximated $412.64 billion.

      The gross replacement values presented represent the sum of the estimated
positive fair values of all of AIGTG's derivatives contracts at December 31,
1997 and December 31, 1996. These values do not represent the credit risk to
AIGTG.

      Net replacement values presented represent the net sum of estimated
positive fair values after the application of legally enforceable master
closeout netting agreements and collateral held. The net replacement values most
closely represent the net credit risk to AIGTG or the maximum amount exposed to
potential loss within a product category. At December 31, 1997, the net
replacement value of AIGTG's futures, forward and option contracts and interest
rate and currency swaps approximated $5.0 billion.

      The following tables present AIGTG's derivatives portfolio and the
associated credit exposure, if applicable, by maturity and type of derivative at
December 31, 1997 and December 31, 1996:


<TABLE>
<CAPTION>
(in thousands)
- ----------------------------------------------------------------------------------------------------------------
                                                                   Remaining Life
                                                  -------------------------------------------------------------
                                                            One      Two Through      Six Through     After Ten 
                                                           Year       Five Years        Ten Years         Years 
================================================================================================================
<S>                                               <C>              <C>              <C>              <C>        
Contractual amount of futures, forwards 
 and options:
  Exchange traded futures and options             $  21,613,406    $   2,931,347    $      34,545    $       -- 
================================================================================================================
  Forwards                                        $ 253,917,460    $  12,347,787    $   1,694,038    $       -- 
================================================================================================================
  Over the counter purchased options              $  39,756,245    $  17,466,110    $   2,932,703    $  849,059 
================================================================================================================
  Over the counter sold options (a)               $  48,398,996    $   9,595,654    $     964,050    $  134,771 
================================================================================================================
Notional amount:
  Interest rate swaps and forward rate agreements $  60,017,945    $  14,798,198    $   2,376,472    $  310,035 
  Currency swaps                                        628,542        5,134,893          725,898            -- 
- ----------------------------------------------------------------------------------------------------------------
Total                                             $  60,646,487    $  19,933,091    $   3,102,370    $  310,035 
================================================================================================================
Credit exposure:
  Futures, forwards and purchased options
    contracts and interest rate and
     currency swaps:
      Gross replacement value                     $   9,330,966    $   1,364,417    $     308,435    $   15,899 
      Master netting arrangements                    (5,277,129)        (442,284)         (70,963)       (7,935)
      Collateral                                       (135,303)         (73,991)         (15,384)           -- 
- ----------------------------------------------------------------------------------------------------------------
Net replacement value (b)                         $   3,918,534    $     848,142    $     222,088    $    7,964 
================================================================================================================


<CAPTION>
(in thousands)
- -------------------------------------------------------------------------------
                                                 
                                                 
                                                          Total           Total
                                                           1997            1996
===============================================================================
<S>                                               <C>              <C>         
Contractual amount of futures, forwards 
 and options:
  Exchange traded futures and options             $  24,579,298    $ 17,004,692
===============================================================================
  Forwards                                        $ 267,959,285    $216,775,766
===============================================================================
  Over the counter purchased options              $  61,004,117    $ 27,377,217
===============================================================================
  Over the counter sold options (a)               $  59,093,471    $ 31,049,529
===============================================================================
Notional amount:
  Interest rate swaps and forward rate agreements $  77,502,650    $ 66,306,480
  Currency swaps                                      6,489,333       5,853,194
- -------------------------------------------------------------------------------
Total                                             $  83,991,983    $ 72,159,674
===============================================================================
Credit exposure:
  Futures, forwards and purchased options
    contracts and interest rate and
     currency swaps:
      Gross replacement value                     $  11,019,717    $  7,489,766
      Master netting arrangements                    (5,798,311)     (3,872,291)
      Collateral                                       (224,678)       (149,347)
- -------------------------------------------------------------------------------
Net replacement value (b)                         $   4,996,728    $  3,468,128
===============================================================================
</TABLE>


(a)   Sold options obligate AIGTG to buy or sell the underlying item if the
      option purchaser chooses to exercise. The amounts do not represent credit
      exposure.
(b)   The net replacement values with respect to exchange traded futures and
      options, forward contracts and purchased over the counter options are
      presented as a component of trading assets in the accompanying balance
      sheet. The net replacement values with respect to interest rate and
      currency swaps are presented as a component of unrealized gain on interest
      rate and currency swaps, options and forward transactions in the
      accompanying balance sheet.

      AIGTG independently evaluates the creditworthiness of its counterparties,
taking into account credit ratings assigned by recognized statistical rating
organizations. In addition, AIGTG's credit approval process involves pre-set
counterparty, country and industry credit exposure limits and, for particularly
credit intensive transactions, obtaining approval from AIG's Credit Risk
Committee. The maximum potential loss will increase or decrease during the life
of the derivative commitments as a function of maturity and market conditions.


                                                                              61

<PAGE>   63

Notes to Financial Statements  (CONTINUED)

11. Commitments and Contingent Liabilities (continued)

      AIGTG determines counterparty credit quality by reference to ratings from
independent rating agencies or internal analysis. At December 31, 1997 and
December 31, 1996, the counterparty credit quality and counterparty breakdown by
industry with respect to the net replacement value of AIGTG's derivatives
portfolio was as follows:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                          Net Replacement Value
                                                         -----------------------
                                                               1997         1996
================================================================================
<S>                                                      <C>          <C>       
Counterparty credit quality:
  AAA                                                    $  752,741   $  447,236
  AA                                                      2,503,289    1,075,713
  A                                                       1,023,650    1,133,332
  BBB                                                       342,695      518,485
  Below investment grade                                     98,425      115,810
  Not externally rated, including exchange 
    traded futures and options*                             275,928      177,552
- --------------------------------------------------------------------------------
Total                                                    $4,996,728   $3,468,128
================================================================================
Counterparty breakdown by industry:
  Non-U.S. banks                                         $2,685,998   $1,269,399
  U.S. industrials                                          163,484      761,634
  Governmental                                              135,269      121,278
  Non-U.S. financial service companies                      260,412      186,476
  Non-U.S. industrials                                      167,835      192,669
  U.S. banks                                                560,388      309,154
  U.S. financial service companies                          747,414      449,966
  Exchanges*                                                275,928      177,552
- --------------------------------------------------------------------------------
Total                                                    $4,996,728   $3,468,128
================================================================================
</TABLE>


* Exchange traded futures and options are not deemed to have significant credit
  exposure as the exchanges guarantee that every contract will be properly 
  settled on a daily basis.

      Spot commodities sold but not yet purchased represent obligations of AIGTG
to deliver spot commodities at their contracted prices and thereby create a
liability to repurchase the spot commodities in the market at prevailing prices.

      AIGTG limits its risks by holding offsetting positions. In addition, AIGTG
monitors and controls its risk exposures through various monitoring systems
which evaluate AIGTG's market and credit risks, and through credit approvals and
limits. At December 31, 1997, AIGTG did not have a significant concentration of
credit risk from either an individual counterparty or group of counterparties.

      The net trading revenues for the twelve months ended December 31, 1997,
1996 and 1995 from AIGTG's operations were $561.8 million, $288.6 million and
$317.2 million, respectively.

      At December 31, 1997, AIGTG had issued and outstanding $169.8 million
principal amount of letters of credit. These letters of credit were issued
primarily to various exchanges.

      AIG has issued unconditional guarantees with respect to the prompt
payment, when due, of all present and future obligations and liabilities of
AIGFP and AIGTG arising from transactions entered into by AIGFP and AIGTG.

      (e) At December 31, 1997, ILFC had committed to purchase or had secured
positions for 328 aircraft deliverable from 1998 through 2006 at an estimated
aggregate purchase price of $17.7 billion. ILFC will be required to find
customers for any aircraft presently on order and any aircraft to be ordered,
and it must arrange financing for portions of the purchase price of such
equipment.

      In the normal course of business, ILFC enters into interest rate swaps,
swaptions and interest rate floors (derivatives transactions). The objective is
to lower ILFC's overall borrowing cost and to maintain an optimal mix of
variable and fixed rate interest obligations. ILFC accounts for its derivatives
transactions on an accrual basis. Accrued future payments or receipts are
reflected in operating income in the period incurred or earned.

      Credit risk exposure arises from the potential that the counterparty may
not perform under these agreements with respect to the derivatives transactions.
ILFC minimizes such exposure through transacting with recognized U.S. derivative
dealers rated at least A by a recognized statistical rating organization. The
counterparties to the majority of the derivatives transactions are rated AAA.
ILFC monitors each counterparty's assigned credit rating throughout the life of
each of the derivatives transactions. ILFC currently does not require security
nor is security required by its counterparties for its positions. ILFC has the
right to require security under certain circumstances.


62

<PAGE>   64

                             American International Group, Inc. and Subsidiaries

11. Commitments and Contingent Liabilities (continued)

      The following table presents ILFC's notional amounts of its interest rate
swaps, swaptions and interest rate floors by maturity at December 31, 1997 and
1996:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                              Remaining Life
                   ----------------------------------
                                  Two to   After Five        Total        Total
                   One Year   Five Years        Years         1997         1996
================================================================================
<S>              <C>          <C>          <C>          <C>          <C>       
Interest Rate:
Swaps            $  365,806   $  659,931   $  261,790   $1,287,527   $1,349,234
Swaptions*               --      100,000           --      100,000      100,000
Floors               33,409      440,221      393,435      867,065      900,434
- -------------------------------------------------------------------------------
Total            $  399,215   $1,200,152   $  655,225   $2,254,592   $2,349,668
================================================================================
</TABLE>


*   Swaptions obligate ILFC to convert certain fixed note obligations to
    floating rate obligations if the swaption purchaser chooses to exercise.
    These amounts do not represent credit exposure.

      AIG does not anticipate any losses in connection with the aforementioned
activities that would have a material effect on its financial condition or
results of operations.

      (f) AIG and its subsidiaries, in common with the insurance industry in
general, are subject to litigation, including claims for punitive damages, in
the normal course of their business. AIG does not believe that such litigation
will have a material effect on its operating results and financial condition.

      AIG continues to receive claims asserting injuries from toxic waste,
hazardous substances, and other environmental pollutants and alleged damages to
cover the cleanup costs of hazardous waste dump sites (hereinafter collectively
referred to as environmental claims) and indemnity claims asserting injuries
from asbestos. Estimation of asbestos and environmental claims loss reserves is
a difficult process, as these claims, which emanate from policies written in
1984 and prior years, cannot be estimated by conventional reserving techniques.
Asbestos and environmental claims development is affected by factors such as
inconsistent court resolutions, the broadening of the intent of policies and
scope of coverage and increasing number of new claims. AIG and other industry
members have and will continue to litigate the broadening judicial
interpretation of policy coverage and the liability issues. If the courts
continue in the future to expand the intent of the policies and the scope of the
coverage, as they have in the past, additional liabilities would emerge for
amounts in excess of reserves held. This emergence cannot now be reasonably
estimated, but could have a material impact on AIG's future operating results.
The reserves carried for these claims as at December 31, 1997 ($2.31 billion
gross; $787.3 million net) are believed to be adequate as these reserves are
based on known facts and current law.

      A summary of reserve activity, including estimates for applicable incurred
but not reported losses and loss expenses, relating to asbestos and
environmental claims separately and combined at December 31, 1997, 1996 and 1995
was as follows:


<TABLE>
<CAPTION>
(in millions)
- ----------------------------------------------------------------------------------------------------------------------
                                                               1997                  1996                  1995
                                                      --------------------  --------------------  --------------------
                                                         Gross         Net     Gross         Net     Gross         Net
======================================================================================================================
<S>                                                   <C>         <C>       <C>         <C>       <C>         <C>     
Asbestos:
Reserve for losses and loss expenses
  at beginning of year                                $  875.9    $  172.3  $  744.8    $  127.9  $  686.0    $  130.2
Losses and loss expenses incurred                        238.4        68.3     392.5       102.7     197.7        20.5
Losses and loss expenses paid                           (272.2)      (45.5)   (261.4)      (58.3)   (138.9)      (22.8)
- ----------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year   $  842.1    $  195.1  $  875.9    $  172.3  $  744.8    $  127.9
======================================================================================================================
Environmental:
Reserve for losses and loss expenses
  at beginning of year                                $1,427.4    $  570.6  $1,197.9    $  379.3  $  728.1    $  200.1
Losses and loss expenses incurred                        223.1        85.0     379.6       240.3     684.9       231.7
Losses and loss expenses paid                           (183.4)      (63.4)   (150.1)      (49.0)   (215.1)      (52.5)
- ----------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year   $1,467.1    $  592.2  $1,427.4    $  570.6  $1,197.9    $  379.3
======================================================================================================================
Combined:
Reserve for losses and loss expenses
  at beginning of year                                $2,303.3    $  742.9  $1,942.7    $  507.2  $1,414.1    $  330.3
Losses and loss expenses incurred                        461.5       153.3     772.1       343.0     882.6       252.2
Losses and loss expenses paid                           (455.6)     (108.9)   (411.5)     (107.3)   (354.0)      (75.3)
- ----------------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses at end of year   $2,309.2    $  787.3  $2,303.3    $  742.9  $1,942.7    $  507.2
======================================================================================================================
</TABLE>



                                                                              63

<PAGE>   65

Notes to Financial Statements  (CONTINUED)

12. Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" (FASB 107) requires disclosure of fair value
information about financial instruments, as defined therein, for which it is
practicable to estimate such fair value. These financial instruments may or may
not be recognized in the consolidated balance sheet. In the measurement of the
fair value of certain of the financial instruments, quoted market prices were
not available and other valuation techniques were utilized. These derived fair
value estimates are significantly affected by the assumptions used. FASB 107
excludes certain financial instruments, including those related to insurance
contracts.

      The following methods and assumptions were used by AIG in estimating the
fair value of the financial instruments presented:

      Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.

      Fixed maturity securities: Fair values for fixed maturity securities
carried at amortized cost or at market value were generally based upon quoted
market prices. For certain fixed maturity securities for which market prices
were not readily available, fair values were estimated using values obtained
from independent pricing services. No other fair valuation techniques were
applied to these securities as AIG believes it would have to expend excessive
costs for the benefits derived.

      Equity securities: Fair values for equity securities were based upon
quoted market prices.

      Mortgage loans on real estate, policy and collateral loans: Where
practical, the fair values of loans on real estate and collateral loans were
estimated using discounted cash flow calculations based upon AIG's current
incremental lending rates for similar type loans. The fair values of the policy
loans were not calculated as AIG believes it would have to expend excessive
costs for the benefits derived.

      Trading assets and trading liabilities: Fair values for trading assets and
trading liabilities approximate the carrying values presented in the
consolidated balance sheet.

      Securities available for sale: Fair values for securities available for
sale and related hedges were based on quoted market prices. For securities and
related hedges for which market prices were not readily available, fair values
were estimated using quoted market prices of comparable investments.

      Trading securities: Fair values for trading securities were based on
current market value where available. For securities for which market values
were not readily available, fair values were estimated using quoted market
prices of comparable investments.

      Spot commodities: Fair values for spot commodities were based on current
market prices.

      Unrealized gains and losses on interest rate and currency swaps, options
and forward transactions: Fair values for swaps, options and forward
transactions were based on the use of valuation models that utilize, among other
things, current interest, foreign exchange and volatility rates, as applicable.

      Securities purchased (sold) under agreements to resell (repurchase), at
contract value: As these securities (obligations) are short-term in nature, the
contract values approximate fair values.

      Other invested assets: For assets for which market prices were not readily
available, fair valuation techniques were not applied as AIG believes it would
have to expend excessive costs for the benefits derived.

      Policyholders' contract deposits: Fair values of policyholder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.

      GIAs: Fair values of AIG's obligations under investment type agreements
were estimated using discounted cash flow calculations based on interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued. Additionally, AIG follows a
policy of minimizing interest rate risks associated with GIAs by entering into
swap transactions.

      Securities and spot commodities sold but not yet purchased: The carrying
amounts for the financial instruments approximate fair values. Fair values for
spot commodities sold short were based on current market prices.

      Deposits due to banks and other depositors: To the extent certain amounts
are not demand deposits or certificates of deposit which mature in more than one
year, fair values were not calculated as AIG believes it would have to expend
excessive costs for the benefits derived.

      Commercial paper: The carrying amount of AIG's commercial paper borrowings
approximates fair value.

      Notes, bonds, loans and mortgages payable: Where practical, the fair
values of these obligations were estimated using discounted cash flow
calculations based upon AIG's current incremental borrowing rates for similar
types of borrowings with maturities consistent with those remaining for the debt
being valued.


64

<PAGE>   66

                             American International Group, Inc. and Subsidiaries

12. Fair Value of Financial Instruments (continued)

      The carrying values and fair values of AIG's financial instruments at
December 31, 1997 and December 31, 1996 and the average fair values with respect
to derivative positions during 1997 and 1996 were as follows:


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------
                                                                               1997                    
                                                               ---------------------------------------
                                                                                               Average
                                                                  Carrying          Fair          Fair
                                                                     Value         Value         Value
======================================================================================================
<S>                                                            <C>           <C>           <C>        
Fixed maturities                                               $51,565,986   $52,692,748   $        --
Equity securities                                                5,348,019     5,348,019            --
Mortgage loans on real estate, policy and collateral loans       7,919,764     7,966,673            --
Securities available for sale                                    9,145,317     9,145,317     8,652,779
Trading securities                                               3,974,561     3,974,561     2,904,702
Spot commodities                                                   459,517       459,517       450,292
Unrealized gain on interest rate and currency swaps, options
  and forward transactions                                       7,422,290     7,422,290     7,225,716
Trading assets                                                   6,715,486     6,715,486     5,480,796
Securities purchased under agreements to resell                  4,551,191     4,551,191            --
Other invested assets                                            4,681,423     4,681,423            --
Short-term investments                                           3,332,542     3,332,542            --
Cash                                                                86,917        86,917            --
Policyholders' contract deposits                                10,323,112    10,432,709            --
Borrowings under obligations of guaranteed
  investment agreements                                          8,000,326     8,675,838            --
Securities sold under agreements to repurchase                   2,706,310     2,706,310            --
Trading liabilities                                              5,366,421     5,366,421     4,548,789
Securities and spot commodities sold but not yet purchased       5,171,680     5,171,680     3,647,536
Unrealized loss on interest rate and currency swaps, options
  and forward transactions                                       5,979,571     5,979,571     5,270,414
Deposits due to banks and other depositors                         972,423       972,423            --
Commercial paper                                                 3,374,907     3,374,907            --
Notes, bonds, loans and mortgages payable                       13,885,412    13,959,672            --
======================================================================================================


<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------
                                                                                1996
                                                               ---------------------------------------
                                                                                               Average
                                                                  Carrying          Fair          Fair
                                                                     Value         Value         Value
======================================================================================================
<S>                                                            <C>           <C>           <C>        
Fixed maturities                                               $48,625,226   $49,345,449   $        --
Equity securities                                                6,065,640     6,065,640            --
Mortgage loans on real estate, policy and collateral loans       7,876,820     7,881,348            --
Securities available for sale                                    9,785,909     9,785,909     6,172,883
Trading securities                                               2,357,812     2,357,812     2,344,717
Spot commodities                                                   204,705       204,705       278,941
Unrealized gain on interest rate and currency swaps, options
  and forward transactions                                       6,906,012     6,906,012     6,450,376
Trading assets                                                   3,793,433     3,793,433     3,427,781
Securities purchased under agreements to resell                  1,642,591     1,642,591            --
Other invested assets                                            2,915,302     2,915,302            --
Short-term investments                                           2,008,123     2,008,123            --
Cash                                                                58,740        58,740            --
Policyholders' contract deposits                                 9,803,409     9,888,685            --
Borrowings under obligations of guaranteed
  investment agreements                                          5,723,228     6,195,954            --
Securities sold under agreements to repurchase                   3,039,423     3,039,423            --
Trading liabilities                                              3,313,508     3,313,508     3,227,531
Securities and spot commodities sold but not yet purchased       1,568,542     1,568,542       263,722
Unrealized loss on interest rate and currency swaps, options
  and forward transactions                                       5,414,433     5,414,433     4,976,258
Deposits due to banks and other depositors                       1,206,374     1,206,374            --
Commercial paper                                                 4,497,976     4,497,976            --
Notes, bonds, loans and mortgages payable                       13,299,310    13,596,511            --
======================================================================================================
</TABLE>


      Off-balance sheet financial instruments: Financial instruments which are
not currently recognized in the consolidated balance sheet of AIG are
principally commitments to extend credit and financial guarantees. The
unrecognized fair values of these instruments represent fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
current agreements and the counterparties' credit standings. No valuation was
made as AIG believes it would have to expend excessive costs for the benefits
derived.

13. Stock Compensation Plans

At December 31, 1997, AIG had two types of stock-based compensation plans. One
was a stock option plan; the other, an employee stock purchase plan. AIG applies
APB Opinion 25 "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans. Accordingly, no compensation costs
have been recognized for either plan.

      Had compensation costs for these plans been determined consistent with the
method of Statement of Financial Accounting Standards No. 123 "Accounting for
Awards of Stock Based Compensation to Employees," AIG's net income and earnings
per share for the years ended December 31, 1997, 1996 and 1995 would have been
reduced to the pro forma amounts as follows:


<TABLE>
<CAPTION>
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
                                        1997              1996              1995
================================================================================
<S>                            <C>               <C>               <C>          
Net income:
  As reported                  $   3,332,335     $   2,897,257     $   2,510,383
  Pro forma                        3,323,289         2,892,422         2,509,261
Earnings per share-
  diluted:
  As reported                          $4.73             $4.08             $3.52
  Pro forma                             4.71              4.08              3.52
================================================================================
</TABLE>


      The fair value of stock grants included in the pro forma amounts is not
necessarily indicative of future effects on net income and earnings per share.

      (a) Stock Option Plan: On December 19, 1991, the AIG Board of Directors
adopted a 1991 employee stock option plan (the 1991 Plan), which provided that
options to purchase a maximum of 6,750,000 shares of common stock could be
granted to officers and other key employees at prices not less than fair market
value at the date of grant. Both the 1991 Plan, and the options with respect to
168,580 shares granted


                                                                              65

<PAGE>   67

Notes to Financial Statements  (CONTINUED)

13. Stock Compensation Plans (continued)

thereunder on December 19, 1991, were approved by shareholders at the 1992
Annual Meeting. An amendment to the 1991 Plan, approved by shareholders at the
1997 Annual Meeting, increased the aggregate number of shares available for
grant to 11,812,500 shares to assure that adequate shares are available for
grant during the remaining term of the 1991 Plan. A second amendment to the 1991
Plan limits the maximum number of shares as to which stock options may be
granted to any employee in any one year to 135,000 shares. At December 31, 1997,
6,648,316 shares were reserved for future grants under the amended 1991 Plan. As
of March 18, 1992, no further options could be granted under the 1987 employee
stock option plan (the 1987 Plan), but outstanding options granted under the
1987 Plan continue in force until exercise or expiration. At December 31, 1997,
there were 6,206,676 shares reserved for issuance under these plans.

      Under each plan, 25 percent of the options granted become exercisable on
the anniversary of the date of grant in each of the four years following that
grant and all options expire 10 years from the date of the grant. As of December
31, 1997, outstanding options granted with respect to 4,075,338 shares qualified
for Incentive Stock Option treatment under the Economic Recovery Tax Act of
1981.

      Additional information with respect to AIG's plans at December 31, 1997,
and changes for the three years then ended, was as follows:


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
                                                1997                          1996                         1995
                                    --------------------------    --------------------------      ------------------------
                                                      Weighted                      Weighted                      Weighted
                                                       Average                       Average                       Average
                                       Shares   Exercise Price       Shares   Exercise Price       Shares   Exercise Price
==========================================================================================================================
<S>                                 <C>                <C>        <C>                <C>        <C>                <C>    
Shares Under Option:                                                                                             
Outstanding at beginning of year    6,470,656          $ 39.18    6,196,069          $ 32.59    6,222,123          $ 26.87
Granted                               743,550           105.78      935,100            72.37      836,512            60.22
Exercised                            (935,321)           26.11     (591,827)           22.25     (775,806)           16.56
Forfeited                             (72,209)           52.10      (68,686)           42.33      (86,760)           32.14
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year          6,206,676          $ 48.98    6,470,656          $ 39.18    6,196,069          $ 32.59
- --------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end     4,228,252          $ 34.51    4,354,324          $ 28.76    4,124,275          $ 24.67
- --------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per                                                                            
  share of options granted                             $ 39.31                       $ 27.34                       $ 21.95
==========================================================================================================================
</TABLE>


      Information about stock options outstanding at December 31, 1997, is
summarized as follows:


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
                                          Options Outstanding                           Options Exercisable
                             ------------------------------------------------     ----------------------------
                                                   Weighted          Weighted                         Weighted
                                  Number  Average Remaining           Average          Number          Average
Range of Exercise Prices     Outstanding   Contractual Life    Exercise Price     Exercisable   Exercise Price
==============================================================================================================
<S>                            <C>                <C>                   <C>         <C>                  <C>  
$12.09- 17.37                    741,294          1.7 years           $ 15.08         741,294           $15.08
 21.33- 28.67                  1,089,691          3.0 years             23.70       1,089,691            23.70
 35.33- 40.67                  1,275,951          5.4 years             37.27       1,269,299            37.26
 42.89- 53.33                    804,951          7.0 years             43.65         578,522            43.47
 57.58- 62.92                    694,702          8.0 years             62.09         335,162            62.12
 65.83- 73.75                    857,137          8.9 years             73.02         214,284            73.02
 82.83-106.50                    742,950          9.9 years            105.78              --               --
- --------------------------------------------------------------------------------------------------------------
                               6,206,676                                            4,228,252          
==============================================================================================================
</TABLE>


      The fair values of stock options granted during the years ended December
31, 1997, 1996 and 1995 were $29,226,000, $25,566,000 and $18,356,000,
respectively. The fair value of each option is estimated on the date of the
grant using the Black-Scholes option-pricing model.

      The following weighted average assumptions were used for grants in 1997,
1996 and 1995, respectively: dividend yields of 0.30 percent, 0.33 percent and
0.32 percent; expected volatilities of 20.0 percent, 20.0 percent and 20.4
percent; risk-free interest rates of 6.03 percent, 6.29 percent and 5.77 percent
and expected terms of 7 years.

      (b) Employee Stock Purchase Plan: AIG's 1984 employee stock purchase plan
was adopted at its 1984 shareholders' meeting and became effective as of July 1,
1984. Eligible employees could receive privileges to purchase up to an aggregate
of 2,953,125 shares of AIG common stock, at a price equal to 85 percent of the
fair market value on the date of grant of the purchase privilege. Purchase
privileges were granted annually and were limited to the number of whole shares
that could be purchased by an amount equal to 5 percent of an employee's annual
salary or $5,500, whichever was less.


66

<PAGE>   68

                             American International Group, Inc. and Subsidiaries

13. Stock Compensation Plans (continued)

      AIG's 1996 employee stock purchase plan was adopted at its 1996
shareholders' meeting and became effective as of July 1, 1996, replacing the
1984 plan. Eligible employees may receive privileges to purchase up to an
aggregate of 1,500,000 shares of AIG common stock, at a price equal to 85
percent of the fair market value on the date of the grant of the purchase
privilege. Purchase privileges are granted annually and are limited to the
number of whole shares that can be purchased by an amount equal to 5 percent of
an employee's annual salary or $5,500, whichever is less. Beginning with the
January 1, 1998 subscription, the maximum allowable purchase limitation
increased to 10 percent of an employee's annual salary or $10,000, whichever is
less and the eligibility requirement was reduced to one year. In all other
respects, the 1996 plan is identical to the 1984 plan.

      There were 69,339 shares, 219,326 shares and 228,609 shares issued under
the 1984 plan at weighted average prices of $52.76, $44.59 and $33.48 for the
years ended December 31, 1997, 1996 and 1995, respectively. The excess or
deficit of the proceeds over the par value or cost of the common stock issued
was credited or charged to additional paid-in capital.

      There were 147,085 shares issued under the 1996 plan at a weighted average
price of $57.76 for the year ended December 31, 1997. The excess or deficit of
the proceeds over the par value or cost of the common stock issued was credited
or charged to additional paid-in capital.

      As of December 31, 1997, there were 181,049 shares of common stock
subscribed to at a weighted average price of $77.37 per share pursuant to grants
of privileges under the 1996 plan. There were 1,171,866 shares available for the
grant of future purchase privileges under the 1996 plan at December 31, 1997.

      The fair values of purchase privileges granted during the years ended
December 31, 1997, 1996 and 1995 were $3,625,000, $3,039,000 and $2,005,000,
respectively. The weighted average fair values per share of those purchase
rights granted in 1997, 1996 and 1995 were $20.02, $13.14 and $9.93,
respectively. The fair value of each purchase right is estimated on the date of
the subscription using the Black-Scholes model.

      The following weighted average assumptions were used for grants in 1997,
1996 and 1995, respectively: dividend yields of 0.30 percent, 0.37 percent and
0.32 percent; expected volatilities of 26.0 percent, 21.9 percent and 16.9
percent; risk-free interest rates of 5.81 percent, 5.54 percent and 5.64
percent; and expected terms of 1 year.

14. Employee Benefits

(a) Employees of AIG, its subsidiaries and certain affiliated companies,
including employees in foreign countries, are generally covered under various
funded and insured pension plans. Eligibility for participation in the various
plans is based on either completion of a specified period of continuous service
or date of hire, subject to age limitation.

      AIG's U.S. retirement plan is a qualified, noncontributory, defined
benefit plan. All qualified employees who have attained age 21 and completed
twelve months of continuous service are eligible to participate in this plan. An
employee with 5 or more years of service is entitled to pension benefits
beginning at normal retirement at age 65. Benefits are based upon a percentage
of average final compensation multiplied by years of credited service limited to
44 years of credited service. The average final compensation is subject to
certain limitations. Annual funding requirements are determined based on the
"projected unit credit" cost method which attributes a pro rata portion of the
total projected benefit payable at normal retirement to each year of credited
service.

      AIG has adopted a Supplemental Executive Retirement Program (Supplemental
Plan) to provide additional retirement benefits to designated executives and key
employees. Under the Supplemental Plan, the annual benefit, not to exceed 60
percent of average final compensation, accrues at a percentage of average final
pay multiplied for each year of credited service reduced by any benefits from
the current and any predecessor retirement plans, Social Security, if any, and
from any qualified pension plan of prior employers. The Supplemental Plan also
provides a benefit equal to the reduction in benefits payable under the AIG
retirement plan as a result of Federal limitations on benefits payable
thereunder. Currently, the Supplemental Plan is unfunded.

      Eligibility for participation in the various non-U.S. retirement plans is
either based on completion of a specified period of continuous service or date
of hire, subject to age limitation. Where non-U.S. retirement plans are defined
benefit plans, they are generally based on the employees' years of credited
service and average compensation in the years preceding retirement.

      Assumptions associated with the projected benefit obligation and expected
long-term rate of return on plan assets at December 31, 1997 were as follows:


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
                                                        Range of
                                                  Non-U.S. Plans*     U.S. Plans
================================================================================
<S>                                                     <C>                 <C> 
Discount rate                                           3.5-10.0%           7.0%
Salary increase rate                                    2.5-10.0            5.0
Expected long-term rate of return on plan assets        4.0- 9.2            9.0
================================================================================
</TABLE>


* The ranges for the non-U.S. plans reflect the local socioeconomic environments
  in which AIG operates.


                                                                              67

<PAGE>   69

Notes to Financial Statements  (CONTINUED)

14. Employee Benefits (continued)

      The following table sets forth the funded status of the various pension
plans and the amounts recognized in the accompanying consolidated balance sheet
as of December 31, 1997 and 1996:


<TABLE>
<CAPTION>
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                            1997                                  1996
                                                          -----------------------------------    ----------------------------------
                                                           Non-U.S.         U.S.                  Non-U.S.         U.S.
                                                              Plans        Plans        Total        Plans        Plans       Total
===================================================================================================================================
<S>                                                       <C>          <C>          <C>          <C>          <C>         <C>      
Plan assets at fair value*                                $ 159,734    $ 297,433    $ 457,167    $ 171,037    $ 230,767   $ 401,804
- -----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
  Accumulated benefits earned prior to valuation date:
    Vested                                                  234,264      206,242      440,506      240,023      155,738     395,761
    Nonvested                                                29,414       30,833       60,247       30,222       22,222      52,444
- -----------------------------------------------------------------------------------------------------------------------------------
  Accumulated benefit obligation                            263,678      237,075      500,753      270,245      177,960     448,205
  Additional benefits based on estimated
    future salary levels                                     66,307      126,282      192,589       69,981       94,956     164,937
- -----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation                                329,985      363,357      693,342      340,226      272,916     613,142
- -----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess
  of plan assets                                            170,251       65,924      236,175      169,189       42,149     211,338
- -----------------------------------------------------------------------------------------------------------------------------------
  Unrecognized prior service cost                           (14,322)     (20,827)     (35,149)     (19,288)     (17,102)    (36,390)
  Unrecognized net gain (loss)                              (64,770)      16,356      (48,414)     (59,897)      29,550     (30,347)
  Unamortized balance of the initial transition amounts     (11,583)      (7,635)     (19,218)     (15,241)      (9,137)    (24,378)
- -----------------------------------------------------------------------------------------------------------------------------------
Net amounts to be applied to future periods                 (90,675)     (12,106)    (102,781)     (94,426)       3,311     (91,115)
Adjustment to reflect minimum liability                      47,965        4,031       51,996       61,024        3,217      64,241
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued pension liability                                 $ 127,541    $  57,849    $ 185,390    $ 135,787    $  48,677   $ 184,464
===================================================================================================================================
</TABLE>


* Plan assets are invested primarily in fixed-income securities and listed
  stocks.

      Net pension cost for the years ended December 31, 1997, 1996 and 1995
included the following components:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                   1997        1996        1995
================================================================================
<S>                                            <C>         <C>         <C>     
Cost of benefits earned during the period      $ 48,648    $ 47,783    $ 40,015
Interest cost on the projected benefit
  obligation                                     34,383      31,603      27,320
Actual return on all retirement plan assets     (66,769)    (41,387)    (53,904)
Net amortization and deferral of
  actuarial gains and losses                     39,743      17,918      30,114
Amortization of the initial
  transition amount                               3,093       3,323       3,720
- --------------------------------------------------------------------------------
Net pension expense*                           $ 59,098    $ 59,240    $ 47,265
================================================================================
</TABLE>


* Net pension expense included $31,323, $34,584 and $30,978 related to non-U.S.
  plans for 1997, 1996 and 1995, respectively.

      (b) AIG sponsors a voluntary savings plan for domestic employees (a 401(k)
plan), which, during the three years ended December 31, 1997, provided for
salary reduction contributions by employees and matching contributions by AIG of
up to 6 percent of annual salary depending on the employees' years of service.

      (c) In addition to AIG's defined benefit pension plan, AIG and its
subsidiaries provide a postretirement benefit program for medical care and life
insurance, domestically and in certain foreign countries. Eligibility in the
various plans is generally based upon completion of a specified period of
eligible service and reaching a specified age. Benefits vary by geographic
location.

      AIG's U.S. postretirement medical and life insurance benefits are based
upon the employee electing immediate retirement and having a minimum of ten
years of service. Retirees and their dependents who were age 65 by May 1, 1989
participate in the medical plan at no cost. Employees who retired after May 1,
1989 and on or prior to January 1, 1993 pay the active employee premium if under
age 65 and 50 percent of the active employee premium if over age 65. Retiree
contributions are subject to adjustment annually. Other cost sharing features of
the medical plan include deductibles, coinsurance and Medicare coordination and
a lifetime maximum benefit of $1,000,000. The maximum life insurance benefit
prior to age 70 is $32,500, with a maximum of $25,000 thereafter.

      Effective January 1, 1993, both plans' provisions were amended. Employees
who retire after January 1, 1993 are required to pay the actual cost of the
medical benefits reduced by a credit which is based upon age and years of
service at retirement. The life insurance benefit varies by age at retirement
from $5,000 for retirement at ages 55 through 59 to $15,000 for retirement at
ages 65 and over.

      Assumptions associated with the accrued postretirement benefit liability
at December 31, 1997 were as follows:


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
                                                       Non-U.S.          U.S.
                                                          Plans         Plans
================================================================================
<S>                                                    <C>                <C> 
Discount rate                                          7.0-10.0%          7.0%
Medical trend rate year 1*                                 12.0           7.5
Medical trend rate year 3 and 9                             6.0           5.5
================================================================================
</TABLE>


* The Medical trend rate grades downward from years 1 through 3 domestically and
  years 1 through 9 for the foreign benefits. The trend rates remain level
  thereafter.


                                                                              68

<PAGE>   70

                             American International Group, Inc. and Subsidiaries

14. Employee Benefits (continued)

      The following table sets forth the liability for the accrued
postretirement benefits of the various plans, and amounts recognized in the
accompanying consolidated balance sheet as of December 31, 1997 and 1996. These
plans are not funded currently.


<TABLE>
<CAPTION>
(in thousands)
- -------------------------------------------------------------------------------
                                                Non-U.S.        U.S.
                                                   Plans       Plans      Total
===============================================================================
<S>                                              <C>        <C>        <C>     
1997
Accumulated postretirement benefit obligation:
Retirees                                         $  1,923   $ 49,030   $ 50,953
Fully eligible active employees                     6,539      2,436      8,975
Other active employees                             10,048     18,529     28,577
- -------------------------------------------------------------------------------
                                                   18,510     69,995     88,505
- -------------------------------------------------------------------------------
Unrecognized net loss                                  --    (11,277)   (11,277)
Unrecognized prior service cost                        --     22,132     22,132
- -------------------------------------------------------------------------------
Accrued postretirement benefit
  liabilities                                    $ 18,510   $ 80,850   $ 99,360
===============================================================================
1996
Accumulated postretirement benefit obligation:
Retirees                                         $  2,025   $ 44,568   $ 46,593
Fully eligible active employees                     6,127      2,127      8,254
Other active employees                              8,757     11,926     20,683
- -------------------------------------------------------------------------------
                                                   16,909     58,621     75,530
- -------------------------------------------------------------------------------
Unrecognized net loss                                  --     (5,299)    (5,299)
Unrecognized prior service cost                        --     27,287     27,287
- -------------------------------------------------------------------------------
Accrued postretirement benefit
  liabilities                                    $ 16,909   $ 80,609   $ 97,518
===============================================================================
</TABLE>


      The net periodic postretirement costs for the years ended December 31,
1997, 1996 and 1995 included the following components:


<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
                                                               Life
                                                Medical   Insurance
                                                  Plans       Plans       Total
================================================================================
<S>                                             <C>         <C>         <C>    
1997
Cost of benefits earned during
  the period                                    $ 1,617     $   606     $ 2,223
Interest cost on accumulated
  postretirement benefit obligations              4,225       1,431       5,656
Amortization of prior service cost               (1,344)       (172)     (1,516)
Amortization of net actuarial losses                 80          31         111
- --------------------------------------------------------------------------------
Net periodic postretirement
  benefit costs                                 $ 4,578     $ 1,896     $ 6,474
================================================================================
1996
Cost of benefits earned during
  the period                                    $ 1,315     $   574     $ 1,889
Interest cost on accumulated
  postretirement benefit obligations              3,992       1,307       5,299
Amortization of prior service cost               (1,344)       (172)     (1,516)
Amortization of net actuarial losses                 59          22          81
- --------------------------------------------------------------------------------
Net periodic postretirement
  benefit costs                                 $ 4,022     $ 1,731     $ 5,753
================================================================================
1995
Cost of benefits earned during
  the period                                    $ 1,011     $   448     $ 1,459
Interest cost on accumulated
  postretirement benefit obligations              3,744       1,246       4,990
Amortization of prior service cost               (1,344)       (172)     (1,516)
- --------------------------------------------------------------------------------
Net periodic postretirement
  benefit costs                                 $ 3,411     $ 1,522     $ 4,933
================================================================================
</TABLE>



                                                                              69

<PAGE>   71

Notes to Financial Statements  (CONTINUED)

14. Employee Benefits (continued)

      The medical trend rate assumptions have a significant effect on the
amounts reported. Increasing each trend rate by 1 percent in each year would
increase the accumulated postretirement benefit obligations as of December 31,
1997 by $6.0 million and the aggregate service and interest cost components of
the periodic postretirement benefit costs for 1997 by $557,000.

      (d) AIG has certain benefits provided to former or inactive employees who
are not retirees. Certain of these benefits are insured and expensed currently;
other expenses are provided for currently. Such uninsured expenses include long
and short-term disability medical and life insurance continuation, short-term
disability income continuation and COBRA medical subsidies. The provision for
these benefits at December 31, 1997 was $5.6 million. The incremental expense
was insignificant.

15. Leases

(a) AIG and its subsidiaries occupy leased space in many locations under various
long-term leases and have entered into various leases covering the long-term use
of data processing equipment.

      At December 31, 1997, the future minimum lease payments under operating
leases were as follows:


<TABLE>
<CAPTION>
(in thousands)
================================================================================
<S>                                                                   <C>       
1998                                                                    $218,319
1999                                                                     152,004
2000                                                                     112,630
2001                                                                      96,075
2002                                                                      75,747
Remaining years after 2002                                               225,693
- --------------------------------------------------------------------------------
Total                                                                   $880,468
================================================================================
</TABLE>


      Rent expense approximated $240,600,000, $219,100,000 and $215,600,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.

      (b) Minimum future rental income on noncancelable operating leases of
flight equipment which have been delivered at December 31, 1997 was as follows:


<TABLE>
<CAPTION>
(in thousands)
================================================================================
<S>                                                                   <C>       
1998                                                                  $1,460,145
1999                                                                   1,248,816
2000                                                                     962,415
2001                                                                     722,347
2002                                                                     552,554
Remaining years after 2002                                               792,066
- --------------------------------------------------------------------------------
Total                                                                 $5,738,343
================================================================================
</TABLE>


      Flight equipment is leased, under operating leases, for periods ranging
from one to ten years.

16. Ownership and Transactions with Related Parties

(a) Ownership: The directors and officers of AIG, the directors and holders of
common stock of C. V. Starr & Co., Inc. (Starr), a private holding company, The
Starr Foundation, Starr International Company, Inc. (SICO), a private holding
company, and Starr own or otherwise control approximately 29 percent of the
voting stock of AIG. Six directors of AIG also serve as directors of Starr and
SICO.

      (b) Transactions with Related Parties: During the ordinary course of
business, AIG and its subsidiaries pay commissions to Starr and its subsidiaries
for the production and management of insurance business. There are no
significant receivables from/payables to related parties at December 31, 1997.
Net commission payments to Starr aggregated approximately $46,200,000 in 1997,
$48,400,000 in 1996 and $42,600,000 in 1995, from which Starr is required to pay
commissions due originating brokers and its operating expenses. AIG also
received approximately $13,900,000 in 1997, $15,300,000 in 1996 and $14,100,000
in 1995 from Starr and paid approximately $35,000 in 1997 and $34,000 in both
1996 and 1995 to Starr in rental fees. AIG also received approximately $900,000
in 1997, $1,000,000 in 1996 and $1,500,000 in 1995 from SICO and paid
approximately $1,200,000 in each of the years 1997, 1996 and 1995 to SICO as
reimbursement for services rendered at cost. AIG also paid to SICO $3,900,000 in
1997, $4,400,000 in 1996 and $5,000,000 in 1995 in rental fees.

17. Segment Information

(a) AIG's operations are conducted principally through four business segments.
These segments and their respective operations are as follows:

      Parent - AIG parent is a holding company owning directly or indirectly all
of the capital stock of certain insurance, insurance related and financial
services companies in both the United States and abroad.

      General Insurance - AIG's general insurance operations are multiple line
property and casualty companies writing substantially all lines of insurance
other than title insurance. The general insurance operations also include
mortgage guaranty insurance operations.

      Life Insurance - AIG's life insurance operations offer a broad line of
individual and group life, annuity and accident and health policies.

      Financial Services - AIG's financial services operations engage in
diversified financial services for affiliated and non-affiliated companies. Such
operations include, but are not limited to, asset management, short-term cash
management and financing, premium financing, interest rate, currency, equity and
commodity derivative products business, various commodities trading and market
making activities, banking services and operations and leasing and remarketing
of flight equipment.


70

<PAGE>   72

                             American International Group, Inc. and Subsidiaries

17. Segment Information (continued)

      The following table is a summary of the operations by major operating
segments for the years ended December 31, 1997, 1996 and 1995:


<TABLE>
<CAPTION>
                                                                       Industry Segments-1997
                                     ----------------------------------------------------------------------------------------
                                                                                                  Adjustments
                                                         General          Life     Financial              and
(in thousands)                             Parent      Insurance     Insurance      Services     Eliminations(a) Consolidated
=============================================================================================================================
<S>                                  <C>             <C>           <C>           <C>             <C>             <C>         
Revenues                             $ 1,480,649(b)  $14,402,738   $12,843,294   $ 3,273,478     $ (1,397,859)   $ 30,602,300
=============================================================================================================================
Income before income taxes           $ 1,480,649(b)  $ 2,471,866   $ 1,571,483   $   701,337     $ (1,526,437)   $  4,698,898
=============================================================================================================================
Equity in net income of                                                                          
  partially-owned companies          $    55,698     $    56,183   $       899   $        --     $         --    $    112,780
=============================================================================================================================
Depreciation expense                 $        84     $    88,543   $    56,356   $   653,599     $     74,323    $    872,905
=============================================================================================================================
Capital expenditures                 $     3,545     $   166,286   $   345,618   $ 3,519,261(c)  $    169,817    $  4,204,527(c)
=============================================================================================================================
Identifiable assets                  $25,288,425     $62,386,262   $52,103,905   $51,756,123     $(27,564,028)   $163,970,687
=============================================================================================================================
                                                                                                 
                                                                                               
<CAPTION>
                                                                      Industry Segments-1996
                                     ---------------------------------------------------------------------------------------
                                                                                                 Adjustments
                                                          General          Life     Financial            and
(in thousands)                             Parent       Insurance     Insurance      Services   Eliminations(a) Consolidated
============================================================================================================================
<S>                                  <C>              <C>           <C>           <C>           <C>             <C>         
Revenues                             $ 1,148,627(b)   $13,610,598   $11,688,925   $ 2,555,477   $ (1,061,060)   $ 27,942,567
============================================================================================================================
Income before income taxes           $ 1,148,627(b)   $ 2,205,567   $ 1,323,758   $   523,906   $ (1,188,636)   $  4,013,222
============================================================================================================================
Equity in net income of
  partially-owned companies          $    50,488      $    49,799   $        73   $     1,240   $        157    $    101,757
============================================================================================================================
Depreciation expense                 $        42      $    84,933   $    54,102   $   592,841   $     73,663    $    805,581
============================================================================================================================
Capital expenditures                 $       342      $   132,955   $   236,945   $ 3,357,506(c)$    167,355    $  3,895,103(c)
============================================================================================================================
Identifiable assets                  $22,608,843      $58,791,735   $48,376,033   $43,861,592   $(25,207,201)   $148,431,002
============================================================================================================================


<CAPTION>
                                                                      Industry Segments-1995
                                     ---------------------------------------------------------------------------------------
                                                                                                 Adjustments
                                                          General          Life     Financial            and
(in thousands)                             Parent       Insurance     Insurance      Services   Eliminations(a) Consolidated
============================================================================================================================
<S>                                  <C>              <C>           <C>           <C>           <C>             <C>         
Revenues                             $   730,057(b)   $13,021,380   $10,335,758   $ 2,204,090   $   (677,281)   $ 25,614,004
============================================================================================================================
Income before income taxes           $   730,057(b)   $ 2,032,286   $ 1,090,605   $   417,741   $   (804,806)   $  3,465,883
============================================================================================================================
Equity in net income of
  partially-owned companies          $    38,308      $    43,204   $     3,150   $        --   $        358    $     85,020
============================================================================================================================
Depreciation expense                 $        --      $    91,112   $    49,786   $   522,141   $     71,521    $    734,560
============================================================================================================================
Capital expenditures                 $       141      $   127,827   $    53,936   $ 3,359,468(c)$     95,745    $  3,637,117(c)
============================================================================================================================
Identifiable assets                  $20,445,762      $56,223,416   $43,280,484   $36,833,772   $(22,647,036)   $134,136,398
============================================================================================================================
</TABLE>


(a) Including other operations and other income (deductions)-net, which are not
    deemed to be reportable segments.
(b) Substantially dividend income from subsidiaries.
(c) Relating primarily to ILFC.


                                                                              71

<PAGE>   73

Notes to Financial Statements  (CONTINUED)

17. Segment Information (continued)

      (b) The following table is a summary of AIG's general insurance operations
by major operating category for the years ended December 31, 1997, 1996 and
1995:


<TABLE>
<CAPTION>
                                                                       Net Premiums
                                     --------------------------------------------------------------------------------- 
                                                     Written                                    Earned                 
                                     ---------------------------------------   --------------------------------------- 
(in thousands)                              1997          1996          1995          1997          1996          1995 
=======================================================================================================================
<S>                                  <C>           <C>           <C>           <C>           <C>           <C>         
Underwriting:
Foreign                              $ 4,369,989   $ 4,324,847   $ 4,202,815   $ 4,068,809   $ 4,033,210   $ 4,083,200 
Commercial casualty(a)                 7,041,086     6,398,039     5,895,757     6,428,763     5,853,271     5,645,281 
Commercial property                      485,621       490,644       452,323       408,437       480,388       403,037 
Pools and associations(b)                358,275       435,127       400,951       369,294       429,565       394,088 
Personal lines(c)                        811,742       725,295       692,747       790,448       734,042       628,068 
Mortgage guaranty                        340,816       317,727       248,429       355,289       324,339       252,057 
- -----------------------------------------------------------------------------------------------------------------------
Total underwriting                   $13,407,529   $12,691,679   $11,893,022   $12,421,040   $11,854,815   $11,405,731 
======================================================================================================================
Net investment income                                                                                                  
Realized capital gains                                                                                                 
                                                                                                                       
General insurance operating income                                                                                     
=======================================================================================================================


<CAPTION>
                                               Operating Income
                                     ------------------------------------
(in thousands)                             1997         1996         1995
=========================================================================
<S>                                  <C>          <C>          <C>       
Underwriting:
Foreign                              $  497,356   $  397,965   $  305,031
Commercial casualty(a)                  148,263      338,482      306,168
Commercial property                     (64,142)    (136,638)      (9,238)
Pools and associations(b)              (225,497)    (240,932)    (263,291)
Personal lines(c)                        18,633         (680)      (5,961)
Mortgage guaranty                       115,555       91,587       83,928
- -------------------------------------------------------------------------
Total underwriting                      490,168      449,784      416,637
=====================================
Net investment income                 1,853,523    1,690,798    1,547,572
Realized capital gains                  128,175       64,985       68,077
                                     ------------------------------------
General insurance operating income   $2,471,866   $2,205,567   $2,032,286
=========================================================================
</TABLE>


(a) Including workers' compensation and retrospectively rated risks.
(b) Including involuntary pools.
(c) Including mass marketing and specialty programs.

      (c) AIG's individual life insurance and group life insurance portfolio
accounted for 69 percent, 68 percent and 66 percent of AIG's consolidated life
insurance operating income before realized capital gains or losses for the years
ended December 31, 1997, 1996 and 1995, respectively. For those years, 92
percent, 92 percent and 94 percent, respectively, of consolidated life operating
income before realized capital gains or losses was derived from foreign
operations.

      (d) A substantial portion of AIG's business is conducted in countries
other than the United States and Canada. The following table is a summary of
AIG's business by geographic segments. Allocations have been made on the basis
of location of operations and assets.


<TABLE>
<CAPTION>
                                             Geographic Segments-1997
                             -------------------------------------------------------
                                                                Other
(in thousands)                   Domestic(a)   Far East       Foreign   Consolidated
====================================================================================
<S>                          <C>            <C>           <C>           <C>         
Revenues (b)                 $ 14,141,330   $11,670,811   $ 4,790,159   $ 30,602,300
====================================================================================
Income before income taxes   $  2,015,556   $ 1,668,703   $ 1,014,639   $  4,698,898
====================================================================================
Identifiable assets          $105,757,551   $32,291,980   $25,921,156   $163,970,687
====================================================================================


<CAPTION>
                                             Geographic Segments-1996
                             -------------------------------------------------------
                                                                Other
(in thousands)                   Domestic(a)   Far East       Foreign   Consolidated
====================================================================================
<S>                          <C>            <C>           <C>           <C>         
Revenues (b)                 $ 12,954,888   $10,690,814   $ 4,296,865   $ 27,942,567
====================================================================================
Income before income taxes   $  1,877,203   $ 1,521,650   $   614,369   $  4,013,222
====================================================================================
Identifiable assets          $ 92,088,305   $32,222,889   $24,119,808   $148,431,002
====================================================================================


<CAPTION>
                                             Geographic Segments-1995
                             -------------------------------------------------------
                                                                Other
(in thousands)                   Domestic(a)   Far East       Foreign   Consolidated
====================================================================================
<S>                          <C>            <C>           <C>           <C>         
Revenues (b)                 $ 11,841,338   $ 9,859,833   $ 3,912,833   $ 25,614,004
====================================================================================
Income before income taxes   $  1,698,606   $ 1,375,307   $   391,970   $  3,465,883
====================================================================================
Identifiable assets          $ 84,456,853   $27,580,921   $22,098,624   $134,136,398
====================================================================================
</TABLE>


(a) Including general insurance operations in Canada.
(b) Revenues are derived from revenues of the general, life and financial
    services operations, equity in income of minority-owned insurance operations
    and realized capital gains attributable to the segments.


72

<PAGE>   74

                             American International Group, Inc. and Subsidiaries

18. Summary of Quarterly Financial Information--
    Unaudited

The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1997 and 1996 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown.


<TABLE>
<CAPTION>
                                                                         Three Months Ended
                               -----------------------------------------------------------------------------------------------------
                                       March 31,                  June 30,               September 30,            December 31,
(in thousands, except          -----------------------   -----------------------   -----------------------   -----------------------
 per share amounts)                  1997         1996         1997         1996         1997         1996         1997         1996
====================================================================================================================================
<S>                            <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>       
Revenues                       $7,188,998   $6,576,960   $7,758,359   $6,891,748   $7,704,343   $7,116,105   $7,950,600   $7,357,754
====================================================================================================================================
Net income                     $  780,935   $  671,218   $  826,495   $  724,368   $  840,318   $  731,437   $  884,587   $  770,234
====================================================================================================================================
Net income per common share:
  Basic                        $     1.11   $     0.94   $     1.18   $     1.03   $     1.19   $     1.04   $     1.27   $     1.09
  Diluted                            1.10         0.94         1.18         1.02         1.19         1.04         1.26         1.08
Average shares outstanding:
  Basic                           704,259      710,954      702,185      706,631      701,385      704,155      700,213      704,202
  Diluted                         707,211      713,855      705,266      709,521      704,597      707,018      703,348      707,001
====================================================================================================================================
</TABLE>



                                                                              73

<PAGE>   75


I
TEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

There have been no changes in or disagreements with accountants on accounting
and financial disclosure within the twenty-four months ending December 31, 1997.
- --------------------------------------------------------------------------------


PART III


ITEM 10. Directors and Executive Officers of the Registrant

Except for the information provided in Part I under the heading "Directors and
Executive Officers of the Registrant", this item is omitted because a definitive
proxy statement which involves the election of directors will be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the fiscal year pursuant to Regulation 14A.


ITEM 11. Executive Compensation

This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
- --------------------------------------------------------------------------------


ITEM 12. Security Ownership of Certain Beneficial Owners and Management

This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.


ITEM 13. Certain Relationships and Related Transactions

This item is omitted because a definitive proxy statement which involves the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.

- --------------------------------------------------------------------------------


PART IV


ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

    (a) Financial Statements and Exhibits.

    1.  Financial Statements and Schedules. See accompanying Index to Financial
        Statements.

    2.  Exhibits.

         3--Articles of Incorporation and By-Laws.

        10--Material Contracts.

        11--Computation of Earnings Per Share for the Years Ended December 31, 
              1997, 1996, 1995, 1994 and 1993.

        12--Computation of Ratios of Earnings to Fixed Charges for the Years 
              Ended December 31, 1997, 1996, 1995, 1994 and 1993.

        21--Subsidiaries of Registrant.

        23--Consent of Coopers & Lybrand L.L.P.

        24--Power of Attorney.

        27--Financial Data Schedule.

        99--Undertakings.

    (b) Reports on Form 8-K.

        There have been no reports on Form 8-K filed during the quarter ended
December 31, 1997.


74

<PAGE>   76


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the issuer has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York, on the 30th day of March, 1998.



                                       AMERICAN INTERNATIONAL GROUP, INC.




                                       By s/s M.R. Greenberg
                                          --------------------------------------
                                          (M. R. Greenberg, Chairman)


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report on Form 10-K has been signed below by the following persons
in the capacities indicated on the 30th day of March, 1998 and each of the
undersigned persons, in any capacity, hereby severally constitutes M.R.
Greenberg, Edward E. Matthews and Howard I. Smith and each of them, singularly,
his true and lawful attorney with full power to them and each of them to sign
for him, and in his name and in the capacities indicated below, this Annual
Report on Form 10-K and any and all amendments thereto.


         Signature                              Title                     
         ---------                              -----                     
                                                                          
                                                                          
    s/s M.R. Greenberg                  Chairman and Director             
- ---------------------------------         (Principal Executive Officer)   
     (M. R. Greenberg)                                                    
                                                                          

                                                                          
    s/s Howard I. Smith                 Executive Vice President,         
- ---------------------------------         Chief Financial Officer,        
     (Howard I. Smith)                    Comptroller and Director        
                                          (Principal Financial            
                                          and Accounting Officer)         



    s/s M. Bernard Aidinoff                      Director  
- --------------------------------- 
     (M. Bernard Aidinoff)



- --------------------------------- 
    (Lloyd M. Bentsen)                           Director



     s/s Pei-yuan Chia                           Director
- ---------------------------------                                         
      (Pei-yuan Chia)                            



   s/s Marshall A. Cohen                         Director
- --------------------------------- 
    (Marshall A. Cohen)                                         



   s/s Barber B. Conable, Jr.                    Director                 
- --------------------------------- 
    (Barber B. Conable, Jr.)



  s/s Martin S. Feldstein                        Director                 
- --------------------------------- 
   (Martin S. Feldstein)


                                      II-1

<PAGE>   77

                             SIGNATURES- (Continued)

         Signature                              Title                     
         ---------                              -----                     



      s/s Leslie L. Gonda                        Director 
- ---------------------------------                         
       (Leslie L. Gonda)                                  
                                                          
                                                          
                                                  
     s/s Evan G. Greenberg                        Director
- ---------------------------------                         
      (Evan G. Greenberg)                                 
                                                          
                                                          
                                                  
      s/s Carla A. Hills                          Director        
- ---------------------------------                         
       (Carla A. Hills)                                   
                                                          

                                                          
    s/s Frank J. Hoenemeyer                       Director        
- ---------------------------------                         
     (Frank J. Hoenemeyer)                                
                                                          
                                                          
    s/s Edward E. Matthews                        Director        
- ---------------------------------                         
     (Edward E. Matthews)                         
                                                          
                                                          
                                                          
      s/s Dean P. Phypers                         Director        
- ---------------------------------                 
       (Dean P. Phypers)                                  
                                                          
                                                          
                                                          
     s/s Thomas R. Tizzio                         
- ---------------------------------                 Director        
      (Thomas R. Tizzio)                                  
                                                          
                                                          
                                                  
    s/s Edmund S.W. Tse                           Director        
- ---------------------------------                         
     (Edmund S.W. Tse)                                    
                                                          
                                                          
                                                  
                                                  Director
- --------------------------------- 
     (Frank G. Wisner)


                                      II-2

<PAGE>   78


                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
Exhibit
Number                      Description                                                Location
- ------                      -----------                                                --------
  <C>       <S>                                                        <C>
  2         Plan of acquisition, reorganization, 
            arrangement, liquidation or succession ..............      None.

  3(i)      Restated Certificate of Incorporation of AIG ........      Incorporated by reference from Exhibit 3(i)    
                                                                         to AIG's Annual Report on Form 10-K          
                                                                         for the year ended December 31, 1996.        

  3(ii)     By-laws of AIG ......................................      Incorporated by reference from Exhibit 3(ii) to AIG's   
                                                                         Annual Report on Form 10-K for the year ended         
                                                                         December 31, 1994 (File No. 1-8787).                  

  4         Instruments defining the rights of security                  
            holders, including indentures                              

                (a) Fiscal Agency Agreement dated as                   Not required to be filed. The Registrant hereby      
                    of October 1, 1984 between AIG and                   agrees to file with the Commission a copy of       
                    Citibank, N.A. ..............................        any instrument defining the rights of holders      
                                                                         of the Registrant's long-term debt upon request    
                                                                         of the Commission.                                 

                (b) Indenture dated as of July 15, 1989                Not required to be filed. The Registrant hereby       
                    between AIG and The Bank of New York ........        agrees to file with the Commission a copy of
                                                                         any instrument defining the rights of holders
                                                                         of the Registrant's long-term debt upon request     
                                                                         of the Commission.                                  
</TABLE>



                                      II-3

<PAGE>   79


<TABLE>
<CAPTION>
Exhibit
Number                      Description                                                Location
- ------                      -----------                                                --------
 <C>        <S>                                                        <C>
  9         Voting Trust Agreement...............................      None.
 10         Material contracts*
                (a)  AIG 1969 Employee Stock Option Plan and           Filed as exhibit to AIG's Registration Statement  
                     Agreement Form                                       (File No. 2-44043) and incorporated herein by  
                                                                          reference.                                     

                (b)  AIG 1972 Employee Stock Option Plan.........      Filed as exhibit to AIG's Registration Statement        
                                                                          (File No. 2-44702) and incorporated herein by        
                                                                          reference.                                           
                                                                                                                               
                (c)  AIG 1972 Employee Stock Purchase Plan.......      Filed as exhibit to AIG's Registration Statement        
                                                                          (File No. 2-44043) and incorporated herein by        
                                                                          reference.                                           
                                                                                                                               
                (d)  AIG 1984 Employee Stock Purchase Plan.......      Filed as exhibit to AIG's Registration Statement        
                                                                          (File No. 2-91945) and incorporated herein by        
                                                                          reference.                                           
                                                                                                                               
                (e)  AIG 1996 Employee Stock Purchase Plan.......      Filed as exhibit to AIG's Definitive Proxy Statement    
                                                                          dated April 2, 1996 (File No. 1-8787) and            
                                                                          incorporated herein by reference.                    
                                                                                                                               
                (f)  AIG 1977 Stock Option and Stock Appreciation      
                     Rights Plan.................................      Filed as exhibit to AIG's Registration Statement        
                                                                          (File No. 2-59317) and incorporated herein by        
                                                                          reference.                                           
                                                                                                                               
                (g)  AIG 1982 Employee Stock Option Plan.........      Filed as exhibit to AIG's Registration Statement        
                                                                          (File No. 2-78291) and incorporated herein by        
                                                                          reference.                                           
                                                                                                                               
                (h)  AIG 1987 Employee Stock Option Plan.........      Filed as exhibit to AIG's Definitive Proxy Statement    
                                                                          dated as of April 6, 1987 (File No. 0-4652) and      
                                                                          incorporated herein by reference.                    
                                                                                                                               
                (i)  AIG 1991 Employee Stock Option Plan.........      Filed as exhibit to AIG's Definitive Proxy Statement    
                                                                         dated as of April 4, 1997 (File No. 1-8787) and       
                                                                         incorporated herein by reference.                     
                                                                                                                               
                (j)  AIRCO 1972 Employee Stock Option Plan.......      Incorporated by reference to AIG's Joint                
                                                                          Proxy Statement and Prospectus (File No.             
                                                                          2-61994).                                            
                                                                                                                               
                (k)  AIRCO 1977 Stock Option and Stock                       
                     Appreciation Rights Plan....................      Incorporated by reference to AIG's Joint Proxy          
                                                                         Statement and Prospectus (File No.2-61994).           
                                                                                                                               
                                                                                                                               
                (l)  Purchase Agreement between AIA and 
                     Mr. E.S.W. Tse..............................      Filed herewith.                                         

 11         Statement re computation of per share earnings.......      Filed herewith.
 12         Statements re computation of ratios..................      Filed herewith.
 13         Annual report to security holders....................      Not required to be filed.
 18         Letter re change in accounting principles............      None.
 21         Subsidiaries of the Registrant.......................      Filed herewith.
 22         Published report regarding matters submitted to 
            vote of security holders ............................      None.

            ----------
            * All material contracts are management contracts or compensatory plans or arrangements.
</TABLE>



                                      II-4

<PAGE>   80


<TABLE>
<CAPTION>
Exhibit
Number                      Description                                                Location
- ------                      -----------                                                --------
 <C>        <S>                                                        <C>
 23         Consent of Coopers & Lybrand L.L.P...................      Filed herewith.
 24         Power of attorney....................................      Included on the signature page hereof.
 27         Financial Data Schedule..............................      Provided herewith.
 99         Undertakings by the Registrant required by Item 17  
            of Form S-3 and Item 21 of Form S-8, deemed to be
            incorporated by reference into AIG's Registration
            Statements on Forms S-3 and S-8 (No. 2-38768,
            No.2-44043, No. 2-45346, No. 2-51498, No. 2-59317,
            No. 2-61858, No. 2-62760, No. 2-64336, No. 2-67600,
            No. 2-72058, No. 2-75874, No. 2-75875, No. 2-78291,
            No. 2-87005, No. 2-82989, No. 2-90756, No. 2-91945,
            No. 2-95589, No. 2- 97439, No. 33-8495, No. 33-13874,
            No. 33-18073, No. 33-25291, No. 33-41643, No.
            33-48996, No. 33-57250, No. 33-60327, No. 33-60827,
            No. 33-62821, No. 333-21365 and No. 333-48639) ......      Filed herewith.
</TABLE>



                               II-5





<PAGE>   1


                                                                 Exhibit 10(L)

                      Dated the 28th day of November 1996.

                American International Assurance Company Limited
                                 (the "Vendor")

                                       and

                               Tse Sze Wing Edmund
                                (the "Purchaser")
                                       and

                                 Tse Wai Pik Kin
                                 (the "Spouse")

                                       and
                    Ada Koon Hang Tse & Elaine Koon Ming Tse
                                (the "Children")

- --------------------------------------------------------------------------------

                                    AGREEMENT

                                       for

Sale and Purchase of 3,327 equal undivided 46,954th parts or shares of and in
Rural Building Lot No. 687 and of and in the messuage erections and buildings
erected thereon known at the date hereof as No. 9 Headland Road (previously
known as No. 10 Headland Road) and No. 10 Headland Road (previously known as
No. 9 Headland Road (The "Estate")) together with the exclusive right and 
privilege to hold use occupy and enjoy all that UNIT 10C (also known as Unit 3)
on the GROUND FLOOR and the Carparks Nos. 23 and 24 of the Estate.

- --------------------------------------------------------------------------------

          REGISTERED at the Land

Registry by Memorial No.

on
                                p. Land Registrar

                               PHILIP K. H. WONG,
                            KENNEDY Y.H. WONG & CO.,
                             SOLICITORS & NOTARIES,
                                    HONG KONG

Ref.: 1/56/196/61044
Doc #:NO203


<PAGE>   2

THIS AGREEMENT is made the 28th day of November, One thousand nine hundred and
ninety six

BETWEEN the several person(s) or corporations(s) whose respective names adreeses
and descriptions are set out in Part I of the Schedule hereto (the "Vendor", the
"Purchaser" the "Spouse" and the "Children").

Whereas:

A.
      The Vendor is the registered and beneficial owner of the property more
        particularly described in Part V of the Schedule hereto (the 
        "Property").

B.      The Purchaser has worked with the Vendor for 35 years and is now the
        President and Chief Executive Officer of the Vendor.

C.      In consideration of the Purchaser's loyalty faithfulness and
        contributions to the Vendor, the Vendor agrees to sell the Property to
        the Purchaser on the terms and conditions as hereinafter appearing.

D.      The Spouse is the wife and the Children are the natural children of the
        Purchaser and they join in this Agreement to signify their
        acknowledgement of the provisions of this Agreement, in particular 
        Clause 34 hereof and their agreement to observe the conditions set out
        therein if those conditions apply to them at the relevant material time.

It is hereby agreed as follows:

Agreement

1. The Vendor shall sell and the Purchaser shall purchase the "Property"
absolutely or (as the case may be) for the residue of the term of years created
by the Crown Lease referred to in Part V of the Schedule hereto ("the Crown
Lease")


                                      -1-

<PAGE>   3

subject as hereinafter provided but otherwise free from all incumbrances.

Price:            

2. The purchase price for the Property is set out in Part II of the Schedule
hereto ("the Price").

Deposit           

3. A deposit/deposits in the amount(s) set out in Part III of the Schedule
hereto ("the Deposit") is or shall be paid in manner as therein described as a
deposit/deposits of the purchase money which amount(s) shall on completion be
applied towards payment of the Price and the Purchaser hereby agrees that the
Deposit so paid shall be released to the Vendor on the signing hereof instead of
being held by Messrs. Philip K. H. Wong, Kennedy Y. H. Wong & Company,
Solicitors, as stakeholders. The balance of the Price shall be paid on
completion.

Completion        

4. Completion shall take place at the offices of Messrs. Philip K. H. Wong,
Kennedy Y. H. Wong & Company, on or before the time and date stated in Part IV
of the Schedule hereto ("the Completion Date"). Completion shall take place by
way of undertaking (subject to the usual Law Society Qualifications) unless
either party shall serve on the other party or the other party's solicitors 3
days before the Completion Date a notice in writing requesting formal completion
in which case formal completion shall take place.

Vacant Possession

5. Vacant possession of the Property shall be given to the Purchaser on
completion. The Vendor hereby warrants that no Order or decision


                                      -2-

<PAGE>   4

in any manner or form has been or is deemed to have been made by the Lands
Tribunal or the District Court or any Court of Record in Hong Kong during the
period of two years immediately preceding the date hereof under or pursuant to
Section 53 or Section 119E of the Landlord and Tenant (Consolidation) Ordinance
(Cap. 7) for possession of the Property or any part thereof.

Time of the Essence

6. Time shall in every respect be of the essence of this Agreement.

Capacity          

7. The Vendor shall assign the Property as BENEFICIAL OWNER.

Commencement of good title

8.(a)   The title shall commence with the Crown Lease and the Vendor shall give
        good title to the Property in accordance with Section 13 of the
        Conveyancing and Property Ordinance (Cap.219) ("the Title Documents")
        and no requisitions or objection to title or otherwise shall be raised
        by the Purchaser to the Vendor's title prior to the Title Documents or
        to the physical condition or illegibility of any documents.

(b)     The Vendor shall prove such title at his own expense and shall at the
        like expense make and furnish to the Purchaser such copies of any deeds
        and documents of title, wills and matters of public record as may be
        necessary to prove such title. The costs of verifying the title by
        inspection and examination including search fees shall be borne by the
        Purchaser who


                                      -3-

<PAGE>   5

        shall also if the Purchaser requires copies or certified copies of any
        documents in the Vendor's possession relating as well to the Property as
        to other property retained by the Vendor pay the costs of such copies or
        certified copies.

Requisitions 

9.(a)   Any requisitions or objections in respect of the title or otherwise
        arising out of this Agreement shall be delivered in writing to the
        Vendor's Solicitors within seven working days from the date of delivery
        of the title deeds to the Purchaser's Solicitors or (as the case may be)
        within seven working days from the date of reply to the requisitions of
        the Purchaser's Solicitors by the Vendor's Solicitors otherwise the same
        shall for all intents and purposes be considered as waived (in which
        respect time shall be of the essence of the Agreement) and the
        Purchaser shall be deemed for all intents and purposes to have accepted
        the Vendor's title to the Property if no requisitions or objection to 
        title is made within the said respective seven working days' periods 
        and if the Purchaser shall make and insist on any objection or 
        requisitions in respect of the title or otherwise which the Vendor 
        shall be unable or (on the grounds of difficulty, delay or expense or 
        on any other reasonable ground) unwilling to remove or comply with the 
        Vendor shall notwithstanding any previous negotiation or litigation be 
        at liberty on giving to the Purchase or his Solicitors not less than 
        seven days' notice in writing to annul the sale in which case, unless 
        the objection or requisitions shall have been in the meantime 
        withdrawn, the sale shall at


                                      -4-

<PAGE>   6

        the expiration of the notice be annulled the Purchaser being in that
        event entitled to a return of the Deposit forthwith but without
        interest, costs or compensation and the Purchaser shall return to the
        Vendor all title deeds, documents and any other papers furnished to the
        Purchaser or his solicitors by or on behalf of the Vendor in connection
        with the sale and purchase hereunder.

(b)     Notwithstanding anything contained in Section 13 of the Conveyancing and
        Property Ordinance (Cap.219) or herein contained to the contrary it is
        hereby expressly agreed that as obtaining certified copy(ies) of title
        deeds and documents from the Land Registry or the appropriate New
        Territories Land Registry takes some time, in case that the Purchaser
        shall require additional title deeds or documents not in the possession
        of the Vendor (hereinafter called the "Missing Documents") to prove such
        title, the Purchaser shall, against the Vendor's or his Solicitors'
        undertaking to produce certified copy(ies) or original (if applicable)
        thereof within 7 days of the Vendors' Solicitors receiving the same from
        the Land Registry or the appropriate New Territories Land Registry (as
        the case may be) or other relevant parties, accept for the purpose of
        approving title of the Property, copy(ies) of the Missing Documents 
        obtained from the records of the Land Registry or the appropriate New 
        Territories Land Registry (as the case may be) or other relevant 
        parties and the seven-working-day limit for raising requisitions or 
        objection insofar as they/it relate(s) to the Missing Documents shall 
        run from the date of receipt of the said copy(ies) of the 

                                      -5-

<PAGE>   7

        Missing Documents by the Purchaser and the failure of the Vendor to
        furnish certified copy(ies) or original (if applicable) of the Missing
        Documents to the Purchaser on the Completion Date shall not by itself be
        a ground for delay or refusal of completion by the Purchaser.

Deed of Mutual Covenant and Management Agreement
                 
10. On Completion of the sale and purchase the Purchaser Mutual shall EITHER
enter into a Deed of Mutual Covenant and Management Agreement relating to the
Estate to define their respective rights and obligations of and in the Estate
and to make provision for the management of the Estate OR at the Vendor's option
accept the Assignment of the said premises from the Vendor subject to and with
the benefit of a Deed of Mutual Covenant and Management Agreement entered into
by the Vendor with another purchaser or purchasers in respect of the Estate. The
draft of such Deed of Mutual Covenant and Management Agreement ("the Deed of
Mutual Covenant") shall be provided to the Purchaser/ his solicitors before the
Completion of the Sale and Purchase.

Insurance               

11.(a)  Immediately after the signing of the Agreement, the Property shall as
        between the Vendor and the Purchaser be at the Purchaser's risk.

(b)     The Vendor does not warrant that any or any adequate policy of insurance
        exists relating to the Property or, is any such policy exists, that it
        will be renewed on expiration.

(c)     The Purchaser has also been advised that it is difficult for the Vendor
        to transfer the insurance policy (if any) on the Property or the benefit
        thereof 


                                      -6-

<PAGE>   8

        to the Purchaser and the Purchaser is advised to take out proper
        insurance coverage on the Property for his own protection and benefit.

12. On the payment of the residue of the Price in manner provided herein (or
where the parties have agreed on any applicable undertakings following such
payment as aforesaid and in compliance with the applicable undertakings), the
Vendor as beneficial owner and all other necessary parties (if any) will execute
a proper Assignment or other assurance of the Property sold to the Purchaser in
favour of the Purchaser personally subject as herein provided but otherwise free
from incumbrances and thereafter deliver the same to the Purchaser. The 
Purchaser shall not sub-sell the Property nor nominate another party to take 
up the Assignment.

Legal costs and Expenses

13. Each party shall pay his own solicitors' costs and expenses for incidental 
to the preparation, execution and registration of this Agreement and the 
subsequent Assignment.

Agency                  

14.(a)  Except as herein otherwise stated all moneys paid hereunder by the
        Purchaser to the Vendor's solicitors as deposit or balance of purchase
        price shall be deemed to have been received by them as the Vendor's
        agents.

(b)     The Vendor declares that Messrs. Philip K. H. Wong, Kennedy Y. H. Wong &
        Company are the Vendor's agents for the purposes of receiving all monies
        payable to the Vendor pursuant to this Agreement including the balance
        of the purchase money payable upon completion.


                                      -7-

<PAGE>   9

(c)     The Vendor further declares that the payment to such agents of any
        deposit, installments of the purchase monies (if any) and the balance
        thereof shall be a full and sufficient discharge of the Purchaser's
        obligations hereunder.

(d)     The Vendor may revoke the authority of such agents and appoint other
        solicitors as agents in their place. No such revocation shall be valid
        unless it:

        (i)     is in writing addressed to the Purchaser; and

        (ii)    is delivered to the Purchaser care of Messrs. T. S. Tong & Co.,
                his solicitors, at least seven clear days prior to completion;
                and

        (iii)   specifically identifies this Agreement.

Stamp duty, etc.  

15. The stamp duty and land registration fees payable on this Agreement and the
subsequent Assignment made pursuant to this Agreement and the plan fees for the
plans annexed or to be annexed to this Agreement and the Assignment shall be
borne by the Purchaser absolutely. The Purchaser shall submit this Agreement to
the Collector of Stamp Revenue for adjudication of stamp duty and the
adjudication fee shall be borne and paid by the Purchaser absolutely. In the
event of the consideration stated in the Assignment being not accepted by the
Collector of Stamp Revenue as representing the true value of the Property hereby
agreed to be sold and purchased the excess stamp duty being charged in
accordance with his valuation of the Property shall also be paid by the
Purchaser and the Purchaser shall keep the Vendor fully indemnified in respect
thereof. The provisions of the Clause shall survive completion of the sale and
purchase hereunder. 


                                      -8-

<PAGE>   10

16. Then parties hereto hereby declare that they fully understand and
acknowledge that the date referred to in Clause 2(A) to Part VI of the Schedule
hereto will be the date upon which the valuation of the Property for stamp duty
purpose under the Stamp Duty (Amendment) Ordinance 1992 is to be made. Without
prejudice to the generality of the information as set out in Part VI of the
Schedule hereto, no warranty or representation is or is deemed to be given by
the Vendor as to any matters stated in item 1 of the said part VI of the
Schedule hereto and the Purchaser is hereby advised to make such investigation
and inquiry as he sees fit.

Withdrawal of warranty representation

17. This Agreement comprises all the terms agreed between the parties hereto and
no warranties or representations express or implied are or have been made or are
given by the Vendor or by any person on his behalf relating to the Property or
the user thereof or the possibility of any redevelopment thereof or its
redevelopment potential prior to the signing hereof and if any such warranty or
representation express or implied has been made the same is withdrawn or deemed
to have been withdrawn immediately before the parties entered into this
Agreement.

Land resumption 

18. The Vendor hereby declares that the Vendor has not received any notice under
the Crown Land Resumption Ordinance (Cap.124) or the Mass Transit Railway (Land
Resumption and Related Provisions) Ordinance (Cap.276) or any notice from any
government or other competent authority subsisting at the date hereof requiring
the Vendor to demolish or reinstate any part of the Property and that he has no
actual 


                                      -9-

<PAGE>   11

knowledge whatsoever whether the Property is included in or affected by any
lay-out plans (draft or approved) under the Town Planning Ordinance (Cap.131).
The Vendor hereby undertakes to notify the Purchaser forthwith upon receipt of
any of the aforesaid notices (if any). The Purchaser shall be solely responsible
for making his own inquiry and investigation regarding any provisions or
redevelopment restrictions affecting the Property. The Vendor shall not be
liable for any loss or damage which the Purchaser may incur or suffer as a
result of the Property becoming affected or being made subject to the provisions
of any Ordinance and the Purchaser shall take the Property at his own risks and
shall nevertheless complete the purchase of the Property.

No Warranty as to dimension boundary etc. 

19. The respective positions measurements (if any) and boundaries stated and
shown on any plan referred to or furnished with this Agreement are believed but
not warranted by the Vendor to be correct. No discrepancy or inaccuracy or error
misstatement misdescription or omission herein or in any plan referred to or
furnished with or any statement made in the course of the negotiations leading
to this Agreement shall invalidate this Agreement, annul the sale nor entitle
the Purchaser to be discharged from the purchase hereunder nor shall any
compensation be allowed in respect thereof.

Inspection 

20. Notwithstanding anything to the contrary herein, the Purchaser hereby
expressly declares that he has duly inspected the Property prior to the signing
of this Agreement and is fully aware that he is purchasing the Property in its
present state 


                                      -10-

<PAGE>   12

and user thereof and shall not make any objection or raise any requisition
thereto or in connection therewith. No warranty is given by the Vendor on any of
the following matters, namely: 

(a)     the physical state and condition quality or fitness of the fixtures
        fittings and finishes or the installations and appliances (if any)
        incorporated in the Property or in the Estate:

(b)     the physical state and condition of the Property and the Estate;

(c)     the permitted user of the Property; and 

(d)     the redevelopment potential of the Property.

21.(a)  Should the Purchaser for any cause (other than the default of the
        Vendor) fail to complete the purchase herein in accordance with the
        terms and conditions herein contained the Vendor may (without being
        obliged to tender an Assignment to the Purchaser) forthwith determine
        this Agreement by giving notice of termination in writing to the
        Purchaser or his Solicitors to such effect and the Vendor shall
        thereupon be entitled to re-enter upon the Property and repossess the
        same if possession shall have been given to the Purchaser free from any
        right or interest of the Purchaser therein and the Vendor shall be
        entitled to forfeit the Deposit. Upon determination of this Agreement
        the Vendor may either retain the Property, the subject of this Agreement
        or any part or parts thereof or resell the same either by public auction
        or by private contract or partly by one and partly by the other subject
        to such conditions and stipulations as to title or otherwise as the
        Vendor may think fit and the Vendor shall be entitled to recover from
        the Purchaser any deficiency in 


                                      -11-

<PAGE>   13

        price which may result on and all expenses incurred in such resale and
        to retain any excess of the consideration under any such resale over the
        Price. It is hereby further agreed that the Vendor shall also be
        entitled to recover from the Purchaser such other damages and/or losses
        (if any) as the Vendor may sustain by reason of such failure on the part
        of the Purchaser. On the exercise of the Vendor's right to determine
        this Agreement as aforesaid the Vendor shall have the right, if this
        Agreement shall have been registered at the Land Registry or any New
        Territories Land Registry, to register at the Land Registry or the
        relevant New Territories Land Registry an instrument signed by the 
        Vendor alone evidencing determination as aforesaid of the sale of the 
        Property. This Clause shall not preclude or be deemed to preclude the 
        Vendor from taking other steps or remedies to enforce the Vendor's 
        rights under this Agreement or otherwise and shall not prevent the 
        Vendor from recovering any deficiency in the price and expenses 
        incurred in the resale and such other damages, and/or losses (if any)
        suffered by him by reason of the Purchaser's failure.

(b)     If the Vendor shall (for any cause save as herein provided) fail to
        complete the sale of the Property in accordance with the terms and
        conditions hereof then the Deposit paid by the Purchaser hereunder shall
        be forthwith returned to the Purchaser who shall also be entitled to
        recover from the Vendor such damages (if any), in addition to the return
        of the Deposit, as the Purchaser may sustain by reason of such failure
        on the part of the Vendor and it shall not be necessary for the
        Purchaser to enter an Assignment to the Vendor for execution before
        taking proceedings to enforce specific performance of this Agreement or
        for damages for breach of this Agreement.


                                      -12-

<PAGE>   14

Implied covenants 

22. There are incorporated into this Agreement as if they were herein written
the covenants and the conditions respectively on the part of the Vendor and the
Purchaser set out in Part A of the Second Schedule to the Conveyancing and
Property Ordinance (Cap.219) unless they are inconsistent with the provisions
herein in which event the provisions herein shall prevail.

Interpretation 

23. Where two or more persons are comprised in any of the expressions "the
Vendor" and/or "the Purchaser" the agreements herein contained shall be deemed
to be made by such persons jointly and severally. 

24. Notwithstanding anything herein provided, if the completion date for the
sale and purchase of the Property and/or any of the dates(s) stipulated for
payment herein shall fall on a day which is not a business day (defined as a day
on which licensed banks are open for business in Hong Kong) or shall fall on a
day on which typhoon signal No. 8 or above is hoisted in Hong Kong at any time
between 9:00 am and 4:00 pm, such date or dates for payment or the Completion
Date (as the case may be) shall automatically be postponed to the next business
day or such next succeeding business day on which no typhoon signal No. 8 or
above is hoisted between the aforementioned hours (as the case may be). If
completion is stipulated to take place on or before a certain date but no time
of the day is expressly stipulated, the sale and purchase shall be completed 
between the hours of 9:00 am and 5:00 pm on or before the completion date and 
if such date shall fall on a Saturday then between the hours of 9:00 am and 
1:00 pm.


                                      -13-

<PAGE>   15

Gender clause 

25. Unless the context otherwise requires, words herein importing the masculine
feminine and neuter genders shall include the others of them and words importing
the singular shall include the plural and vice versa.

Marginal notes 

26. The marginal notes herein are inserted for convenience and reference only,
and in no way define, limit or describe the scope of this Agreement or the
intent of any provisions thereof and do not form part of this Agreement.

27. Notwithstanding anything hereinbefore contained the parties hereto further
agree as follows:

(i)     In respect of each payment of purchase price or any part thereof
        required to be made hereunder, the party making such payment ("the
        Payer") shall deliver to the party to whom such payment is to be made
        ("the Payee") on the date on which such payment is required to be made
        hereunder a cashier order issued by a licensed bank in Hong Kong or a
        cheque of the Purchaser's solicitors in favour of the payee for the
        relevant amount.

(ii)    Where the purchase price or any part thereof is required to be applied
        by the Payee to discharge an existing mortgage, charge or incumbrance,
        or to pay any person(s) who will be a party to the assignment on
        completion of the sale and purchase herein, the Payee or the Payee's
        solicitors shall be entitled, by giving the Payer or the Payer's
        solicitors prior notice in writing, to require the Payer to split such
        payment and deliver to the Payee's solicitors one or more cashier
        order(s) or one or more cheques of


                                      -14-

<PAGE>   16

        Purchaser's solicitors issued in favour of the person(s) or party(ies)
        entitled to such payment(s) and a separate cashier order or cheque of
        the Purchaser's solicitors in favour of the Payee for the balance. The
        provisions of paragraph (i) above shall apply to such cashier orders or
        cheques of the Purchaser's solicitors.

(iii)   The Payer shall not be deemed to have discharged the obligations to make
        payment hereunder unless in making such payment, the Payer also
        complies with the provisions of this Clause.

28.(a)  The Vendor shall also on completion deliver all those fitting and
        fixtures which are presently located or installed in the Property ("the
        Fitting and Fixture") to the Purchaser. The Vendor does not give any
        warranty as to the quality condition or otherwise of the Fitting and
        Fixture at the date hereof or one Completion, and the Purchaser shall
        take them in the state as they are at the date of Completion. The Vendor
        hereby warrants that he has good right and title to sell the Fitting and
        Fixture and that none of the Fitting and Fixture is subject to any
        charge, lien, hire-purchase agreement or any other incumbrances
        whatsoever. 

(b)     For the avoidance of doubt it is hereby expressly agreed between the
        parties hereto that failure by the Vendor to deliver the Fitting and
        Fixture or any part thereof does not entitle the Purchaser to rescind
        this Agreement and the Purchaser must complete the sale purchase
        hereunder.


                                      -15-

<PAGE>   17

29.(a)  Without affecting the generality of other clauses of the Agreement, the
        Vendor declares and warrants that the Vendor is the sole legal and
        beneficial owner of the Property and there is no other person or
        occupier having any beneficial interest in the Property and that the
        Vendor agrees to allow the Purchaser to inspect the Property at the time
        convenient to both the Vendor and the Purchaser on the completion date
        but in any event at least one hour earlier that the time or deadline for
        completion as set out in other Clauses hereof.

        (b) The Vendor has been advised by the Vendor's Solicitors to expressly
        inform the Vendor's Solicitors or the Purchaser if there are occupiers
        in the Property having any beneficial interest in the Property.

        (c) The Purchaser has been advised by the Purchaser's Solicitors that
        the Purchaser should make his own inquiry with the Vendor or occupiers
        (if any) of the Property to verify the declaration and warranty prior to
        completion and to inspect the Property on the completion date as 
        mentioned in Sub-clause (a) above.

        (d) In the event of any third party claiming a beneficial interest to
        the Property, whether legal or equitable, whether by issuing a writ of
        summons or by registering his beneficial interest in the Land Registry
        against the Property, on or before Completion the Vendor shall return
        the deposit paid herein to the Purchaser and without prejudice to the
        Purchaser's right to claim against the Vendor for all losses and damages
        sustained by the Purchaser by reason of the Vendor's failure and or
        inability to complete the sale in accordance with the terms hereof and
        it shall not be necessary for the Purchaser to tender an Assignment to
        the Vendor for execution.

        30. The Vendor and the Purchaser hereby warrants and represents to and


                                      -16-

<PAGE>   18

        undertakes with the other that the information specified in Section
        29B(5) of Stamp Duty (Amendment) Ordinance 1992 as contained herein are
        in all respects accurate.

        31. It is hereby certified that the transaction hereby effected does not
        form part of a larger transaction or of a series of transactions in
        respect of which the amount or value or the aggregate amount or value of
        the consideration exceeds HK$3,500,000.00.

        32. Subject to the provisions herein contained, the Purchaser shall be
        entitled to sell or otherwise dispose of the Property. The Purchaser
        shall also be entitled to let licence mortgage or charge the Property
        provided that such letting, licensing, mortgage or charge shall only be
        done by the Purchaser with the prior written consent of the Vendor and
        in strict compliance with any condition imposed by the Vendor in
        connection therewith and Provided Always that such consent shall not be
        unreasonably withheld and such condition imposed shall not be
        unreasonable.

        33. In the event that the Purchaser shall cease to work for the Vendor
        for any reason other than early retirement approved by the Vendor, death
        or disability before the normal retirement age set by the Vendor, that
        is to say, the age of 65 ("the Normal Retirement Age"), the Purchaser
        shall as beneficial owner sell and the Vendor shall purchase the
        Property free from any encumbrances and with vacant possession at a
        price equivalent to the aggregate total of the following:

                (a)     the Price set out in part II of the Schedule hereto;

                (b)     interest at the rate of 2% over the prime rate from time
                        to time


                                      -17-

<PAGE>   19

                        quoted by The Hongkong and Shanghai Banking Corporation
                        Limited calculated from the date of completion of the
                        sale and purchase hereof up to the date of completion of
                        such repurchase by the Vendor; and

                (c)     the amortized value of any capital improvements the
                        Purchaser has then made to the Property,

        and the sale and purchase shall be completed within ninety days from the
        date of the Purchaser's cessation to work for the Vendor. In the event
        that there shall be any disagreement as to the said amortized value of
        capital improvements, the same shall be referred to an independent
        surveyor to be specified by the Vendor and the opinion of such
        independent surveyor as to the amortized value shall be final and
        conclusive and binding on the parties hereto. The fees and disbursements
        charged by the independent surveyor so appointed pursuant to this Clause
        shall be borne and paid by the Purchaser absolutely but all the stamp
        duty arising from the sale and purchase pursuant to this Clause shall be
        borne and paid by the Vendor absolutely.

        34. Save such circumstances as provided in Clause 33 hereof, in the
        event of the Purchaser (which expression shall for the purpose of this
        Clause where the context so permits include his executors,
        administrators, heirs, devises, and persons entitled to his estate under
        the law of intestacy) wishes to sell or otherwise dispose of the
        Property at any time hereafter, the Purchaser shall offer to sell or
        dispose of the same to the Vendor free from the encumbrances and with
        vacant possession at the then current market value of the Property in
        which event the Vendor shall within


                                      -18-

<PAGE>   20

        thirty days upon receipt of the Purchaser's written notification of his
        intention to sell or to dispose of the Property give written notice to
        the Purchaser or his duly authorized legal representative indicating
        whether the Vendor wished to repurchase the same on conditions as set
        out in this Clause, and in default of the Vendor doing so as aforesaid,
        the Vendor shall for all intents and purposes be deemed to have waived
        and/or given up and/or relinquished all or any right to repurchase the
        Property which the Vendor may have by virtue of the provisions herein
        contained or otherwise. In the event that there shall be any dispute as
        to the then current market value of the property for the purpose
        aforesaid, it shall be conclusively determined by an independent valuer
        or surveyor to be agree on the by the Vendor and the Purchaser and in
        default of such agreement a surveyor to be appointed by the Chairman of
        The Royal Institution of Chartered Surveyors (Hong Kong Branch) or in
        default of such appointment by the President of the Hong Kong Institute
        of Surveyor or equivalent professional body provided always that the
        cost and disbursement of such independent valuer or surveyor shall be
        borne and paid by the Purchaser solely. In the event that the Vendor
        validly exercised its right to repurchase the Property in accordance
        with the provisions aforesaid , the Vendor and the Purchaser shall
        within seven days of the determination by the independent valuer or
        surveyor of the then current market value of the Property or within
        seven days of the receipt by the Purchaser or his duly authorized legal
        representative of the Vendor's written notice that it wishes to
        repurchase the Property on the conditions as aforesaid, whichever is
        later, enter into a binding agreement to re-convey the Property to the
        Vendor within 30 days from the date of the agreement and such agreement
        for sale and purchase 


                                      -19-

<PAGE>   21

        shall as far as possible contain the terms and conditions in the form of
        those as set out in Clauses 1 to 31 and for the avoidance of doubt the
        Purchaser shall be at liberty to choose any firm of solicitors to
        represent him in the sale.

        35. For avoidance of doubts, the Purchaser shall be entitled to devise
        the Property to the Spouse and the Children or any of them but subject
        nevertheless to the conditions provided in Clause 34 hereof.

        36. The Spouse and the Children hereby jointly and severally agree to
        join in this Agreement and confirm acknowledge and declare that the
        conditions set out in Clause 34 hereof shall be binding on each and all
        of them in the event that the Property shall be vested in them or any of
        them under the will of the Purchaser or under the laws of intestacy upon
        the Purchaser's death.

        37. The Purchaser shall at all times keep the Property and the fittings
        and fixtures therein in good repair and condition and at all times
        observe and comply with any provisions in the Deed of Mutual Covenant
        and the Crown Lease and duly and punctually pay all rates, management
        fee and other outgoings payable in respect of the Property.

        38. The Purchaser shall until the extinguishment of all possibilities
        for the Vendor to be entitled to purchase the Property in accordance
        with the provisions 


                                      -20-

<PAGE>   22

        hereof or to the right of the first refusal to purchase the Property in
        accordance with the provisions contained herein effect and maintain
        insurance of the Property against loss or damage by fire or explosion or
        such other risks as the Vendor may require in its full reinstatement
        value with some reputable insurance company as the Vendor shall first
        approve of in writing and shall duly and punctually pay all premia or
        sums of money necessary for such purpose and will not do or cause or
        suffer anything to be done whereby such policy or policies may become
        void or voidable and in the event of loss or damage to the Property the
        Vendor shall use the proceed from insurance to re-build or repair the
        Property and shall reinstate to its original state and if any of the
        obligations under this Clause are not performed by the Purchaser, the
        Vendor shall be at liberty to arrange for any of such obligations to be
        performed at the cost and expense of the Purchaser and the Purchaser
        shall forthwith fully indemnify the Vendor and keep the Vendor so
        indemnified for all such cost and expense.

        39. The Vendor hereby agrees and undertakes that in the event of the
        Vendor electing not to exercise the right to re-purchase or otherwise
        refuse to purchase the Property from the Purchaser pursuant to Clauses
        34 hereof, the Vendor shall at the request of the Purchaser furnish 
        forthwith to the Purchaser at the Vendor's costs and expenses such 
        document(s) and/or proof of is refusal or lapse of the first right of 
        refusal in relation to the re-purchase of the Property by the Vendor 
        pursuant to Clauses 34 hereof.

        40. In this Agreement, the expression "the Purchaser" shall include the
        person 


                                      -21-

<PAGE>   23

        named in part I of the Schedule hereto and where the context admits his
        personal representative(s) and "the Vendor" shall include the
        corporation named in Part I of the Schedule hereto and where the context
        admits also its successors and assigns.


                                      -22-

<PAGE>   24

                        THE SCHEDULE ABOVE REFERRED TO

                                    PART I

            (The Vendor the Purchaser the Spouse and the Children)

The Vendor:     American International Assurance company Limited (Company
                Registration No. 2047(INS) and business Registration No.
                00003901-000) whose registered office is situate at AIA
                Building, 1 Stubbs Road, Hong Kong.

The Purchaser:  Mr. Tse Sze Wing Edmund (holder of Hong Kong Identity Card No.
                B400094(9)) of Flat 10C, 10 Headland Road, Hong Kong.

The Spouse:     Tse Wai Pik Kin (holder of Hong Kong Identity Card No.
                B245249(4)) of Flat 10C, No. 10 Headland Road, Hong Kong.

The Children:   Tse Koon Hang Ada (holder of Hong Kong Identity Card No.
                G248570(1)) and Tse Koon Ming Elaine (holder of Hong Kong
                Identity Card No. G447810(9)) of Flat 10C, No. 10 Headland Road,
                Hong Kong.


                                      -23-

<PAGE>   25

                                     PART II

                             (the Price - Clause 2)

Price:          DOLLARS TWO MILLION NINE HUNDRED AND TWO THOUSAND EIGHT 
                HUNDRED AND EIGHTEEN (HK$2,902,818.00) Hong Kong Currency.

                                    PART III

                            (the Deposit - Clause 3)


<TABLE>
<CAPTION>
            Amount of Deposit/Further Deposits        Date of Payment
            ----------------------------------        ---------------
<S>                                                  <C>
            Deposit:    HK$290,281.80                on the signing hereof.
</TABLE>


                                     PART IV

                        (the Completion date - Clause 4)

Completion Date: within one month from the signing hereof, that is on or before


                                      -24-

<PAGE>   26

                                     PART V

                           (the Property - Recital A)

1.(a)   Description, Address, Lot Number, Sections and Undivided Shares etc.:
        ALL THOSE 3,327 equal undivided 46,954th parts of shares of and in ALL
        THOSE pieces or parcels of ground situate lying and being on Hong Kong
        Island and registered in the Land Registry as Rural Building Lot Nos.688
        and 687 ("the Land") And of and in the messuage erections and buildings
        erected thereon known at the date hereof as No. 9 Headland Road
        (previously known as No. 10 Headland Road) and No. 10 Headland Road
        (previously known as No. 9 Headland Road) ("the Estate") TOGETHER with
        the exclusive right and privilege to hold use occupy and enjoy ALL THAT
        UNIT 10C (also known as Unit 3) on the GROUND FLOOR and the FIRST FLOOR
        and the Carparks Nos.23 and 24 of the Estate which said Units and the
        Carparks are shown on the Plan annexed hereto and thereon coloured Pink.

(b)     Easements and other appurtenant rights, if any: Together with such
        rights, rights of way, easements and other appurtenant rights as are
        more particularly described in an Assignment registered in the Land
        Registry by Memorial No. 236232 ("the said Assignment").

(c)     Exceptions and reservations, etc,: 

        Subject to such rights, rights of way, exceptions and reservations as 
        are more particularly described in the said Assignment.


                                      -25-

<PAGE>   27

2.A     The Crown Lease

        (a) Date:       28th January 1955

        (b) Parties:    Queen Elizabeth II of the one part and American
                        International Underwriters, Limited of the other part.

        (c) Term:       75 years commencing from 5th July 1947 with right of
                        renewal for one further term of 75 years.

        (d) Lot No.:    Rural Building Lot No. 687

        (e) Variation:  as varied by a Deed of Variation of Crown Lease dated
                        10th October 1983 and registered in the Land Registry by
                        Memorial No. 2494257.

B       Crown Lease:

        (a) Date:       28th January 1955.

        (b) Parties:    Queen Elizabeth II of the one part and American
                        International Assurance Company, Limited of the other
                        part.

        (c) Terms:      75 years from 5th July 1947 with a right of renewal for
                        one further term of 75 years.

        (d) Lot No.:    Rural Building Lot No. 688

        (e) Variation:  as varied and modified by a Deed of Variation of Crown
                        Lease dated 10th October 1983 and registered in the Land
                        Registry by Memorial No. 2494258.


                                      -26-

<PAGE>   28

                                   PART VI

The following additional information are provided for the purposes of Section
29B(1) of Stamp Duty (Amendment) Ordinance 1992 ("the Ordinance"):

1.      The Property is a residential property within the meaning of Section
        29A(1) of the Ordinance.

2.(A)   The date of the preceding unwritten sale agreement or agreement for sale
        made between the same parties on same terms is _____________________.

(B)     Amount or value of any other consideration (excluding legal expenses):
        __________________________________________


        i)      Estate agent commission payable by the Vendor.

                (a) Amount HK$: Nil

                (b) Name of the Agent: not applicable

                (c) Address of the Agent: not applicable

                (d) Identification No.: not applicable

                                       or

                (e) Business Registration No: not applicable

        ii)     Estate agent commission payable by the Purchaser.

                (a) Amount HK$: Nil

                (b) Name of the Agent: not applicable

                (c) Address of the Agent: not applicable

                (d) Identification No. : not applicable

                                       or


                                      -27-

<PAGE>   29

                (c) Business Registration No.: not applicable

        iii)    Other consideration payable by the Vendor.

                (a) Amount HK$: Nil

                (b) Relates to: not applicable

                (c) The Recipient: not applicable

                (d) Address: not applicable

                (e) Identification No.: not applicable

                                       or

                (f) Business Registration No.: not applicable

        (iv)    Other consideration payable by the Purchaser.

                (a) Amount HK$: Nil

                (b) Relates to: not applicable

                (c) The Recipient: not applicable

                (d) Address: not applicable

                (e) Identification No.: not applicable

                                       or

                (f) Business Registration No.: not applicable


                                      -28-

<PAGE>   30

SEALED with the Common              )
                                    )
Seal of The Vendor                  )


the Vendor and SIGNED by            )
                                    )
G.R.S. Crichton                     )
                                    )
                                    )        /s/ G.R.S. Crichton [SEAL]
                                    )
(I.D. Card XD520592)                )
                                    )
in the presence of:                 )


/s/[Illegible]


SIGNED SEALED DELIVERED by          )
                                    )
the Purchaser                       )
                                    )        /s/ Tse Sze Wing Edmund
(Holder of Hong Kong                )        
                                    )
Identity Card No. B400094(9)        )

in the presence of:


/s/ Gerald TO

GERALD TO

Solicitor

Hong Kong


                                      -29-

<PAGE>   31

SIGNED SEALED DELIVERED by          )
                                    )
the Spouse                          )
                                    )
(Holder of Hong Kong                )        /s/ Tse Wai Pik Kin 
                                    )
Identity Card No. B245249(4)        )
                                    )
in the presence of:                 )


/s/ Gerald TO

GERALD TO

Solicitor

Hong Kong


SIGNED SEALED DELIVERED by          )
                                    )
the Children, Tse Koon              )
                                    )
Hang Ada (Holder of Hong            )        /s/ Ada Koon Hang Tse 
                                    )
Kong Identity Card No.              )
                                    )
G248570(1)) and Tse Koon            )
                                    )
Ming Elaine (Holder of Hong         )        /s/ Elaine Koon Ming Tse
                                    )
Kong Identity Card No.              )
                                    )
G447810(9)                          )

in the presence of:


/s/ Gerald TO

GERALD TO

Solicitor

Hong Kong


                                      -30-

<PAGE>   32

        RECEIVED the day and year first above written of and from the Purchaser
the above-mentioned deposit of HK$290,281.80.

                              /s/ G.R.S. Crichton
                              -------------------
                                                 the Vendor


                                      -31-

<PAGE>   33

                          CLARIFICATION OF AGREEMENT

        Clarification of Agreement, dated November 25, 1996 (the "Agreement"),
among American International Assurance Company, Limited, Tse Sze Wing Edmund,
Tse Wai Pik Kin, Ada Koon Hang Tse and Elaine Koon Ming Tse.

        This letter confirms our understanding that Purchaser may not sell or
otherwise dispose of the Property pursuant to Paragraph 34 of the Agreement
until the Purchaser ceases to work for Vendor as a result of retirement at
normal retirement age, an early retirement approved by Vendor, death or
disability before normal retirement age. All capitalized and undefined terms
used herein have the meanings specified in the Agreement. Please acknowledge
this clarification by signing below.

Dated: March 19, 1998

                               American International Assurance
                               Company, Limited

                               By:/s/ G.R.S. Crichton
                               Name: G.R.S. Crichton
                               Title: Senior Vice President and General Counsel

 /s/   Tse Sze Wing Edmund
- --------------------------
Tse Sze Wing Edmund

 /s/    Tse Wai Pik Kin
- --------------------------
Tse Wai Pik Kin

 /s/   Ada Koon Hang Tse
- --------------------------
Ada Koon Hang Tse

/s/   Elaine Koon Ming Tse
- --------------------------
Elaine Koon Ming Tse



<PAGE>   1

                                                                      Exhibit 11

Computation of Earnings Per Share
                             American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                       1997(b)        1996(a)        1995(a)        1994(a)        1993(a)
==================================================================================================================================
<S>                                                     <C>            <C>            <C>            <C>            <C>        
Numerator:

Income before cumulative effect of accounting changes   $ 3,332,335    $ 2,897,257    $ 2,510,383    $ 2,175,515    $ 1,918,078

Cumulative effect of accounting changes, net of tax
  Minority-owned insurance operations                            --             --             --             --         20,695

Preferred stock dividend                                         --             --             --             --         (1,043)
- ----------------------------------------------------------------------------------------------------------------------------------
  Net income applicable to common stock                 $ 3,332,335    $ 2,897,257    $ 2,510,383    $ 2,175,515    $ 1,937,730
==================================================================================================================================
Denominator:

Average outstanding shares used in the computation of
 per share earnings:
   Common stock issued                                      759,124        759,126        759,128        759,130        759,134
   Common stock in treasury                                 (57,194)       (52,558)       (48,095)       (46,811)       (44,846)
- ----------------------------------------------------------------------------------------------------------------------------------
   Average outstanding shares-- basic                       701,930        706,568        711,033        712,319        714,288
==================================================================================================================================
   Stock options (treasury stock method)                      3,025          2,716          2,452          2,074          2,291
   Stock purchase plan                                           29             32             27             36             24
- ----------------------------------------------------------------------------------------------------------------------------------
   Average outstanding shares-- diluted                     704,984        709,316        713,512        714,429        716,603
==================================================================================================================================
Earnings per share:
Basic
Income before cumulative effect of accounting changes   $      4.75    $      4.10    $      3.53    $      3.05    $      2.68
Cumulative effect of accounting changes, net of tax
  Minority-owned insurance operations                            --             --             --             --           0.03
- ----------------------------------------------------------------------------------------------------------------------------------
Basic                                                   $      4.75    $      4.10    $      3.53    $      3.05    $      2.71
==================================================================================================================================
Diluted                                                 
Income
 before cumulative effect of accounting changes   $      4.73    $      4.08    $      3.52    $      3.05    $      2.67
Cumulative effect of accounting changes, net of tax
Minority-owned insurance operations                              --             --             --             --           0.03
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted                                                 $      4.73    $      4.08    $      3.52    $      3.05    $      2.70
==================================================================================================================================
</TABLE>


(a)   Share information reflects common stock splits in the form of 50 percent
      common stock dividends paid July 27, 1997 and July 28, 1995.
(b)   The number of common shares outstanding as of December 31, 1997 was
      699,518,281. The number of common shares that would have been outstanding
      as of December 31, 1997 assuming the exercise or issuance of all dilutive
      potential common shares outstanding is 702,981,657.


                                      II-6



<PAGE>   1

                                                                      Exhibit 12

Computation of Ratios of     
Earnings to Fixed Charges    American International Group, Inc. and Subsidiaries


<TABLE>
<CAPTION>
(in thousands, except ratios)
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                    1997         1996         1995         1994         1993
====================================================================================================================
<S>                                                   <C>          <C>          <C>          <C>          <C>       
Income before income taxes and cumulative effect of
  accounting changes                                  $4,698,898   $4,013,222   $3,465,883   $2,951,979   $2,601,081
Less-Equity income of less than 50% owned persons        119,696      121,347       91,444       54,091       43,966
Add-Dividends from less than 50% owned persons            29,978       13,431        6,515        4,660        4,349
- --------------------------------------------------------------------------------------------------------------------
                                                       4,609,180    3,905,306    3,380,954    2,902,548    2,561,464
Add-Fixed charges                                      1,834,054    1,614,703    1,483,752    1,404,633    1,213,487
Less-Capitalized interest                                 49,771       50,352       50,746       46,023       42,699
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes, cumulative effect of
  accounting changes and fixed charges                $6,393,463   $5,469,657   $4,813,960   $4,261,158   $3,732,252
====================================================================================================================
Fixed charges:
  Interest costs                                      $1,753,854   $1,541,670   $1,411,886   $1,335,300   $1,146,654
  Rental expense*                                         80,200       73,033       71,866       69,333       66,833
- --------------------------------------------------------------------------------------------------------------------
Total fixed charges                                   $1,834,054   $1,614,703   $1,483,752   $1,404,633   $1,213,487
====================================================================================================================
Ratio of earnings to fixed charges                          3.49         3.39         3.24         3.03         3.08
====================================================================================================================
</TABLE>


*     The proportion deemed representative of the interest factor.

The ratios shown are 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,
excluding the effects of the operating results of AIGFP, are 5.42, 5.18, 4.77,
5.25 and 5.66 for 1997, 1996, 1995, 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.


                                      II-7



<PAGE>   1

                                                                      Exhibit 21

Subsidiaries of Registrant


<TABLE>
<CAPTION>
                                                                                                              % of Voting
                                                                                                               Securities
                                                                                                             Owned by its
                                                                                 Jurisdiction of                Immediate
Name of Corporation                                                                Incorporation                   Parent (1)
- -------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                             <C>
Starr                                                                                   Delaware                          (2)
SICO                                                                                      Panama                          (2)
  AIG (Registrant)(3)                                                                   Delaware                          (4)
    AICCO                                                                          New Hampshire                     100%
    AIG Asset Management Group, Inc.                                                    Delaware                     100%
    AIG Capital Partners, Inc.                                                          Delaware                     100%
    AIG Aviation, Inc.                                                                   Georgia                     100%
    AIG Capital Corp.                                                                   Delaware                     100%
    AIG Capital Management Corp.                                                        Delaware                     100%
    AIG Claim Services, Inc.                                                            Delaware                     100%
    AIG Consumer Finance, Inc.                                                          Delaware                     100%
    AIG Finance Holdings, Inc.                                                          New York                     100%
      SPC Credit Limited                                                                Hong Kong                    100%
    AIG Financial Products Corp.                                                        Delaware                     100%
    AIG Funding, Inc.                                                                   Delaware                     100%
    AIG Global Investment Group, Inc.                                                   Delaware                     100%
    AIG Global Trade & Political Risk Insurance Company                               New Jersey                     100%
    AIG Life Insurance Company                                                          Delaware                    78.9% (5)
    AIG Life Insurance Company of Puerto Rico                                        Puerto Rico                     100%
    AIG Marketing, Inc.                                                                 Delaware                     100%
    AIG Risk Management, Inc.                                                           New York                     100%
    AIG Trading Group Inc.                                                              Delaware                      80%
    AIU Insurance Company                                                               New York                      52% (6)
    AIU North America, Inc.                                                             New York                     100%
    American Home                                                                       New York                     100%
      AIG Hawaii Insurance Company, Inc.                                                  Hawaii                     100%
      American International Insurance Company                                          New York                     100%
        American International Insurance Company
 of California, Inc.                  California                     100%
        American International Insurance Company of New Jersey                        New Jersey                     100%
        Minnesota Insurance Company                                                    Minnesota                     100%
      Transatlantic Holdings, Inc.                                                      Delaware                   33.98% (7)
    American International Assurance Life Company, Ltd.                                   Canada                     100%
    American International Group Data Center, Inc.                                 New Hampshire                     100%
    American International Life Assurance Company of New York                           New York                   77.52% (8)
    American International Reinsurance Company Limited                                   Bermuda                     100%
      AIA                                                                              Hong Kong                     100%
        Australian American Assurance Company Limited                                  Australia                     100%
      American International Assurance Company (Bermuda) Limited                         Bermuda                     100%
      Nan Shan Life Insurance Company, Ltd.                                               Taiwan                   94.12%
    American International Underwriters Corporation                                     New York                     100%
    AIUO                                                                                 Bermuda                     100%
      AIG Europe (Ireland) Ltd.                                                          Ireland                     100%
      Universal Insurance Co., Ltd.                                                     Thailand                     100%
      Interamericana Compania de Seguros Gerais (Brazil)                                  Brazil                     100%
      La Seguridad de Centroamerica, Compania de Seguros, Sociedad Anonima             Guatemala                     100%
      American International Insurance Company of Puerto Rico                        Puerto Rico                     100%
      La Interamerica Compania de Seguros Generales S.A.                                Colombia                     100%
      American International Underwriters G.m.b.H.                                       Germany                     100%
      Underwriters Adjustment Company, Inc.                                               Panama                     100%
</TABLE>



                                      II-8

<PAGE>   2

Subsidiaries of Registrant--(continued)


<TABLE>
<CAPTION>
                                                                                                              % of Voting
                                                                                                               Securities
                                                                                                             Owned by its
                                                                                 Jurisdiction of                Immediate
Name of Corporation                                                                Incorporation                   Parent (1)
- -------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                             <C>
    American Life Insurance Company                                                     Delaware                     100%
      AIG Brasil Holding Ltda.                                                            Brazil                    73.6% (9)
      Kenya American Insurance Company Limited                                             Kenya                     100%
      ALICO                                                                               France                      89%
    American Security Life Insurance Company, Ltd.                                   Switzerland                    99.8%
    Birmingham Fire Insurance Company of Pennsylvania                               Pennsylvania                     100%
    China America Insurance Company, Ltd.                                               Delaware                      50%
    Commerce and Industry Insurance Company                                             New York                     100%
    Commerce and Industry Insurance Company of Canada                                    Ontario                     100%
    Delaware American Life Insurance Company                                            Delaware                     100%
    Hawaii Insurance Consultants, Ltd.                                                    Hawaii                     100%
    The Insurance Company of the State of Pennsylvania                              Pennsylvania                     100%
    Landmark Insurance Company                                                        California                     100%
    Le Metropolitana de Seguros, C. por A.                                    Dominican Republic                     100%
    Mt. Mansfield Company, Inc.                                                          Vermont                     100%
    National Union                                                                  Pennsylvania                     100%
      American International Specialty Lines Insurance Company                            Alaska                      70% (10)
      International Lease Finance Corporation                                         California                     100%
      Lexington                                                                         Delaware                      70% (10)
        JI Accident & Fire Insurance Co. Ltd.                                              Japan                      50%
      National Union Fire Insurance Company of Louisiana                               Louisiana                     100%
    NHIG Holding Corp.                                                                  Delaware                     100%
      Audubon Insurance Company                                                        Louisiana                     100%
        Audubon Indemnity Company                                                    Mississippi                     100%
        Agency Management Corporation                                                  Louisiana                     100%
          The Gulf Agency, Inc.                                                          Alabama                     100%
      New Hampshire                                                                 Pennsylvania                     100%
        AIG Europe, S.A.                                                                  France                          (11)
        A.I. Network Corporation                                                   New Hampshire                     100%
          Marketpac International, Inc.                                                 Delaware                     100%
        American International Pacific Insurance Company                                Colorado                     100%
        American International South Insurance Company                              Pennsylvania                     100%
        Granite State Insurance Company                                             Pennsylvania                     100%
        New Hampshire Indemnity Company, Inc.                                       Pennsylvania                     100%
        AIG National Insurance Company, Inc.                                            New York                     100%
        Illinois National Insurance Co.                                                 Illinois                     100%
        New Hampshire Insurance Services, Inc.                                     New Hampshire                     100%
    PHILAM                                                                           Philippines                      99%
      Pacific Union Assurance Company                                                 California                     100%
      The Philippine American General Insurance Company, Inc.                        Philippines                     100%
        Philam Insurance Company, Inc.                                               Philippines                     100%
        The Philippine American Assurance Company, Inc.                              Philippines                      25%
    Pine Street Real Estate Holdings Corp.                                         New Hampshire                          (12)
      American International Realty Corp.                                               Delaware                     100%
</TABLE>



                                      II-9

<PAGE>   3

Subsidiaries of Registrant--(continued)


<TABLE>

<CAPTION>
                                                                                                              % of Voting
                                                                                                               Securities
                                                                                                             Owned by its
                                                                                 Jurisdiction of                Immediate
Name of Corporation                                                                Incorporation                   Parent (1)
- -------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                             <C>
Risk Specialist Companies, Inc.                                                         Delaware                     100%
20th Century Insurance Company of Arizona                                                Arizona                      51%
UeberseeBank, AG                                                                     Switzerland                     100%
UGC                                                                               North Carolina                   36.31% (13)
  United Guaranty Insurance Company                                               North Carolina                     100%
  United Guaranty Mortgage Insurance Company                                      North Carolina                     100%
  United Guaranty Mortgage Insurance Company of North Carolina                    North Carolina                     100%
  United Guaranty Residential Insurance Company of North Carolina                 North Carolina                     100%
  United Guaranty Residential Insurance Company                                   North Carolina                      75% (14)
      United Guaranty Commercial Insurance Company of North Carolina              North Carolina                     100%
      United Guaranty Commercial Insurance Company                                North Carolina                     100%
      United Guaranty Credit Insurance Company                                    North Carolina                     100%
      United Guaranty Services, Inc.                                              North Carolina                     100%
</TABLE>



================================================================================

(1)   Percentages include directors' qualifying shares.
(2)   The directors and executive officers of AIG as a group own 79.50 percent 
       of the voting common stock of Starr and 75 percent of the voting stock of
       SICO. Six of the directors of AIG also serve as directors of Starr and
       SICO.
(3)   All subsidiaries listed except for minority-owned Transatlantic Holdings,
       Inc., which is included under the equity method, are consolidated in the
       accompanying financial statements. Certain subsidiaries have been omitted
       from the tabulation. The omitted subsidiaries, when considered in the
       aggregate as a single subsidiary, do not constitute a significant
       subsidiary.
(4)   The common stock is owned 16.2 percent by SICO, 2.4 percent by Starr and
       3.5 percent by The Starr Foundation.
(5)   Also owned 21.1 percent by Commerce & Industry Insurance Company.
(6)   Also owned 8 percent by The Insurance Company of the State of
       Pennsylvania, 32 percent by National Union, and 8 percent by Birmingham.
(7)   Also owned 15.02 percent by American International Group, Inc.
(8)   Also owned 22.48 percent by American Home.
(9)   Also owned 26.4 percent by American International Group, Inc. 
(10)  Also owned 20 percent by The Insurance Company of the State of
       Pennsylvania and 10 percent by Birmingham.
(11)  100 percent to be held with other AIG companies.
(12)  Owned by 13 AIG subsidiaries.     
(13)  Also owned 45.88 percent by National Union, 16.95 percent by New Hampshire
       and 0.86 percent by The Insurance Company of the State of Pennsylvania.
(14)  Also owned 25 percent by United Guaranty Residential Insurance Company of
       North Carolina.


                                      II-10



<PAGE>   1

                                                                      Exhibit 23

Consent of Independent Accountants


We consent to the incorporation by reference in the Registration Statements of
American International Group, Inc. on Forms S-3 and S-8 (No. 2-38768, No.
2-44043, No. 2-45346, No. 2-51498, No. 2-59317, No. 2-61858, No. 2-62760, No.
2-64336, No. 2-67600, No. 2-72058, No. 2-75874, No. 2-75875, No. 2-78291, No.
2-87005, No. 2-82989, No. 2-90756, No. 2-91945, No. 2-95589, No. 2-97439, No.
33-8495, No. 33-13874, No. 33- 18073, No. 33-25291, No. 33-41643, No. 33-48996,
No. 33-57250, No. 33-60327, No. 33-60827, No. 33-62821, No. 333-21365 and No.
333-48639) of our report dated February 10, 1998, on our audits of the 
consolidated financial statements and financial statement schedules of American
International Group, Inc. and subsidiaries as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997, which report
is included in the Annual Report on Form 10-K of American International Group,
Inc. for the year 1997, and to the reference to our firm under the headings
"Financial Statements" or "Experts" included in the Prospectuses.


                                                        COOPERS & LYBRAND L.L.P.



New York, New York
March 30, 1998.


                                      II-11





<TABLE> <S> <C>

<ARTICLE> 7
<LEGEND>
                      AMERICAN INTERNATIONAL GROUP, INC.
                           Financial Data Schedule
                For the twelve months ended December 31, 1997
                   (in thousands, except per share amounts)
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               DEC-31-1997
<DEBT-HELD-FOR-SALE>                        38,077,792
<DEBT-CARRYING-VALUE>                       12,530,315
<DEBT-MARKET-VALUE>                         13,365,703
<EQUITIES>                                   5,348,019
<MORTGAGE>                                   3,012,811
<REAL-ESTATE>                                1,442,390
<TOTAL-INVEST>                             119,554,170
<CASH>                                          86,917
<RECOVER-REINSURE>                          16,110,521
<DEFERRED-ACQUISITION>                       6,592,506
<TOTAL-ASSETS>                             163,970,687
<POLICY-LOSSES>                             57,902,165
<UNEARNED-PREMIUMS>                          8,739,006
<POLICY-OTHER>                                       0
<POLICY-HOLDER-FUNDS>                       12,675,626
<NOTES-PAYABLE>                             17,260,319
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                     1,897,804
<OTHER-SE>                                  22,103,323
<TOTAL-LIABILITY-AND-EQUITY>               163,970,687
<PREMIUMS>                                  22,346,679
<INVESTMENT-INCOME>                          4,749,992
<INVESTMENT-GAINS>                             118,515
<OTHER-INCOME>                                (96,652)
<BENEFITS>                                  18,167,417
<UNDERWRITING-AMORTIZATION>                  1,847,463
<UNDERWRITING-OTHER>                         3,187,803
<INCOME-PRETAX>                              4,698,898
<INCOME-TAX>                                 1,366,563
<INCOME-CONTINUING>                          3,332,335
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 3,332,335
<EPS-PRIMARY>                                     4.75
<EPS-DILUTED>                                     4.73
<RESERVE-OPEN>                              20,407,300
<PROVISION-CURRENT>                          9,732,600
<PROVISION-PRIOR>                            (376,400)
<PAYMENTS-CURRENT>
                           2,976,300
<PAYMENTS-PRIOR>                             5,615,700
<RESERVE-CLOSE>                             21,171,500
<CUMULATIVE-DEFICIENCY>                        398,600
        

</TABLE>




<PAGE>   1

                                                                      Exhibit 99

Undertakings


(a) The undersigned registrant hereby undertakes:

(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

            (i) to include any prospectus required by Section 10(a) (3) of the
      Securities Act of 1933 unless the information required to be included in
      such post-effective amendment is contained in a periodic report filed by
      registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934 and incorporated herein by reference,

            (ii) to reflect in the prospectus any facts or events arising after
      the effective date of this Registration Statement (or the most recent
      post-effective amendment thereof) which, individually or in the aggregate,
      represent a fundamental change in the information set forth in this
      Registration Statement unless the information required to be included in
      such post-effective amendment is contained in a periodic report filed by
      the registrant pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 and incorporated herein by reference, and

            (iii) to include any material information with respect to the plan
      of distribution not previously disclosed in this Registration
 Statement or
      any material change to such information in this Registration Statement;

(2) that, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment that is incorporated by reference in
this Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof;

(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering; and

(4) that, for purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

(b) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given, a copy of the registrant's annual report to shareholders for its last
fiscal year, unless such employee otherwise has received a copy of such report
in which case the registrant shall state in the prospectus that it will promptly
furnish, without charge, a copy of such report on written request of the
employee. If the last fiscal year of the registrant has ended within 120 days
prior to the use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120-day period the
annual report for the last fiscal year will be furnished to each such employee.

(c) The undersigned registrant hereby undertakes to transmit or cause to be
transmitted to all employees participating in the plan, who do not otherwise
receive such material as shareholders of the registrant, at the time and in the
manner such material is sent to its shareholders, copies of all reports, proxy
statements and other communications distributed to its shareholders generally.

      Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.


                                      II-12

<PAGE>   2

                                                                      Schedule I

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1997


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           Amount at
                                                                                                                         which shown
                                                                                                                              in the
                                                                                                                             Balance
Type of Investment                                                                  Cost*              Value                   Sheet
====================================================================================================================================
<S>                                                                          <C>                   <C>                  <C>         
Fixed maturities:
  Bonds:
    United States Government and government agencies
      and authorities                                                        $  1,331,075          $ 1,450,881          $  1,450,018
    States, municipalities and political subdivisions                          18,595,100           19,771,734            18,937,245
    Foreign governments                                                         8,730,451            9,004,582             9,004,546
    Public utilities                                                            2,861,864            3,083,929             3,083,929
    All other corporate                                                        18,279,799           18,850,917            18,850,917
- ------------------------------------------------------------------------------------------------------------------------------------
  Total bonds                                                                  49,798,289           52,162,043            51,326,655
  Preferred stocks                                                                239,331              530,705               239,331
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities                                                         50,037,620           52,692,748            51,565,986

Equity securities:
  Common stocks:
    Public utilities                                                              157,713              201,714               201,714
    Banks, trust and insurance companies                                          750,658            1,153,918             1,153,918
    Industrial, miscellaneous and all other                                     3,717,062            3,853,642             3,853,642
- ------------------------------------------------------------------------------------------------------------------------------------
  Total common stocks                                                           4,625,433            5,209,274             5,209,274
  Non-redeemable preferred stocks                                                 138,412              138,745               138,745
- ------------------------------------------------------------------------------------------------------------------------------------
Total equity securities                                                         4,763,845            5,348,019             5,348,019
- ------------------------------------------------------------------------------------------------------------------------------------

Mortgage loans on real estate, policy and collateral loans                      7,919,764            7,966,673             7,919,764
Financial services assets:
  Flight equipment primarily under operating leases, net of            
    accumulated depreciation                                                   14,438,074                   --            14,438,074
  Securities available for sale, at market value                                9,145,244            9,145,317             9,145,317
  Trading securities, at market value                                                  --            3,974,561             3,974,561
  Spot commodities, at market value                                                    --              459,517               459,517
  Unrealized gain on interest rate and currency swaps,
    options and forward transactions                                                   --            7,422,290             7,422,290
  Trading assets                                                                6,715,486                   --             6,715,486
  Securities purchased under agreements to resell, at contract value            4,551,191                   --             4,551,191
Other invested assets                                                           4,681,423                   --             4,681,423
Short-term investments, at cost (approximates market value)                     3,332,542                   --             3,332,542
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments                                                            $105,585,189                   --          $119,554,170
====================================================================================================================================
</TABLE>

*     Original cost of equity securities and, as to fixed maturities, original
      cost reduced by repayments and adjusted for amortization of premiums or
      accrual of discounts.


                                       S-1

<PAGE>   3

                                                                     Schedule II
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET -- PARENT COMPANY ONLY


<TABLE>
<CAPTION>
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,                                                                                              1997                 1996
===================================================================================================================================
<S>                                                                                                <C>                  <C>        
Assets:
  Cash                                                                                             $     4,110          $       676
  Short-term investments                                                                                   573                   13
  Invested assets                                                                                      584,513              305,895
  Carrying value of subsidiaries and partially-owned companies, at equity                           24,476,844           22,194,522
  Premiums and insurance balances receivable-net                                                        61,521               37,880
  Other assets                                                                                         270,181              615,716
- -----------------------------------------------------------------------------------------------------------------------------------
      Total assets                                                                                 $25,397,742          $23,154,702
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
  Insurance balances payable                                                                       $   204,479          $   148,477
  Due to affiliates-net                                                                                229,917              467,140
  Medium term notes payable                                                                            248,225              140,000
  Zero coupon notes                                                                                     91,179               81,761
  Italian Lire bonds                                                                                   159,067              159,067
  Other liabilities                                                                                    463,748              114,033
- -----------------------------------------------------------------------------------------------------------------------------------
        Total liabilities                                                                          $ 1,396,615          $ 1,110,478
- -----------------------------------------------------------------------------------------------------------------------------------
Capital funds:
  Common stock                                                                                     $ 1,897,804          $ 1,265,210
  Additional paid-in capital                                                                           105,689              127,415
  Unrealized appreciation of investments, net of taxes                                               1,350,182            1,378,318
  Cumulative translation adjustments, net of taxes                                                  (1,178,041)            (493,218)
  Retained earnings                                                                                 22,920,991           20,420,881
  Treasury stock                                                                                    (1,095,498)            (654,382)
- -----------------------------------------------------------------------------------------------------------------------------------
        Total capital funds                                                                         24,001,127           22,044,224
- -----------------------------------------------------------------------------------------------------------------------------------
        Total liabilities and capital funds                                                        $25,397,742          $23,154,702
===================================================================================================================================
</TABLE>



STATEMENT OF INCOME--PARENT COMPANY ONLY


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                 1997               1996               1995
====================================================================================================================================
<S>                                                                               <C>                <C>                <C>        
Agency income                                                                     $       145        $       484        $     1,561
Financial services income                                                             105,897            227,242            119,541
Dividend income from consolidated subsidiaries:
  Cash                                                                              1,458,676          1,141,468            728,825
Dividend income from partially-owned companies                                         21,973              7,159              1,232
Equity in undistributed net income of consolidated subsidiaries
  and partially-owned companies                                                     2,340,991          1,900,389          1,901,252
Other income (deductions)-net                                                        (302,249)           (80,989)           (76,537)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes                                                          3,625,433          3,195,753          2,675,874
Income taxes                                                                          293,098            298,496            165,491
- ------------------------------------------------------------------------------------------------------------------------------------
Net income                                                                        $ 3,332,335        $ 2,897,257        $ 2,510,383
====================================================================================================================================
</TABLE>



                                       S-2

<PAGE>   4

                                                                     Schedule II
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
STATEMENT OF CASH FLOWS--PARENT COMPANY ONLY


<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                                                       1997            1996            1995
====================================================================================================================================
<S>                                                                                     <C>             <C>             <C>        
Cash flows from operating activities:
  Net income                                                                            $ 3,332,335     $ 2,897,257     $ 2,510,383
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided 
  by operating activities: 
  Non-cash revenues, expenses, gains and losses included in income:
    Equity in undistributed net income of consolidated subsidiaries and
      partially-owned companies                                                          (2,340,991)     (1,900,389)     (1,901,252)
    Change in premiums and insurance balances receivable and payable-net                     32,361          22,310          20,142
    Change in cumulative translation adjustments                                             40,904          65,427          18,196
    Other-net                                                                               400,794        (293,680)       (402,841)
- ------------------------------------------------------------------------------------------------------------------------------------
    Total adjustments                                                                    (1,866,932)     (2,106,332)     (2,265,755)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                                 1,465,403         790,925         244,628
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Purchase of investments                                                                   (10,251)           (300)        (15,400)
  Sale of investments                                                                            --          34,343             395
  Change in short-term investments                                                             (560)         10,146          (9,090)
  Change in collateral and guaranteed loans                                                (236,434)          2,000          15,000
  Contributions to subsidiaries and investments in partially-owned companies               (700,223)       (292,069)        (68,398)
  Other-net                                                                                  (4,097)        (94,099)           (135)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                                      (951,565)       (339,979)        (77,628)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Change in medium term notes                                                               108,225          25,000         (40,000)
  Proceeds from common stock issued                                                          36,568          23,013          20,519
  Change in loans payable                                                                    43,844         150,700          17,680
  Cash dividends to shareholders                                                           (199,631)       (174,115)       (153,572)
  Acquisition of treasury stock                                                            (507,707)       (493,872)        (17,646)
  Other-net                                                                                   8,297          18,862           6,104
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                                      (510,404)       (450,412)       (166,915)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in cash                                                                                3,434             534              85
Cash at beginning of year                                                                       676             142              57
- ------------------------------------------------------------------------------------------------------------------------------------
Cash at end of year                                                                     $     4,110     $       676     $       142
====================================================================================================================================
</TABLE>


NOTES TO FINANCIAL STATEMENTS--PARENT COMPANY ONLY

(1)   Agency operations conducted in New York through the North American
      Division of AIU are included in the financial statements of the parent
      company.
(2)   Certain accounts have been reclassified in the 1996 and 1995 financial
      statements to conform to their 1997 presentation.
(3)   "Equity in undistributed net income of consolidated subsidiaries and
      partially-owned companies" in the accompanying Statement of Income--Parent
      Company Only--includes equity in income of the minority-owned insurance
      operations.
(4)   See also Notes to Consolidated Financial Statements.


                                       S-3

<PAGE>   5

                                                                    Schedule III
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
As of December 31, 1997, 1996 and 1995 and for the years then ended



<TABLE>
<CAPTION>
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
                                 Reserves for
                                   Losses and                                                            Losses and  Amortization
                       Deferred          Loss       Reserve        Policy                                      Loss   of Deferred
                         Policy      Expenses,          for           and                         Net      Expenses        Policy  
                    Acquisition Future Policy      Unearned      Contract       Premium    Investment      Incurred,  Acquisition  
Segment                   Costs   Benefits(a)      Premiums      Claims(b)      Revenue        Income      Benefits       Costs(c) 
===================================================================================================================================
<S>                 <C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>          
1997
  General insurance $ 1,637,211   $33,400,160   $ 8,739,006   $        --   $12,421,040   $ 1,853,523   $ 9,356,219   $ 1,216,000  
  Life insurance      4,955,295    24,502,005            --       794,604     9,925,639     2,896,469     8,811,198       631,463  
- -----------------------------------------------------------------------------------------------------------------------------------
                    $ 6,592,506   $57,902,165   $ 8,739,006   $   794,604   $22,346,679   $ 4,749,992   $18,167,417   $ 1,847,463  
===================================================================================================================================
1996
  General insurance $ 1,415,849   $33,429,807   $ 7,598,928   $        --   $11,854,815   $ 1,690,798   $ 8,996,431   $ 1,180,138  
  Life insurance      5,055,508    24,002,860            --       794,181     8,978,246     2,675,881     8,103,578       627,714  
- -----------------------------------------------------------------------------------------------------------------------------------
                    $ 6,471,357   $57,432,667   $ 7,598,928   $   794,181   $20,833,061   $ 4,366,679   $17,100,009   $ 1,807,852  
===================================================================================================================================
1995
  General insurance $ 1,289,788   $33,046,717   $ 6,938,064   $        --   $11,405,731   $ 1,547,572   $ 8,659,835   $ 1,108,040  
  Life insurance      4,477,785    20,864,635            --       708,878     8,038,150     2,264,905     7,088,034       620,487  
- -----------------------------------------------------------------------------------------------------------------------------------
                    $ 5,767,573   $53,911,352   $ 6,938,064   $   708,878   $19,443,881   $ 3,812,477   $15,747,869   $ 1,728,527  
===================================================================================================================================

<CAPTION>
(in thousands)
- -----------------------------------------------
                    
                    
                    
                            Other           Net
                        Operating      Premiums
Segment                  Expenses       Written
===============================================
<S>                   <C>           <C>        
1997
  General insurance   $ 1,358,653   $13,407,529
  Life insurance        1,829,150            --
- -----------------------------------------------
                      $ 3,187,803   $13,407,529
===============================================
1996
  General insurance   $ 1,228,462   $12,691,679
  Life insurance        1,633,875            -- 
- -----------------------------------------------
                      $ 2,862,337   $12,691,679
===============================================
1995
  General insurance   $ 1,221,219   $11,893,022
  Life insurance        1,536,632            --
- -----------------------------------------------
                      $ 2,757,851   $11,893,022
===============================================
</TABLE>

(a)   Reserves for losses and loss expenses with respect to the general
      insurance operations are net of discounts of $294 million, $62 million and
      $21 million for 1997, 1996 and 1995, respectively.
(b)   Reflected in insurance balances payable on the accompanying balance sheet.
(c)   Amounts shown for general insurance segment exclude amounts deferred and
      amortized in the same period.


                                       S-4

<PAGE>   6

                                                                     Schedule IV
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
REINSURANCE
As of December  31, 1997, 1996 and 1995 and for the years then ended


<TABLE>
<CAPTION>
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         Percent of
                                                                      Ceded             Assumed                              Amount
                                                                   to Other          from Other                 Net         Assumed
                                            Gross Amount          Companies           Companies              Amount          to Net
====================================================================================================================================
<S>                                        <C>                 <C>                 <C>                 <C>                      <C> 
1997
Life insurance in-force                    $436,573,123        $ 50,924,412        $  1,242,877        $386,891,588             0.3%
====================================================================================================================================
Premiums:
  General insurance                        $ 17,096,848        $  5,334,526        $  1,645,207        $ 13,407,529            12.3%
  Life insurance                             10,191,376             286,139              20,402           9,925,639             0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total premiums                             $ 27,288,224        $  5,620,665        $  1,665,609        $ 23,333,168             7.1%
====================================================================================================================================
1996
Life insurance in-force                    $421,983,133        $ 36,887,659        $    815,650        $385,911,124             0.2%
====================================================================================================================================
Premiums:
  General insurance                        $ 16,696,419        $  5,627,453        $  1,622,713        $ 12,691,679            12.8%
  Life insurance                              9,226,821             261,142              12,567           8,978,246             0.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total premiums                             $ 25,923,240        $  5,888,595        $  1,635,280        $ 21,669,925             7.5%
====================================================================================================================================
1995
Life insurance in-force                    $376,097,107        $ 34,779,331        $    239,787        $341,557,563             0.1%
====================================================================================================================================
Premiums:
  General insurance                        $ 16,357,919        $  6,002,098        $  1,537,201        $ 11,893,022            12.9%
  Life insurance                              8,234,425             207,272              10,997           8,038,150             0.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total premiums                             $ 24,592,344        $  6,209,370        $  1,548,198        $ 19,931,172             7.8%
====================================================================================================================================
</TABLE>



                                       S-5